ALFI 2012

Alfi GlobAl DistributionConferenCein AssoCiAtionwith niCsA& hKifA

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AIFM: are you ready to navigate

the strategic opportunities and

challenges?

The AIFM Directive goes well beyond compliance – it will lead to restructuring in the alternatives sector. The Directive will impact EU and non-EU alternative investment funds, their managers, service providers and investors. Find out more at ey.com/lu/aifm

Financial Services | Alternative Investment Funds

Michael Ferguson Hedge and UCITS FundsErnst & Young, [email protected]

Alain Kinsch Private Equity Funds Ernst & Young, [email protected]

Kai BraunAlternatives AdvisoryErnst & Young, [email protected]

Michael HornsbyReal Estate FundsErnst & Young, [email protected]

3Special alfi global distribution conference in association with nicsa & hkifa

September - October 2012 —

The next 20 years

Unique opportunitiesLuxembourg’s Minister of Finance aims to make the Grand Duchy

the jurisdiction of choice for alternative investment funds.

Text Luc Frieden Illustration Vanda Romão

T his year’s ALFI Global Distribution Conference, in association with NICSA & HKIFA, takes place at highly interesting

juncture: in an environment marked by volatile market conditions and uncertain economic developments, the fund industry has proven its unparalleled resilience. Yet, it is also facing tre-mendous challenges in the months ahead and they may well represent a recurring theme in many of your discussions, presentations and debates throughout the 21st edition of this key event for the Luxembourg fund industry.

Among these numerous challenges, however, lie unique opportunities. With the imminent publication of the draft legislation transposing the Alternative Investment Fund Managers Directive, the alternative investment industry is set for a major overhaul of the regulatory land-scape. The draft bill will not only foresee a coher-ent transposition of the directive’s much discussed provisions into national law, but will crucially include a complementary legal package

Conference is such that it will provide the ideal forum for key stakeholders from around the world to gather in Luxembourg, build the neces-sary relationships and discuss the business opportunities that lie ahead.

Based on our long-standing, global success story with the Luxembourg UCITS brand, I am highly confident that the Luxembourg fund industry – in conjunction with regulators and rel-evant government authorities – will indeed be able to leverage on its vast experience and know-how that it has accumulated over the past 20 years in building a AAA brand for investment funds recognized throughout the world.

I can also assure you that I will continue to lead the efforts for a growth strategy in the coming months to further develop and grow the Luxem-bourg jurisdiction as a centre of excellence and prime location for the European and interna-tional fund industry and I very much look for-ward to the valuable conclusions arising out this year’s ALFI Global Distribution Conference.

specifically designed to accompany and facilitate the expansion of the alternative investment industry in Luxembourg. This package will cater for the specific needs of the industry and foresees inter alia the creation of a new legal structure – the société en commandite spéciale, or “special lim-ited partnership” – and includes certain tax provisions, for instance in relation to “carried interest”. The aim is therefore to unleash the full potential of the directive for managers of hedge funds, private equity funds and real estate funds by further completing the legal, fiscal and regula-tory offering and thereby establishing Luxem-bourg as the single jurisdiction of choice for all types of funds.

My personal ambition is to see this raft of measures in relation to AIFMD to be adopted and implemented by the end of this year such that all the players in the industry can swiftly start the necessary preparations and reap the benefits of this unique opportunity. In this context, the timing of this year’s ALFI Global Distribution

Luc FriedenMinister of Finance, Grand Duchy of Luxembourg

Fernand GrulmsGian Luigi Costanzo

ALFIHong Kong Investment Funds Association

Luxembourg for FinanceNICSA

editorial

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Mutual interest

Wake-up callThe head of Luxembourg’s finance promotion agency

calls for asset managers to take on a new advocacy role.

Text Fernand Grulms Illustration Vanda Romão

The outlook for the global economy is still uncertain. This is also true for the finan-cial sector in many parts of the world.

Governments worldwide have introduced and are still introducing legislation to better regulate the financial industry. One purpose of the new rules is to improve transparency. It should also help regain customer confidence. But it appears that not all of the necessary lessons have been learned yet. When I look back at recent events, I see for example a Facebook IPO, largely overpriced, where financial intermediaries were sitting on comfortable long positions pushing up the issue price to fill their own pockets with complete dis-regard for the final investors’ interests.

The asset management industry has a key role to play: it sits in the middle, acting as an interme-diary between the financial markets and the final investor. As Gian Luigi Costanzo notes in the OECD Journal, asset managers fulfil three essen-tial functions: channelling capital from creditors to debtors, providing liquidity to ensure the func-

could be jeopardised as these countries are heav-ily dependent on the developed world for their exports.

All this is not good news for the asset manage-ment industry. Especially in Europe, there is suf-ficient room for rationalisation. Asset managers need to increase the size of their funds and expand the geographic focus to monitor costs. Mergers and acquisitions remain a main avenue for growth of asset management firms. Out-sourcing and the mutualisation of activities can also help to better monitor costs. Apart from administration, mutualisation could be realised in product development or in research.

The asset management and fund industries are still doing well. But challenges lie ahead and the industry needs to take them seriously. The annual ALFI-NICSA-HKIFA autumn conference is a perfect setting to discuss all these issues and many more to pave the way for a successful future, in the interest of the investor and of the asset management companies.

tioning of capital markets and giving clients access to a broad range of asset classes to diver-sify their portfolio.

But I see an important fourth role for the asset management industry: that of protecting the interests of the investor. Asset managers should act as stewards of their clients’ interests. They have a duty to act responsibly and sustainably. They have to point out malfunctioning of the markets and they have to voice their opinions to help raise the governance principles and ethical standards. To this extent, asset managers have an important role to play in shaping the capital mar-kets of tomorrow.

The asset management industry will be facing hard times. Households are deleveraging and unemployment is increasing all over Europe. This means that growth in retail asset manage-ment is especially inhibited. Increasing public debt and fiscal consolidation plans will slow down growth prospects in the developed world. The growth robustness in emerging markets

Fernand Grulms CEO, Luxembourg for Finance

Fernand GrulmsGian Luigi Costanzo

ALFIHong Kong Investment Funds Association

Luxembourg for FinanceNICSA

editorial

Getting the right structure calls for expert analysis

Deloitte Luxembourg’s app is

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DELOITTE_AD_MOLECULE_230X300.PDF 1 07/09/2012 17:21:17

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Editorials3

Luc Frieden

Unique opportunitiesLuxembourg’s Minister of Finance aims to make the Grand duchy the jurisdiction of choice for alternative investment funds.

5

Fernand GruLMs

Wake-up callThe head of Luxembourg’s finance promotion agency calls for asset managers to take on a new advocacy role.

Interview8

Marc saLuzzi

“I see a kind of regulation fatigue settling in”The president of the association of the Luxembourg Fund industry (aLFi) doesn’t argue against the principle of strict regulations in the financial sphere. However, he fears that their chaotic accumulation may generate counter-productive effects on the entire funds industry.

Exhibition plan

18

Who? Where? Here’s a practical guide.

Conferenceagenda

20

The whole programme at a glance.

Speakers26

VieW FroM WasHinGTon

What’s ahead for the US fund industryBy Theresa Hamacher

28

HonG KonG perspecTiVe

Positive cooperationBy sally Wong

30

reGuLaTion

Challenges to collective investmentBy eddy Wymeersch

32

inVesTor proTecTion

Beyond systematic riskBy Jean-Baptiste de Franssu

34

LooKinG easT

The survival guide to the Asian fund industryBy Justin ong

36

disTriBuTion

UCITS IV: the overlooked efficiency package?By Lou Kiesch

38

neW researcH

East moving west: the Chinese dimensionBy Michael Ferguson

40

deposiTaries

UCITS V on its wayBy Freddy Brausch

42

aLTernaTiVes

AIFMD: opportunities for LuxembourgBy claude niedner

44

Tax deBaTe

Forced to think differentlyBy Georges Bock

46

coMMunicaTions

Business critical?By Tony Langham

Picture report48

2011

FlashbackThe previous Global distribution conference took place on 27 and 28 september 2011 in the centre de conférences in Luxembourg-Kirchberg.

ContentsALFI Global Distribution Conference 2012



— September - October 2012

Special alfi global distribution conference in association with nicsa & hkifa

Marc SaluzziLuc FriedenTom Seale

AlfiHKFIANicsaLipperEuropean Central bankEuropean CommissionEuropean Parliament

8



Marc Saluzzi

“I see a kind of regulation fatigue

settling in”The president of the Association of the Luxembourg Fund Industry (ALFI)

doesn’t argue against the principle of strict regulations in the financial sphere. However, he fears that their chaotic accumulation may generate

counter-productive effects on the entire funds industry.

Text Marc Saluzzi Illustration Vanda Romão

Mr. Saluzzi, macroeconomic publica-tions, be they Luxembourgish or international, are pessimistic to say

the least. What impact should one expect this to have on Luxembourg’s investment funds sector? “The current economic situation is not very upbeat. Even countries that are reputed as sound economically, such as China and Germany, are beginning to experience problems with slow-ing growth rates. There is no positive news to be expected over the coming months and quarters.

As far as the financial markets are concerned, there is a different trend, which is more based on anticipation. And quite surprisingly, these mar-kets have been rising at a time when the raw eco-nomic data is not very optimistic. This impact directly benefits the funds management sector, mechanically increases the value of the assets and restores a certain profitability to the business, at least in the short term.

As for Luxembourg’s asset management sector, it has maintained its market share, even though there have not been a notable rebound worldwide over the past few years. Thus, with regard to assets under management, we managed to recover after the crisis and returned to the record levels of 2008. In 2011, net subscriptions amounted to five billion euros, but in the first half of 2012, the figure had risen to 43 billion euros, with a positive market effect that is due to improve further in July and in August.

If you combine all this together, the conclusion one reaches is that ‘so far, so good!’, but not much

remarkable levels of assets under management. But that’s not to say that this is the sole savings or invest-ment tool ‘of choice’ of the entire planet.

Has the current sovereign debt crisis had a direct impact on the funds sector? “There are of course very significant effects, as shown by a very recent study published by Lipper detailing the impacts of the crisis on each class of assets. If you want a very concrete and particularly striking exam-ple, the European Central Bank decided to cut its key rate by a quarter point to 0.75% [ed.: which constitutes its lowest historical level] in early July. As a result, a whole number of money market funds and cash funds found themselves in trouble, unable to pay out a positive yield to their shareholders.

What can be done to face off such a danger? “Unfortunately not much. Asset managers have but little influence on the rates set by the various central banks or on valuation of the financial markets!

Apart from extreme caution in terms of invest-ment and drastic cost-cutting, they have very lit-tle ability to influence the rate of return of their products in such a fluctuating economic and financial environment.

You launched five projects at the start of your presidency, one year ago. Now, just over one year down the line, where do we stand now in relation to your roadmap? “I should point out briefly that the idea was to protect the concept of

more than that. It is all still very delicate and it is very difficult to know where we are heading. We can see that we are able to take and absorb a cer-tain number of hits, thanks to our cross-border model. But the question is to know up to what point and until when we can hold out against a slew of bad news. For the time being, we are holding out rather well. That is rather encouraging in the world in which we live.

A new record amount of assets under mana-gement in Luxembourg (2,225.6 billion euros) was reached in April. Does this mean that investment funds constitute a kind of safe haven for investors? “You cannot think of it as such. If you look at what is happening in a number of developed or emerging countries, such as France, China and India, you see a rationalisation, not to mention a reduction in the assets under manage-ment and a reduction in the number of funds over-all. In Luxembourg, it is above all our cross-border model and our diversification in terms of classes of assets and geographical areas of investment which increase our resistance to the crisis.Thus, over a period of 10 years, the combined mar-ket share of Luxembourg and Dublin, the leading operators in the market for cross-border distribu-tion of asset management services in Europe, rose from 20 to 40%.In general, the concept of regulated investment funds is showing strong resilience, and in spite of a lack of growth over the past few years, retains rather

9


– September - October 2012

regulated products against the current regula-tory onslaught; to consolidate, with the AIFM direc-tive, the positioning of Luxembourg as an alternative management centre in Europe and beyond; to develop innovation with a focus on ‘responsible investing’; to facilitate cross-border distribution, and finally, to position ourselves as the key partner for all of the players in this sector worldwide.

