Global and EU developments 1
1.1 MAR: New insider dealing and market abuse rules from 3 July, final draft Commission delegated regulation on RTS relating to
market soundings 1
1.2 CMU: European Commission first status report and speech on
key upcoming actions 1
1.3 MiFID II: COREPER agrees Council of the European Union's
negotiating mandate on legislative package to delay application 2
1.4 Benchmark Regulation adopted by the European Parliament 2
1.5 European financial associations call for one year delay of
application of PRIIPs Regulation 3
1.6 ESMA publishes updated Prospectus Q&A 3
UK developments 4
2.1 MAR implementation: FCA Handbook and AIM Rules 4
2.2 Public register for foreign companies that own properties in
the UK 4
2.3 Persons with significant control (PSC): Revised BIS guidance 5
2.4 Listed Funds - Primary Market Bulletin No 14 5
2.5 FRC final draft updates to the UK Corporate Governance Code
and Guidance on Audit Committees 5
2.6 FCA consults on UCITS V Level 2 Regulation and certain
requirements under SFT Regulation 5
2.7 Handbook Notice 32 supplement — Application of the FCA's
redress rules to ELTIFs 6
EU and Global tax developments 7
3.1 Joint statement on beneficial ownership information 7
3.2 New BEPS Consultations 7
3.3 India ends capital gains exemption under India-Mauritius tax
UK tax developments 8
4.1 Finance Bill 2016 8
4.2 UK - Alternative Investment Fund Managers Mechanism
(form updated) 8
Funds Bulletin May 2016 1
1. Global and EU developments
1.1 MAR: New insider dealing and market abuse rules from 3 July, final draft Commission delegated regulation on RTS relating to market soundings
From 3 July 2016, the existing European market abuse regime is changing across the EU. The new regime will affect issuers (those companies with financial instruments traded on a relevant exchange or platform), trading venues and market participants. Issuers will need to review their policies and procedures with a view to revising them to ensure they are compliant. They will also need to train directors, managers and other relevant employees on their obligations under the new regime.
Key areas subject to change are:
disclosure of inside information and the process for delaying;
notification of managers' dealings and when they are prohibited;
persons discharging managerial responsibilities (PDMRs) and persons closely associated with them will have to notify not only the issuer but also the FCA of transactions by them in the issuer's instruments. The issuer must then make the information public.
the content and management of insider lists;
a new market soundings regime;
extension of the regime to financial instruments traded on a multilateral trading facility (or for which a request for admission has been made) or traded on an organised trading facility; and
the scope of the regime now captures certain behaviours relating to spot commodity contracts, emission allowances and benchmarks.
For further information about the key changes and points to be aware of, please see our client briefing.
Another MAR development is the Commission published the final draft text of its delegated regulation supplementing MAR with regard to regulatory technical standards for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings. This regulation will apply from 3 July 2016; see also 2.1.
1.2 CMU: European Commission first status report and speech on key upcoming actions
The Commission has announced the publication of its first status report on its progress towards establishing a Capital Markets Union (CMU) and a new edition of the European Financial Stability and Integration Review (EFSIR), which focuses on CMU.
The Commission has also published a speech by Lord Hill, European Commissioner for the Directorate General Financial Services, Financial Stability and CMU which highlights certain key actions for the Commission during this quarter, including:
this month it will consult on improving the passporting system for investment funds, including UCITS;
before summer 2016, it will bring forward proposals to strengthen Europe's venture capital markets to build up scale, diversity and choice. Based on the results of the consultation that closed earlier in 2016, it will amend existing rules on European venture capital funds (EuVECAs) and European social entrepreneurship funds (EuSEFs). Proposed amendments include:
removal of the minimum investment limit, which is currently EUR 100,000 (in order to increase the investor base); and
allowing authorised AIFMs to manage EuSEFs and EuVECAs; currently, it is only possible for sub-threshold AIFMs to manage such funds.
2 Hogan Lovells
before summer 2016, it will launch a pan-European venture capital fund-of-funds framework to encourage further private investment in venture capital markets. It will publish a call for expressions of interest from private sector asset managers interested in managing such a fund.
during Quarter 2, it will launch a consultation on an EU framework for loan originating Alternative Investment Funds (AIFs), which, if adopted may introduce additional regulatory requirements for direct lending funds, for example mandatory authorisation requirements and limits on leverage. It's unclear whether non-EU funds and managers will be in scope and also whether it will be a mandatory regime or a more flexible opt-in model. This was covered in our April Funds Bulletin.
