Radically simple The portal that delivers answers

Industry Spotlight
Spring 2016
News and views from Citco on alternative industry developments
Today, data transparency
is more vital than ever
William Keunen,
Head of Citco Fund Services
wkeunen@citco.com
W
elcome to Citco’s Spring
edition of Spotlight.
This issue coincides
with a sustained period
of tumult in the capital
markets, and at times like these both
managers and investors need to understand
their financial exposure by relying more
than ever on data transparency.
The current twitchy environment will
inevitably cause stakeholders to consider
their investment options – and this applies
equally to service providers, whose interests
are so closely aligned to the continued wellbeing of the industry.
Consequently, we are delighted to
demonstrate our continued investment
in the sector by presenting CitcoOne.
This next generation portal offers our
clients a true self-service tool for sourcing
and mining the data and reports we
generate as part of our asset servicing
responsibilities.
As usual, Spotlight also covers our
perspectives on industry trends, such as
the emergence of fund governance as a
discipline in its own right and the decline
of shadow administration for funds of
hedge funds, as well as the plethora of rules
that continue to flow from our regulators,
including FinCEN’s AML rules, UCITS V,
MiFID II and the focus on cyber security on
both sides of the Atlantic. □
NE
SPV oversight makes
2 governance a job for
specialist firms
CitcoOne aims to
3 help managers make
NE
better decisions
Timely and accurate
4 NAV figures build
Radically simple
The portal that
delivers answers
page 3
trust in administrators
Shadow capital
5 investors make fund
administration harder
Investors seek lower
6 fees and greater
transparency
Common reporting
7 standard requires
extra due diligence
Citco pushes for
8 clarity in anti-money
laundering rules
Regulatory round-up:
10 AIFMD to UCITS V
plus local updates
Citco assets: flows
11 and performance for
July to December
12
Australia’s IMR offers
tax breaks
We welcome any feedback you
may have on Industry Spotlight.
Please get in touch with us at
industry.spotlight@citco.com
The Citco Group of Companies (“Citco”) is a worldwide group of independent financial service providers, established in over 40 countries and serving the
world’s elite hedge funds, private equity and real estate firms, institutional banks, Global 1000 companies and high net worth individuals. Companies of the
Citco Group provide global alternative investment fund administration, custody and fund trading, financial products, and corporate and trust planning solutions.
Governance set to become a specialist discipline
Funds are finding that only independent specialists can
deliver the necessary oversight of complex SPV structures
Tim van Dijk, Division Management, Citco Corporate & Trust
tvandijk@citco.com
C
hanging regulations and tax legislation are giving Chief Financial
Officers and General Counsels
a virtually impossible task. The
private equity (PE) and real estate
(RE) funds they oversee typically have large
numbers of underlying special purpose vehicles (SPVs). Keeping track of shifting rules
and laws is in danger of overwhelming the
resources of some in-house teams.
According to Citco analysis, each of our RE
investment fund clients has an average of 25
SPVs, organised in eight or more jurisdictions. The biggest RE funds may have more
than 100. PE funds typically have fewer SPVs
than RE funds but face similar challenges.
Over time, the larger PE and RE funds
have grown extensive webs of SPVs as
their international portfolios have grown.
Managing the different entities, including
corporate secretarial activities, has become
a significant burden. Now multi-country
reporting for tax purposes is increasing,
as are other regulatory requirements.
Just keeping abreast of changing requirements across many different jurisdictions is
extremely challenging.
As if this were not enough, institutional
investors and regulatory authorities are
shining a light on corporate governance.
They want transparency in governance, often
down to SPV level. Ideally, this is delivered
by an independent specialist firm that has
governance skills and can administer the
SPVs.
Such is the difficulty of maintaining faultless governance that it’s likely to become a
specialist discipline in its own right. Indeed,
having a single firm administer a fund and
its underlying holding companies and SPVs
should serve to give investors and regulators
alike comfort.
Reconciling accounting formats
In most cases, a fund selects a single global
accounting standard, such as US, Luxembourg or Irish GAAP, or IFRS, for reporting
to its management, investors and other
stakeholders. It commits to this standard in
Spring 2016
its offering documents. For local statutory
filing purposes, however, such reports may
need to be translated to a local accounting
standard that is applicable in an SPV’s jurisdiction. This may require complex conversion
processes.
Besides the challenges associated with
different reporting formats for management/investors and statutory accounts,
intercompany accounts (IC accounts) and
consolidations create additional complexities. Intercompany relationships are created
both between funds and their lower-tier
SPVs, as well as between lower-tier SPVs
directly. As these SPVs are domiciled in many
different countries, reconciliation of these
intercompany accounts through communication between different offices is inefficient.
Centralising SPV administration
In order to give investors and regulators
the transparency they require, while also
simplifying the challenges of SPV accounting,
there is much to be gained from appointing a
single independent service provider.
