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Page last published: 5 May 2006

Fiduciary Services
Citicorp Trustee Company Limited
Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB
Regulatory Update
5 May 2006

CitiGroup home page

FSA Quarterly Consultation paper CP06/6 released April 06

· Accounting periods

The paper attempts to address the anomaly, that under the old CIS rules a Manager was able to extend the first annual accounting period of a fund by up to 6 months but was prevented from doing so under COLL. When COLL was first introduced this issue was not highlighted to AFM's and consequently some groups made the assumption incorrectly that the rules had not changed resulting in a breach of the regulations.

· Disclosure of Bond Issuers for Non-UCTS bond funds.

The requirement for Non - UCITS bond funds to disclose the issuers of government and other public securities in the Instrument of Incorporation is likely to be relaxed and it is proposed to rely solely on the prospectus for shareholder notification purposes.

· Other matters

The FSA are proposing that the ability for the AFM to charge the fund for the costs of preparing and printing the simplified prospectus and key features should be subject to a specific COLL rule in the Handbook as opposed to guidance, providing this is disclosed to investors in the prospectus.

Subject to the outcome of the consultation process it is expect the new rules will become effective on the 6th November 2006.

Abbey: European Court of Justice's Decision on the VAT treatment of Depositary and Administration fees -

http://www.investmentuk.org/closed/members/circulars/2006/red/112-06.asp

The European Court of Justice's decision in the Abbey case was released on the 4th May. The case considered the scope of VAT exemption in respect of the management of UK authorised unit trusts and Oeics.

It has been confirmed that:

· The concept of "management" is an independent concept of Community law from which Member States may not diverge.

· Services provided by a third-party manager in respect of the administrative management of the fund can qualify for exemption from VAT if, viewed broadly, they form a distinct whole and are specific to and essential for the management of a special investment fund, the meaning of this will be clarified further by Industry Lawyers;

· Services provided by a depositary do not qualify for exemption as the management of UK authorised unit trusts and Oeics and so remain standard rated in the UK.

The IMA has published a taxation circular which is available on their website covering the issues in greater detail.

FSA consultation paper CP 05/13

The consultation period for this paper "Bundled brokerage and soft commission arrangements for retail funds" ended on the 6th January 2006 and CTCL contributed to the response submitted by DATA.

The paper discussed ideas regarding the extent to which retail investors would benefit from the Manager reporting on broker commission arrangements where these are "bundled" or "softed" and the level of detail which could be understood by a non-sophisticated investor. The FSA also asked questions on whether there should be an individual or body to act as the representative of retail investors to consider disclosures and to interact with managers and if the Depositary should fulfill this role for Unit Trusts and OEICs.

The paper was built upon the IMA's Pension Fund Disclosure code which provides a minimum standard for two distinct types of disclosure;

· Level one:

Level one is at a general level and encompasses the AFM's in house policies, processes and procedures in relation to the management of costs on behalf of clients across all funds. The disclose to investors would include how brokers are selected and relationships reviewed, how research is purchased and how conflicts of interest are managed.

· Level two:

Level two is fund specific and is of relevance to all types of underlying investors of a retail product.

We foresee the Depositaries' role to include;

· Whether the goods and services described in the disclosures constitute execution or research services?

· Has the AFM reasonable grounds for claiming that the services will benefit the funds?

· Is the indirect payment of goods and services in this manner likely to impair the AFM's overall duty to act in the best interests of investors?

We will be agreeing with AFM's a master list of services which can be paid for under a "softing "arrangement when more information is provided by the FSA in their response due in May.

It is likely that rules and guidance will become effective from 1st July 2006

Consultation Paper 06/7 -

http://www.fsa.gov.uk/pubs/cp/cp06_07.pdf

On the 20th April, the FSA issued Consultation Paper 06/7 'Single and Dual Pricing for authorised collective investment schemes' from which the following important proposals emerged:

· The FSA did not recommend one particular pricing method over another. The overriding consideration should be that the pricing method chosen should be 'accurate, fair to investors and transparent'.

· The FSA proposed that dual pricing can continue to be used beyond the current expiration date of 12th February 2007and the proposals will if adopted be applicable for both unit trusts and OEICs as part of the 'level playing-field' approach of the FSA.

There is not likely to be separate chapter on dual pricing within the COLL Handbook (there was a separate chapter under CIS). The FSA is also proposed that sub-funds within a particular fund, may adopt different methods of pricing. However, in practice, it recognised that this flexibility may not be widely used.

It was proposed that changes to a fund's pricing method (i.e. moving from a dual to single-priced fund or an ICVC moving to dual pricing for the first time), be considered a 'significant change', requiring 60 days' notice to unit(share)holders.

QIS schemes will not be required to notify the Depositary of prices (a requirement that was dropped for retail funds anyway under COLL).

There are two other issues which, whilst not forming part of this consultation paper, the FSA nevertheless would welcome views on. These are:

· How should the preliminary charge for the buying price of a dual-priced fund be expressed? i.e. should the charge be separately shown as is the case for single-priced funds? The aim of this change would be to make the actual investments more transparent to investors.

· Should netting of creations and cancellations between unit classes be allowed for both single and dual-priced funds? (COLL rules currently require each class to be treated separately)

The consultation period ends on 21st July 2006 and it is proposed that final rules will become effective from 12th February 2007.