Overall, we have made a lot of progress in these various endeavours. After the first year of our five year plan, we are highly confident of being able to achieve our aims.

Concerning the first point, for instance, we have engaged in extensive lobbying and have responded to countless consultations. This reg-ulatory agenda, mainly in Europe but also in America, is, despite all our efforts, very difficult to manage and right now no one is really able to know where it is going to take us.

On the one hand, there is already talk of Ucits V and Ucits VI whereas we have only just come to grips with Ucits IV. On the other hand, we are still waiting to know what will be the level 2 measures of the AIFM directive, which were due out at the start of the summer and are now expected in Septem-ber. There has also been talk about the proposed tax on financial transactions, FATCA, Volker Rules, not to mention many others.

In the final analysis, we have mixed feelings about all this. We are battling for every inch while remain-

ing proactive, but with results that are not always in keeping with our expectations.

Under these circumstances, our workgroups are being pressed into action to analyse these new stat-utes and regulations in order to make them easier to understand for all of our members. For example, a series of one-day sessions on the impact of AIFMD on the three classes of alternative assets of private equity, real estate and hedge funds, drew nearly 600 people over the past three months.

As far as the AIFM directive is concerned, however, things appear to be going rather well in Luxembourg, since the bill of law transpo-sing the directive is about to be presented to parliament [ed.: the bill was presented fol-lowing paperJam's interview with Saluzzi, on 30 August].“Indeed, the text is ready. It is about to be put before parliament. Apart from the transposi-tion of the directive per se, there is also a second part of the text, an ‘alternative pack’, which goes beyond the transposition and which will lay the ground for more effective investment structures, including a limited partnership scheme as well as a new taxation regime for ‘carried interest’. We plan to communicate proactively about this text as part of a series of road shows which will be held until early 2013, with the aim of consolidating Luxembourg’s leadership in the field of alternative management, and attracting investors.

10

ConferenCe

Three partnersThe Association of the Luxembourg fund Industry (ALfI) is the official representative body for the Luxem-bourg investment fund industry and was set up in november 1988 to promote its development.nISCA (national Investment Company Service Association) is the leading provider of independent education and networking forums to profession-als in the global investment manage-ment community. It was founded in 1962 in the US and has a network of nearly 10,000 business profession-als from within that community. The Hong Kong Investment funds Association (HKIfA) was established in 1986, as a non-profit-making indus-try organisation that represents the fund management industry of Hong Kong. Its goals are to foster the development of the fund man-agement industry in Hong Kong, to enhance the professional stan-dards of the industry to ensure that they are in line with international best practices and to maintain Hong Kong’s competitiveness as the major fund management center in Asia.

“We managed to recover after the crisis and returned to the record levels of 2008”Marc Saluzzi (ALFI)



“In general, the concept of regulated

investment funds is showing strong

resilience”

Marc Saluzzi (ALFI)

Many professionals in the sector believe that the extensive experience of Luxembourg with Ucits can help it to develop the field of hedge funds under the AIFM directive. Is it that simple?“There is a major difference between the starting points of these two businesses. Peo-ple tend to overlook this. When Ucits was created, the market for collective management aimed at a retail client base was mainly local and each coun-try had its own sector. Luxembourg was one of the first to develop this sector on a cross-border basis. And our country benefited extensively from being the first to do so.

In the case of alternative management or hedge funds, the activity is already globalised. With the introduction of AIFMD, a part of the world is being saddled with a set of rather strict regulations in return for a passport. From that point of view, the way in which this directive will influence the sector is less clear. The issue is to know how the players on the market will incorporate these new regulatory requirements into a business model which already exists. It will also be very important to look at how the regulation of this sector will develop outside Europe. The United States have introduced new rules as part of the Dodd Frank act, but Asia has not yet really reacted.

The notion of ‘first mover advantage’ is there-fore not as critical, even if our aim is to be among the first to deploy this directive.

Nevertheless AIFMD is going to significantly alter the alternative management model in Europe by regulating it in a relatively similar way to what we have experienced in our Ucits busi-ness. Our expertise and experience in the field of

12

regulated funds as well as the lever formed by our global distribution platform should enable us to replicate in alternatives our success on the mar-ket for Ucits funds.

Last year you said that you regretted the slowdown in innovation in the funds sector in Luxembourg. Do you think that things have improved over the past fifteen months? “Yes. In order to achieve concrete targets in this area, we began by choosing a theme on which we then focused specifically: ‘responsible investing’. In this specific field, we remodelled our workgroups and technical commissions, placing them under the responsibility of Tom Seale [ed.: ALFI board of directors member and chairman of the association between 2003 and 2007] This led first and foremost to the organisation of a major international event, which was backed and attended by members of the Grand-Ducal family, Finance Minister Luc Frieden and the European Commission. We managed to draw to Luxembourg the big players in ‘responsible investing’.

This conference was also an opportunity to share the results of a survey commissioned by ALFI into funds that are active in this field in Europe. The next step will be to push even further those funds that have social-related goals and to build around them a set of structures that will ena-ble this business to develop itself even more actively, such as the notion of ‘Société d’Impact’..

We are aware that this is a long-term process, since our ambition is to basically design the 3rd pillar of our fund centre, together with Ucits funds and hedge funds. We are only at the start of this particular venture, but we are already quite

Number of Luxembourg funds

Net Luxembourg assets (in € billion)Fund statistics

3,900

3,800

3,700

3,600

3,500

3,400

3,300

3,200

Number of investment fundsNet assets(€ billion)

2,400

2,100

1,700

Jan

10

Jan

11

Jan

12

Ap

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Ap

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Ap

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Jul 1

0

Jul 1

1

Jul 1

2

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14

CV

Marc SaluzziMarc Saluzzi, age 49, is chairman of the ALFI’s board of directors, and has more than 25 years of experience in the asset management industry in Luxembourg and in the US. He graduated from the Institut Supérieur de Gestion, or ISG business school, in Paris, and today is partner at the consulting firm PwC in Luxembourg, as well as a réviseur d’entreprises agréé, or an accredited auditor. The French national joined the firm in 1986, worked at PwC in Boston from 1990 to 1992, and became a partner in the Grand Duchy in 1996. Between 2006 and 2010, Saluzzi led the PwC Global Asset Management practice. He currently is a member of the CSSF-OPC Committee, advising Luxembourg’s financial regulator on laws and regulations impacting the fund industry in Luxembourg. Saluzzi was elected chairman of ALFI in June 2011.

advanced, with certain significant market shares such as in carbon funds and microfinance funds.

What about the aspects linked to the develop-ment of cross-border distribution? “There too, we have been doing our job. I don’t have the detailed figures for this year, but in 2011, we visited 22 countries, 25 cities and made presentations to more than 4,500 professionals in the collective management sector. We have also adapted our events to our audiences, with massive shows before audiences of up to 750 people, as we recently did in London, but also tailor made presentations to more carefully targeted professionals.

The intensity is therefore there and the sophis-tication is increasing. We are acknowledged as being the most active association in our field. We continue more than ever before to promote the strengths of the Ucits product in general and to reassure investors about its soundness. These efforts are still ongoing this year, with a greater focus on AIFMD.

As for the last aspect, that of being the key partner for the sector as a whole, we are continu-ing to do what we have always done, i.e., trying to convince asset managers to create operations or to structure products in Luxembourg. But we have

added a new dimension to our approach, namely to demonstrate that we can also provide solutions to fund managers or products that are not domi-ciled in Luxembourg. We have gained such an expertise in so many fields that we can clearly put this expertise at the service of everyone.

We are having some success with this approach. We are, internally, in the process of assessing what we are really able to do and to what extent this is a strong trend. Once we have a clearer picture, we will be better placed to com-municate on this aspect of things.

Is this an innovative approach? “It is an inno-vative approach, though the content is still the same. We aim to send out a more subtle and inclusive message, rather than just saying ‘Come and get it here!’

You have regularly denounced the excessive amount of regulations which has been burdening the sector in recent times. Are you able to sound the alarm in Brussels, or even Washington? “We are issuing such warning mes-sages all the time! It is not the increase in regula-tions per se that we are complaining about. But the fundamental message that we are trying to put

“AIFMD is going to significantly alter the alternative management model in Europe”Marc Saluzzi (ALFI)

015_delagardelle.indd 1 10/9/12 10:58 AM



The 2012 conference

ContinuityLike last year, the Global Distribution conference, which is being held on 18 and 19 September in Luxembourg, is being organised by ALfI, in association with its traditional US partner nIScA, but also with its hong Kong counterpart hKIfA. “This partnership has been renewed to demonstrate our intention to form closer links with Asia”, says Marc Saluzzi. “What was a new dimension in 2011 will now be confirmed this year.” The conference will focus particularly on this part of the world, through themes relating to global distribution, all aspects of which will be dealt with, be they technical or regulatory. “The world is suffering economically and financially, which is tempting many players to adopt a somewhat more protectionist approach towards their local investor populations” says Saluzzi. “Through our conferences, but also our road shows, we must once again go out and meet our business partners, in order to identify all the potential sources of blockage or lack of understanding and clarify the situation so as to reassure the international community about the benefits that Ucits or AIFMD can contribute.” The conference will also dedicate part of its agenda to alternative funds, with professionals of the funds sector looking at the ways in which the alternative management sector can leverage the passport principle introduced by the directive.

across, is to urge lawmakers to make the effort to understand what are the real problems affecting the sector and to attempt to deal with these prob-lems only, as opposed to spewing out an uncoordi-nated and chaotic morass of regulations, without considering what its impact will be on the financial sector and beyond that, on its users.

At our level, we also point out that the funds sector was not the cause of the crisis nor did it exacerbate the crisis, and it must therefore be dealt with separately. Due to the current fad for applying transversal regulations to the entire financial sector, the funds sector is becoming over-regulated, whereas it was already very tightly regulated to begin with, at the risk of causing it to lose its competitive advantage.

The returns are already very low. If, on top of this, the costs of compliance increase dispropor-tionately, the net outcome for the investor will of course be a ‘risk free’ product, but also a product with zero yield, as is already the case with some money market funds.

Do you reckon you are managing to make yourselves heard? “I am not convinced that we are being heard enough. I see a kind of regulation fatigue settling in, including at the level of the supervisory authorities themselves, who are also subject to tremendous challenges in respect of the sheer volume of rules that they have to implement.

It is about time that the politicians realised that this regulatory agenda, in order to be effective, must be structured, reasonable and orderly, and

“Funds sector must be dealt

with separately”

Marc Saluzzi (ALFI)

16

not merely a profusion of regulations pulling in all directions and threatening the viability of a sec-tor, asset management, which operated smoothly before and during the crisis. We must truly insist on this message.

Do you trust that things will improve never-theless? “I am optimistic for Luxembourg, bear-ing in mind that the thing which we must at all cost pay attention to, is the future of regulated funds. We have shown that we had, with Ucits, a product that could meet the expectations of a broad spectrum of investors. We want to apply the same principles to alternative funds, while ensur-ing that these regulated funds are not regulated out of the market in favour of investment vehicles that do not offer the same guaranties in terms of investor protection. This is a particularly difficult balance to achieve, but this regulatory ‘level play-ing field’ is an absolute priority for our industry.

