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Page last published: 10 August 2008

Citigroup® Global Transaction Services
www.transactionservices.citigroup.com
European News & Views; Second Edition 2008

Contributors

Introduction

Across Europe

· Who makes EU legislation?

· Is asset eligibility still an issue under UCITS?

· EC’s Expert Group Report on open-ended real-estate funds

· Filling the gap for retail investors: is the KID moving forward?

Ireland

· Irish tax update: the 8-year deemed disposal requirements for Irish resident investors in Irish funds

Luxembourg

· Amendments to the SICAR legislation

· The challenges of market efficiency

· Disclosure of soft commissions and bundled brokerage arrangements for CISs

· FSA consults on electronic settlement of transaction in units

Glossary

Contacts

Contributors

European
Stefano Pierantozzi European Head of Fiduciary Oversight & Research stefano.pierantozzi@citi.com Tel: +352 451 414 370	Alan Houmann Director, European Government Affairs alan.houmann@citi.com Tel: +44 (0) 20 750 0812	Teresa Extance European Fiduciary Risk Manager teresa.extance@citi.com Tel: +44 (0) 20 7500 9957
Ireland
Ingrid Byrne Fiduciary Oversight & Research ingrid.byrne@citi.com Tel: +353 1 622 6264
Luxembourg
Patrick Watelet Head of Fiduciary Services, Luxembourg patrick.watelet@citi.com Tel: +352 451 414 231	Steve Bernat Transfer Agency Product Head, Luxembourg steve.bernat@citi.com Tel: +352 451 414 418	Charles Etonde Legal Manager Mourant Luxembourg S.A.
United Kingdom
Tony Wright Head of Fiduciary Oversight & Research, UK tony.wright@citi.com Tel: +44 (0) 20 7500 1598	Amanda Hale Fiduciary Oversight & Research amanda.jayne.hale@citi.com Tel: +44 (0) 20 7508 0178	Cian O'Callaghan Fiduciary Oversight & Research cian.ocallaghan@citi.com Tel: 44 (0) 20 7500 8834

Introduction

A very warm welcome to our second edition of European News & Views this year. Already 2008 is an interesting year in terms of the number of regulatory guidance, amendments and funds-industry-related advice or consultations that have been implemented or are underway. We continue to see industry-led initiatives, where working groups or bodies are proposing regulatory guidance based on representation and feedback from the funds industry at European and Member State (MS) level. A number of these initiatives we monitor for their evolution, and we are delighted to share with you some key developments that have emerged.

Before we do, and while we eagerly await an update from the European Commission (EC) on the decision on how to progress with possible amendments to the UCITS Directive (85/611/EEC) or the so-called “UCITS IV Directive”, we hope our first article entitled “Who Makes EU Legislation?” will help to provide a high-level summary of the structure and give some insight into the legislative process that, ultimately, aims to achieve consistency at the MS level to capture the full benefits of the euro.

At the European supervisory level, we provide a summary of the key recommendations to improve cross-border market-access barriers for nationally regulated open-ended real-estate funds, identified by the publication in March of the “Expert Group Report on open ended real estate funds”. Also at the European supervisory level, our article entitled “Filling the Gap for Retail Investors: Is the Key Information Document (KID) Moving Forward?” summarises some of the key elements of advice of the Commission of European Securities Regulators (CESR) to the EC on the content and form of the KID for UCITS.

One noteworthy example of an industry-led initiative in the United Kingdom, is the work performed by the Investment Management Association (IMA) and the Depositary and Trustee Association (DATA), who have developed a Collective Investment Scheme Disclosure Code on soft commission and bundled-brokerage arrangements. This follows on from the FSA Consultation Paper 05/13 published in 2005 and subsequent Policy Statement 06/5 published in June 2006. The finalised Code was published on 26 June 2008 so it is a timely opportunity to highlight the suggested format and timings of these disclosures.

Also for the UK, we summarise the recent FSA-proposed amendments to the COLL Sourcebook, following secondary legislation changes, which are to be introduced by HM Treasury and are designed to facilitate paperless settlement for UK authorised funds.

For Luxembourg, we provide an article, entitled “The Challenges of Market Efficiency”, which provides insight into the “Funds Processing Passport” initiatives that were launched in Luxembourg in April this year. For cross-border markets like Luxembourg, where almost one hundred per cent of the fund investors are domiciled outside the jurisdiction, we believe this to be a positive step forward.

We thank Charles Etonde at Mourant Luxembourg S.A. for an update and summary on the major legislative changes that will affect the investment vehicle “Société d’Investissement en Capital à Risque” (Risk Capital Investment Company), otherwise known as SICAR.

In Ireland, we have seen recent tax developments, the details of which we summarise in our article “Irish Tax Update: The 8-Year Deemed Disposal Requirements for Irish Resident Investors in Irish Funds”.

And finally, following the implementation of the Eligible Assets Directive (2007/16/ EC) of March 2007, questions around what are eligible assets and non-eligible assets still occur. While we recognise that the Eligible Assets Directive has introduced important clarifications, we hope our article entitled “Is Asset Eligibility Still an Issue Under UCITS?” will provide an insight into the type of queries or issues that may need to be considered.

At the back of this publication, we include a short glossary of abbreviations and acronyms that are commonly referred to in this edition but not necessarily defined in the articles.

We hope you will find this edition of European News & Views interesting, and as always we welcome and look forward to your invaluable feedback.

Sean Quinn
EMEA Head of Fiduciary Services

Across Europe

Who makes EU legislation?

European countries have seen an explosion of financial-markets legislation in recent years. Most of it originates in Brussels, not in national finance ministries or supervisory authorities. It is neither ad hoc nor designed to fix specific market failures in the Member States (MS). Instead it is part of a very ambitious, detailed and meticulous plan to integrate the EU's capital markets, deepen the single market in goods and services and make sure that financial market structures across the EU could be transformed to capture the full benefits of the euro.

So how is the legislation made, implemented and enforced?

The restructuring of the EU financial services

The plan to restructure the EU's financial services — the action plan (FSAP) — was started in the late 1990s. Most of the legislation — MiFID (Market in Financial Instruments Directive), MAD (Market Abuse Directive), etc. — has now been passed, but some key elements are only now being implemented in national legislation. In fact, the FSAP is not a static project, as the rules are being updated and interpreted constantly. It may eventually give rise to a single EU-wide rule book for supervisors and regulated firms and markets.

The processes behind the FSAP are complex, and the institutional architecture labyrinthine, to say the least. But given the nature and necessity of being able to work quickly to create a single market from 27 very different legal and supervisory traditions, it has been remarkably efficient and transparent. Before the FSAP started to kick in, the national regulators — the competent authorities responsible for the national stock exchanges and capital markets — were not a cohesive or well coordinated group. They rarely met to discuss common problems, and national markets were divided by different currencies and legislation.

The first steps for change were taken in 1997 when the newly formed Forum of European Securities Commissions (FESCO) brought together the various national securities commissions. This started the process of building trust and cooperation between supervisors.

The big leap occurred when the European Commission (EC) and finance ministries started to develop the outlines of the FSAP integration plan. It rapidly became obvious to them that success would founder on a mass of technical detail and national and legal obstacles, and that the existing system would be very hard pressed to tackle these problems.

The big leap occurred when the EC and finance ministries started to develop the outlines of the FSAP integration plan.

The EU's general approach to intractable problems like this is to create a wise-men's group. In this case, a group under the chairmanship of Baron Alexandre Lamfalussy. (As an aside, Baron Lamfalussy was also the founding president of the institute that later became the European Central Bank (ECB)). This wise-men's group duly declared that new institutional structures were needed to generate, implement and enforce the new legislation.

Levels 1, 2 and 3

This has given us what is now known as the Lamfalussy process. Essentially, it is designed to speed up drafting and consultation, to put the FSAP's 42 major pieces of financial legislation in place in the shortest possible time without compromising the political accountability of the process.

This involved a number of compromises and political shifts: the EC agreed to dilute its sole right to draft EU legislation by agreeing to take advice directly from experts (i.e. the industry and supervisor). The European Parliament (EP) agreed to delegate the power of passing secondary legislation and more detailed rules to committees composed of national finance ministry officials. And the supervisory community agreed to come together to follow a single set of convergent supervisory practices and definitions of what the legislation should mean.

The chart opposite gives an overview of how all these institutions fit together. It is highly simplified; the reality, inevitably more complex.

At the EU level, the treaties insist that the EC must draft and propose legislation, which is then passed jointly by the Council of National Ministers (ECOFIN) and the EP. But with Lamfalussy they have agreed that legislation should be enacted at two levels: level 1 should be mainly high-level principles, and level 2 should set out the more detailed rules that are needed to put these principles into practice.

At the inter-governmental level, the European Securities Committee (ESC) of finance ministry officials provides advice to the Commission on these high level 1 legislative proposals. It also has a formal role, with the EP, in the decision-making on more detailed level 2 implementing legislation. Crucially, it can also be to amend level 2 legislation fairly quickly, without the need to go back to the EP or ECOFIN, e.g. if there is a need to update the rules to take account of market developments.

(Highly simplified) European Committee structure

However, one of the biggest problems with EU legislation — one that is faced by any firm that wants to do business in more than one MS — is that when legislation comes to be implemented in each MS, local interpretations can be pretty wide of the original intention. Lamfalussy's big leap was to propose that the bulk of the work to deliver the FSAP intact should be done by the national supervisors. The solution was to turn FESCO into the Committee of European Securities Regulators, with a reasonable budget, a substantial secretariat and headquarters in Paris.

CESR has established itself as a serious force. Its members are the EU's most senior supervisors, i.e. the chairs or presidents of the national authorities. Its chairman, Eddy Wymeersch, is Chairman of the Belgian Commission Bancaire, Financière et des Assurances (CBFA). Sir Callum McCarthy, Chairman of the Financial Services Authority (FSA), is the UK member.