FSA Feedback statement 06/03 on DP05/03

The FSA has published its Feedback Statement to DP05/03 Wider Range of Retail Investment Products: Consumer Protection in a rapidly changing world.

In the feedback statement, the FSA have stated that they intend during the first quarter 2007, to consult on widening the range of funds that can be marketed to retail investors. This would enable retail investors, who are already gaining access to funds with hedge fund characteristics, to invest in funds that would be subject to the FSA's regime for authorised collective investment schemes by extending the range of Non UCITS Retail Schemes (NURSs) to include funds of unregulated (Hedge funds) schemes.

The funds would be subject to structural and operational safeguards in order to enhance investor protection whilst increasing investor choice. For example, the funds would have to have a Depositary and the hedge funds being invested into would be subject, for example, to liquidity conditions.

The FSA also commented in the paper that they remain concerned about the degree to which firms and consumers are prepared for and aware of the different performance characteristics and possible outcomes of utilizing the wider investment powers of UCIT III funds. With this in mind the FSA intend to review and scrutinize AFM's "derivative risk management programmes and will be keeping a close eye on associated advertisements to ensure that the nature of such funds and the performance charatcteristics are communicated clearly and fairly.

Collective Investment Scheme Sourcebooks (Miscellaneous Amendments) Instrument 2006 CP05/14

(http://fsahandbook.info/FSA/handbook/LI/2006/2006_5.pdf )

On the 6th April new rules were introduced in response to CP05/14

Changes made by the FSA to the handbook included;

· OEIC AGMs - A 60 days notice period to allow ACD's to discontinue meetings in the future with disclosure of this policy in the prospectus and Long form Report and accounts

· Scheme Prospectus requirements - changes to disclosure to Investors on whether or not the box is used by the Manager to make a profit and the identification of the category of the scheme i.e. UCITS or non UCITS to investors

· Unitholder Meetings - Rule changes to allow prohibited voters to vote in instances where all voters are currently ineligible to vote under the existing rules. This is of particular relevance to Managers seeking approval for mergers.

· Report and Accounts - the ability to publish long form report and account on individual sub-funds

· Investment and Borrowing Powers -changes to the borrowing limits on property funds

· Qualified Investor Schemes - changes to make the Manager accountable for reviewing and updating the prospectus in relation to material changes.

MiFID (Market in Financial Instruments Directive) -

(http://europa.eu.int/comm/internal_market/securities/isd/mifid2_en.htm )

Background

The overall frame work (level one measures) of the Directive were adopted by members in April 2004, however finer details were outlined in level 2 measures by strict regulation or by Directive requiring individual state implementation which were published on the 6th February 2006.

As you maybe aware EEC Regulations are directly applicable and cannot be adapted by national authorities while a directive has to be transposed into national rules so there is a little more room for flexibility. It is intended, however, that the areas in which national authorities can go beyond the requirements of the directive are very limited. The FSA are considering the implications of this.

The draft regulations cover the transaction reporting, record keeping and market transparency requirements of MiFID and the Directive includes firms organisation requirements and conduct of business rules.

In the UK this will involve amendments to the FSMA itself and changes to the individual handbooks.

Proposals for implementing MiFID will be carried in four CPs as detailed in our future dates section of this update.

MiFID must become enshrined in UK law by the 31st January 2007 and be implemented by the 1st November 2007 at which point the existing Investment Services Directive (ISD) will be repealed.

The objective of MiFID is to have one set of rules and regulations across Europe covering the following areas;

1) Market Integrity

2) Passport of investment services with a single authorization in the member's home state

3) Changes to governance and conduct of business requirements

4) New provisions covering order execution, transparency and best execution

Future Dates

· May 2006 MiFID - Best execution discussion paper released by FSA

· May 2006 MiFID - Systems and controls consultation paper released by FSA

· July 2006 Main MiFID consultation paper to be released by the FSA covering transaction reporting, Authorisation and Permissions, and enforcement and cooperation, but excluding conduct of business and financial promotions

· October 2006 MiFID financial promotions consultation paper (including MiFID provisions on marketing communications released by FSA

· October 2006 MiFID consultation paper on conduct of business to be released by FSA

· 6th November 2006. CP06/06 become effective

· 31st January 2007 MiFID becomes Law in UK

· 12 February 2007 - Possible revocation of the FSA's CIS sourcebook (ICIS)

· 12 February 2007 - CP06/7 becomes effective

· 13 February 2007 - Operators of UCITS schemes that were authorised on or before 13 February 2002 have until 13 February 2007 to comply with the requirements of the Product Directive

· 13 February 2007 -COLL will apply to all authorised funds

· 1st November 2007 - Introduction of MiFID

This document is solely for information and Citibank will not be responsible for updating any information contained herein. It is not intended to provide specific advice on any other matter. If advice is required you should consult your own advisors, legal or otherwise. No responsibility for any loss occasioned as a result of using this document is accepted. Under no circumstances is it to be considered an offer to sell or a solicitation to buy any investment or product.

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Fiduciary Services Citicorp Trustee Company Limited Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB Regulatory Update 5 May 2006 CitiGroup home page

Fiduciary Services
Citicorp Trustee Company Limited
Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB
Regulatory Update
5 May 2006

CitiGroup home page