We also note that a number of sectors in the financial industry are veering away from the real economy. Yet, funds can be used to fuel the real economy, be it by way of traditional or alternative funds – such as private equity – or through funds invested in keeping with the principles of ‘respon-sible investing’, such as the new EuSEF.

From that point of view, since funds, as a prod-uct, form part of the solution, let’s ensure that this part of the solution is protected and nurtured so as to contribute ever more to the economy. We will then achieve a win-win situation for all of the economic players.

Country of origin for funds domiciliated in Luxembourg (June 2012)

US23.8%

GERMANY16%

SWITZERLAND15.3%

UK13.3%

ITALY 7.8%

FRANCE7.2%

BELGIUM: 5.2%

NETHERLANDS: 2%

LUXEMBOURG: 2%

SWEDEN: 1.7%

OTHERS: 5.7%

Source: CSSF

More information on our locations on

2012

2012

Special alfi global distribution conference in association with nicsa & hkifa18


Here is a quick overview of the expositions at the New Conference Centre Kirchberg.

Exhibitorsplan

2

Lunch Cold Buffet

Lunch Hot Buffet

Lunch Hot Buffet

WC WC

Lunch Cold Buffet & Breaks Buffet W

ardrobe

2 110

16 17

14 15

1819

2021

2322

24

28 27 2625

3735

3940

38

4342

4544

41

NewEntrance

Exit

7 69 8

31 32

Publication Desk11

1st Floor:Sponsors

Lunch

1st Floor: Speakers Lounge

Meeting Point & Lounge

ALFI Info Desk

Massage Zone

Internet Corner

Bag Booth Registration Desk

Tea Bar

Lunch Cold Buffet & Breaks Buffet

Lunch Cold Buffet Breaks Buffet

Lunch Cold Buffet Breaks Buffet

Tea Bar

Permanent BarPermanent Bar

Lunch Hot BuffetPress Lounge

Lunch Cold Buffet

Lunch Hot Buffet

21a

Coffee &Drinks BarCoffee &

Drinks Bar

Coffee &Drinks BarCoffee &

Drinks Bar

Lunch Hot Buffet

Lunch Hot Buffet

29 3029a

4 3

P

booth n° company booth n° company booth n° company

exhibitors

floor plan

1 arendt & medernach

42 bnp paribas Securities Services

39 bonn & Schmitt avocats

7 brown brothers harriman

17 cacEIS

28 cerulli associates

30 confluence

41 Deloitte

6 DIamoS

20 Ernst & young

31 Eurizon capital

24 Finesti S.a.

9 Funds Europe

37 hSbc Securities Services

25 IDS Gmbh-analysis and Reporting Services

10 Institut IFbL

29a J.p. moRGan

8 KnEIp

11 KoGER Inc.

18 KpmG

43 Loyens & Loeff

22 mDo Services S.a.

21 mEtRoSoFt

32 milestone Group

35 money media (Ignites)

26 morningstar

27 much-net financial software & services S.à r. l.

4 multifonds

23 northern trust

14 portfolio institutional

40 profidata Services aG

45 pwc

2 Rbc Investor Services

29 RR Donnelley

15 Six Financial Information

21a Société Générale Securities Services

19 State Street

16 Swiss & Global

38 transperfect

44 UbS

3 Vitalbriefing

How to find us?

By bus: With most bus lines to Kirchberg – stop at “Philharmonie/Mudam” – transit via Centre Aldringen, central train station and boulevard Royal. Further information can be obtained from the “Mobilitéitszentral” hotline (+352) 24 65 24 65 or www.mobiliteit.lu.

By car: Direct and covered access from the “place de l’Europe” car park; entry on avenue John F. Kennedy. From the “Trois Glands” car park; via avenue John F. Kennedy and the place de l’Europe tunnel; or via rue du Fort Thüngen.



Why should you be a sponsor or have an exhibition booth at the next

event, in 2013? The forum will offer you a unique opportunity to position

your company as a major player in the investment fund area, to meet with

an impressive number of fund industry professionals in a single place over

a two-day period and, last but not least, increase brand visibility

amongst key-decision makers.

More information on

www.alfi.lu

Company Booth number

Arendt & Medernach 1

BNP Paribas Securities Services 42

Bonn & Schmitt Avocats 39

Brown Brothers Harriman 7

CACEIS 17

Cerulli Associates 28

Confluence 30

Deloitte 41

DIAMOS 6

Ernst & Young 20

Eurizon Capital 31

Finesti 24

Funds Europe 9

HSBC Securities Services 37


IDS GmbH-Analysis and Reporting Services

25

Institut IFBL 10

J.P. MORGAN 29a

KNEIP 8

KOGER Inc. 11

KPMG 18

Loyens & Loeff 43

MDO Services 22

METROSOFT 21

Milestone Group 32

Money Media (Ignites) 35

Morningstar 26

much-net financial software & services

27

Multifonds 4


Northern Trust 23

Portfolio institutional 14

PwC 40

RBC Dexia 45

RBC Investor Services 2

RR Donnelley 29

Six Financial Information 15

Société Générale Securities Services

21a

State Street 19

Swiss & Global 16

TransPerfect 38

UBS 44

VitalBriefing 3


— Septembre - Octobre 2012

AgendaProgramme day 1 – Tuesday 18th September 2012

xxxxx

xxxxxx

Chairperson’s wrap up

12.20 – 12.30

Lunch hosted by

12.30 – 14.30

Ernst & YoungState Street Bank Luxembourg

Chairperson’s introduction

14.30 – 14.35

Bob Kneip, Chief Executive Officer, Kneip, Luxembourg

Upcoming opportunities in the African capital market

14.35 – 15.15

Moderator: Fernand Grulms, CEO, Luxembourg for Finance

Panelists: Said Ibrahimi, CEO, Moroccan Financial Board, Casablanca

Reda El Alj, Managing Director, RMA Capital, Casablanca

The Asian opportunity – where do we stand and what can we expect?

15.15 – 16.15

Moderator: Justin Ong, Partner, PwC, Luxembourg

Panelists: Angelyn Lim, Partner, Dechert, Hong Kong

Sally Wong, Chief Executive Officer, Hong Kong Investment Funds Association, Hong Kong

Refreshment break and visit of the exhibition area

16.15 – 16.45

East moving West – the Chinese dimension

16.45 – 17.45

Moderator: Michael Ferguson, Partner, Asset Management Leader, Ernst & Young, Luxembourg

Panelists: Dr Qi Chen, CEFA, Head of Fund and Risk Controlling, Commerz Funds Solutions,Luxembourg

Jin Wang, Managing Director, CSOP Asset Management, Hong Kong

Michael Wong, Senior Associate, Allen & Overy, Hong Kong

Skype: a recipe for success in a fast paced and constantly evolving industry

17.45 – 18.25Neil Ward, Vice President and General Manager, Business Operations, Skype Communications, Luxembourg


18.25 – 18.30

Cocktail reception at the Hotel Melia sponsored by

18.30 – 19.30PwC Luxembourg

Day 1

Registration & breakfast

08.00 – 09.00

Welcome & introduction

09.00 – 09.20

Theresa Hamacher, CFA, President, NICSA, Boston

Sally Wong, Chief Executive Officer,Hong Kong Investment Funds Association, Hong Kong

Marc Saluzzi, Chairman, ALFI, Luxembourg


09.20 – 09.25

Thomas Seale, Chief Executive Officer,European Fund Administration, Luxembourg

Opening speeches

09.25 – 09.45

H.E. Luc Frieden, Minister of Finance, Luxembourg Government

It’s not about the money...

09.45 – 10.15

David Schrieberg, Chief Executive Officer and Co-Founder, VitalBriefing, Luxembourg

Letter from America

10.15 – 10.45

William Lee, Managing Director, Office of the Global Chief Economist, Citi, New York


10.45 – 11.15

The fund industry confronted with the regulatory challenge

11.15 – 11.45

Eddy Wymeersch, Professor, University of Gent, Belgium and former CESR Chairman

A new dawn for distribution – the impact of regulation on distributor remuneration and business models

11.45 – 12.20 Diana MacKay, Chief Executive Officer, MacKay Williams, London

Neil Longmuir, Global Head of Product, Investment Fund Services, Standard Chartered Bank, Singapore

Colin Lunn, Head of Fund Services Asia-Pacific, UBS Global Asset Management, Hong Kong

Mostapha Tahiri, Head of Asset and Fund Services Asia, BNP Paribas SecuritiesServices, Singapore



AgendaProgramme day 2 – Wednesday 19th September 2012

Interview: Governance imperatives for funds and asset managers – where are we and where should we be going?

11.00– 11.40

Interviewees:Jean Guill, Director General, Commission de Surveillance du Secteur Financier, Luxembourg

Professor Dr. J.W. Winter, De Brauw Blackstone Westbroek, Amsterdam

Interviewer: Rafik Fischer, General Manager, Head of Global Investor Services, KBL European Private Bankers, Luxembourg

AIFM Directive – is all of this reasonable?

11.40 – 12.10

Jacques Elvinger, Partner, Elvinger Hoss & Prussen, Luxembourg


12.10 – 12.15

Lunch hosted by

12.30 – 14.15BNP ParibasDeloitte

Day 2

Registration & breakfast

08.00 – 08.45


08.45 – 08.50

Julien Zimmer,General Manager Investment Funds, DZ Privatbank, Luxembourg

Addressing investor protection

08.50 – 09.20

Jean-Baptiste de Franssu, Chairman, INCIPIT, Brussels

Commission’s proposal on cross-cutting product disclosures

09.20 – 09.30

Tilman Lueder, Head of Unit, Asset Management, European Commission, Brussels

Deep dive into distribution – the follow-up

09.30 – 10.20

Moderator: Lou Kiesch, Partner Regulatory Consulting, Deloitte Tax & Consulting, Luxembourg

Panelists: Sheenagh Gordon-Hart, Client and Industry Research Executive, J.P. Morgan Worldwide, London

Noel Fessey, Global Head of Fund Services, Schroder Investment Management, Luxembourg

Rob Lay, Managing Director, Head of Distribution Partners Europe and Middle East, UBS Global Asset Management, London

Tilman Lueder, Head of Unit, Asset Management, European Commission, Brussels

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10.20 – 10.50

Governance trends in the Europeanfinancial services sector and implications for the asset management industry

10.50 – 11.00

Professor Dr. J.W. Winter, De Brauw Blackstone Westbroek, Amsterdam



AgendaProgramme day 2 – Wednesday 19th September 2012

AIFM Directive – passport or private placement: what is the best option?

16.55– 17.35

Moderator: Claude Niedner, Partner, Arendt & Medernach, Luxembourg

Panelists: Natasha Cazenave, Deputy Head of the Asset Management Regulation Policy Division,Autorité des Marchés Financiers, Paris

Joanna Cound, Managing Director, Government Affairs & Public Policy, BlackRock, London

Stefan Gavell, Head of Regulatory, Industry and Government Affairs, State Street Bank, Luxembourg

Felix Haldner, Partner, Member of the Executive Board, Head Investment Structures, Partners Group, Baar-Zug

Chairperson’s closing remarks

17.35 – 17.40

Day 2


14.15 – 14.20 Serge Krancenblum, Chief Executive Officer, SGG, Luxembourg

New Media in Financial Services

14.20 – 14.50

Tony Langham, Chief Executive, Lansons Communications, London

Trends in Global Distribution

14.50 – 15.20

Nils Johnson, Director, Spence Johnson, London


15.20 – 15.50

Investment funds in the tax debate: active participants or passive ones?

15.50 – 16.30

Keith O’Donnell, Partner, Atoz, Luxembourg

Gérard Laures, Partner, Tax, Financial Services, KPMG, Luxembourg

UCITS V, only a concern for the depositories?