The Citco group of companies has SPV
servicing centres in Lithuania and the Philippines, where more than 300 staff members
are fluent in 20 different local accounting
standards in addition to US GAAP and
IFRS. Teams of qualified accounting staff
convert management accounts into formats
that can be used for local statutory filing
purposes. They also process consolidations
and intercompany account reconciliations in
real time. This is all done on a single system,
which supports administration of all PE or
RE entities.
Additionally, Citco’s Global Subsidiary
Governance Services (GSGS) works closely
with PE, RE and multinational companies.
A team of lawyers makes sure that all client
entities are in good legal standing in their
relevant jurisdictions.
Such is the pressure on RE and PE
managers to ensure solid fund governance
that we believe services such as these will
become increasingly sought after. □
“Having a single
firm administer
a fund, its
underlying
holding
companies and
SPVs should
give investors
and regulators
comfort”
CitcoOne: introducing radical simplicity
Citco’s innovative web portal makes it easy for clients to make
better decisions. It doesn’t just deliver data – it delivers answers
Nick Eisenlau, Director, Citco Fund Services
neisenlau@citco.com
L
ike many things, CitcoOne began
with an innocuous question. It
was time to refresh the web portal
and universal opinion within Citco
was that the next version needed
to deliver more data. But when we talked to
clients about what they wanted, they talked
more about outcomes, such as transparency,
insight and user experience. All these discussions coalesced into one when a client asked:
“But how can you make it simple?”
While the web has proved an efficient
way to deliver statements to a large and
constantly changing group of stakeholders,
operational platforms and offline communication have still done much of the heavy
lifting. Excel, emails and static reports even
now perform a lot of the work.
Making the complex simple
The trouble is that administrators’ web
portals take the complex and keep it
complex. What makes CitcoOne radically
different is that it borrows the best practices
emerging in Silicon Valley to improve the
user experience. It achieves the difficult goal
behind many successful technology products
of making the complex simple.
The CitcoOne project began in late 2013.
Approximately 15 clients were interviewed
about their needs. But then we also spoke
to a number of next-generation financial
technology firms in Silicon Valley. Financial
services’ technology often lags best practice
and we wanted to get ahead of the curve.
With big data technologies, it has never
been easier to provide data. However, firms
are drowning in data, and making sense of
it is highly complex. Everyone involved in
CitcoOne became convinced that we would
need to rethink the web experience, and with
that came the tacit acceptance that simplicity
could only be achieved through building
something radically different.
CitcoOne has evolved into a simple way to
monitor, survey and explore the information
that is important to the user. It leverages
new technology frameworks to intelligently
expose different levels of content. This allows
Spring 2016
CitcoOne: key features
§§Interactive dashboards
§§Interactive workflows
§§Order placement
§§Enhanced document
management
§§Enhanced fund details
users to find answers with minimal time and
effort. Whether you keep the platform open
all day for real-time reconciliation updates,
or just log in late afternoon to review daily
service level agreements, CitcoOne consolidates the underlying data across all key
operational platforms and workflows.
By itself, that’s quite an achievement, but
there was another challenge: could CitcoOne
help you make sense of that data? To achieve
this goal, we incorporated a full suite of
dynamic visualisations designed for data
mining. Instead of simply capturing data,
§§Dynamic reporting
§§Capital activity
monitoring
this allows you to frame questions about the
data in an intuitive, visual way, while jumping
across different lenses of information. It’s not
just self-service to your data, it’s self-service
to the answers important to your business.
When someone asks for simplicity in technology, it’s easy to mistake that for simplistic
technology. But the real question is: “Can
technology give me exactly what I need to
make better decisions?” That is the accomplishment of CitcoOne. □
CitcoOne will be available to clients from the second quarter
of 2016.
Transparency and control builds trust
Accurate, timely NAV figures and clear processes are enabling
administrators to work increasingly closely with funds of funds
I
Gio Maso, Head of Product and Business Development, Citco Alternative Investor Services, North America
gmaso@citco.com
t’s no secret that because of declining
assets and pressure on fees from institutional investors, fund of hedge fund
managers’ margins are being squeezed.
But as they respond by seeking to cut
operating costs, they’re being forced to rely
on third-party administrators far more than
before, putting trust at a premium.
The fund of hedge fund industry received
some long awaited good news over the winter
holiday season, with assets under management within this strategy increasing by 3.7%
to $1.23 trillion in the 12-months to October
2015*. Fund of hedge funds also contributed
to 3% of all new hedge fund launches during
the same period†.
However this should not obscure the fact
that fund of hedge fund assets have fallen
steadily since 2008. Fund managers in this
space continue to suffer from redemptions as
pension funds and other institutional investors move the task of allocating to hedge
funds in-house, or hire hedge fund consultants to do the job for much lower fees than a
fund of hedge fund manager.