From the start, CESR has been tasked with providing advice to the EC to help develop all the level 1 and 2 legislation, from a technical (and hopefully less political) angle. It has subgroups to provide this advice. It also deals with day-to-day cooperation between the national supervisors, national enforcement decisions and the sharing of good practice.

CESR is supposed to be highly transparent and involves several stages of public consultation. Typically, the process starts with informal discussions between the EC, ministries and supervisors. This gradually coalesces into a formal call for advice or a "mandate" to CESR from the EC, sanctioned by the level 2 finance ministry committee. (CESR can also propose own-initiative advice but this is more rare.) CESR will then establish an expert group to carry out the mandate. These are chaired by one of the CESR members and as such have a high degree of credibility. The expert groups are designed to work transparently and usually establish a consultative working group of market experts or consumers, depending on the issue, to give it advice during the drafting process. The industry advisers are also supposed to be experts and should not represent their own firms. The advisers are not a substitute for the full public consultation that must always take place before the advice is finalised and submitted to the EC. To keep the work fresh, CESR tries to disband its expert groups when the mandate is finished and to form new groups when new mandates are issued.

One quirk of the system is that the EC is not bound by CESR's advice. There is a presumption that the advice, especially if it has been endorsed by the industry at the consultation phase, will be largely followed. However, there have been occasions when the EC disagreed with the advice it received. In those cases, the EC consulted again on its draft legislation. There have been efforts to keep these incidents to a minimum.

Banking and insurance

The fairly easy consensus that allowed the EC to create CESR did not extend into the area of prudential supervision and legislation. The FSAP was primarily about markets and investment, so perhaps there was a less pressing need to challenge the more informal arrangements that existed for banking and insurance. But the institutional rivalries, playing out in a mix of committees of central bankers and supervisors, some under the guidance of the ECB in Frankfurt and some in Brussels, meant that it took until 2004 to set up the same committees and relationships for banking and insurance.

The Committee of European Banking Supervisors (CEBS) was based in London, and the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) was located in Frankfurt. The ECB kept its own Banking Supervision Committee, but agreed that it would focus on financial stability and macro-prudential issues and leave supervisory issues to CEBS.

What now, after the FSAP?

For the last five years, CESR has been giving detailed technical advice to the EC, to draft the very long and varied list of FSAP directives. But this is more or less finished. It is increasingly turning to what is know as level 3, i.e. making sure that its members agree to abide by a common interpretation of what the legislation means and how their rules and practices are supposed to work ("convergence" in the supervisory jargon). This will involve drafting guidelines and standards for supervisors. It also means checking how they are doing this, with self-assessments of how they approach their tasks. The committees have also introduced mediation mechanisms to bring peer pressure to bear on each other.

The openness of this system means that it attracts a great deal of comment and input at the consultation phases. The industry has many opportunities to help shape the ideas that wind up in legislation, the definition of legal and financial terms and the supervisory practices. Citi works hard with many trade associations, and frequently directly, to make sure the industry's voice is well heard.

Most observers agree that CESR has been a significant but qualified success. It has delivered precisely what it was asked to do, more or less on time. But the products themselves have not been everything the industry might have hoped for. The whole structure is being reviewed this year. Some want to strengthen it substantially so that the supervisory committees become embryo pan-EU supervisory authorities, with policy making powers over their national members. Naturally, these sorts of ideas have produced a very heated debate.

There is a stronger argument for practical reforms that help reduce the level of detail in level 1 and 2 legislation and make sure that more time is given to consultation and addressing problems earlier in the process.

So what would we like CESR to do next? Getting the legislation in place was just the first step. The next step should be making it operational and making sure that each national supervisor takes the same, or a very similar, approach. With CESR's help, they need to agree on a single definition for all the legal terms and conditions set out in the directives. With convergence they should also be able to fully recognise each other's approaches as equally valid and feel comfortable enough not to want to impose extra requirements on foreign firms that enter their markets from other EU MS.

In truth, CESR cannot fix the basic problem: too many options, opt-outs and ambiguities for MS to reinterpret EU directives in any way they see fit. With the best will in the world, technical advice to promote convergence cannot be a substitute for poor political fixes when the original legislation is being drafted. And the old game of national rivalry sits oddly in a committee that is aimed at pooling decision-making and finding convergence. On the other hand, it is harder to make these arguments as the system becomes more open and transparent.

Across Europe

Is asset eligibility still an issue under UCITS?

The implementation of the Eligible Assets Directive [Commission Directive 2007/16/EC of 19 March 2007] in various European Union Member States has clarified existing issues around assets eligibility for UCITS, but has also unlocked the doors to investment into assets that should not, in line of principle, be eligible for investment.

With the implementation of UCITS III [EC Directive 2001/107/EC and 2001/108/EC amending EC Directive 85/611/EEC], portfolio managers have benefited from enhanced flexibility in the way they manage assets. Techniques such as synthetic short selling and the possibility to obtain exposure to hedge funds (through derivatives on hedge-fund indices) are already known consequences of the UCITS III enhanced framework and the clarification work carried out by CESR. However, other less obvious investment opportunities are available to UCITS.

Two notable exceptions to the rule

First exception

The first exception to the rule refers to instances where transferable securities can be linked or backed by other assets.

The Eligible Assets Directive states, under article 2(2)(c)(ii), that financial instruments that "are backed by, or linked to the performance of, other assets, which may differ from those referred to in article 19(1) of Directive 85/611/EEC", may qualify as transferable securities, as long as some conditions are met. We will review these conditions later in this article; for the time being, it is important to underline the reference to "other assets".

The EC has fully clarified this reference [Background note on the ESC working document, "Elements for a possible Commission Regulation on the clarification of definitions under the UCITS Directive", ESC/14/2006, p. 5] stating that, in respect of financial instruments backed by or linked to the performance of other assets, "the categorisation of these instruments (often referred to as 'structured financial products') gives rise to uncertainties, particularly if the backing or linked assets are not themselves eligible under the UCITS Directive, e.g. instruments referring to the oil price or to commodities...". Such instruments are transferable securities if they comply with the criteria set out [in the eligible assets and in the UCITS directives]. "Whether the linked or backed assets are themselves eligible for UCITS investment in accordance with article 19(1) of the Directive is not relevant for this qualification. This approach is based on the consideration that the Directive does not require such a 'looking-through approach'."

In the same document, the EC has also pointed out that should such financial instruments embed a derivative element, that element should be taken into account to ensure compliance with limits on global exposure and issuer risk. However, "not all forms of linkage to other assets should be construed as embedding a derivative element.... If, for instance the instrument merely replicates the performance of a certain underlying (e.g. oil price) at a ratio of 1:1, there would be no embedded derivative element...".

Second exception

The second exception to the rule refers to financial derivatives on financial indices.

The Eligible Assets Directive clarifies that financial derivative instruments (FDIs) are eligible only if their underlying are eligible for UCITS investment and cannot result in the delivery or in the transfer, including in the form of cash, of assets other than those eligible for UCITS investment [Articles 8(1)(a) and 8(2)(b)]. This follows on from the work carried out by CESR in a document entitled "CESR's Advice to the European Commission on clarification of Definitions Concerning Eligible Assets for Investments of UCITS." (CESR's advice) on the clarification of eligible assets for UCITS investment [CESR/06-005, Level 2 advice, p. 50, 61].

The only exception to the rule is granted to financial derivatives on financial indices, where the eligibility criteria are applied not to the constituents of the financial index but to the index per se. Under the terms of article 9(1)(a)(iii) of the Eligible Assets Directive, a financial index may qualify as such also "where the index is composed of assets other than those referred to in article 19(1)" of the UCITS Directive.

The categorisation of these instruments (often referred to as "structured financial products") gives rise to uncertainties, particularly if the backing or linked assets are not themselves eligible under the UCITS Directive.

The definition of "transferable security"

Firstly, let us consider the case of financial instruments backed by or linked to the performance of non-eligible assets: how and under what circumstances do these financial instruments qualify as transferable securities?

Article 2 of the Eligible Assets Directive defines the criteria that a financial instrument is required to meet in order to qualify as transferable security, which is in line with CESR's advice. These criteria can be summarised as follows:

a) Exposure: the potential loss which the UCITS may incur with respect to holding the instrument is limited to the amount paid for it;

b) Liquidity: the liquidity of the instrument does not compromise the ability of the UCITS to meet investors redemption requests;

c) Valuation: reliable valuation is available for the instrument — either in the form of accurate, reliable and regular market prices, or in the form of a valuation on a periodic basis — available from the issuer or obtained from "competent investment research";

d) Information: regular, accurate and comprehensive information is available to the market on the security, or where relevant on the portfolio of the security.

Additionally included are the basic requirements of compliance of the security with the investment policy and/ or the investment objectives of the UCITS; the inclusion of the security in the RMP of the UCITS; and (if applicable) the appropriate consideration of any embedded derivative element.

Exchange-traded commodities

Exchange-traded commodities (ETCs) provide for an interesting example of transferable securities backed by or linked to the performance of non-eligible assets. ETCs are "investment vehicles (asset-backed bonds) that track the performance of an underlying commodity index including total return indices based on a single commodity. Similar to exchange-traded funds (ETFs) and traded and settled exactly like normal shares on their own dedicated segment, ETCs have market-maker support with guaranteed liquidity, enabling investors to gain exposure to commodities, on-Exchange, during London hours" ["What are ETCs?" Redefining the Commodities Marketplace: Exchange Traded Commodities (Great Britain: London Stock Exchange, 2006), p. 4].

Although key investment restriction rules (the so-called "5/10/40 rules") apply, UCITS may invest in ETCs as standard transferable securities, achieving exposure to non-eligible assets (mainly commodities).

Various types of ETCs are available, differing not only in terms of underlying asset but also in terms of strategy — leveraged ETCs or ETCs replicating short-selling strategies are also available.