1.3 MiFID II: COREPER agrees Council of the European Union's negotiating mandate on legislative package to delay application
The Council of the European Union has announced proposals to extend the effective date relating to Markets in Financial Instruments Directive and the Markets in Financial Instruments Regulation (MiFIR) (together, MIFID II):
the deadline for the Member States to transpose MIFID II into national legislation would be 3 July 2017;
the date of application of both MIFID II and MIFIR would be 3 January 2018.
Aspects of MiFID II relevant to investment managers include:
a ban on third-party commissions for investment managers;
the unbundling of execution costs from payments for research;
additional corporate governance requirements;
additional best execution requirements;
additional requirements for complaints handling, record keeping and the recording of telephone and email communications;
enhanced requirements for reporting to clients;
a product governance regime;
the expanded scope of the transparency and transaction reporting regimes; and
a "third country" regime for non-EU firms providing services into the EU.
COREPER has asked the Council Presidency to start negotiations with the European Parliament as soon as possible, to enable adoption at first reading of the legislation enacting the extension.
1.4 Benchmark Regulation adopted by the European Parliament
The European Parliament has announced that it has voted to adopt the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmark Regulation). The adopted text has been published. This regulation was proposed following the recent LIBOR offences and is intended to prevent similar offences in the future.
Funds Bulletin May 2016 3
Under the new arrangements:
data for the calculation of benchmarks would have to be publicly available, as well as information on what each benchmark measures and its intended purposes;
administrators of benchmarks would be regulated through supervision by national competent authorities under the coordination of ESMA;
all those who calculate benchmarks or contribute information used in their calculation would be required to tighten up their governance and scrutiny procedures;
banks would have to assess the suitability of the benchmarks they use before entering into any financial contracts with a customer, and would have to warn the client if the benchmark is unsuitable.
The Benchmark Regulation now needs to be officially approved by the Council of the European Union. It will then be published in the Official Journal of the European Union and enter into force on the day following that of its publication. It will apply 18 months after it enters into force.
1.5 European financial associations call for one year delay of application of PRIIPs Regulation
Various European financial associations have requested a one year delay (until 31 December 2017) of the application of the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (see letter to Jonathan Hill, the European Commissioner for Financial Stability, Financial Services, and CMU from the European Banking Federation, Insurance Europe, the European Fund and Asset Management Association and the European Structured Investment Products Association).
The associations have set out various reasons for this delay including:
If the final regulatory technical standards (RTS) relating to the KID are not officially published until the third quarter of 2016, it will only leave three to four months for product manufacturers and distributors to meet the 31 December 2016 deadline to provide the PRIIPs KID.
PRIIPs manufacturers face considerable operational challenges to provide the PRIIPs KID to retail investors.
A number of fundamental questions are still unresolved in the final draft RTS proposed by the ESAs from a practical, technical and legal point of view.
1.6 ESMA publishes updated
The European Securities and Markets Authority (ESMA) has published an updated version of its Q&A document on prospectuses. It includes new guidance on the inclusion of information on recent or future material changes to capitalisation and indebtedness statements, see full article.
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2. UK developments
2.1 MAR implementation: FCA Handbook and AIM Rules
The Financial Conduct Authority (FCA) has published a policy statement, PS16/13, which reports on the main issues arising from its consultation paper CP1s/35: "Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation (MAR)" and consultation paper CP15/38: "Provisions to delay disclosure of inside information with the FCA's Disclosure and Transparency Rules" and contains the final rules, which will take effect on 3 July 2016. MAR has direct effect as it is a Regulation, but certain sections of the FCA Handbook will need to be revised. For example, the FCA considers that the Model Code is partially incompatible with MAR, so proposes to replace it with guidance for firms to use when developing their processes. A new LR 6.1.29 will require premium listed companies and applicants for premium listing to have effective systems and controls regarding dealing clearance procedures. There will also be changes in relation to insider lists.
It should be noted that it will no longer possible for listed closed ended companies to carry out transactions during a closed period even if all inside information has been notified to a RIS. This permitted under the current Listing Rule 15.5.1 which will be deleted.
MAR will impose a closed period of 3o calendar days before the announcement of an interim financial report or a year-end report. It is not clear if this closed period will end once a preliminary statement of annual results is published - guidance from the FCA or ESMA is expected on this point. During this period, persons discharging managerial responsibilities (PDMR) must not conduct any transactions that directly or indirectly relate to the shares or debt instruments of their company (or any derivative or other instruments that are linked to their company). This ban relates to transactions on the PDMR's own account and also any
transactions for the account of a third party. This is contrary to the current Model Code.