In order to remain competitive within this
changing industry landscape, an area that
hedge fund managers look to for generating
greater efficiency is eliminating the practice
of shadowing the administrator’s NAV calculation, and the in-house pricing of underlying
fund of hedge fund portfolios. This trend is
set to continue, as a recent survey by PWC
revealed that at least 50% of hedge fund
managers now outsource these middle office
tasks to third-party administrators.
Reducing the size of the middle office
One of the world’s largest multi-strategy
hedge fund managers, which recently
outsourced its fund administration services
and increased oversight tolerance thresholds
on third-party administrators, was able to
reduce its middle office workforce by 80% by
adopting this approach.
Shadowing duplicates the work performed
by the administrator, but managers have
historically been reluctant to trust administrators entirely with such a critical task.
Spring 2016
“Administrators
are providing
greater insight
into their
management
of books and
records than
ever before”
Instead, they have performed it in parallel,
checking the administrator’s calculations.
But this is changing, and not just because
margins are being squeezed. As the fund
administration industry continues to
mature, a few of the top-tier administrators
have perfected the art of striking an accurate
and timely NAV. They are also developing
more detailed service level agreements and
workflow technology that give hedge fund
managers the required level of transparency and control to effectively monitor their
outsourced activities.
As the growing number of fund of hedge
fund managers have cut back on shadowing
in order to reduce costs, they have had to
overcome their inherent lack of trust of
third-party fund administrators. Arguably,
only a few administrators have the people
and technology that can deliver a quality
NAV to gain that trust.
The more client-service focused fund
administrators are also now providing greater
insight into their management of books and
records than ever before, making it easier for
their clients to trust what is being delivered.
To hold themselves accountable, the best
third-party administrators have also introduced more relevant key performance indicators with delivery thresholds embedded in
service level agreements. The distribution
of management reports has also become far
more transparent and efficient.
Real time reporting is key
At the heart of this lies management
reporting technology solutions, such as
CitcoOne. It will publish KPIs and SLAs, as
well as exceptions, and has the ability for
users to query data on a real-time basis.
Citco has seen a number of its clients trust
it to administer their funds of hedge funds
without the need for shadowing. Experienced
people and advanced proprietary technology
have helped it to grow assets under administration whilst the sector has plateaued.
At the end of October 2015, Citco’s fund
of hedge fund assets under administration
grew to US$153 billion, ranking it the largest
global administrator in this area*. □
* HFW: 25th Biannual Assets Under Administration Survey,
2015. † Preqin Quarterly Update: Hedge Funds Q3 2015.
Rise of shadow capital challenges administrators
Over a quarter of private equity funding is now shadow capital,
which requires an array of bespoke terms and share structures
Andrew Stewart, Director, Citco Fund Services (London)
anstewart@citco.com
T
he dramatic shift in the private
equity industry towards ‘shadow
capital’ raises fresh challenges
for administrators because it
requires a level of flexibility that
some may find difficult to deliver.
Many co-investments, direct investments
and managed accounts can be considered
shadow capital. Instead of allocating to a
blind pool, shadow capital investors negotiate bespoke terms and lower fees – and
they can have a say in what investments a
fund makes.
These kinds of investments were previously the domain of a handful of deeppocketed limited partners (LPs), but they are
now much more widespread – placing greater
demands on fund administrators.
For example, each shadow capital
investor will require different terms and a
standard limited partnership agreement
isn’t sufficient. This requires sophistication,
accuracy and attention to detail from the
administrator.
Rapid rise of shadow capital
In 2015, shadow capital totalled an estimated
US$161bn or 26% of all private equity fund
raising, according to Triago. By comparison,
in 2010 it totalled just US$24bn, equating to
11% of fund raising.
Shadow capital is becoming more popular
as large investors seek more control of their
investments and find that they earn better
returns from having it. The largest investors,
such as pension funds, can put more money
to work in private equity without diluting
returns by spreading their investments across
a large number of managers. They can also
negotiate lower fees than the standard 2% for
management and 20% for performance.
Driving higher returns for LPs
There’s growing evidence that shadow
investing yields higher returns. As recently
as 2012, only 13% of the LPs interviewed for
a Preqin survey believed that returns from
co-investment were significantly better than
those of a typical fund. But in Preqin’s latest
Spring 2016
round of interviews in March 2014, 52%
of LPs reported that their co-investment
returns were far higher than the returns
their funds generated – and none said
they were lower. With that proven track
record, 77% of the LPs said they were now
co-investing and more than half said they
planned to do more of it in the future.
“Shadow capital is
becoming more popular
as large investors seek
more control over their
investments”
Vital role for administrators
Administrators play a vital part in making
this more bespoke form of investing work.