16.30 – 16.55Freddy Bausch, Partner, Linklaters LLP, Luxembourg



“That simple world is gone

now”

View from Washington

What’s ahead for the US fund industry

The American market is seeing greater convergence between retail and institutional funds,

and an increasing regulatory focus on investor advice.

Text Theresa Hamacher Illustration Vanda Romão

Theresa HamacherPresident, NICSA

T he environment facing the US fund industry over the past year has been tumultuous. With a stuttering economic recovery, near

zero interest rates, instability in the Eurozone and heightened regulatory scrutiny, US fund managers have been forced to adapt and innovate.

The pace of change shows no sign of slackening. Here are a few things to watch closely over the next 12 months:

The battle over money market funds

The Federal Reserve argues that money market funds pose a systemic risk, while the Securities and Exchange Commission claims that they’re inherently unfair because they favour sophisticated in ves tors. Both argue that even more regulation is needed.

The fund industry counters that money market funds are nowhere near as risky as the regulators claim, especially after additional investment restrictions were imposed shortly after the credit crisis. Fund managers also contend that more regulation would make money funds unviable, effectively wiping out an important alternative to bank deposits. As of midJuly, the SEC seems on the brink of pro

mutual funds. Hedge fund managers are now regulated as investment advisers, thanks to the DoddFrank Act, and they’ll soon be able to advertise publicly for new investors–as an unintended consequence of the JOBS Act, passed in January.

The gap between the types of fund managers is likely to continue to steadily close.

The convergence is creating challenges for regulators, who have started looking for ways to better match a fund to a specific investor’s risk tolerance. Greater disclosure or more precise labelling of funds could be on the way.

Solutions rather than products

However, investors aren’t just looking for new funds–they’re increasingly looking for integrated solutions that help them reach their financial goals–and the fund industry is looking for ways to address that need.

Most of the action has been in the retirement planning space. Target date funds have gained broad consumer acceptance. With target dates now seen as a “one-stop” solution for the accumulation phase, providers are now focusing on the payout phase–encouraging greater use of annuities.

Outside the retirement arena, most investors are turning to financial advisors for help in crafting solutions.

Regulatory focus on advice

Recognising the importance of financial advisors to consumers, US regulators are reviewing the rules that apply to them. Both the SEC and the Department of Labor, which regulates retirement plans, are considering whether financial advisors should be held to a higher “fiduciary standard”, rather than to the “suitability standard” that now applies.

At the same time, regulators are considering an official definition of financial planner. At the moment, anyone can use the title.

Finally, a review of the fees that advisors receive for selling funds remains on the SEC’s agenda. If the 12b2 proposal is approved as presented, frontend loads on funds could well become a thing of the past–further pushing advisors toward an assetbased fee model.

posing a combination of restrictions on money fund redemptions with a capital “buffer”, effectively a reserve requirement. Proponents appear to want to drive the reform package through before the presidential election in November, but whether they have enough support to do so remains to be seen.

The great convergence

It used to be simple. Mutual funds were highly regulated, could be sold to the general public, and used traditional, conservative approaches when investing. Hedge funds were unregulated, were sold privately, and took a lot of risk while using innovative investment approaches.

That simple world is gone now–a casualty of the low interest rate environment and of recent legislation.

Mutual funds are looking more and more like hedge funds. They’re responding to consumer demand for higherreturn vehicles, by adopting alternative investment approaches. The shift has been popular – alternative mutual funds have been dominating fund sales recently. At the same time, hedge funds are starting to look more like

26

Theresa Hamacher

Federal ReserveNICSASecurities and Exchange CommissionUS Department of Labor

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Hong Kong perspective

Positive cooperationIncreased cooperation between Asian and European bodies

will help the funds industry grow across markets.

Text Sally Wong Illustration Vanda Romão

28

Georges Bock

AberdeenEFAMAEuropean CommissionEuropean Court of JusticeKPMG

64%

20082009

2010

20112012 (up to May)

59%

Equity funds

42%49%44% 44% 22%

68%

Gross salesSince the global finance crisis, Hong Kong investors have shown increased interest in bond funds (marketshare figures include balanced funds, money market funds and fund of funds):

4,493

13,680

Equity funds (Gross sales US dollars million)

Bond funds

Bond funds (Gross sales US dollars million)

16,358

16,643

14,239

11,972

8,883

4,067

11,574

2,930

27%

16%

Sou

rce

: Ho

ng

Ko

ng

Inv

est

me

nt F

un

ds

Ass

oci

atio

n

Net salesIn recent years, bond funds have captured the lion’s share of net Hong Kong fund sales (figures in US dollars million):

2008 2009 2010 2011 2012 (up to May)

Equity funds -2,722 1,866 1,429 516 -679

Bond funds 371 2,021 5,283 4,814 5,524

S ince the global financial crisis, retail fund sales in Hong Kong have picked up steadily and enjoyed robust growth. In the first five

months of 2012, the Hong Kong fund industry reg-istered gross and net sales of more than US$20 bil-lion and US$5 billion respectively. These represent an increase of 15 and 34 percent over the respective periods in 2011.

Prior to the crisis, equity funds had been the most popular type of products, but since then bond funds have gone from strength to strength. In 2011, bond funds assumed the lion’s shares both in terms of gross and net sales (see graphics). Even when the global markets experi-

We expect that the market will continue to be plagued by uncertainties. But we believe that mutual funds – thanks to the UCITS platform which enable providers to offer a diverse spec-trum of offerings – can provide investment choices to suit the different risk profile of inves-tors amidst a volatile market environment.

China

Another important development is the ren-minbi business in Hong Kong. The first renminbi-denominated authorised fund was launched in August 2010. Since then, about half a dozen authorised funds have been launched which pri-marily invest in “dim sum” bonds.

Following the announcement by Li Keqiang, vice premier of the State Council, in August 2011, a series of initiatives had been implemented, includ-ing the introduction of the Renminbi Qualified For-eign Institutional Investors scheme. In December 2011, the Mainland authorities announced the RQFII pilot scheme that allows Hong Kong subsid-iaries of qualified Mainland fund managers and securities companies to use renminbi raised in Hong Kong to invest in the Mainland securities markets. There are now about 20 RQFII authorised funds and they are all Hong Kong-domiciled.

Meanwhile, the China Securities Regulatory Commission has approved two cross-border ETFs and more of these products are in the pipeline.

All these initiatives reaffirm the central govern-ment’s support of Hong Kong’s development as the nation’s offshore renminbi business centre.

enced much gyration in the third and fourth quarters of 2011, bond funds continued to attract robust inflows.

There are three key reasons for the increasing interest in bond funds. First, since the global financial tsunami, volatility in the stock markets may have spooked investors. Second, bond funds offer exposure to a wide array of markets, includ-ing emerging markets, where investors see the growth potential. Finally, a number of bond funds offer features such as regular distribu-tions. This is attractive as there is a general search for yields in the extremely low interest rate envi-ronment.

Sally WongCEO, Hong Kong Investment Funds Association

At Kurt Salmon, we all understand the highly competitive nature of fi nancial services, the key industry trends and the regulatory challenges ahead. We know how to help fi rms cope with the demands for optimised effi ciency, increased integrity, higher levels of liquidity, greater degrees of transparency and sustainability while at the same time delivering a return on investment.

A management consultancy focused on business transformationKurt Salmon is a management consultancy with 21 offi ces in North America, Europe, Asia and Africa. Our 1,400 consultants advise companies’ top management on projects that have a tangible impact on the success of their businesses and, in particular, their transformation projects. The firm’s success lies in our ability to build long-lasting client relationships based on trust and to achieve the outstanding results that make us standard-setters for the consulting sector.

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2012_format_ANG_230x300_pub.indd 12012_format_ANG_230x300_pub.indd 1 11/09/12 11:5211/09/12 11:52



30

risks. Their yield may be driven down while in the opposite direction a real estate bubble may build up. In the end and oddly enough, the only safe investment remaining may indeed be central bank notes! But would that be a desirable out-come? And would that be risk free?

Longer term business models

Investors in alternative investment funds are often contractually obliged to stay on board, allowing managers to make good in a subsequent period. In the UCITS field, investors can exit any time. This often leads asset managers to simply emulate the benchmark, and results in the inves-tors bearing the liquidity risk. The last investor to exit will have to bear the “portfolio” risk, any short-falls falling on his head. Is this business model well conceived? Should it be the exclusive model?

In the AIF space investors commit to remain in the fund for an extended period of time, or the manager can prevent individual exits. Should one not consider a similar approach for UCITS, with UCITS being offered with a clause obliging inves-tors to stay in the fund whether for a predeter-mined period, or at least until after giving notice? As an alternative the fund shares may be traded on an organised market allowing investors to exit without touching the investment portfolio itself. As is the case with ETFs, exit from the fund may go along with exiting through the market.

This longer-term approach will engage inves-tors and fund managers to become less fixed on the day-to-day price movement. In a different business model more attention is paid to the long-term growth of the portfolio securities, e.g., due to improvements in corporate governance. In the absence of this short-term redemption requirement, funds could play an active role in delivering long-term capital. A change in approach would have far going consequences for both the funds’ investment activity, the markets where their securities are traded, the financing of the investees, and finally the overall economy.

Change in orientation

The UCITS formula has been very successful in many parts of the world. It was the remarkable achievement of the joint effort of the industry, financial specialists and asset managers, sup-

T oday’s very low interest rates are changing many of the fundamental assumptions underlying investment structures and

decisions. When a fixed return on investment has been promised–a frequent feature of life insu-rance products, and for some pension products as well–then low interest rates–and these days even negative rates–make it almost impossible to achieve longer-term contractual objectives. Increasing the risk profile for higher returns is not an option: it is prevented by regulation–e.g., including more equity–or it is more risky. Firms may be able to continue to weather the storm for several more years, but in the end they risk beco-ming more like a Ponzi scheme, with the last investors leaving the scheme taking all the losses.

There is an urgent need to have this issue openly discussed, first with a view of solving the financial challenges, but down the road to see how these changes will affect the social balances in our societies. And these low rates will result in significant stress on the employers that have to offer a backstop for the shortfall in retirement provisions. Their annual accounts will be consid-erably affected. Existing insurance contracts with a fixed term may enjoy a better risk cover. New contracts should be offered at a much lower return, and will be quite difficult to sell.

Reducing some of the relative retirement ben-efits is already on the table in some places, but ultimately the entire system may have to be revised. Oddly enough, the system of state funded pensions might reappear as the primary retirement regime.

In the investment fund segment, portfolio risks are ultimately born by the investors, leading to a clearer allocation of risks. But there remain some other concerns.

Money market funds are closing for lack of return in this low interest rate environment. Banks have a comparable problem as their deposits at the central banks are interest free, and in fact bear a negative yield, which is already trig-gering a reduction in their deposits at the ECB. This raises the question of where investors will have to address themselves to find a safe, equally liquid and reliable counterparty. In most jurisdic-tions, they cannot go directly to the central banks. But they can invest in government bonds, not an attractive proposition as bonds carry a negative interest rate, others presenting definite

Regulation

Challenges to collective investment productsThe financial and banking crisis is changing all segments of the financial world in many significant ways.

Text Eddy Wymeersch Illustration Vanda RomãoEddy Wymeersch

CESRUniversity of Gent



ported by the European and national regulators and supervisors. However, many funds essen-tially have the ambition to match the benchmark, and only a few outperform it. I do not underesti-mate the difficulty to outperform, but is it not simpler to invest directly in the benchmark through an ETF, that is less expensive, both in terms of access and of management? Moreover, in these difficult times investors do not necessar-ily pursue outperformance, as they would already be satisfied if the value of their investment is maintained. Most funds, however, do not include maintaining value as their stated objective.