Derivatives on financial indices

The first consideration to make is that CESR has already clarified that derivatives on financial indices of a specific category of non-eligible assets, such as hedge funds or funds of hedge funds, are eligible for investment by UCITS under certain conditions [CESR's guidelines concerning eligible assets for investment by UCITS — the classification of hedge fund indices as financial indices (CESR/07-434)].

ETCs provide for an interesting example of transferable securities backed by or linked to the performance of non-eligible assets.

In line with the above, the Eligible Assets Directive provides under article 9 three basic criteria that indices (regardless of the nature of the underlying assets) should meet to qualify as financial indices and therefore become acceptable underlying instruments for OTC derivative instruments [Refer to article 19.1(g) of the UCITS Directive]:

a) Diversification: the index should be composed in such a way that price movements or trading activities regarding one of its components do not unduly influence the performance of the whole index;

b) Representation: the index should represents an adequate benchmark for the market to which it refers; and

c) Publication: the index should be published in an appropriate manner.

More detail can be found in the text of the Eligible Assets Directive, and appropriate guidance is also provided by CESR [CESR/07-434. See also "CESR Launches a Consultation on Derivatives on Hedges Fund Indices for UCITS Investments", News & Views, March 2007].

Considering diversification in more detail

It is apparent from recent industry discussion that there are different interpretations of exactly what might constitute diversification for a given index in a specific set of circumstances. This has been a particular issue when considering commodity indices.

Neither the Commission nor CESR appears to clearly define the term in a quantitative sense. In trying to determine what is meant by diversification, it therefore seems reasonable to analyse alternative data sources. One approach would be to apply the spread and concentration rules indicated by article 22 of the UCITS Directive — the 5/10/40 rule.

We should also consider that, in a recent article entitled "Index Usage and Replication by UCITS Schemes," ["Index Usage and Replication by UCITS Schemes", Euromoney ETFs & Indices Handbook 2008, (Great Britain: Euromoney Yearbooks, 2008)] a member of the FSA CIS regulation and policy team, writing in a personal capacity, suggests where the policy of a UCITS scheme is replication of an index, the limit of 5 per cent investment in shares and/or debt securities issued by the same body is extended to 20 per cent, in essence ensuring that any index being replicated must consist of at least five issues.

Should the criteria defined in article 22 always be referred to, the key question would be: "what exactly constitutes an 'issue' when considering a given financial index?" In the case of a financial index on commodities, for example, do we take this to mean a group of commodities such as energy, precious metals, softs, etc., or types of commodities within those groups, such as oil, gas, electricity, etc.?

Correlation and diversification

Should we look at the potential correlation between different types of assets when assessing a financial index diversification?

It may be argued that where analysis demonstrates an obvious correlation between certain underlying assets within a group, the implication is that each group of commodities should be regarded as an "issue" for the purpose of article 22.

Under this approach, although exceptions may apply, a UCITS would be in general limited to 20 per cent investment in each asset class (commodity of energy, precious metals, properties, etc.).

Should we look at the potential correlation between different types of assets when assessing a financial index diversification?

CESR's advice also touched on the issue of correlation under point 164, stating: "When assessing these diversification ratios, components which are highly correlated (i.e. futures on oil-traded on different regulated markets) should be treated as giving exposure to the same commodity."

Additional guidance on the requirement of "diversification" in the context of financial indices would be useful. As UCITS' investment restrictions, and the investment objectives and policies can vary, when assessing diversification, it would be prudent for any management company to undertake some form of analysis of the correlation between the components of a financial index before taking any investment decision.

Availability of indices of non-eligible assets

The financial markets are already providing for indices of non-eligible assets that may qualify as financial indices. The Vienna Stock Exchange (Wiener Börse AG) is a valid example, as it has developed a series of indices that may serve as benchmarks, as underlyings for derivative instruments and for the issuance of structured products.

Additional considerations

UCITS that invest in transferable securities backed by or linked to non-eligible assets or in FDIs whose underlyings are financial indices of non-eligible assets have already been established in different jurisdictions.

In principle, any asset becomes eligible for UCITS. As of now, we could safely state that UCITS are already allowed to indirectly invest into any category of asset. Properties, carbon emissions, hedge funds, property funds, loans (mainstream and microfinance ones), wines, fine arts and so on are all eligible if packaged in an appropriate manner, such as via an index.

Similarly, nothing, in theory, prevents sophisticated investment strategies from being packaged and sold via UCITS — short-selling strategies, 130/30 strategies, hedge-fund strategies and so on.

Conclusions

The Eligible Assets Directive has introduced important clarifications. However, as always any change may bring new issues that had not been previously considered or simply raise new questions or doubts.

By way of example, the question now arises as to the meaningfulness of look-through obligations to prevent UCITS gaining exposure to non-eligible assets by the use of OTC FDIs. In those cases where, for instance, the OTC FDI allows for cash settlement, shouldn't non-eligible assets be considered as acceptable underlying assets? Why discriminate between a cash-settled OTC financial derivative contract and an ETC if the underlying is the same?

Additional guidance on the requirement of "diversification" in the context of financial indices would be useful.

We also note that article 19(2)(d) states that a UCITS may not acquire precious metals or certificates representing them. Is the reference to "certificates" still a valid one, or should that be reviewed in line with the provisions applicable to financial instruments backed by or linked to the performance of non-eligible assets — assuming that acquiring the certificate does not prevent the UCITS from meeting investors' redemptions requests?

Finally, one could also argue that even other initiatives, currently promoted by the EC, concerning the possibility of establishing a regulatory framework for retail property funds, should be reconsidered [See "EC's Expert Group Report on Open Ended Real Estate Funds" in this issue]. As a matter of fact, UCITS can already invest in property, via property-backed listed financial instruments, or through an FDI whose underlying is a property index, although it could be argued that indices or derivatives are generally more liquid and offer more diversification, with derivative investment generally offering a cheaper method of investment.

Similar considerations could also be applied to master-feeder structures proposed under the so-called UCITS IV Directive, where synthetic cross-border pooling of assets could be achieved via UCITS-backed listed financial instruments ["Initial Orientations of Possible Adjustments to UCITS Directive (85/611/EEC)", Working Document DG Markt Services (European Commission, 2007). See also "Possible EC Adjustments to the UCITS Directive: Getting Ready for UCITS IV", European News & Views, October 2007].

Across Europe

EC's Expert Group Report on open-ended real-estate funds

On 13 March 2008, the European Commission published an Expert Group Report, which analyses cross-border market-access barriers, for nationally regulated open-ended real-estate funds [Expert Group Report on open ended real estate funds, 13 March 2008]. The contents of the Report and the Expert Group's proposals were publicly debated at an open hearing in Brussels on 8 April 2008.

Background

In June 2007, the EC appointed the members of a newly established Expert Group on open-ended real-estate funds [As per Commission Decision C(2007)1403 of 30 March 2007]. The purpose of the Expert Group was to assess the characteristics of the EU market for open-ended retail real-estate funds, to provide input to policy considerations and to provide a starting point for discussions with MS authorities and other stakeholders.

The Expert Group believes that legislative action at European level is required in order to overcome existing regulatory barriers to the marketing of OEREFs to retail investors across borders.

The Expert Group was requested to submit a report, to address the following three issues [Article 2, Section 1, Reference Commission Decision C(2007)1403 of 30 March 2007].

1. The risk and performance characteristics of open-ended real-estate funds; and

2. The scale and scope of the perceived benefit for the industry and for investors of introducing an EU-wide passporting mechanism for open-ended real-estate funds. In doing so, the group would provide:

· A description of the European market for real-estate funds, including open-ended funds;

· An analysis of the existing or likely future demand for providing open-ended real-estate funds across borders;

· An examination of the barriers to cross-border development of open-ended real-estate funds; and

· An evaluation of existing national regulatory (including tax) approaches to open-ended real-estate funds.

3. An analysis of the different cost-effective options for providing the possibility for open-ended real-estate funds to be offered across EU borders.

The Expert Group's recommendations

On the basis of the analysis conducted, the Expert Group has put forward eight key recommendations, which we summarise in the following paragraphs. However, we recommend the Report be read in its entirety.

1. The need for a European Single Market framework for OEREFs.

The Expert Group considers that the EU is "currently a patchwork of fragmented OEREF markets" [Recommendation 1, Expert Group Report, p. 23]. Despite the fact that OEREFs are now a mainstream product for retail investors in many MS, and that it represents over EUR110 billion in AUM, most of the attempts to distribute OEREFs on a cross-border basis have proven to be unsuccessful, due to multiple and divergent national regimes. The Expert Group's view is that "only an EU passport can create a single market for OEREFs".

2. An effective solution requires EU legislative action.

The Expert Group believes "that legislative action at European level is required in order to overcome existing regulatory barriers to the marketing of OEREFs to retail investors across borders." [Recommendation 2, Expert Group Report, p. 26]

3. Fiscal regime to accommodate cross-border OEREFs.

OEREFs encounter significant tax barriers when distributed across borders, both at fund and at investor level. Discriminatory tax practices often apply to foreign OEREFs. The Expert Group is aware of the fact that achieving a common tax framework for OEREFs would be very difficult; therefore, it recommends that "in the light of the EU treaty freedoms, notably the free movement of capital, it reminds Member States of the prohibited discrimination of foreign OEREFs and invites the EU Commission, if need be, to enforce these freedoms." [Recommendation 3, Expert Group Report, p. 28]

4. Strong potential for a harmonised approach.

"The new EU OEREF regime should be modelled to the extent possible on existing national frameworks". [Recommendation 4, Expert Group Report, p. 30] Although harmonisation is a complex process, that often requires compromise between different approaches, negotiations should be more easily conducted if the OEREFs regime is based, as much as possible, on tested and common ground.

5. The building blocks for an EU regime. The Expert Group has conducted an analysis of existing OEREF regimes and extracted a set of key features that should be used as building blocks for the EU OEREF regime. These features should be seen as a complete package of regulatory safeguards and investor-protection rules and include (among others): regulatory authorisation and approval requirements, risk-spreading and borrowing-limits rules, and the role of the independent depositary.