They need flexible systems that can handle
the different investment terms, as well as
additional share classes and structures. They
must have people with sufficient experience
to set up customised solutions. And they
often must have a global reach that can bring
together investors, managers and investments based in different parts of the world.
Taking the shadow capital trend to its
logical conclusion, the biggest pension funds
and sovereign wealth funds are likely to build
more in-house private equity teams that
select and invest in deals. But to account for
their investments they are likely to require
external administrators that can provide
both professionalism and transparency. □
Funds forced to reduce fees and increase transparency
For a new hedge fund to attract investors, it will have to match
competitors on fees, expenses and visibility of internal investors
I
Michael Regan, General Counsel, Citco Fund Services
mregan@citco.com
n the dynamic and ever-changing
hedge fund industry, it is important
for hedge fund managers to be aware
of the current trends regarding fund
structures and terms to give themselves the best opportunity to effectively
market and raise capital from investors. In
this article, we highlight some recent trends,
as well as terms managers are negotiating
with investors to help make fund launches
successful.
Management fees
The standard 2% management fee has been
on the decline for a number of years and,
according to a 2015 Walkers study, the
average management fee for new funds
launched in 2015 was between 1.5% and
1.8%. Another reflection of the downward
fee pressure managers are facing is the rise
in sliding scale management fees, where
managers are required to reduce the fee
once the AUM of the fund reaches a certain
size. The most extreme but, as yet, relatively
uncommon example of the changing environment is a hard dollar cap on fees.
Performance fees
The 20% performance fee remains the
industry norm for hedge funds but performance fee breaks are increasingly offered
in the early stage for large investors. The
convergence between hedge funds and
private equity funds has also seen hedge
fund managers introduce fee terms that have
been common in the private equity sector,
particularly in funds that invest in less liquid
opportunities. These terms include multiyear performance periods, clawbacks and
fees paid on realised appreciation.
Liquidity
Investor-level redemption gates continue
to be more popular than fund level gates,
especially with institutional investors. This
is not surprising because if an institutional
investor is a large investor in a fund, a fundwide gate could often be triggered by that
investor’s redemption request while smaller
Spring 2016
need to have a clear expense allocation policy
in place and ensure that the fund’s confidential memorandum provides a detailed
description of the expenses which will be
charged to the fund. Regulators and investors will no longer accept the old practice
where expense disclosures were crafted
generally and interpretational issues were
decided solely by the fund manager.
“Institutional investors
demand the same liquidity
as internal investors”
investors may be able to fully redeem if no
other redemption requests are made.
Consequently, the market prefers to have
investor-level gates, usually at the 25%
level, so that all investors are treated equally
when making redemption requests. Lock-up
periods are becoming increasingly popular,
with the typical lock-up lasting one year.
Some managers have used lock-ups to offset
pressure on other fund terms: for example,
a manager may offer an investor a lower
fee structure in exchange for that investor
agreeing to a longer lock-up.
Fund expenses
Because of increased pressure on fees,
managers have a greater incentive to pass
certain expenses to the fund. However, both
investors and regulators are scrutinising
what expenses are charged.
This heightened scrutiny has resulted in
more requests from investors for a detailed
breakdown of expenses charged to the fund.
A recent survey of 175 managers revealed
that 76% of them were providing investors
with a detailed breakdown of expenses.
Investors and regulators are particularly
focused on compliance expenses, marketing
expenses, investment-related travel costs,
shadow accounting and research expenses.
Accordingly, when launching a fund, mangers
Side pockets
Side pockets are making a comeback due to
managers’ renewed interest in less liquid
investments. Because of the way some
managers applied side pockets to hold their
worst performing or illiquid assets during
the financial crisis, some investors have
a particular distaste for side pockets. As
a result, some managers have offered an
opt-in/opt-out feature in connection with
side pockets, which allows an investor to
elect to opt out of all (but not less than all)
of the fund’s side-pocket investments at the
time of its initial subscription to the fund.
While such an opt-out is a useful tool to
address the concerns of those investors wary
of side pockets, it does not provide a solution
to deal with an existing investment held by
the fund that is subsequently deemed to be
illiquid.
Monitoring proprietary capital
External investors are focusing on the difference between the liquidity terms granted
to internal investors employed within the
manager and external investors.
Larger institutional investors are now
demanding that they have the same liquidity
terms as internal investors. Additionally,
larger institutional clients want to be notified when (or before) the general partner/
principal redeems a certain percentage of its
investment. In a further effort to demonstrate alignment with the interests of investors, some managers have offered a proportional redemption right. This allows an
investor to redeem a proportionate amount
from the fund when the general partner/
principal makes a redemption. □
Smoothing the move to common reporting
It’s basically a global version of FATCA, but the CRS adds a
few new wrinkles to due diligence and reporting requirements
Greg Fenlon, Global Head of Investor Relations
gfenlon@citco.com
T
No harmonisation on types of entity
All three sets of regulations and agreements require financial institutions (FIs) to
perform due diligence and account opening
procedures to determine ‘reportable’ account
holders under one or more of the regimes.