The role of disclosure for purposes of investor protection is now being discussed. For many years the regulations generally that disclosure was

the right way to protect investors: they should be able to fend for themselves on the basis of true, fair and comprehensive disclosures. Ultimately as no one knows what is a good, proper investment, so it is up to the investors themselves to decide how much risk they want to take: this was the old doctrine of “caveat emptor”. It has many advan-tages: it obliges the offeror to submit full, relevant information; it obliges the investor to do his “homework”; and does not restrict the types of products to be offered, thereby contributing to innovation. From the supervisory side, it reduces the risk of the supervisor to be held liable for allowing “unsuitable” products.

Recently proposed European regulations take another stand: investors should be prevented

from being exposed to products that are too risky, not appropriate for their risk profile. There-fore financial supervisors–at least in the field of securities, but not in insurance–have the right to suspend or restrict the offering of certain instru-ments financial activities that constitute a “threat to investor protection or to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system in the Union,” as stated in the Mifir rules.

Whether protection should be ensured by dis-closure, or by more substantive, “merit”–some will say “paternalistic”–supervision is debatable, excluding some investors from some of the more sophisticated products. European regulations seem more and more to go in the latter direction, probably due to the increasing wealth of investors and their interest for all sorts of sophisticated investment products. The attitude of representa-tives of financial groups is one who does not act anymore as the person of confidence, but as a salesman essentially interested in selling the product and ultimately in his fee on the transac-tion. Legislators are concerned about the numer-ous cases of misselling, and want to better protect investors. But is this to be done by pro-hibiting certain products or services? Indeed, what distinguishes a good from a bad product? Much, if not all, depends on the characteristics of the product, of the investor’s capacity of analysis and of the investment advisor approach. And will this type of intervention be ex ante–a serious threat to innovation–or only ex post? One can only hope that the competent authorities will make a moderate use of these powers.

“They risk becoming more like

a Ponzi scheme”

Eddy Wymeersch Professor, University of Gent; former Chair, CESR

31



Investor protection

Beyond systematic riskIn taking an approach based mainly on prudential regulation, the commission risks addressing only part of the issue and–worse–confusing the investors it is trying to reinvigorate.

Text Jean-Baptiste de Franssu Illustration Vanda Romão

I nvestor protection has been the rallying call of regulators and policymakers since the financial crisis took hold. Failure to streng-

then it will contribute to European economic growth remaining elusive and investors to shy away from investing in long term financial pro-ducts. Yet so far the European Commission’s ini-tiatives have somewhat missed the mark.

The commission is drafting regulations around investor protection. Some, such as Mifid II or ICSD are advanced; others such as packaged retail invest-ment products (Prips) and the Insurance Mediation Directive have only recently been released. We are told these different pieces of regulations should take a harmonised view of relationships between pro-viders, distributors, advisers and investors to give investors the right balance of protection.

The reality is that this overall initiative has adopted a piecemeal approach and has been pro-tracted. It also hardly addresses investor protection issues at the point of sale. As a result, for the fore-seeable future protection and transparency rules will vary depending on the product, the distribu-tion channel an investor chooses and the country where he invests from. This patchwork structure will encourage regulatory arbitrage where the most transparent channels and products (such as UCITS) will be the most disadvantaged. This is hardly in line with fair competition ideals.

Additionally, more must be done to improve the relationship between investors and their advisers and providers. The commission has focused on disclosure and inducements in Mifid II. Yet it should take a broader approach embracing the definition of advice, independence, sales force training and professional qualification and the product launch process. These ideas need to extend into Prips to identify all the products that should be regulated, and their distribution mech-anisms to ensure a level playing field.

If it seems that a ban on inducements will ulti-mately occur across Europe as a way to respond to conflicts of interests, it is probably at this stage too early a move for most European markets. In addition, and as various market experiences around the world have demonstrated, it takes a lot of effort and thorough legislative and regula-tory work to successfully implement such a ban. To that extent, Mifid II should rather focus on hard disclosure of such inducements in addition

cial education as no rules can adequately address retail investors’ lack of knowledge.

Yet, the regulatory framework being devised today will neither tempt investors back, nor ade-quately protect those that do return. Indeed, it risks adding cost through an overly complex set of mismatched rules that are limited to a few nar-row initiatives and bring about unfair competi-tion with an uneven level playing field between member states.

It would be refreshing to see the views of pan-European policymakers, regulators, Prips provid-ers, distributors and investor associations coalesce into a single investor protection blueprint. The resulting regulatory initiatives would go well beyond provisions contained in the current draft of Mifid II and respond to the long-term need for a level playing field of investor protection that any fully functioning saving market requires.

Such a move would also demonstrate to Euro-pean citizens that it is the ambition of Brussels to draw lessons from the financial crisis that go beyond addressing systemic risk issues, and that deliver concrete tangible improvements to their daily lives.

to the rules that exist for disclosure at the point of sale: once or twice a year, wherever they are based in the EU, clients should receive a simple state-ment indicating the amount of fees received by the advisor for which type of services. Such an inter-mediary step would contribute to ensuring that an appropriate level of advice services remains availa-ble in the interest of retail investors whilst disclos-ing clearly the cost of that service. In the long term this would contribute in a pragmatic way to finan-

32

Jean-Baptiste de Franssu

European CommissionINCIPIT

“This is hardly in line with fair

competition ideals”

Jean-Baptiste de Franssu Chairman, INCIPIT

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ven playing field and local cultural nuances, which can require local knowledge and networks to gain access and market shares, will represent a challenge to any newcomer. Fees, retrocessions and charges are negotiated individually; since asset managers remain bound to a distribution oligopoly, profita-bility is still a high hurdle for many.

Fund investors’ preferences also vary from one country to another on account of differing invest-ment maturity levels, making it difficult to have a single distribution and product strategy across Asia. This is why country-specific solutions and approaches are often needed. The high risk/high return investment mentality among Asian inves-tors also contributes to fast fund inflows and out-flows, while the rapidly changing demographics in Asia will require better product innovation and solutions to suit investor needs.

The local regulatory environment is also continu-ally changing throughout Asia, with new rules on ownership, sales practices and product guidelines. Regulatory scrutiny is making fund launches and sales tougher. In Hong Kong, non-standard funds are subject to a much longer approval process, while in Taiwan foreign fund managers are likely to be required to increase sales and investment process substance locally if they want to continue market-ing offshore funds to retail investors.

All in all, Asia provides significant opportuni-ties for those who are prepared to invest and develop their footprint over the long term, and adapt their business practices and expectations to the Asian environment. Those with ambition to succeed must also build their business onshore–it is no longer enough to operate remotely and rely on networks; one must become “local” to build longevity and create a brand able to compete with the best in the business.

Much ado about something?

Many areas are already aware of the Asia Funds Passport Initiative, introduced in late 2010 by the

W hile not entirely immune to market volatility and the global economic cri-sis, Asia remains a favoured destina-

tion for those seeking to tap into the world’s fastest growing wealth in the world today. The region’s economies have remained resilient, with the rising middle classes in countries like China, Indonesia and India growing wealthier and get-ting ready to dip their toes into the new world of investment funds. Asia now has the largest num-ber of wealthy individuals in the world, and it will not be long before Asia’s wealth exceeds that of the United States in dollar terms.

The current mutual fund penetration rate in Asian households, as a percentage of household wealth, is far below that in the West, ranging from four to eight percent as compared to approximately 16 percent in Europe and the US in aggregate. In this regard, the long-term prospects for Asia’s mutual fund growth looks promising for those who are pre-pared to commit to a sustainable Asian strategy. Asian investors are also on the lookout for innova-tive fund ideas, and there are strong opportunities for those who can provide creative and high-perfor-mance products. The latest cross-border exchange-traded funds (ETFs) in China, launched by two local fund houses, quickly raised about 8 billion US dol-lars in total assets. Investors are now looking forward to the forthcoming cross-border ETF launches in China and the renminbi qualified foreign institu-tional investor ETFs in Hong Kong. Other countries in Asia such as Malaysia, Thailand, Vietnam and the Philippines are watching these developments closely and players should expect more changes in Asia in the future.

While Asia’s fund industry represents a signifi-cant growth opportunity for international asset managers, it is not without challenges. Firstly, dis-tribution in the region is not straightforward. The regional market is geographically fragmented and large consumer banks dominate distribution in some countries, while securities houses are the main channels of distribution in others. The une-

Looking east

The survival guide to the Asian fund industryWinning in tomorrow’s most promising marketplace.

Text Justin Ong Illustration Vanda Romão

Australian Treasury at the APEC Leaders meeting. This initiative is still work-in-progress. Although nothing concrete has emerged yet, the APEC Finance Ministers group has issued supportive statements to continue developing the proposition.

Another version of a cross-border funds frame-work has recently surfaced, with the Monetary Authority of Singapore (MAS) issuing a draft con-sultation paper setting out the basic framework, standard requirements and product restrictions for the mutual recognition of collective invest-ment schemes under the ASEAN Capital Mar-kets Forum. The Association of Southeast Asian Nations, or ASEAN, was established on 8 August 1967 and now comprises Indonesia, Malaysia, Phil-ippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar and Cambodia.

The MAS draft consultation paper is the first piece of the puzzle which may result in a frame-work emulating much of what the UCITS vehicle and framework has done for the EU albeit on a much smaller scale than a true pan-Asian initia-tive as proposed by the Australian Treasury. In the ASEAN proposal, qualified collective invest-ment schemes authorised and managed in mem-ber jurisdictions may be offered in other host jurisdictions through a fast-track process, although application for recognition will still need to be submitted to the host jurisdiction regulator. A number of features have also been introduced for discussion, covering a wide range of areas such as operational requirements for the fund promoter and the trustee, product restrictions, disclosure requirements as well as governance requirements applicable not only to the fund promoter and trustee, but also to the fund auditor and fund pro-moter.

It is early days and much work is still needed before a concrete proposal agreed by all ASEAN member states can emerge. Questions are also being raised as regards to some of the limitations imposed on the investment restrictions and reporting requirements. Yet, it is encouraging

Justin Ong

pWc



from an Asian perspective to see such efforts starting to take shape, as local and indigenous fund managers have long complained about the uneven playing field in their own region, in which they have less access to regional markets than foreign offshore funds. Many players are adopt-ing – or considering – the “round-tripping” route, whereby funds are established in Luxembourg or

Dublin and re routed back to regional markets in Asia such as Singapore, Hong Kong, Taiwan, Korea and Japan for sale to retail investors.

Interestingly, Thailand has recently announced that it would soon approve the ASEAN cross-border fund initiative, initially for institutional and private client segments, with approval for retail investors planned for later in the year.

All in all, the introduction of the ASEAN cross-border funds initiative should not be seen as a threat to the UCITS brand in Asia. Currently, the larger ASEAN member nations such as Malaysia, Indonesia and Thailand are not open to direct distribution of UCITS funds. It would be interest-ing to see whether the final product of the ASEAN cross-border funds initiative will allow funds domiciled in jurisdictions such as Singapore, cre-ated as feeders funds into Luxembourg or Dublin UCITS funds, to be recognised for distribution in these ASEAN markets, thereby creating an opportunity for UCITS funds to access these regional markets indirectly without the need to create a local fund in each jurisdiction.

Survival in today’s Asian marketplace

Understand your marketplace: each Asian coun-try is different and appreciating the individual cul-tural and investment environment is critical.

Choose your distribution relationships care-fully: the right person in the right place makes all the difference.

Be onshore: there is nothing like showing a serious commitment to your customers; offshore servicing demonstrates you don’t care enough about them to invest in being there.

“It is no longer enough to operate

remotely”

Justin Ong Partner, PwC Luxembourg

35



“No reasonable person could raise

objections”

Distribution

UCITS IV: the overlooked

efficiency package?Regulatory requirements are rising, but they are also

creating opportunities for the investment industry.