Importantly under MAR, permitted dealings during a closed period are considerably narrower than the current Model Code exceptions. Under MAR these are limited to exceptional circumstances of extreme financial hardship on a case by case basis and also transactions made under an employee share or savings scheme. Also, under MAR PDMRs only need to seek permission to deal during a closed period. However, it is still expected that companies may decide to continue to impose voluntary dealing code on PDMRs and require deal permission in all circumstances. This is because of the general MAR prohibition on insider dealing and unlawful disclosure.
The AIM Rules also need to be revised in light of MAR. The London Stock Exchange is
consulting on proposed changes to the MM Rules for Companies in advance of the Market Abuse Regulation coming into effect on 3 July 2016. In MM Notice 44, the LSE has identified that the following areas of the AIM Rules will need revising:
disclosure of price sensitive information (rule 11),
directors' dealings (rule 17), and
restrictions on dealings (rule 21); for further details see our article.
2.2 Public register for foreign
companies that own properties in the UK
Following the recent Anti-Corruption Summit, the government has announced various initiatives relating to beneficial ownership transparency. One of these is that foreign companies that own properties in the UK will be required to publicly register who controls them, and will not be able to buy UK properties or bid for central government contracts without joining the register. This will affect offshore entities which hold UK real estate.
Funds Bulletin May 2016 5
2.3 Persons with significant control (PSC): Revised BIS guidance
The Department of Business Innovation and Skills (BIS) has published further revisions to its non-statutory guidance for companies, SEs and LLPs and to its non-statutory guidance for PSCs in relation to the Register of People with Significant Control; see our article. Our Client note provides more detail on the new PSC regime and what needs to be done and can be found here. Version 4 of the guidance for companies, SEs and LLPs can be found here and version 2 of the guidance for PSCs here.
2.4 Listed Funds - Primary Market Bulletin No 14
The FCA has published its Primary Market Bulletin No 14, explains the latest changes the FCA has made, or is proposing to make to its Knowledge Base. This issue deals mainly with primary market debt listings. However, there is a minor change to one existing technical note on smaller transactions under the related party rules. This covers LR 11.1.10R(2)(b) which requires a premium listed company to obtain a written confirmation from a sponsor that the terms of the proposed arrangement with the related party are fair and reasonable. The amendment makes it clear that the UKLA needs to have discussions, where necessary, if a sponsor questions the correct classification under the class tests, before the transaction is entered into. Sponsors should approach UKLA for guidance in such a case. A signed, final confirmation needs to be in place before the premium listed company enters into the relevant transaction.
Comments are requested by 8 June 2016.
2.5 FRC final draft updates to the UK Corporate Governance Code and Guidance on Audit Committees
The FRC has issued its final draft update to the UK Corporate Governance Code and to the
FRC's Guidance on Audit Committees; see full article.
2.6 FCA consults on UCITS V Level 2 Regulation and certain requirements under SFT Regulation
The FCA has published a consultation paper (CP16/14) on various changes to the FCA Handbook as a result of the Regulation on reporting and transparency of securities financing transactions (SFT Regulation) and the UCITS V Level 2 Regulation. These are both directly applicable in the EU and do not require transposition by Member States. However, the FCA is in this consultation paper proposing amendments to certain FCA rules and guidance in the FCA Handbook to ensure consistency with these regulations.
The SFTR came into force on 12 January 2016. It introduces a number of measures including new requirements on the transparency of SFTs, total return swaps and the re-use of financial instruments received under a collateral arrangement. It should be noted that certain requirements apply to managers of UCITS and AIFs. They have to disclose their use of SFTs and total return swaps in the funds' pre-contractual documents and periodic reports to investors. These requirements supplement existing disclosure requirements set out in COLL and FUND. In this CP, the FCA proposes to copy out the relevant SFTR provisions into COLL and FUND to help firms comply with the new disclosure requirements. The requirement to disclose SFT information in the fund's periodic reports to investors will apply from 13 January 2017 and the requirement to disclose SFT information in the funds' pre-contractual documents will apply from 13 July 2017 to managers of funds constituted before 12 January 2016, while managers of new funds constituted since 12 January 2016 should comply with the requirements from the point when the fund has been constituted.
The UCITS V Level 2 Regulation will apply to firms from 13 October 2016. It introduces new
6 Hogan Lovells
requirements for UCITS depositaries, including safekeeping requirements for UCITS depositaries, requirements for the UCITS management company and the depositary to act independently, and also steps to protect the UCITS assets if a third-party delegated custodian becomes insolvent.
Comments on these proposals can be made until 19 July 2016. The FCA intends to publish a policy statement in the third quarter of 2016.
2.7 Handbook Notice 32 supplement —Application of the FCA's redress rules to ELTIFs
The FCA has published a supplement to Handbook Notice 32 which introduces the European Long-Term Investment Funds Regulation (No 2) Instrument 2016, FCA 2016/34/FOS 2016/7, which came into force on 28 April 2016 and makes changes to apply the FCA's redress rules (ie the rules about the Financial Ombudsman Service and Financial Services Compensation Scheme (FSCS)) to European long-term investment funds (ELTIFs) marketed to retail investors.