The definitions of what types of entity
classify as FIs are not harmonised across
the regulations, making it possible for an
entity to have a different classification under
FATCA than under CRS.
In addition, account holders that are active
non-financial entities are reportable under
CRS unless they fall into one of a number of
prescribed low risk categories. Many entities
will also fall into the passive non-financial
entity category due to differences in the
regimes, requiring a look-through to controlling persons. All of this classification must
be achieved alongside the continuing need to
clarify US-specified and UK-specified account
holders, as defined by the current regimes.
Spring 2016
Automatic exchange of information timeline
AEOI regimes
US FATCA
Existing accounts for DD* (the ‘population for review’)
New account onboarding start date
First regulatory filing
Existing account DD complete – high value individuals
30 Jun 2014
UK CDOT
CRS
30 Jun 2014 31 Dec 2015
1 Jul 2014
1 Jul 2014
1 Jan 2016
2015
2016
2017
30 Jun 2015
30 Jun 2015 31 Dec 2016
Existing account DD complete – remaining account types 30 Jun 2016
30 Jun 2016 31 Dec 2017
“These deadlines will in
future be much more
firm, and late filings
could result in penalties”
Classifications and data collected to
determine account status must pass reasonability checks, and must be monitored on
an ongoing basis for any change in account
holders’ circumstances that may require a
re-review of documentation and of previous
determinations held. With the advent of
CRS, this so-called ‘change in circumstance’
monitoring takes on a new level of required
attention, with any address change of an
account holder within participating countries
requiring a case review.
For your pre-existing investor base, a
review of the collected documents for US
FATCA and UK CDOT would need to be
revisited. There could be circumstances
where Citco would need to ask the investors
for additional information to classify them
appropriately for CRS purposes.
Citco covers due diligence and reporting
Citco offers a consolidated approach to all
three regimes, which includes investor due
diligence and annual regulatory reporting.
This benefits our clients by ensuring all data
is maintained in a central data repository,
allowing for consistency and accuracy when
preparing regulatory filings and identifying
reportable accounts.
Separating the due diligence and regulatory reporting between Citco and the client,
or using other service providers and public
accounting firms may result in information
being overlooked. This could lead to missed
deadlines or inaccurate interpretation of the
information.
The 2014 FATCA reporting season was
in a transitional period where the respective jurisdictions and the IRS took a soft
approach on the reporting deadlines. As
everyone has now been given a year to familiarise themselves with the portals and the
technology requirements, these deadlines
will in future be much more firm, and late
filings could result in penalties.
Citco is currently contacting clients to
ensure their needs under the various AEOI
regimes are met in 2016 and beyond. □
* DD: due diligence
he first question most managers
ask us about the common
reporting standard (CRS) at
Citco’s Central FATCA Team is:
“Is this just more FATCA?”
The answer in a nutshell is… well, yes.
But, as the older moniker GATCA implied,
this is FATCA on a global scale, with almost
100 countries pledged to participate and
agreeing to share tax information on account
holders within their jurisdiction with other
participating countries. We refer to these
regulations – US FATCA, UK CDOT and
CRS – collectively as automatic exchange of
information (AEOI) regimes.
In many ways, the objectives for participating tax authorities are similar: they want
to receive information about accounts with
financial institutions in foreign jurisdictions
held by, or controlled by, persons taxable
in their own jurisdiction. That much, most
will agree, is understandable. It is a global
attempt to remove the ability to conceal
assets in accounts held outside one’s country
of tax residence.
However, that is where the simplicity ends.
FinCEN proposes anti-money laundering rules
for SEC-registered investment advisers
Citco and industry bodies seek clarification on key issues
I
Michael Regan, General Counsel, Citco Fund Services
mregan@citco.com
n August 2015, the US Department
of the Treasury’s Financial Crimes
Enforcement Network (FinCEN) issued
a notice of proposed rulemaking (the
“proposed rule”) which, if enacted,
will require all SEC-registered investment
advisers to establish anti-money laundering
(AML) programs and report suspicious
activity to FinCEN.
This article summarises the high level
impact of the proposed rule and highlights some of the key issues and current
AML practices which industry bodies have
requested be clarified and/or adopted in
the final rule. Citco provided input into the
comment letters submitted to FinCEN by
both the Managed Funds Association (MFA)
and Alternative Investment Management
Association (AIMA).