Text Lou Kiesch Illustration Vanda Romão

Lou KieschPartner, Deloitte Luxembourg

T here are currently as many as 32 initiatives, legislative projects, upcoming directives and regulations facing the financial

sector. These range from measures designed to increase the stability of the sector with measures such as Solvency II and Basel III addressing capital requirements, to provisions aimed at investor protection written into instruments such as AIFMD and UCITS V.

And when the legislative process of the EU is not enough, there are the overlapping requirements of DoddFrank and FATCA at the international level, and other purely national contributions aimed at the same goals, but pursuing their own paths and direction towards… what precisely?

The stated aim is to protect the consumer both at an individual level and at a collective level, in the role of taxpayer, from inappropriate investments and from shouldering the burden now and in future generations of weaknesses in the capital

It should not be forgotten at a time when much proposed legislation is top down, that the provisions of UCITS IV were inspired by what the industry itself believed necessary to grow the product to the next level of efficiency and security. The industry and investors asked for UCITS IV. It is up to that same industry to make best use of what it has obtained.

For within UCITS IV there is a central core around the “efficiency package”–the twin pillars of the Simplified Notification Procedure and the Key Investor Information Document.

Through the Simplified Notification Procedure, products may be offered to investors when and as they need it, to meet the rapidly changing circumstances of international markets; instead of limiting investor choice it will enrich it. Via the KIID, the investor has the necessary tool to make balanced and informed judgements. Taken in isolation, either may seem an additional layer of administration and cost; brought together the necessary synergies are created to achieve genuine progress.

At the end of the day, regulation, legislation, product itself can only go so far. It is the use that is made of these elements that can bring success. Nowhere is this more evident than in Luxembourg. This country has brought something essential to UCITS that has allowed it to “punch far above its weight” in turning raw materials into value. That is its savoir faire. The building blocks were there for any country to use, but Luxembourg has made the UCITS product its own through that concentration of competence and skills that within its own version of the square mile offers a range of abilities and complementary services unequalled in Europe. By deploying those skills in the elaboration of the KIID, by continuing to build the cross border distribution infrastructure through registration and market expertise, Luxembourg can make so much out of so little. When the dust settles on the current debates and upheavals, if Europe continues to have a thriving internal and external market in financial services, it will be in no small part due to those synergies, and that quality that have created the label–“UCITS–made in Luxembourg”.

markets born of excess. No reasonable person could raise objections to such high aspirations.

If by adding cost and complexity via regulation to this already explosive mix, the current tide of regulation further deteriorates the risk/reward profile in attracting available savings into productive investment, then the financial sector will indeed be a desert, and the victory for investors and markets alike pyrrhic.

Growth and success are not nebulous concepts to be left to populist posturing; they are the fruits of judgement, discernment and industry. Nowhere is this more true than in the passage that UCITS as a global brand must forge through current difficulties to fulfil its potential role as a catalyst for productive investment. If UCITS grew from nothing to a multitrillion export industry over a mere two decades, it is because opportunity was identified at grass roots, by know ledgeable market practitioners and by astute investors alike.

36

Lou Kiesch

Deloitte

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3838

their home markets, which will attract interna-tional investors looking for a gateway into the booming Chinese and Asian markets.

A number of Chinese asset managers also believe that their current and future investors will favour a more balanced global asset allocation. They see plenty of rewarding investment opportu-nities outside China, with the European market representing an opportunity to build up their over-seas investment capabilities in mature markets.

A first step outside

The Chinese market is dominated by retail investors with the institutional market being very limited. In China, publicly offered open ended mutual funds are the most common vehicles. As the market is dominated by retail investors, banks represent around 70 percent of the distribution market, with the rest shared by securities compa-nies and the fund managers themselves. Direct and online marketing is becoming more popular with both institutional and retail investors. Despite a recent regulatory change which has allowed third party distributors, the managers expect that banks will continue to dominate and that distribution will remain “expensive” for inde-pendent asset managers for quite some time yet.

Since the financial crisis, asset managers and investors worldwide are hoping to take advantage of the growing importance of Asia Pacific mar-kets. A new wave of capital from Europe and North America is heading for the region, leading both local and global firms active in Asia Pacific to develop their distribution capabilities.

The limited distribution channels in mainland China are driving Chinese asset managers to go abroad. As a first step, a number of Chinese fund managers have, over the last four years, estab-lished a presence in Hong Kong. Hong Kong is seen as an offshore RMB centre, an asset man-agement centre, a major investment destination and a talent pool. A Hong Kong presence makes it easier for international investors to access Chi-

S weeping regulatory reforms expected from the Chinese regulators are to further open up the Chinese asset management industry,

allowing Chinese asset managers to expand their businesses. Foreign firms are queuing up to par-tner with Chinese financial service firms, both to enhance their service offering at home and to get a foothold in China. During the second quarter of 2012, Ernst & Young interviewed c-suite execu-tives of some of the leading Chinese asset mana-gers to understand their overseas expansion stra-tegy. We found that they have defined strategies to overcome the challenges and take advantage of the opportunities to enhance their position in the Asia region, but are less clear on how to get a foo-thold in Europe.

All the Chinese asset managers we interviewed offer a range of products, such as mutual funds and management accounts, although the diversity of the products is limited by regulatory require-ments. Their assets under management ranged from two to more than 200 billion renminbi.

All of the respondents view overseas expan-sion as a key element of their business strategies in the next three to five years despite their suc-cesses in the Chinese market. Seeing foreign firms expanding their footprint in Asia Pacific has intensified Chinese asset managers’ desire to expand their geographical coverage. Further-more, as few Chinese asset managers have expanded internationally to date, many of them are keen to gain a first mover advantage.

The majority of Chinese managers are confi-dent in their investment expertise and capability in the Chinese market. They believe that they can use this competitive advantage over western asset managers to build brand names in the global market and, with full liberalization of the RMB is still in progress, attract international investors to their RMB-denominated funds, while at the same time offering a wider range of products in China.

They believe that they have competitive invest-ment strategies, leveraging their insights into

New research

East moving west: the Chinese dimensionChinese asset managers’ European strategy.

Text Michael Ferguson Illustration Vanda Romão

nese securities. Chinese managers can therefore use their Hong Kong platform to offer Chinese products – i.e., products investing in Chinese assets – to international investors. The major challenge for such Chinese managers is gaining access to European and international distrib-ution channels, so they are focusing these Chi-nese products primarily on institutional investors. In Europe, Chinese managers see their greatest opportunities in the United Kingdom, followed by Luxembourg and France. About half see opportunities in Germany, and also opportuni-ties in the Nordic countries and Switzerland. Outside Europe, Chinese managers intend to target investors in the United States, Hong Kong and Korea, followed by the Middle East, Japan and Singapore.

Above all, Hong Kong offers Chinese asset managers an opportunity to learn from the depth of experience of its asset management industry, but perhaps also as a springboard to regional, or even global, expansion.

Looking west

Ernst & Young’s 2012 European attractiveness survey found that the Eurozone crisis is likely to foster increased investment into Europe from emerging markets. China, in particular, is expected to increase its level of investment in the Eurozone as assets come to the market.

Few Chinese asset managers have launched “European products,” i.e., products investing in European assets. Where they have, the products mainly target institutional mainland Chinese investors. However, European products are part of the development plans of many Chinese asset managers, primarily targeting institutional inves-tors, both in China and international investors through Hong Kong.

Chinese managers’ preferred strategy to launch European products is to establish a physical pres-ence in Europe. Many Chinese managers have, for some time, been working on setting up in

Michael Ferguson

Ernst & Young



Europe “behind the scenes” so as not to compro-mise their development strategies.

Some managers are pursuing another strategy: collaborating with European asset managers or banks. However, their primary concern is that such collaboration will either be expensive or mean sacrificing some “flexibility”. We expect Chi-nese managers to continue to develop bilateral or even multilateral distribution agreements, espe-

cially in more mature markets where new entrants find it particularly hard to gain a foothold.

In the long term, we expect Chinese asset managers to pursue acquisitions in Europe and other developed markets, as the surest means to lock in both product manufacturing and local distribution capabilities. Potential obstacles do remain however, including how to ease the con-cerns of regulators, co-investors and even the

general public when a foreign firm takes over an established European financial institution.

While European asset managers and banks are keen to seize the opportunities to cooperate with ambitious Chinese asset managers, not all are “attractive” or “trustworthy” in the eyes of a Chinese asset manager. A strong brand name with substan-tial assets under management significantly helps boost the confidence of their potential Chinese partners. Proven track record, demonstrated investment expertise and capabilities are seen as essential. Chinese managers want to learn from their partner to enhance their investment research processes, sales strategies, risk management, con-trol framework and other operational and manage-ment areas so as to achieve international standards. “Chemistry” – the ability to adapt to each other’s dif-ference in investment philosophies and work together – is vital when establishing a partnership.

A key challenge facing Chinese managers look-ing west is that, compared with current business models and product ranges, launching European products such as UCITS is relatively complex. Sec-ondly, Chinese managers have difficulty develop-ing a distribution strategy for their European products which cannot be distributed in mainland China directly due to regulatory restrictions.

Overall, Chinese managers are confident that they will be preferred by investors who want to benefit from China’s economic boom.

“Many of them are keen to gain a first mover advantage”

39

Michael FergusonEMEIA Regulated Funds Practice Leader, Ernst & Young



“UCITS are likely to enter a new era”

Depositaries

UCITS V on its wayProposed retail fund regulations have been published, and they share

much in common with the draft rules for alternatives.

Text Freddy Brausch Illustration Vanda Romão

Freddy BrauschPartner, Linklaters Luxembourg

On 3 July 2012, the European Commission released the long-awaited proposal for a UCITS V Directive. The proposal aims

to strengthen investor protection by focusing on the UCITS depositary role and liability, remuner-ation of UCITS managers (not dealt with here), and sanctions for non-compliance.

Some had hoped that shortcomings – there are some – under UCITS IV would be tackled on this occasion. This will not be the case. It is rumoured that more might come, though this will not be under UCITS V.

The proposed directive, attempting to clarify the requirements applied to a UCITS depositary, heav-ily relies on – the much debated – provisions under the AIFMD, going sometimes one step further.

UCITS depositary role and liability

The UCITS depositary regime is clarified under the proposal (appointment of a single depositary for each UCITS; written contract with the depos-itary; rules establishing the flow of information

of proof, the onus being on the depositary) will, for most depositaries, be a major departure from the presently applicable liability regimes they are used to. The duty of restitution for lost financial instruments in custody (safe where the deposi-tary can prove that the loss arose as a result of an external event beyond its reasonable control, the consequences of which would have been una-voidable despite all its reasonable efforts to the contrary), introduces a standard on the deposi-tary that is particularly tough, some claim unrea-sonably tough. They argue that the impact of the proposal on pricing – where fund products are already at a disadvantage, compared to other financial products – will ultimately harm the fund product. The depositaries argue further that beyond pricing issues, the investment in less developed and hence more risky countries by their fund clients may result in certain fund prod-ucts having to be discontinued.

Finally, depositaries are worried by situations where the depositary may have to accept liability for an agent over whom the depositary has little or no control. Same where the depositary’s liabil-ity may be at stake for the keeping of certain types of collateral. It may further be the case of the depositary’s potential liability for third-party fraud and in case of a potential liability in a “melt-down situation”, which are departures from the present regime.

The debate among the several European law-making bodies towards the adoption of the pro-posal will be the subject of much attention from the industry in all its several constituencies. It is unlikely though that the standards the commis-sion is endeavouring to set in its proposal will be materially altered during the legislative process. UCITS are likely to enter a new era.

Sanctions

The third element of the proposal introduces rules similar to those that have been included in all the commission’s recent proposals in the con-text of its horizontal policy making.

for the depositary to perform its functions) as are the entities eligible to serve as UCITS depositary (EU registered credit institutions and certain EU MiFID authorised investment firms).