6. Key issues requiring particular attention. The Expert Group considers that some key features play a vital role in allowing an effective functioning of OEREFs and in ensuring adequate investor protection. Therefore, the Expert Group recommends: [Recommendation 6, Expert Group Report, p. 32]

i. OEREFs should have the possibility to make full use of property SPVs;

ii. OEREFs should be permitted to borrow up to 60 per cent of their real-estate assets (including real-estate SPVs);

iii. OEREFs should redeem units at investor request, which may be on a daily basis, but could be as infrequent as once in a quarter;

OEREFs should have a minimum liquidity of 10 per cent of their assets and install a sophisticated liquidity-management system appropriate to their subscription/redemption policy;

Properties held within an OEREF portfolio should be subject to independent and regular valuation at least once per calendar year to determine a market value of the properties, based on international valuation standards; and

vi. OEREFs should fully disclose their pricing policies. They should also highlight to investors the long-term investment focus of OEREFs and that redemption of units may be suspended under exceptional circumstances".

7. EU OEREF regime mostly built on the UCITS [UCITS: Undertaking for Collective Investment in Transferable Securities, as defined by the so-called UCITS Directive, Council Directive 85/611/EC] model.

The OEREF regime should be built, to the extent possible, on the basis of UCITS legislation "except in areas where UCITS rules would be inappropriate for managing real estate portfolios, and in addressing their specific risks. In these cases, additional or modified rules are required." [Recommendation 7, Expert Group Report, p. 38]

8. Introduction of a new OEREF chapter to the UCITS Directive.

"A modification of the UCITS Directive to provide a product passport for OEREFs would be the most efficient way to achieve cross-border OEREF distribution to the retail market". [Recommendation 8, Expert Group Report, p. 38]

OEREF rules should be drafted as much as possible according to Lamfalussy procedures.

Conclusion

The Expert Group is of the opinion that their Report presents a convincing business case for legislative action at the EU level, and considers that amending the UCITS Directive to include OEREF provisions is the most reasonable and effective way of introducing a harmonised regime for OEREFs.

A modification of the UCITS Directive to provide a product passport for OEREFs would be the most efficient way to achieve cross-border OEREF distribution to the retail market.

At the same time, one may argue that the process of amending and updating the UCITS Directive is well underway, and it is difficult to think that after all the time and effort spent so far in discussing the proposed amendments [See "Possible EC Adjustments to the UCITS Directive: Getting Ready for UCITS IV", European News & Views, October 2007], the EC will decide to restart a UCITS Directive review process, unless the so-called UCITS IV review is abandoned for possible replacement by a UCITS V Directive.

Interestingly, it is worth asking if other non-UCITS products — i.e. private equity, hedge funds and collective commodity or carbon-emission investment — would also benefit from some additional harmonisation. It may be the time to step back and rethink the entire collective investment framework (UCITS and non-UCITS) rather than enforcing partial regulatory solutions that cater for only very specific or contingent market needs.

Nonetheless, the Expert Group Report is a very valuable contribution and identifies areas where legislative action is required. Some of the recommendations may need further discussion (for example, a clearer definition of the concept of "sophisticated liquidity management system", which could be simply embedded in the "risk management process"), but in general terms we consider that the recommendations put forward by the Expert Group are sound and practical.

Across Europe

Filling the gap for retail investors: is the KID moving forward?

In February 2008, CESR published recommendations and proposals on information to be disclosed to retail investors, prior to investing in a UCITS fund, in the publication entitled "CESR's advice to the European Commission on the content and form of Key Information Document disclosures for UCITS" (the report) [Ref. CESR/08-087].

In this article, we aim to capture some of the key elements of the report by summarising these key elements into questions, that we hope you find both interesting and useful.

What does the KID refer to?

The EC requested CESR to provide advice on the form and contents of the Key Investor Information (KII), which the EC proposes to introduce to replace the current Simplified Prospectus. CESR, in the report, proposes to rename the KII to the "Key Information Document" (thus applying the acronym "KID").

Why is there a need for the KID to replace the Simplified Prospectus (SP)?

The concept of the SP was introduced in 2002, as part of the UCITS Management Directive [Directive 2001/107/EC]. The primary benefit aimed to simplify key elements of the prospectus to enable retail investors to be able to make well-informed decisions prior to investing in a UCITS fund. The SP was designed to improve the lack of clear information available to retail investors on UCITS funds, in comparison to the information available to the provider and/or distributor of UCITS funds within the market. Without this clear information available, the effectiveness of the UCITS Directive [Directive 85/611/EEC] (within the retail market) may have been limited.

In 2004, the EC published a recommendation encouraging Member States (MS) to provide consistency to the approach on key elements of the SP [Commission Recommendation 2004/384/EC on some contents of the Simplified Prospectus as provided for in Schedule C of annex 1 to Council Directive 85/611/EEC, April 2004]. Finally, the SP was implemented in all MS with effect from 2005.

In 2005, the EC published the Green Paper "on the enhancements of the EU framework for investment funds", seeking feedback on the effectiveness of the SP, by requesting CESR to undertake a review of the implementation of the SP by MS. The evidence received indicated that there continued to be a lack of transparency about UCITS funds, particularly in relation to their associated costs and risks. It also evidenced, among other things, that the information provided in the SP "is too lengthy and technical", that the content is inconsistent in MS, and that:

· The average retail investor may not easily understand or use the information in the SP; and

· The SP does not assist in comparisons between funds, especially when cross-border sales are experienced.

Therefore, the overall benefit of the SP has not been fully achieved within the retail market and may hamper the cross-border sales of UCITS funds.

The fundamental objective is for KID to provide a pre-contractual tool on essential information, to assist retail investors who opt to invest in UCITS funds, to make well informed investment decisions.

Who is working on the implementation of the KID?

The EC proposed replacing the exiting SP with the concept of the KID as part of a number of enhancements to the UCITS Directive, announced in March 2007 ["Initial Orientations of Possible Adjustments to UCITS Directive (85/611/EEC)", Working Document DG Markt Services (European Commission, 2007)]. This culminated in the EC requesting CESR to provide advice on the form and content of the KII.

CESR achieved this by forming a sub group of CESR's Investment Management Expert Group, which is jointly chaired by the French AMF and the UK FSA, and includes representatives of eight other MS.

What is the proposed objective and scope of the KID?

The fundamental objective is for the KID to provide a pre-contractual tool on essential information, to assist retail investors who opt to invest in UCITS funds, thus enabling them to make well informed investment decisions.

In section 10 of the "Summary and Outline of Advice" in the report, CESR states: "A KID should be produced for all UCITS funds, and delivered to all investors in those funds. However, CESR supports examining the possibility of allowing non-retail investors to opt out of receiving a KID if they deem it not relevant to their needs, so as to reduce unnecessary costs".

Who will provide the KID?

Section 3.9 of the "Recommendations on the purpose and scope of the KID" specify "the draft changes to Level 1 of the UCITS Directive indicate that the management company must provide a KID to investors it deals with directly. CESR understand this to mean that there is an obligation to deliver the KID to the investor, not merely to offer him the choice whether or not to receive it".

What does CESR propose for the format and content options of the KID?

Format

CESR considers that the KID should be presented as a single document (i.e. one sheet with two pages) and produced "according to a relatively prescriptive and standardised approach".

It is envisaged the specific local information would not be included in the KID but replaced with a "general invitation to consult a website where the details for each MS would be displayed, or to write to a global contact address".

Option A

Item no.	Suggested 13 key items	Preferably sheet
1	Names of the fund/ the management company/the promoter or group;
2	Fund objectives and investment strategy;	Page 1
3	Material risk/reward factors likely to affect the fund;
4	Indication of past performance;
5	Summary of charges payable directly and indirectly by the investor;
6	Treatment of income (whether paid out or capitalised);
7	Practical information not specific to any one MS, i.e. frequency of NAV calculation;
8	Where further information on locally specified practical information, i.e. latest price;
9	Where/ how to obtain further information: prospectus and fund rules, reports and accounts; the language availability and where all other publications are to be found (e.g. changes in fund rules);	Page 2
10	A warning that the fund's home state taxation regime may impact investors in other MS;
11	An indication of the extent of the provider's legal liability for the KID;
12	Identity of competent regulatory responsible for the fund; and
13	Date of publication of prospectus/KID.

Data source: the report, section 12, "Summary and Outline of Advice" and section 3.25, "Option A - A Minimal Set of Items".

Option B

Item no.	Suggested additional nine items
1	Name of depositary;
2	Name of auditors;
3	Where to complain; ["Although such information was mentioned as important by consumer representatives, CESR notes that it might be problematic achieving a common solution given the complexity of the picture once cross-border sales are taken into consideration"]
4	Local information such as the cut-off time for dealing instructions, contact details of a paying agent collecting orders of subscription/redemption, contact details within the investor's MS (and not only at European level) for the delivery of further information (annual report, change of fund rules, etc.);
5	Information of the existence of other classes of shares;
6	In the case of relevant umbrella funds: information on the existence of other compartments if they are not segregated, and a warning that assets of each compartment are not ring-fenced/within a protected cell structure;
7	The date the fund was created;
8	The fund/share class ISIN (to allow easier "execution-only" subscriptions);
9	The Currency of the NAV.

Data source: the report: section 3.27, "Option B - Testing the Relevance of Some Items in Option A and of Further Items to Add".

Content

CESR references that two options of formats should be consumer-tested to determine the elements that are most useful — i.e. "Option A" (which details a minimal set of items), "Option B" (which applies testing the relevance of some items in Option A) and additional items.

Option A

While CESR suggests the 13 key items should appear in a KID within a fixed order and hierarchy, at the time of the publication of the report, the final order on content was not concluded, so it could change (see table Option A).

Option B

The report proposes that: item 10 and 12 in table Option A should be tested to determine if they add value for stakeholders by having this data in the KID; and the following proposed additional nine items in table Option B are tested to determine if they would be useful to add to Option A.