Issues to be addressed
Delegation
The proposed rule requires SEC registered
investment advisers (RIAs) to establish an
AML program and allows RIAs to contractually delegate the implementation and
operation of certain aspects of its AML
program to “agents or third-party service
providers, such as broker-dealers in securities
(including prime brokers), custodians, and
transfer agents”. Such delegation is broadly
consistent with current industry practice
where RIAs typically procure fund administrators to perform the AML work for their
privately managed funds. Citco has provided
investor AML services for our client funds
for many years and has built up dedicated,
specialist staff trained and experienced in
implementing AML controls, identifying red
flags and conducting due diligence on investors in funds.
Whilst the proposed rule refers to
“transfer agents” as a permitted delegate,
MFA has requested that, when issuing
its final rule, FinCEN specifically refer to
“administrators” as another example of
permitted delegate, in order to dispel any
possible doubt that delegation of these
AML responsibilities to administrators is
Spring 2016
permissible. The MFA has also requested
FinCEN confirm the permissibility of the
delegation of the AML program to offshore
administrators located outside the United
States, noting that offshore administrators,
like Citco, are generally located in jurisdictions with long-standing AML laws (for
example, Cayman Islands and Ireland), and
are regulated entities required to have their
own AML policies, procedures and controls
under the AML laws and regulations of their
home country.
Risk-based approach
The proposed rule expressly endorses a
“risk-based approach” to the AML program
requirement and notes that an RIA AML
program should take into account factors
such as the source of investor funds and the
jurisdictions where investors are located.
Citco’s AML policies and procedures follow a
risk-based approach which is consistent with
the risk factors outlined in the proposed rule.
For purposes of assessing risk, MFA has
requested that FinCEN acknowledge, in
the adopting release or other guidance, the
current industry practice that allows administrators (and RIAs) to take into consideration the AML procedures performed by
financial institutions from which investor
funds originate, including those located in
Financial Action Task Force (FATF)-member
jurisdictions. Such financial institutions
are subject to significant AML controls and
conduct customer identification verification
and due diligence on account holders.
Continues on next page ▻
▻ From previous page
Accordingly, where an investor has already
been approved from an AML perspective by
a regulated financial institution located in
a FATF-member jurisdiction under its own
AML requirements and the subscription
funds are wired from an account in the investor’s name at the institution, it is reasonable
to categorise such an investor as low risk for
money laundering and not require an RIA to
carry out additional AML due diligence in the
absence of any other facts suggesting that
the investor presents a heightened risk for
money laundering.
Investor intermediaries
The proposed rule states that if any of the
investors in a fund are themselves private
funds or other unregistered pools (for
example, fund of funds) the RIA “will need
to assess the money laundering or terrorist
financing risks associated with these investing
pooled entities using a risk-based approach”.
One of the issues for FinCEN to clarify,
which reflects current industry practice, is
whether to permit the “investor intermediary” to be viewed as the RIA’s customer for
AML purposes so the RIA is not be required
to look through the investor intermediary
to the underlying investors and conduct
due diligence on such underlying investors.
MFA has suggested that FinCEN permit
RIAs to rely on AML procedures performed
by investor intermediaries in determining
whether to accept an investment from an
intermediary investor. The intermediaries,
and not the RIAs, are in direct contact with
the underlying investors and consequently
are in the best position to “know the
investor”.
This reflects the industry practice today
where administrators typically rely on
written representations by the investor
intermediary regarding their AML procedures. It is to be hoped that FinCEN will
recognize that permitting the RIA to treat
the intermediary as its customer and rely on
the intermediary’s own AML due diligence
procedures is consistent with the proposed
rule’s risk-based approach.
Spring 2016
“Citco is in a strong
position to help our clients
comply with the FinCEN
proposals”
Extraterritorial concerns
The proposed rule extends to non-US
RIAs notwithstanding where such non-US
managers are already subject to AML rules in
their country of origin. AIMA has requested
that non-US RIAs which are located in
FATF member countries should only have
to comply with that country’s local AML
laws and should not be subject to additional
and/or different AML rules proposed by
FinCEN. In the event FinCEN refuses to
exempt non-US RIAs in such manner, AIMA
has requested that the requirements under
the proposed rule should only apply to the
extent the non-US RIA’s transactions involve
US persons and/or US domiciled financial
institutions.
Grandfathering of existing investors
Another matter to be confirmed by FinCEN
is whether RIAs will be required to re-evaluate the adequacy of their existing investor
on-boarding process and reassess the due
diligence conducted on investors which
invested in a fund prior to the effective date
of the proposed rule. MFA has requested
that the risk assessment and due diligence
requirements of the adopting release should
apply to new investors in a fund after the
effective date of the final rule and the
application of the final rule to pre-existing
investors in a fund could be adopted on an
event-driven basis (i.e., additional subscriptions), as appropriate.
Scope of proposed rule
Another matter which various industry
bodies have requested FinCEN clarify is
that the intent of the proposed rule is to
cover activities involving investors, and not
other aspects of an RIA’s operations, such as
investment activity.