The FCA has decided to implement the proposals for ELTIFs as consulted on, with the exception of ELTIFs set up as investment trusts. The FCA says that as no market for ELTIFs has yet developed, it has therefore proposed to treat ELTIFs set up as investment trusts like other such companies under the redress rules, at least for the time being.
Another point to note in the supplement is that ELTIFs available to retail investors will be required to produce a key information document (KID) in line with the Regulation on KIDs for packaged retail and insurance-based investment products (PRIIPs). While the PRIIPs Regulation will not be applicable until 31 December 2016, the FCA would consider it good practice for managers of ELTIFs marketable to retail investors to comply with disclosures as set out in PRIIPs prior to its entry into force, wherever possible. This includes disclosing to
their potential investors whether or not they are within the scope of the FOS and the FSCS in the intervening period. However, note that various financial associations have called for a one year delay in the application of the PRIIPs Regulation; see 1.6 above.
The supplement also contains feedback to the FCA's September 2015 consultation paper, CP15/27, on UCITS V implementation and other changes to the Handbook affecting investment funds.
Funds Bulletin May 2016 7
3. EU and Global tax developments
3.1 Joint statement on beneficial ownership information
Over 20 countries (led by the UK, and including Gibraltar, the Isle of Man and Germany) have committed to the initiative to automatically exchange information on beneficial ownership.
The various signatories have committed to establishing 'registers or other mechanisms requiring that beneficial owners of companies, trusts, foundations, shell companies and other relevant entities and arrangements are identified and available for tax administration and law enforcement authorities'.
3.2 New BEPS Consultations
The OECD has announced three new BEPS related consultations to take place over the summer:
Interest deductions: Elements of the design and operation of the group ratio rule will be issued on 6 July, with the consultation period running until 3 August;
Hybrid mismatch arrangements: Branch mismatch arrangements will be issued on 15 July, with the consultation period running until 26 August;
Interest deductions: Approaches to address BEPS involving interest in the banking and insurance sectors will be issued on 18 July, with the consultation period running until 29 August.
3.3 India ends capital gains exemption under India-Mauritius tax treaty
In line with the OECD's BEPS guidelines India and Mauritius have signed a protocol to their tax treaty, which allows India to tax capital gains realised by Mauritius tax residents who dispose of shares in Indian companies. Previously, Mauritius tax residents were exempt from Indian capital gains tax on sales of shares in Indian resident companies. This is expected to have a significant impact on investments routed through Mauritius into India, as
investors consider alternative structures. It is possible that investors will seek to invest in India via the Netherlands, as the double tax treaty currently exempts Dutch tax residents from paying capital gains tax on the sale of shares in Indian companies. There is some risk, however, that the Netherlands-India treaty will also be renegotiated to comply with the BEPS guidelines.
The protocol will be effective from 1 April 2017, and includes grandfathering provisions so that investments made into India before that date will not be taxed retroactively. Moreover, during the transitional period from 1 April 2017 to 31 March 2019 the capital gains tax rate will be only 5o% of the Indian domestic rate.
The change is also likely to affect foreign investment into India through Singapore, as the India-Singapore treaty is directly linked to the India-Mauritius treaty.
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4. UK tax developments
4.1 Finance Bill 2016
It is likely that the Finance Bill will be carried
over to the next Parliamentary session
beginning after the summer recess, which
means royal assent could be delayed until
October 2016. The House of Commons has
specified that Public Bill Committee
proceedings must be concluded by 14 July 2016,
which is only a week before the summer recess
on 21 July. However, due to the recess to allow
campaigning for the EU referendum, the Public
Bill Committee will not start its consideration
until after 28 June.
The House of Commons has also agreed a carry-
over motion for this Bill which allows
proceedings to be resumed in the 2016-17
session if they have not been completed in the
current session. If the Bill is carried over, the
Report Stage will not take place until after the
4.2 UK - Alternative Investment Fund
Managers Mechanism (form
HMRC has published an updated form of the
Alternative Investment Fund Managers
mechanism. This mechanism allows members
of an alternative fund manager (AIFM)
partnership to allocate certain restricted profits
to the partnership and represent variable
remuneration under the AIFM Directive (other
than upfront cash profits). Guidance on the
scope, information required and next steps can
be found here. For further information, please
contact Paul Hale or Enrique Clemente.
25 May 2016
Funds Bulletin May 2016 9
Investment funds (UK) Investment funds (US)
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