How will the KID accommodate different fund types?

For different fund types, the report recognises that the KID may require further data, for example:

· Fund of funds "wrapper" may require charges of the underlying funds;

· An umbrella fund may require a separate KID for each sub-fund; or

· A fund with multiple share classes may require separate KID for each share class.

The report does not rule out the scope for a consolidated version of a KID to be produced covering the whole umbrella or combine information for funds with multiple share classes, provided the KID does not become too complex.

Similarly, CESR recognises that it may be less easy to apply a standard KID size for more innovative product types, i.e. structured funds, where there may be a need for additional information. Annex 6 of the report contains "KID mock-ups" for simple funds, complex funds and structured funds.

When the KID is implemented, how often should it be revised?

CESR recommends that "the operator of the UCITS should be under an obligation to revise the KID as often as necessary to reflect any material change in the information that could affect its accuracy" and "to review the KID periodically", which CESR suggests is "likely to be once every 12 months, where no material change has taken place in the period."

Although we have summarised some of CESR's considerations, we recommend the report be read in its entirety.

Conclusion

CESR has moved the KID forward. With its preparation and advice on the format and content of the KID, however, three key factors that require further consideration are:

1. Implementation and delivery of the KID: clearer definitions of the responsibilities of a UCITS operator and any other regulated entity that distributes, promotes or operates UCITS Funds, around the implementation and delivery of the KID.

2. Suitability of a KID for UCITS funds packaged in a wrapper: confirmation if a KID will/will not apply for a wrapper, as a wrapper is likely to hold different information to the fund or sub fund level, e.g. charges, which may be misleading to retail investors investing in the underlying UCITS fund(s).

3. Applicable directives: confirmation on how other directives, e.g.MiFID, will be taken into account with the UCITS Directive to interact with the KID for delivery requirements to achieve consistency in disclosure requirements across products and MS.

According to the "Press Release", the market testing process will be undertaken by the EC in 2008 [CESR/08-088, 15 February 2008]. This may prove to be challenging as it will be key to determining whether the KID will actually provide retail investors opting to invest in a UCITS fund with enough concise information to allow them to make a well informed decision.

It is anticipated that further progress will be made in the spring of 2009, as the Press Release also makes reference to CESR finalising "its advice taking into account the results of the testing exercise and further consultation with market participants (spring 2009)".

As we continue to monitor, with interest, the EC's next steps on the possible adjustments to the UCITS Directive, one question that remains outstanding is: when and how will the final legislative proposals be implemented? ["Initial Orientations of Possible Adjustments to UCITS Directive (85/611/EEC)", Working Document DG Markt Services (European Commission, 2007)] Wherever further value can be added by European legislation to assist investors in making a well informed investment decision prior to investing in the fund is, we believe, a positive step forward for the UCITS fund industry.

Ireland

Irish tax update: the 8-year deemed disposal requirements for Irish resident investors in Irish funds

The Finance Bill 2008 published 31 January 2008 and enacted 5 April 2008 in Ireland (the Bill) references in Section 36 a number of provisions that in the majority of cases will eliminate the anticipated administrative burden of the implementation in Ireland of Section 50 of the Finance Act 2006, entitled "The 8-year deemed disposal requirement".

Interestingly, as the Irish funds are sold predominantly to non-Irish residents, Section 36 of the Bill provides that if an Irish fund has less than 10 per cent of its value held by Irish resident taxable investors, then the fund or its service provider does not have to calculate and apply the deemed disposal tax — instead the obligation to account for the tax is the responsibility of the Irish investor on a self-assessment basis.

Background

Section 50 of the Finance Act 2006 introduced a new requirement for Irish investors investing in an Irish fund. If the Irish investors have been deemed to dispose of units they acquired on or after 1 January 2001, and thereafter every eight years from the date of acquisition, and if there is a gain on this deemed disposal, the exit tax must be deducted and paid by the investment undertaking to the Irish tax authorities.

If an investor continues to hold their units indefinitely, a deemed distribution will occur every eight years on the increase in the value of their units, since the last exit-tax applied. The obligation to calculate this tax has resulted in a number of practical implications for fund-industry companies, including system developments and the controls that would be required to track and facilitate such a calculation.

Who will benefit from this new tax requirement?

This new requirement was introduced, to alleviate the concern of a loss in tax revenue to the Irish Exchequer, as a result of the gross rollup of life products. However, in order to preserve a perceived level playing field between the life assurance market and the investment funds market, an eight-year rule, similar to that applied to the life products, was introduced for investment undertakings. Primarily, life assurance products are sold to Irish residents; therefore, the prospect of indefinite gross rollup represented a potentially serious loss of cash flow/tax revenue to the Irish Exchequer. Investment undertakings, on the other hand, are sold almost exclusively to non-Irish residents, resulting in the systems and costs implications on the Irish funds industry far exceeding the potential tax benefit to the Irish Exchequer.

As Section 36 of the Bill references, if Irish resident taxable investors hold less than 10 per cent of the value of the units in a fund, then the fund does not have to calculate and apply the deemed disposal tax. This only applies if the fund makes an election to benefit from this de minimus rule and to report certain details (including a nil return, where applicable) to the Irish Revenue Commissioners on an annual basis. In this instance, the Irish investor will be required to disclose such a gain in their tax return under the self-assessment reporting basis.

This proposed change should have a significant practical benefit as the vast majority of Irish funds have less than 10 per cent of their value held by Irish taxable residents. Also, going forward, any fund that is not primarily distributed in Ireland should also benefit from the 10 per cent de minimus level.

Is there any tax relief for Irish taxable investors investing in funds?

While the 10 per cent de minimus provision should remove the majority of funds from the eight-year deemed disposal obligation, it will not remove all, as there are some funds that have a considerable proportion of Irish taxable investors. In these instances, the Bill also provides some relief, detailed as follows:

· For the purposes of the eight-year deemed disposal, the investment undertaking can elect to perform the calculation using NAVs that applied at 30 June or 31 December prior to the chargeable event, rather than having to carry out valuations at various dates during the year. This may remove some of the administrative burden.

· Where taxable Irish resident investors hold less than 15 per cent of the value of a fund, and a refund of tax arises, for example, at the eight-year anniversary, the fund applies tax on the deemed gain on the shareholders' units and pays this tax to the Revenue Commissioners. Where the investor subsequently sells their units but the realised gain on the actual sale is less than the realised gain on the deemed disposal, an overpayment of tax arises.

Irish investors can claim refunds directly from the Revenue Commissioners, thus removing the responsibility of the fund or its service providers of having to track the tax over the lifetime of the units, putting the onus on the unit-holder to claim the refund directly from the Revenue Commissioners.

Conclusion

Since the publication of the Finance Bill in 2006, the Industry Tax Committee has engaged with the Department of Finance and the revenue authorities to discuss the following concerns:

· The inappropriateness of this tax requirement for funds;

· The significant costs associated with its implementation; and

· The negligible increase in tax receipts from its introduction.

Their aim is to try to minimise the costs and system implications that this new provision will require for implementation.

The Irish Funds Industry Association has made several submissions to the Department of Finance on this specific matter prior to the sequence of meetings that led to the agreement on the above provisions. With the imminent enactment of the Bill and the subsequent publication of the Finance Act 2008, the introduction of the 10 per cent de minimis and other provisions will now be formalised. This formalisation will bring to a conclusion a process of engagement, which has lasted over two years with the participation of many industry committees addressing this matter.

Luxembourg

Amendments to the SICAR legislation

With the law dated 15 June 2004 relating to the "Société d'Investissement en Capital à Risque" (Risk Capital Investment Company or SICAR), Luxembourg has introduced an investment vehicle with a much more liberal regime, but one complementary to investment funds (UCITS) and especially dedicated to investments in risk capital.

After four years of implementation of the SICAR and the arrival of other new investment vehicles in the Luxembourg financial environment — like the "Société de Gestion de Patrimoine Familial" (Management Company for Private Wealth or SPF), which will replace the Holding 29 company and the "Fonds d'Investissement Spécialisé" or "FIS" (also Specialised Investment Fund or SIF) — it has been decided to amend the legislation relating to the SICAR (SICAR Law).

For this purpose, a bill of law numbered 5842, which will amend the SICAR Law, is currently being examined in the Luxembourg Deputy House and this note highlights the major changes that will affect the SICAR Law when the bill of law will come into force.

Segregation of the estate of the SICAR

The principle currently in force in the SICAR Law is the unity of the estate in the SICAR, so that, all assets of the SICAR have to be considered as representing only one estate. The Luxembourg legislator would like to change this principle by instituting the possibility of segregating the estate of the SICAR. Indeed, as soon as the SICAR Law is amended, it will be possible to create compartments within the SICAR estate by mentioning such possibility in the constitutional documents of the SICAR, as is currently the case for the securitisation vehicles, UCITS and SIF.

The aim of this segregation is to allow investors to efficiently keep assets of each compartment inside the same structure, compartments economically independent of each other. Therefore,

the rights of investors and creditors concerning a compartment or that have arisen in connection with the creation, operation or liquidation of a compartment will be limited to the assets of that compartment where they are located. With this new system, the creditors of a given compartment will never claim for the assets located in the other compartments

As soon as the SICAR Law is amended, it will be possible to create compartments within the SICAR estate by mentioning such possibility in the constitutional documents of the SICAR.

Nevertheless, this can be avoided if mentioned otherwise in the constitutional documents of the SICAR. So, if a clause included in the constitutional documents mentions that investors and creditors cannot see their rights limited to the assets located in a given compartment, they will be validly authorised to claim against the assets located in the other compartments of the SICAR. With the segregation system, it will also be possible to have several investment policies within a given SICAR as each compartment will be authorised to have its own investment policy, which is currently the case for securitisation vehicles, UCITS and SIF.

It will also allow investors to participate in the SICAR by investing several times for several specific investments. If several compartments are mentioned in the constitutional documents, it will be necessary to proceed to the investment policy description for each compartment in the prospectus in order to allow investors to judge investments proposed and risks related thereto.