Timing
The public comment period has closed and
the proposed rule will be subject to additional review and revision before it is finalized by FinCEN. FinCEN is proposing that
RIAs must develop and implement an AML
program that complies with the requirements of the proposed rule no later than six
months from the effective date of the regulation. In light of the fact that the new rule will
require RIAs to, inter alia, designate an AML
compliance officer, train relevant personnel
on the final rule’s requirements and liaise
closely with fund administrators or any
other party engaged to implement an RIA
AML program, various industry bodies have
requested that the proposed implementation
date be extended to eighteen (18) months
after issuance of the final rule.
However, FinCEN has previously required
financial institutions (for example, banks,
broker dealers etc.) to comply with rules
within a six month period so all stakeholders
should be ready and prepared to implement
the final rule within six months.
Conclusion
As noted herein, there are certain provisions
of the proposed rule which require clarification and/or modification before it is possible
to fully evaluate the impact FinCEN’s
proposal will have on an RIA’s business and
the wider alternative asset industry. Citco
is staffed with qualified AML professionals
experienced in both assessing money laundering risks presented by investors in funds
and implementing risk-based AML compliance programs on behalf of funds.
Accordingly, assuming FinCEN provides
the requested clarifications highlighted in
this article and endorses the current riskbased industry practices, Citco is in a strong
position to help our clients comply with
the FinCEN proposals. We will continue to
monitor developments and provide further
updates in due course. □
Regulatory round-up
Our list of the latest advice, rulings and technical
standards from regulators across the globe
UCITS V
AIFMD
The EU Commission has written
to ESMA requesting its opinion
and advice on the AIFMD
passport.
In this letter, dated 17 December
2015, the Commission supports
ESMA’s approach of granting the
non-EU passport on a countryby-country basis. ESMA is asked
to assess the USA, Hong Kong,
Singapore, Japan, Canada, Isle of
Man, Cayman Islands, Bermuda
and Australia by 30 June 2016.
Cyber security
FINRA in the USA published
its annual Priorities Letter on 5
January 2016, in which cyber
security is listed as a priority
for 2016.
Concerns regarding cyber threats
continue at the SEC, with its
examination priorities for 2016
again reflecting a focus on this
area.
The Commission also requests
ESMA’s advice on third country
regulators and inflows of third
country funds, in addition to
another opinion on the current
passporting regime.
In the EU, an agreement was
reached on 7 December 2015
on the Commission’s proposed
measures to increase online security. The Network and Information
Security Directive is the first piece
of European legislation on cyber
security and will take effect 21
months after its publication.
CRD IV
Local updates – Ireland
Citing resource shortages,
on 18 December 2015 the
European Banking Authority
wrote to the EU Commission to
request revised deadlines for
the delivery of a number CRD IV
draft technical standards.
The standards were due by the
end of December 2015 and the
delays requested, if approved, will
push their delivery out to mid-late
2016 in most cases.
By contrast, also on 28 January
2016, a number of CRD IV Level
2 measures were published in the
Official Journal and will take effect
on 17 February 2016.
Spring 2016
On 4 November 2015, the
Central Bank issued a
consultation (CP97) on the
publishing of an investment
firms rule book, which will
consolidate into one document
all of the requirements imposed
on investment firms.
Investment firms are typically
authorised in Ireland as MiFID
firms or under the Investment
Intermediaries Act 1995 as investment business firms.
On 22 December 2015, an
additional consultation (CP100)
was published on the introduction
of a risk assessment and capital
planning requirement for fund
administrators authorised under
the Investment Intermediaries
Act 1995.
MiFID II
With many of the MiFID II
Level 2 rules outstanding, a
lot of work remains for both
the firms impacted and the
regulators to ensure readiness
in advance of the effective date
of 3 January 2017.
This led to ESMA requesting in
October 2015 that the MiFID II
implementation be delayed by one
year to January 2018.
However, concerns have been
raised at ESMA and industry level
that even a one year delay may
be insufficient if the remaining
MiFID II rules are not promptly
finalised and endorsed.
Data protection
The invalidation of the US-EU
Safe Harbor Rule in October
2015, combined with agreement
on a new General Data
Protection Regulation (GDPR)
in the EU on 15 December
2015, have triggered animated
debate on the question of data
protection.
On 2 February 2016, the European
Commission announced that it
had reached agreement with the
United States on the Safe Harbor
Rule’s successor, the EU-US
Privacy Shield.
The GDPR was first proposed
in 2012. It is expected to be
published in early 2016 and should
become applicable in Member
States in 2018.
The delayed UCITS V Level 2
measures were published on
17 December 2015.
With the directive transposition
date of 18 March 2016 looming,
these measures must still be
approved before they can be finalised. Uncertainties consequently
surround the timing of UCITS V’s
full application with the directive
coming into force on 18 March
2016.