The obligations of the depositary (monitoring and oversight roles; proper monitoring of cash flows; safe-keeping of financial instruments and other UCITS assets) are also clarified.

The introduction, taken from the AIFMD, of safe-keeping duties relating to financial instru-ments that can be held in custody and of safe-keeping relating to other assets should be wel comed by all. The required due skill, care and diligence in the selection, appointment, periodic review and ongoing monitoring of delegates by the deposi-tary do not fundamentally deviate from the depos-itary’s present situation. The enlargement of the scope of delegates beyond the traditional network of sub-custodians is not without concern though to the community of depositaries.

The same goes for the proposed provisions on the liability regime of UCITS depositaries. The strict liability regime (with now a reversed burden

40

Freddy Brausch

Linklaters

European Fund Administration www.efa.eu

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42

of AIFs to professional investors within the EU, the AIFMD indeed also offers Luxembourg an opportunity to emulate its long-standing track record in retail cross-border investment fund dis-tribution by becoming a pan-European and global distribution platform for alternative invest-ment funds.

Existing product regulation

Given its longstanding position as an innova-tive financial place, and as the second largest fund centre in the world after the US in terms of assets under management, Luxembourg already offers a robust legal and tax framework for alter-native investment activities through attractive investment structuring opportunities and its double tax treaty network. In terms of regulated investment vehicles, in addition to Investment Companies in Risk Capital (SICARs) governed by the 2004 law and the Part II funds of the 2010 law applicable to non-UCITS structures, the specific legal regime for Specialised Investment Funds (SIFs) created in 2007 has bolstered the alterna-tive sector, facilitating the design of tailor-made investment structures for institutional, well-informed and professional investors in the pri-vate equity, real estate and hedge fund sectors. At the end of 2011, the non-UCITS sector (Part II funds and SIFs) represented 435,974 billion euros of assets under management. The 1,366 SIFs accounted for nearly half of this amount with 235,515 billion euros of assets under management, according to the CSSF.

The AIFMD indirectly regulates the product for which Luxembourg is a leading jurisdiction, and therefore offers significant development oppor-tunities. In this context, there are a number of requirements in the directive which will apply at the level of the AIF, such as the appointment of a depositary or of a central administration agent, the compliance with transparency rules through the issuance of a placement memorandum or issue document, the production of an annual report and appropriate reporting to the authori-

T he Alternative Investment Fund Mana-gers Directive (AIFMD), which came into force on 21 July 2011, forms part of a Euro-

pean programme to extend regulation and over-sight to all actors and activities that embed signi-ficant risk. Among such actors featured in the AIFMD are managers of alternative investment funds (AIFs). AIFs comprise for the most part hedge funds, private equity and real estate funds, but have been defined broadly so as to include in principle all funds that are not regulated under the directive governing undertakings for collec-tive investments in transferable securities (UCITS, i.e., retail funds with a passport for EU-wide distribution).

The AIFMD will significantly change the legal framework for asset managers wishing to man-age AIFs and market them to investors. First, all managers of AIFs managed or marketed within the EU, including those which are domiciled off-shore, will need to be registered and comply with the relevant provisions of the directive, including strict authorisation requirements, operating con-ditions, organisational rules and transparency requirements. Second, managers domiciled in the EU will benefit from a passport as from July 2013 allowing them to market EU AIFs they man-age to professional investors across the EU. Non-EU managers and funds will only be able to benefit from the passport after a transitional period, at the earliest by 2015. Between 2013 and 2018, they will be allowed to market the AIFs they manage in the EU by using national private place-ment rules, subject to complying with a certain number of provisions of the directive, such as transparency requirements and cooperation agreements to be entered into between the rele-vant authorities of the manager and the home state authority of the AIF.

The AIFMD, by creating a harmonised Euro-pean framework, will permit Luxembourg to stretch its pan-European distribution approach alongside the UCITS model and to offer alterna-tive asset managers attractive structuring oppor-tunities. By granting a passport for the marketing

Alternatives

AIFMD: Opportunities for LuxembourgThe Grand Duchy has yet another chance to be the gateway to the EU.

Text Claude Niedner Illustration Vanda RomãoClaude Niedner

Arendt & MedernachESMA

ties and the investors. Unlike for funds of other jurisdictions, these requirements will not signifi-cantly impact Luxembourg UCIs, SICARs or SIFs, as they are already subject to similar require-ments under Luxembourg regulations.

Strong UCITS position

Also, a number of requirements in the directive are UCITS-inspired and give Luxembourg a pos-sibility to leverage on its strong UCITS position. In particular, it is significant that the operational requirements imposed by the AIFMD on an alter-native investment fund manager (AIFM) are similar to those applicable to existing UCITS management companies and service providers, notably in terms of substance and operating con-ditions. Since UCITS management companies shall not be required, in order to be authorised as AIFM, to provide information already provided when applying for authorisation under the UCITS regime, they can easily develop their busi-ness in the alternative sector.

In terms of risk management, adjustments rather than onerous changes are required to ensure compliance with the requirements of the AIFMD.

“Middle-office” hub

Third country managers will only be able to ben-efit from the passport after a transitional period of two years, i.e., in principle starting in 2015. Between 2013 and 2018, they will be allowed to market the AIFs they manage in the EU by using national pri-vate placement rules of EU member states. How-ever, private placements are subject to certain conditions, in particular the existence of coopera-tion agreements between the host country of distri-bution and the home state of the AIF. ESMA intends to centrally negotiate multilateral cooperation agreements. This raises the question of whether ESMA will be in a position to finalise such agree-ments for 2013. In this regard, it is worth noting that Luxembourg already benefits from an efficient net-



work of memoranda of understanding and cooper-ation agreements with asset manager jurisdictions such as the US, Hong Kong, Switzerland, the Chan-nel Islands and Singapore. Finally, under the AIFMD, once the passport becomes available, non-EU managers will be regulated by a “member state of reference” in addition to their home regulators. However, non-EU managers may face significant uncertainties as regards which EU member state will be their member state of reference, since the

designation of the member state of reference depends on a certain number of complex criteria provided by the directive.

In these circumstances, AIFM-licensed Lux-embourg management companies represent an opportunity for non-EU managers to create AIFM managing several AIFs for the purpose of benefit-ing from the AIFM passport in 2013 instead of 2015, and therefore using Luxembourg as a gate-way to Europe. This will allow the management

company, i.e., the AIFM, to delegate portfolio management to a non-AIFM, including third party managers, subject to the conditions of the direc-tive. Luxembourg therefore provides alternative managers with an attractive location to develop their activities in and from Luxembourg.

Ambition of Luxembourg

The deadline for transposing the AIFMD into national law is 22 July 2013. As was the case for the implementation of the UCITS Directive into national law, Luxembourg is keen to become one of the first jurisdictions to implement the AIFMD and wishes to position itself as a first mover. The Luxembourg law is expected to pass parliament before the end of the year.

The draft bill also includes an alternative pack-age of other legislative initiatives, among which the possibility to structure AIFs in the form of a limited partnership which might in particular suit the needs of Anglo-Saxon asset managers and investors. This new structuring opportunity will indisputably contribute to attracting and devel-oping a strong business model for AIFMs and the AIFs they manage.

This article was co-written with Myriam Moulla, Senior Associate, Arendt & Medernach.

“Adjustments rather than onerous

changes”

Claude NiednerPartner, Arendt & Medernach

43



“The industry should rightly

fight”

Tax debate

Forced to think differentlyThe regulatory avalanche challenges the current modus operandi of the investment fund industry.

Text Georges Bock Illustration Vanda Romão

Georges BockPartner, KPMG Luxembourg

Amongst others, the financial transaction tax (FTT), FATCA and the Savings Direc-tive may impose unprecedented compli-

ance obligations on asset managers. At the same time, uncertainties when it comes to retroactive application of double treaties increases risks to operating funds. And yet, if properly managed the right to claim back unduly paid withholding tax –based on the Aberdeen case at the European Court of Justice – is the biggest tax opportunity the fund industry has been offered since many years.

Brussels

In 2008, a draft proposal was presented by the European Commission with the aim to extend the current scope of the Savings Directive. If the pro-posed amendments are adopted, certain invest-ment funds and structured products that are currently out of scope of the directive will be cov-ered. Beyond the current status quo, amongst oth-ers, two other outcomes are possible: an automatic exchange of information without extending the

In September 2011, the commission issued its proposal for an EU wide FTT. At a rate of 0.1% or 0.01%, the tax would be imposed on financial transactions involving financial instruments car-ried out by at least one EU based financial institu-tion. Given the objective of this draft directive, the industry should rightly fight in the interest of investors that UCITS are exempt from FTT.

FATCA between two stools

As far as US tax law is concerned, key improve-ments made by the FATCA draft regulations, issued in February 2012, are the additional categories of deemed-compliant financial institutions, which are subject to lighter compliance obligations. However, the conditions that need to be met in order to fall into one of those categories need to be adjusted. Otherwise only a limited number of investment funds will benefit from the deemed compliant status. Much the same can be said of the inter-governmental approach which entails additional uncer tainties for funds established in the con-cerned countries (France, Germany, Italy, Spain and the United Kingdom, Japan and Switzerland) as the exact scope and rules are yet to be negotiated.

Double tax treaty challenges

The access to a wide DTT network is often considered as fundamental when assessing the attractiveness of a jurisdiction for investment activities. Based on the Luxembourg tax admin-istration’s website, 36 treaty countries are now granting treaty benefits to Luxembourg SICAVs.

Even if the evolution is globally positive, the principle of beneficial ownership remains in many cases an open issue. This was recently the case in Korea and China where new administra-tive practice tends to restrict or deny access to DTT protection for Luxembourg investment funds. The respective authorities are currently discussing the future and the impact on the Lux-embourg funds.

The road ahead

In a nutshell, tax challenges ahead are many and diverse. Funds need to closely monitor and actively manage the ever changing tax environ-ment without losing sight of the great opportuni-ties in the fund market.

scope of the directive (the withholding tax method would no longer be available) and the extension of the scope of the directive and at the same time allow certain member states (e.g., Luxembourg) to continue applying the withholding tax system.

In 2009, ECJ’s decision in the Aberdeen case (C-303/07) was a milestone judgment for the abolishment of discriminatory taxation of cross-border dividends. This decision provides a solid basis for all Luxembourg investment funds to reclaim withholding taxes unduly suffered in the member states where they have made invest-ments. It is key to have a detailed and highly struc-tured approach to ensure that the requests are successfully received and that cash is collected.

In 2010, in the joint EFAMA/KPMG study, tax was identified as an obstacle to the implementa-tion of UCITS IV Directive. Since then, modest progress has been achieved. But on the main issue – tax neutrality for investors on fund reor-ganisations – progress seems to have stalled. Therefore, improvement still needs to be made in order to safeguard investor’s interest.

44

Georges Bock

AberdeenEFAMAEuropean CommissionEuropean Court of JusticeKPMG

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Communications

Business critical?It is high time to take an objective look at new media in financial services.

Text Tony Langham Illustration Vanda Romão

Caroline AllenTony LanghamSimon RutherfordHeather TaylorPhil Taylor

AkbankAlbulusALFIAmerican ExpressAmeripriseArtemis InvestmentsCitiCorporate InsightCubakaE*TRADEEclecticaEconsultancyFacebookFidelityFinancial TimesGoogleInstagramInvestment EuropeISMAJykse Bank TVLansons CommunicationsLinkedInLiongate CapitalMastercardoptionsXpressPathPinterestRuffer InvestmentsTumblr TwitterZecco

Who to “like”

Good investment manager communication1. hugh hendry of eclectica’s electronic

newsletters set out his highly idiosyncratic world views with such mastery of language; they are so more pleasurable to read than communication that merely pushes a product.