Therefore, the possibility of issuing securities with different values remains in force in the SICAR Law.

Thanks to the segregation of the estate of the SICAR, it will be possible to liquidate a given compartment without proceeding to the global liquidation of the SICAR, and such specific liquidation will not affect any other compartment.

Moreover, rules relating to the dissolution and the liquidation of the SICAR will not apply. They will only apply if the SICAR is completely liquidated or if the last remaining compartment of the SICAR is in the process of liquidation.

The well informed investor

Due to their risky nature, investments in the SICAR, as well as investments in the SIF, are reserved to sophisticated investors who can be considered as qualified or well informed investors (institutional investors, professional investors or other persons acting as sophisticated investors).

In order to obtain the status of well informed investor, they have to declare in writing that they adhere to such status and invest a minimum of EUR125,000 in the SICAR or receive a certificate mentioning their ability to adequately appraise an investment in risk capital delivered by a credit institution, another professional of the financial sector or a management company.

The list of persons who can certify the quality of well informed investors will be amended in order to allow investment companies to certify such ability. Indeed, the SICAR Law referred to the other professional of the financial sector, a notion mentioned in a repealed European directive [Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field]. The legislator has only taken into account this repeal and will replace the other professional of the financial sector with an investment company.

Moreover, it has been decided to enlarge the scope of persons who can invest in the SICAR without requiring the status of well informed investor. Indeed, only partners of a limited partnership are currently allowed to invest in the SICAR without obtaining the status of well informed investors. With the new legislation, it will also apply for partners and other persons of any company legally allowed to be created as a SICAR who intervene in the management of the SICAR because they are aware of the investment risks in the SICAR.

Social capital of the SICAR

It is sometimes difficult to reach the minimum social capital of the SICAR of EUR1,000,000 - (to be reached within one year) with regard to the chosen ratio between the nominal value and the share premium. In order to proceed to the calculation of the minimum capital of the SICAR and thus determine the social capital, the legislator opens the possibility to take into account the share premium.

Indeed, certain investors wish the nominal value of the shares not to be too high; but the share premium applied to the share subscription can be the main component of the capital contribution. Therefore, it will be easier for investors to reach the minimum capital necessary for the incorporation of the SICAR with this new method of calculation.

Valuation of the assets of the SICAR

As mentioned in the SICAR Law, the valuation of the assets of the SICAR is done on the basis of the foreseeable sales price estimated in good faith. Such value has to be determined in accordance with the rules set forth in the articles of incorporation of the SICAR.

By taking into account the directive of the European Parliament and of the Council []Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/ EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings relating to the modernisation of the accounting directives, the Luxembourg legislator proposes to replace the reference to the foreseeable sales price by a reference to the fair value.

So, for the future, the SICAR will value its assets in accordance with the principle of fair value. For this purpose, persons in charge of the valuation of the assets of the SICAR can refer to valuation rules established in 2005 by recognised associations involved in the private equity field such as the European Private Equity and Venture Capital Association or the British Private Equity and Venture Capital Association. In any case, the articles of incorporation will set out the valuation methods established by the SICAR in order to estimate the value of its assets.

The custodian functions

The custody of the assets of a SICAR must be entrusted to a custodian. Whereas the mission of the custodian is more than a simple mission of keeping of the assets and involve a general mission of surveillance of the assets, the legislator has given a limited list of certain tasks for the custodian in the SICAR Law i.e. to verify that the subscription price has been received in the time limit set forth in the constitutional documents, control that a consideration is paid or received within the customary time limits with regards to transactions involving the assets of the SICAR and to verify that the income is applied in accordance with the constitutional document of the SICAR. Therefore, it appears that it is useless to keep this limitative list of tasks in the SICAR Law.

The legislator wants to provide the SICAR with a modern and pragmatic legal environment similar to that already existing for the SIF and the securitisation vehicle.

In the legislation relating to the SIF, there is no reference to a list of tasks to be done by the custodian and, as the SIF and the SICAR are both reserved for well informed investors, the legislator has decided to remove the list of certain tasks of the custodian within the SICAR. The custodian will therefore have a general mission of custody and surveillance of the assets of the SICAR.

Net asset value (NAV)

Currently, the NAV of the SICAR has to be established on a semi-annual basis for investors who so require it. In the bill of law 5842, it is proposed to delete any reference to the NAV.

Indeed, the legislator considers that the notion of NAV is not significant in the risk capital field. Therefore, the SICAR will not have any legal obligation to value the NAV of its assets. But, even if it is proposed to remove any reference to the NAV in the SICAR Law and any criminal reference in case of non publication of the NAV, it will still be possible to mention the NAV and its calculation frequency in the prospectus.

Conclusion

The legislator wants to provide the SICAR with a modern and pragmatic legal environment similar to that already existing for the SIF and the securitisation vehicle.

The new regulated and liberal characteristics of the SICAR, expected to be voted by the Luxembourg legislator, will reinforce the position of the SICAR as one of the main vehicles for investment in private equity, and will also reinforce the position of Luxembourg as one of the main hubs for investment in risk capital in Europe.

Charles Etonde
Legal Manager Mourant Luxembourg S.A.

Luxembourg

The challenges of market efficiency

The challenge

The market trends are obvious: a growing complexity of fund products, an important increase of cross-border fund distribution driven by a shift towards open architecture, a continuously evolving market and always more demanding business environment.

The impact these trends have on market participants is also obvious: the efficiency is challenged by the complexity linked to the servicing of sophisticated products such as alternative investments or cross-border vehicles and the need for specialised and value-added services increases the operational risk and the administrative cost.

These trends have an impact on transfer agents (TAs), where the processing of fund orders may benefit from a more standardised and automated approach to the operating models they support. The need for TAs to find the best possible way to optimise their processing costs while delivering the quality services expected in an increasingly global and competitive market is becoming key.

Thus, the cost/quality dilemma appears to be one of the industry's biggest challenges. The fact that the STP ratio for pre-trade processes has only increased by three per cent over the last three years, irrespective of all efforts made by the industry, emphasises the need for more efficiency, especially as an estimated 20 million transactions [Deloitte's and Clearstream's Cross-Border Fund Distribution in Europe (Luxembourg: September 2007)] are being processed in Luxembourg on an annual basis. This combined makes initiatives like the "ISO 20022 communication format" sponsored by SWIFT and the EFAMA Fund Processing Passport (FPP) to be welcomed by the various parties in the market.

The FPP

EFAMA established the Fund Processing Standardisation Group (FPSG) with a mandate to identify obstacles to efficiency within the European investment fund industry. The FPP was part of the first set of recommendations made by the group back in 2005.

The FPP represents a common data catalogue containing the key operational information of an investment fund, such as the ISIN code, contact details, subscription/redemption rules and cut-off times. Making this complete and accurate information available in a standard format to all parties should facilitate trading efficiency, reduce risk and ultimately reduce cost.

The FPP provides benefits to fund promoters, administrators and distributors. When placing an order, the distributor has access to characteristics of a fund at a glance — via the FPP.

The FPP is not a legal document like the simplified prospectus; it is an industry-driven initiative, coordinated and led by EFAMA and drawn up by professionals involved in the fund business, including investment managers, transfer agents and distributors.

The FPP provides benefits to fund promoters, administrators and distributors. When placing an order, the distributor has access to the various characteristics of a fund at a glance — via the FPP, which facilitates ease-of-fund comparison through the standardisation of core fund information capture. The need to contact the administrator to ask processing-related questions is minimised, as a large portion of frequently asked questions are contained within the FPP. As the FPP should always contain up-to-date information, the fund company or TA should receive transaction instructions with accurate information. It also opens up the way to electronic communication of fund-static data through the current Microsoft® Excel format and potentially through future options such as Extensible Markup Language (XML), where the format is currently being drafted.

A number of country-specific fund-industry associations have launched their local FPP initiatives, as has Luxembourg. Since April, Luxembourg has been live with its web-based solution "fundpassport. com", developed by Kneip Communication. A second solution was presented to the industry by Centrale de Communications Luxembourg S.A. (CCLux), demonstrating the willingness of market participants to embrace this initiative, which is of the utmost importance especially for cross-border markets like Luxembourg. This has a significant impact on fund-trade processing due to the added complexity of having to operate with almost 100 per cent of investors domiciled outside the jurisdiction.

The ultimate objective of the EFAMA is to get to a European solution one day, but at this stage, only time will tell whether this will be realistically achievable.

A step towards automation

It is known that pre-trade functions generate the most number of complaints, while fund promoters' and distributors' focus shift towards delivering efficiency gains. One can, therefore, hope that the FPP will not only help the industry to become more efficient, but it will also support the fund managers' efforts in increasing client satisfaction.

To conclude, even though the FPP touches only one part of the process, it is another important step towards the automation of the transaction flow.

United Kingdom

Disclosure of soft commission and bundled brokerage arrangements for CISs

The CIS Disclosure Code

As readers may be aware, the road to a CIS disclosure code commenced in the UK with FSA CP 05/13, published in September 2005, on soft commission and bundled brokerage arrangements relating to a broad range of retail financial service products. The CP established the concept of a body to act as an "investor representative" by considering disclosures on behalf of retail investors and interacting with product providers where necessary. For authorised CISs, it was deemed appropriate that the depositary fulfil this role, as it would (in line with COLL obligations) exercise its functions solely in the interest of investors.

Managers may only claim compliance with the Code if all relevant disclosures are met.

The FSA provided feedback in its Policy Statement of June 2006 (PS 06/5) entitled "Bundled Brokerage and Soft Commission Arrangements for Retail Investment Funds". This indicated that issues relating to soft and bundled services should be resolved through an industry-led initiative, expressing an expectation that trade associations could act effectively in this area, and noting that regulation might still be introduced if they did not. Both the IMA and DATA agreed the most appropriate way forward for the CIS industry was for managers to pass the disclosures of bundled brokerage arrangements, required by the FSA under 11.6 of the New Conduct of Business Sourcebook on "Use of Dealing Commission" (formerly 7.18 of the Conduct of Business Sourcebook) to the depositary, and to develop and publish a CIS Disclosure Code (the Code), primarily based on the IMA's existing Pension Fund Disclosure Code.

This document was published to IMA members in draft form in February 2008, with the FSA understood to be "broadly content" with its content. Subsequently, formal FSA feedback on the draft Code was provided to the IMA and DATA, and a finalised version issued on 26 June [IMA Circular 221-08 on Code on Commission Disclosure by Authorised Funds, 26 June 2008].

Below, we consider in some detail the suggested format and timings of these disclosures.

Scope

The fundamental purpose of the Code is to promote transparency on the part of the fund manager, by providing the depositary with comprehensive, clear and consistent disclosure of commissions levied on fund assets for which they have responsibility, allowing monitoring and comparison of all costs incurred in management of those assets. These disclosures should also be available to investors in simplified form.

The Code is designed to:

· Be adopted by FSA-regulated operators of UK-authorised CISs;

· Apply to all commission costs incurred by those CISs; and

· Explain the management of implicit execution costs.

For pooled funds or CISs managed by a manager or associate, it is intended that the disclosure of costs incurred should be at the fund level.

Disclosure requirements

The Code sets out minimum standards for the disclosure of information on:

· How investment managers make choices between trading counterparties and venues;

· How the resulting commission spend is built up; and

· Which services (in particular, execution and research permitted by the FSA) are met from it.

Quantitative commission disclosure is encouraged wherever possible, but for implicit costs that cannot be measured with certainty, such as transaction costs, it is acceptable to describe the manager's approach to their handling. No particular measurement methodology is advocated, although the requirement to state key aspects of methodology should allow informed readers to draw conclusions as to the usefulness of the narrative information presented. Provision of comparison of fund-specific versus firm-wide information on trading and costs is also required.

It is understood that different house-management styles, products and client requirements will result in varying types of reporting. Managers may only claim compliance with the Code if all relevant disclosures are met, although additional information that could be helpful to clients, such as details of turnover, can be included. If any particular costs addressed by the Code are not relevant to a manager's business, or are perhaps more clearly explained by narrative rather than quantitative reporting, this position should be clarified in relevant reports to justify compliance. Above all, it is crucial that the reporting be clear, consistent and consolidated. It is acknowledged that where a manager operates only one fund, comparative information cannot be provided. Also, if a manager believes that aggregation of data is meaningful, then the reason and method should be disclosed.

The Code also envisages that the "Level One" disclosure (of policy and process) should be updated annually, whereas quantitative client-specific "Level Two" disclosures should be made at least six-monthly (mirroring the FSA rules for certain transaction reports and following fiscal reporting dates for funds if convenient). Material Level One changes should not be left until the next annual reporting date, but reported promptly to the depositary.

These two levels of disclosure are described in more detail below.

Level One: manager's policies, procedures and control processes

This should report on the following areas, with consideration given to addressing the following questions.

Selection processes

1. Execution venues and methods of trading

· What execution venues are used and why? (For example, brokers, crossing networks, direct market access.)

· What trading strategies are utilised? (For example, net trading, execution only, agency trading, principal trading, internal crossing, programme trading.)

· What is the decision-making process for choice of venue? What factors influence the decision? (That is, investment decision, choice of venue and how it is informed, trade delegation, assessment of anticipated explicit and implicit costs, and post-execution quality assessment of trades.)

· How is best execution ensured for clients?

2. Broker selection

· What is the broker selection process? At what frequency, and involving which relevant factors, is the assessment undertaken? What controls are in place to address counterparty risk?

· How are targets established for future levels of business, and how are they allocated between commission-bearing and net business?

· Are any commission-sharing arrangements utilised?

3. Broker review

· What are the frequency and content of broker reviews?

· What are the processes for negotiation with counterparties when arriving at ex-ante "At Full Service" commission rates for agency trades?

· What are the negotiation processes with respect to agreeing the execution component of the "At Full Service" commission rate on an ex-ante basis and on services received for the residual?

· What is the process for monitoring business transacted against targets and how outcome may differ from original targets, whether in monetary terms, trading patterns or commission split?

It is acknowledged that the process of broker selection and review will be different between different firms, reflecting the differing size and complexity of the investment management firm.

4. The manager's execution policy

· Are appropriate details about the manager's execution policy disclosed?

· Is the policy reviewed at least annually and whenever a material change occurs to arrangements?

· Have deficiencies in arrangements been corrected?

5. Variations in rates of commission

· What is the range of commission rates paid (in basis points) across asset classes at firm-wide level?

· How do different trading strategies affect firm-wide rates?

6. Monitoring the efficiency of dealing

· What are the policies and procedures for monitoring transaction costs?

· What is the impact of implicit costs? (For example, bid/offer spread, market impact and opportunity costs.)

· Is there any use of third-party transaction cost analysis services and, if so, how are the results are used? How often is dealing effectiveness formally monitored?

7. Conflicts of interest

· What are the procedures for identifying conflicts of interest? (For example, fair treatment of fund orders and allocation of trades.)

· How are conflicts of interest managed and monitored?

· How is the effectiveness of controls assessed?

8. Purchase of research

· What is the firm's policy on using external (and third-party) research?

· How is external research assessed? (Reference should be made to the process of broker selection.)

· What is the process by which research is purchased?

9. Access to and allocation of IPOs and underwriting

· What policy and procedures are in place to ensure compliance with relevant FSA regulations, and what influence does securing allocations of IPOs and underwriting have on trading patterns?

Level Two: fund-specific information

The information required in Level Two lends itself primarily to a tabular reporting format (and indeed the Code does suggest a template for a Comparative Disclosure Table). The most important requirements here are for division of transactions by counterparties and for disclosure of the amounts of commissions generated on those transactions and the services received in exchange for those commissions. Additional commentary should be provided where this helps to put numerical disclosure into context. The manager is also required to disclose firm-wide, in percentage terms, trading patterns, sources and uses of commission for all clients in that asset class, and to compare that to the specific client fund [Managers should complete the analysis by asset class for equities and bonds as a minimum. Bond trading volumes should be disclosed in order to inform the client of trading pattern by counterparty. Derivatives should be treated as a separate asset class where inclusion would distort disclosure of other numbers. The consideration paid — not the economic exposure — should be disclosed].

The table therefore needs to include the following comparative information:

· Trading for the reporting period by the top ten counterparties, and in total;

· Commissions generated at various commission rates;

· How commissions generated have been spent (That is, totals spent on execution, spent on other services, retained by the executing broker and paid to third parties);

· Total commissions generated for the fund; and

· Fund versus firm-wide comparison of trading, commission generation and expenditure, and of average commission rate paid.

This data is intended to provide for the following analysis:

· Trading on the fund portfolio by counterparty and by trade type;

· Sources (and values in GBP) of commission generated by those trades by counterparty, and the total generated by counterparty;

· Uses to which commissions have been put in respect of purchasing execution and other services, stating (in GBP) both sums retained by executing brokers and sums paid to third parties; and

· Comparison of the above against the total pattern of trading in each asset class for all funds of the asset manager, and comparison of the average commission rate for the fund against the firm.

Additionally, Level Two requires disclosure of any underwriting or sub-underwriting commission received, and the percentage of the portfolio at period end that is not covered by the Code (e.g. direct property, private equity or commodities).

Responsibilities of Citibank International plc as UK depositary

Citibank International plc is owned by Citigroup and is authorised and regulated by the Financial Services Authority. Registered in England No. 1088249 at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB.

Citibank International plc as a UK depositary (hereafter referenced as "the Depositary") provides fiduciary services in the UK and must take reasonable care to ensure that:

· Managers have appropriate policies and procedures in place;

· Issues, if they arise, are identified; and

· Appropriate escalation procedures are applied to ensure resolution.

Whereas the IMA and DATA have no legal authority to impose standards or reporting requirements, the Depositary does have the responsibility and authority under COLL rules to request from managers any information that enables the fulfilment of its duty of oversight of the management and administration of authorised funds; in turn, those managers are obliged to provide such information as may reasonably be required. As previously stated, in some areas the Code sets out minimum — rather than absolute — standards of information requirements, which, of course, will not be the same for all schemes. It also details a common reporting format that may be expanded to suit users and providers accordingly.

To ensure that all statistics are considered in context, it is necessary for the Depositary to understand the rationale and justification for different commission costs and account methods. There is consequently a need for disclosure of certain aspects of managers' trading processes in addition to just the numbers. Not only will costs vary for differing investment strategies, but also the reliability by which different types of costs can be measured or estimated. The Code requires values for explicit costs, although implicit costs are also addressed, with the various types of commissions identified and assessed.

Policies and procedures for the management and monitoring of total transaction costs (including implicit, opportunity and market-impact costs) for clients should be disclosed in order to achieve best execution and aid the Depositary and other depositaries in understanding how different trading strategies are employed in different circumstances.

The oversight of Level One and Level Two data provided by managers would therefore include (but not be limited to consideration that:

· The Level One disclosure meets the requirements of the Code;

· There is consistency between the Level One disclosure description of execution strategies and policies and procedures in place to manage conflicts of interest and the quantitative Level Two disclosure data;

· Fund-specific versus firm-wide trading patterns have been analysed;

· Concentration of trading with counterparties is measured;

· The purpose of any transaction and commission paid to third parties is justified;

· Research costs are justifiably and suitably apportioned to the relevant funds; and

· The fund portfolio turnover level is appropriate.

In line with general depositary oversight responsibilities and the role of "investor representative", reviews conducted by the Depositary, therefore, should over time allow us to build up a complete picture of the policies and procedures used by managers in achieving value for money for retail investors.

The results of these reviews should provide assurance of the effectiveness of each manager's policies, procedures, systems and in-house monitoring. If a reasonable level of comfort cannot be attained and issues are identified that require clarification, they will be raised at an appropriate level and escalated as appropriate should satisfactory responses not be received.