2. For nine months before launching a distressed loan fund, Albulus, a niche German investment house, produced a monthly blog/newsletter. the views were well-considered, targeted at a sophisticated readership, supported with proprietary data and tightly written in a lex-like style.

3. Ruffer investments has a good website–so easy to navigate it is almost childish. liongate Capital has a nice, simple look, while Artemis investments is attractive, humourous and clear.

Source: Phil Davis, FT Journalist, www.phil-davis.co.uk

“It’s not yet a way

of life”

Tony Langham Chief executive, lansons Communications

W henever we make a presentation to a financial services company, there’s always a debate about social media.

That’s hardly surprising as Facebook has grown to more than 800 million active users and Twit-ter to 100 million.

This is changing the way business is done as organisations as diverse as Ford and Starbucks have reinvented their communications struc-tures as social businesses, to benefit from this new world–the number one trend in social media according to Simon Rutherford, Manag-ing Director of social media agency Cubaka (see box page 45, right “top trends in social media”.

Some financial services companies lead the way in this space too. Corporate Insight’s 2012 Social Media Leaders report highlighted how

financial advisory firm Ameriprise offers an adviser search tool on LinkedIn, how online stock brokerage Zecco enables its customers to trade through Facebook, and that both E*TRADE and optionsXpress have launched social communities. Of the bigger brands, American Express, Fidelity and Citi often receive plaudits as do Mastercard, Akbank and Jykse Bank TV. Yet some parts of the industry–particularly investment managers–lag behind. One reason for this is the outlook of senior management. Heather Taylor, Editorial Director of Econsultancy noted that at LinkedIn’s inau-gural Financial Services Summit this May only two of the six social media panellists had Twitter accounts themselves. Caroline Allen, editor of Investment Europe, believes that for financial ser-

vices companies, using social media is particu-larly challenging because public trust is so low. She adds that “we monitor twitter carefully, track the output of trade associations–ISMA and ALFI are effective–and industry leaders, and blogs from major asset managers. We like incisive, direct, open commu-nication, and material that really has something to say. It is still rare to find it.”

On the credit side Financial Times writer Phil Davis has found several examples of good com-munication in the funds industry and his high-lights are summarised in the box above.

Solace for those investment managers that lag behind is that the revolution that is sure to come, has not yet happened. The majority of wealthy investors, intermediaries, pensions consultants and institutional investors may use social media



47

WhAt to WAtCh

Top trends in social media1. Social business:

examining objectives, processes, resources, budgets and it, to help an organisation reinvent itself for the social communications age.

2. Social search: innovations such as Google’s “+1”, integration of twitter and author authority all serve to increase the social relevance of search results.

3. Collaborative consumption: if the social trend for coordinated purchase and ownership amongst consumers takes hold, a wave of social network innovation will follow.

4. A return to privacy: with further developments in “frictionless” sharing planned, consumers may begin to look for a “private” button to sit alongside “share”, “like”, and “tweet”.

5. Facebook continues to evolve: having paid 1 billion dollars for instagram, great things are now expected from that tie-up, and with over 425 million users accessing Facebook from a mobile device every month we can expect the app to keep getting better.

6. Niche networks: instagram, Pinterest, tumblr, and Path are not yet household names, but they represent a growing number of niche networks–sites which will never be as big as Facebook but have enough appeal to attract millions of loyal consumers.

7. Compliance: social media marketing innovation is giving brand’s legal teams and industry regulators sleepless nights. expect a number of products and services to be developed to help brands stay right side of the law.

8. HTML 5: by 2013 the number of htMl5-capable browsers should exceed a billion, significant for social media as htMl5 will make the web quicker, more seamless and better integrated, meaning more capable and attractive websites and apps. Cue the next round of social development.

Source: Simon Rutherford, Managing Director,

cubaka.com

hoW to enGAGe

Observations on socialmedia and crises1. the essence of social media is interaction,

rather than simple delivery of content. the hard part is that social media is more unpredictable than traditional media.

2. Confusion reigns as to how to handle this new beast. the idea of “control” is absurd, since the whole point is that it has a life of its own that a firm hopes to harness for its own benefit.

3. the optimal strategy is to engage intelligently, remaining alert, relevant, flexible and professional. the critical point is that the channel is not the message.

4. executives used to being in charge are naturally suspicious of a medium which exposes vanity, prejudice, half-truths and hidden agendas.

5. in cyberspace, size doesn’t matter, but reach does. As the traditional press lumbers into action, twitter is delivering news, comment, pictures and video direct. Viral communication magnifies the speed–and tone–of the message.

6. in a “hearts and minds” media battle, relying on a nicely crafted press release or scripted conference to put your story is like waiting for history to be written before you engage.

7. the tyranny of social media is its insatiable appetite. one basic error is to set up channels and then neglect them, as if they will spring alive on their own. Another is to babble and spam, ensuring your firm is quickly un-friended and un-followed.

Source: Caroline Allen, editor, Investment Europe,

www.investmenteurope.net

and many of the tools of e-business, but it’s not yet a way of life. I’ve long contended that this new world will change the organisational fabric of the investment management industry.

The communications structures of today–built around sales, marketing, distribution and PR–will be replaced by integrated cross-discipline ones aimed at investors, intermediaries, consultants and government with a small reputation manage-ment function. For now though, investment companies grapple with new media at different paces. Some have hooked all of their investment managers to the world of film, others blog effec-tively, while many do not even have effective Twitter feeds.

According to Caroline Allen, “the latest finan-cial upheaval has provoked a new way of doing

things. From governments to firms, future prospects depend on what ‘stakeholders’ think of how you react.” The box above, left, summarises Allen’s observations on social media and crises. Phil Davis says that at times, looking at their com-munication, you could be forgiven for thinking investment firms were clones of each other. “So few strive for originality or, perish the thought, to entertain. Some seem to think that publishing mes-sages on Twitter or Facebook makes investment firms inherently more interesting, but it doesn’t.” He adds that many corporate websites seem to have been forgotten in the communications matrix. In the same vein, Caroline Allen believes that while channel and style are important, content is king. Phil Davis reflects that “fund managers needn’t always be provocative, but their presentations

could be less formulaic and a little more thoughtful, creative and brave.”

To coincide with ALFI conference in September, Lansons will unveil the results of industry research–among investors and senior industry figures–testing these hypo theses. Our conclusion for now, though, is that while the wise are re-orienting their businesses to new media now–and the far-sighted have already done so–the business critical communications issues revolve around more fundamental issues.

Today’s key questions are: is active manage-ment worth paying more for? What differentiates one fund manager from another? Why is your asset allocation approach superior to your com-petitors? The message, not the medium, will cre-ate commercial advantage, at least for now.

Jeannot KreckéGuillaume Crown PrinceMarc SaluzziFrank VellingSally WongTheresa HamacherThomas FlammantRoman LewszykPaul Schott StevensPatrick ColleLaurence MagloireMarc MeyersPaolo MartinuzziLouise BangThomas SealeJulien ZimmerJohn Parkhouse

AlfiBankInvestHK IFANicsaUK Embassy in LuxembourgAtlantic Fund ServicesInvestment Company InstituteBNP Paribas Securities ServicesMorgan Stanley Investment Management LimitedLoyens & LoeffClearstream BankingDanish AmbassadorEFADZ PrivatbankPwC

48 Special alfi global distribution conference in association with nicsa & hkifa


2011

FlashbackThe previous Global Distribution Conference took place on 27 and 28 September 2011 in the Centre de Conférences in Luxembourg-Kirchberg.

Photos Luc Deflorenne

04

01

06

02

03 07

08

09

05

01. Jeannot Krecké (minister of econmy and trade)

02. Crown Prince Guillaume

03. Marc Saluzzi (Alfi)

04. Frank Velling (BankInvest)

05. Sally Wong (HK IFA)

06. Theresa Hamacher (Nicsa)

07. Thomas Flammant (UK Embassy in Luxembourg)

08. Roman Lewszyk (Atlantic Fund Services)

09. Paul Schott Stevens (Investment Company Institute)



10

14

1211

15

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10. Patrick Colle (BNP Paribas Securities Services)

11. Laurence Magloire (Morgan Stanley

Investment Management Limited)

12. Marc Meyers (Loyens & Loeff)

13. Paolo Martinuzzi (Clearstream Banking)

14. Louise Bang Jespersen (Danish Ambassador)

15. Thomas Seale (EFA)

16. Julien Zimmer (DZ Privatbank)

17. John Parkhouse (PwC)

1716



50

ALFI special supplement

Alfi GlobAl DistributionConferenCein AssoCiAtionwith niCsA& hKifA

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September/October 2012

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Cover Illustrations Vanda Romão

Illustrator and designer Vanda Romão is obstinate and dreamy. She devotes much of her time to her passion – illustration. With a degree in graphic design from the School of Arts and Technology of Lisbon, this young designer has already established a solid reputation in the areas of design and illustration. She has worked as a designer for numerous companies, consolidating knowledge and sharing experiences with other designers. Currently she is following a lifelong dream, and as a freelancer, devotes most of her time and effort to a personal project titled “Porta Amarela”, which she expects will be a grand success.

AAberdeen 28, 44Accenture 45Akbank 46Albulus 46ALFI 3, 5, 8, 37 46, 48Allen Caroline 46Alter Domus 17American Express 46Ameriprise 46Arendt & Medernach 42Artemis Investments 46Atlantic Fund Services 48Atoz 23

BBang Louise 48BankInvest 48Berlitz 22BNP Paribas Securities Services 48Bock Georges 28, 44Brausch Freddy 40

CCaceis 27CESR 30Citi 46Clearstream Banking 48Colle Patrick 48Corporate Insight 46Costanzo Gian Luigi 3, 5Cubaka 46

DDanish Embassy in Luxembourg 48de Franssu Jean-Baptiste 32Deloitte 6, 36Do Recruitments Advisors 20, 24DZ Privatbank 48

EE*TRADE 46Eclectica 46Econsultancy 46EFAMA 28, 44Ernst & Young 2, 38ESMA 42European Central Bank 8European Commission 8, 28, 32, 44European Court of Justice 28, 44European Fund Administration 41, 48European Parliament 8

FFacebook 46Federal Reserve 26Ferguson Michael 38Fidelity 46Financial Times 46Finesti 29Flammant Thomas 48Frieden Luc 8

GGoogle 46Grant Thornton 25Grulms Fernand 3, 5Crown Prince Guillaume 48

HHamacher Theresa 26, 48Hong Kong Investment Funds Association 3, 5, 8, 48

IINCIPIT 32Instagram 46Investment Company Institute 48Investment Europe 46ISMA 46

JJykse Bank TV 46

KKiesch Lou 36KPMG 28, 44, 52Krecké Jeannot 48

LLangham Tony 46Lansons Communications 46Lewszyk Roman 48LinkedIn 46Linklaters 40Liongate Capital 46Lipper 8Loyens & Loeff 48Luxembourg for Finance 3, 5

MMagloire Laurence 48Martinuzzi Paolo 48Mastercard 46Meyers Marc 48Morgan Stanley Investment Management Limited 48

NNICSA 3, 5, 8, 26, 48Niedner Claude 42

OOng Justin 34optionsXpress 46

PParkhouse John 48Path 46Peter & Clark 33Pinterest 46PwC 34, 48

QRuffer Investments 46Rutherford Simon 46

SSaluzzi Marc 8, 48Seale Thomas 8, 48Securities and Exchange Commission 26Stevens Paul Schott 48

TTaylor Heather 46Taylor Phil 46Tumblr 46Twitter 46

UUK Embassy in Luxembourg 48University of Gent 30US Department of Labor 26

VVelling Frank 48

WWong Sally 48Wymeersch Eddy 30

ZZecco 46Zimmer Julien 48

In this Index are all companies, people and advertisers mentioned in this book.

September-October 2012Published on September 18, 2012

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