Ongoing risk assessment of compliance arrangements and control processes will also contribute to determining frequency of reviews and appropriate sampling techniques; consequently, it is reasonable to anticipate that these may vary from manager to manager, and potentially between different funds operated by the same manager.

Conclusion

In respect of issues relating to soft and bundled services for authorised CISs, the FSA ultimately needs to see that investment managers are making decisions that focus on getting value for money from commission spending and are accountable to their clients for those decisions. In its PS 06/5, the FSA advised that it would:

· Monitor developments in the market over the next 18 months;

· Review the effectiveness of industry-led measures during 2008;

· Judge the success of the disclosure-based approach; and

· Consider more prescriptive measures if desired outcomes have not been achieved.

The FSA ultimately needs to see investment managers are making decisions that focus on getting value for money from commission spending and are accountable to their clients for those decisions.

As previously stated, the Code is fundamentally designed to promote clarity and accountability by defining a comprehensive package of consistent disclosures by managers that should allow

depositaries to monitor and compare relevant costs. Ultimately, then, depositary oversight should enable increased transparency and contribute to improving the decision-making processes on trade execution, ancillary services and their impact on expenditure. The Depositary's view, therefore, is that adoption by the industry of the initiatives described above should achieve the necessary level of success to meet the FSA's requirements.

Next steps

Now that the finalised Code has been formally published, it is vital that managers provide the necessary disclosures with immediate effect (if they are not already doing so).

It is important to reiterate that, according to the policy statement issued by the FSA in June 2006, they intend to review the effectiveness of industry-led measures and judge the success of the disclosure-based approach over the course of 2008. Now is the time to act.

United Kingdom

FSA consults on electronic settlement of transactions in units

In their first quarterly consultation of 2008 [CP 08/01 — Quarterly consultation (No. 15) — January 2008], the FSA proposed amendments to the COLL Sourcebook as a consequence of secondary legislative changes — designed to facilitate paperless settlement for UK authorised funds — to be introduced by HM Treasury [Consultation on better regulation measures for the asset management sector — HM Treasury — May 2007]. While COLL currently permits the electronic notification or instruction, either to or from a unit-holder, the proposed changes would allow for the electronic transfer of units [COLL 4.2.5R 17(i) and 8.3.4R 13(10)] and permit the electronic settlement of transactions via CREST [COLL 3.3.11R and 8.2.8R]. These changes will be effective as soon as the secondary legislation comes into force, which is expected to be by the end of June 2008. However, The Treasury has not yet determined the necessary amendments to the current OEIC Regulations, which may impact the FSA proposals, possibly requiring additional changes to COLL before they can be finalised.

Electronic signature and "reasonable steps": further consultation

Under Treasury proposals, electronic signatures could be used to authorise the transfer of title of units. Some amendments would be required to COLL to give full effect to the proposals, which would ultimately give equal footing to written and electronic signatures.

The proposed legal changes would require the AFM or its delegate to take "reasonable steps" to ensure that a particular signature were genuine. This term has not been defined within the FSA proposals and so the IMA has separately consulted AFMs on what it believes these "reasonable steps" should entail. In addition, it will be permissible for the registrar of a fund to refuse to accept an electronic transfer. The FSA proposes to implement this by requiring a description of the conditions under which an electronic signature would be deemed acceptable to be included in the prospectus.

The use of CREST and impact on regulations

Most securities transactions in the UK settle through CREST and while the current COLL rules do not prevent the use of CREST as a means of settlement, the FSA proposes to make a number of changes to ensure that they are consistent with the Uncertificated Securities Regulations (USRs), which detail the obligations of CREST participants. Rule clarifications are only proposed for the sale or the redemption or transfer of units, as it is not foreseen that issues or cancellations of units will be undertaken within the CREST system.

The proposed changes would allow for the electronic transfer of units and permit the electronic settlement of transactions via CREST.

The FSA is proposing to define the term "register" as the record of units held outside CREST. This is to avoid any confusion with the register that is maintained within CREST, referred to as the "Operator Register of Securities", a copy of which must be kept by the registrar. Where it is necessary to refer to both registers, the FSA has proposed to use the term "scheme register". Certain powers such as the ability to maintain a plan register (e.g. for units held in ISAs) cannot be exercised where the units are held in CREST. Therefore, it will be up to each AFM to decide whether it will be commercially beneficial to participate within the CREST mechanism, given that those powers would not then be exercisable.

Change events

AFMs should give due consideration to the systems and controls that will need to be in place to facilitate compliance with the requirements of both COLL and USRs, if opting to go down the CREST route. In addition, if an AFM ultimately decides to operate within the CREST system, certain key changes must be made to the scheme instrument and prospectus. The categorisation of any changes is the responsibility of the AFM, although the FSA has indicated that the introduction of a dealing method, which is optional from an investor's perspective, is unlikely to be regarded as either a fundamental or a significant change.

Feedback to the proposals from the industry

Following the publication of the proposals, the IMA has collated an industry response to the issues raised, which has been submitted for consideration to the FSA. Apart from suggesting some terminology changes, the main points of the response are summarised below.

1. The IMA notes that the Treasury's proposals refer to changes to facilitate the electronic transfer or renunciation of units, rather than the use of electronic signatures per se. They suggest a new definition to clarify that for the proposals under discussion "electronic communication" is equivalent to the term defined in section 15(1) of the Electronic Communications Act 2000.

2. Separate consultation is underway in relation to the definition of "reasonable steps" and FSA confirmation of industry guidance on this will be sought in due course.

3. While the IMA agrees with the FSA that the use of CREST settlement for issues and cancellations occurring through a manager's box is not envisaged, they believe the exclusion should not extend to such transactions through the fund manager in accordance with COLL 6.2.7R.

4. Under USRs, AFMs will not have the power to prevent entries being made to the Operator Register. Until and unless changes are made to USRs, the IMA suggests that AFMs can be required only to request the reversal of any entries by the operator of a system on which an Operator Register is maintained.

Next steps

The FSA is expected to publish feedback on the consultation shortly, which should also include the results of deliberations on how the term "reasonable steps" should be defined. Meanwhile, we continue monitoring the progress for further developments.

Glossary

AMF	Authorité des Marchés Financiers (French financial regulator)
AFM	Authorised fund manager
CESR	Commission of European Securities Regulators
CIF	Collective investment fund
CIS	Collective investment scheme
COLL	Collective Investment Schemes Sourcebook
CP	Consultation Paper (FSA)
CSSF	Commission de Surveillance du Secteur Financier (Luxembourg financial regulator)
DATA	Depositary and Trustee Association
EC	European Commission
EFAMA	European Fund and Asset Management Association
EP	European Parliament
ESC	European Securities Committee
ETCs	Exchange-traded commodities
ETFs	Exchange-traded funds
EU	European Union
FIS	Fonds d'investissement Spécialise (specialised investment funds)
FDIs	Financial derivative instruments
FPP	Fund processing passport
FSA	Financial Services Authority (UK financial regulator)
IMA	Investment Management Association
IPO	Initial public offering
ISAs	Individual savings accounts
ISIN	International securities identifying number
KID	Key Information Document
KII	Key Investor Information
MS	Member State
NAV	Net asset value
OEREFs	Open-ended real-estate funds
OTC	Over the counter
RMP	Risk management process
SICAR	Société d'Investissement en Capital à Risque (Risk Capital Investment Company)
SIF	Special investment funds
SP	Simplified Prospectus
SPF	Société de Gestion de Patrimoine Familial (Management Company for Private Wealth)
SPVs	Special purpose vehicles
STP	Straight-through processing
SWIFT	The Society for Worldwide Interbank Financial Telecommunication
TAs	Transfer agents
UCITS	Undertaking for Collective Investments in Transferable Securities
USRs	Uncertificated Securities Regulations

Contacts

Europe
Sean Quinn European Head of Fiduciary Services sean.quinn@citi.com tel: +44 (0)20 7500 5619	Stefano Pierantozzi European Head of Fiduciary Oversight & Research stefano.pierantozzi@citi.com Tel: +352 451 414 370
Germany
Juergen Ehle Head of German Fund Services juergen.ehle@citi.com tel: +49 (0)69 1366 1409
Ireland
Shane Baily Head of Fiduciary Services, Ireland shane.baily@citi.com tel: +353 1 622 6297	Ian Callaghan Fiduciary Relationship Manager ian.joseph.callaghan@citi.com tel: +353 1 622 1015
Jersey
Ann-Marie Roddie Fiduciary Manager annmarie.roddie@citi.com Tel: +44 (0) 1534 608 201
Luxembourg
Patrick Watelet Head of Fiduciary Relationships, Luxembourg patrick.watelet@citi.com tel: +352 451 414 231 Urlich Witt Head of Fiduciary Oversight & Research, Luxembourg urlrich.witt@citi.com Tel: +352 451 414 520	Francis Pedrini Fiduciary Relationship Manager francis.pedrini@citi.com tel: +352 451 414 228 Davide Tassi Fiduciary Relationship Manager Alternative Investments davide.tassi@citi.com Tel: +352 451 414 630	Daniel Mente Fiduciary Relationship Manager daniel.mente@citi.com tel: +352 451 414 492
United Kingdom
David Morrison Head of Fiduciary Services, UK david.m.morrison@citi.com tel: +44 (0)20 7500 8021 Iain Lyall Fiduciary Relationship Manager ian.lyall@citi.com tel: +44 (0)20 7500 8356	Francine Bailey Fiduciary Relationship Manager francine.bailey@citi.com tel: +44 (0)20 7500 8580	Andrew Newson Fiduciary Relationship Manager andrew.c.newson@citi.com tel: +44 (0)20 7500 8410

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Citigroup® Global Transaction Services www.transactionservices.citigroup.com European News & Views; Second Edition 2008

Citigroup® Global Transaction Services
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European News & Views; Second Edition 2008