The insolvency protection monitoring obligations imposed on
a UCITS depositary, in addition
to the absence of a contractual
discharge provision in the ‘strict
liability’ standard, are significant
departures from existing requirements and equivalent provisions
in AIFMD.
Local updates
– Luxembourg
On 27 November 2015, the
bill of law regarding reserved
alternative investment funds
(RAIF) was approved by the
Council of Government.
The RAIF regime will allow AIFMs
to set up a new type of AIF, which
combines features of the SIF and
SICAR fund regimes but without
the regulatory oversight of the
CSSF. The time to market for the
launch of the RAIF will rest with
the governing body and service
providers of the RAIF as the CSSF
will not be involved in its authorisation or supervision.
Citco assets under administration 2015
The charts below show details of performance and capital
flows across Citco Fund Services through December 2015
Performance by strategy vs industry indices
Equities were top in 2015
(%) Through December 2015 for funds administered by Citco
4.00
Total Citco Fund Services assets under
administration reached almost $850bn at
the end of December 2015.
Growth
Performance in the second half of 2015
was highly challenging for Citco clients.
Many strategies outperformed key indices
over the year in total, whilst still only
achieving low single digit returns.
Strategies
Inflows
by strategy
($bn)
Total inflows
$76.9bn
S&P 500
The second half of 2015 largely continued
investor allocation trends observed in the
first half of the year. Achieving positive
capital flows proved difficult in the second
half of the year, with more than $17bn in
aggregate exiting Citco. Multi-strategy and
funds of funds saw the largest outflows,
whereas equities saw marginal net inflows.
Indices
Arbitrage 1.5
Event Driven 1.8
Private Equity & Real Estate
5.7
Our equities strategy was the lead
performer at 3.30%, whilst emerging
markets lost 1.5% over the year. All other
strategies straddled this range, albeit with
each earning positive returns save for
our event driven strategies, which joined
emerging markets in the red.
Dow Jones
Industrial Average
Barclay Hedge
Fund Index
Private Equity/Real
Global Macro
MSCI World
-4.00
Multi Strategy
-2.00
Fund of Funds
Event Driven
Emerging Markets
Arbitrage
Equities
0.00
Credit Suisse
Hedge Fund Index
2.00
Emerging Markets 1.0
Multi
Strategy
Global
Macro
29.2
7.6
Fund of
Funds
Inflows & outflows 2015
($bn)
20
10
9.4
Outflows
by strategy
($bn)
Total outflows
$94.7bn
Multi
Strategy
-8.3
Fund of
Funds -16.0
-20
Equities -19.1
Spring 2016
-10
-39.1
Inflows
Outflows
Net flow
December
October
November
Global
Macro
September
-3.9
0
Event Driven -1.9
August
Emerging Markets -3.0
Abritrage -3.4
Private Equity & Real Estate
July
Equities 20.7
Australia offers tax exemptions for some foreign funds
Mark Bennett, Managing Director, Citco Fund Services (Australia)
mabennett@citco.com
O
n 25 June 2015, legislation
containing the third and final
element of Australia’s Investment
Manager Regime (IMR 3) was enacted
into law.
The object of the IMR is to encourage
particular kinds of investment made into or
through Australia by certain foreign entities
that have wide membership* or that use
Australian fund managers. This is achieved
by providing non-Australian entities such
as hedge funds with an Australian income
tax exemption for returns or gains crystallised on disposal of their investments.
Non-Australian residents qualify for
the IMR exemption for an income year
either by investing directly in Australia
(direct IMR concession), or by investing in
Australia via an Australian fund manager
(indirect IMR concession).
While the concessions are aimed at
foreign funds, the indirect IMR concession
also provides significant opportunities for
Australian fund managers.
Consequences of IMR concessions
If a fund is entitled to the IMR concessions,
returns or gains it makes from the disposal
of shares, or returns or gains from loans or
derivatives, will be exempt from Australian
income tax.
Amounts that are subject to withholding
tax, such as dividends or interest, are not
entitled to the IMR concessions. These
amounts would continue to be subject to
the regular Australian withholding tax law.
IMR example
A US limited partnership (LP) invests in
§§
listed Australian shares.
It receives unfranked dividends of
§§
A$100,000 on those shares and, for the
year ended 30 June 2016, makes a gain
of A$500,000 on the disposal of some of
those shares.
Assuming it satisfies the requirements
§§
for either or both of the direct and
indirect IMR concessions, the gain of
A$500,000 should be exempt from
Australian income tax.
However, the dividends could still be
§§
subject to Australian dividend withholding tax.
The domestic rate of withholding tax on
§§
unfranked dividends is typically 30% but
this could be reduced under Australia’s
tax treaties (if applicable).
Relevance for foreign funds
The IMR concessions are clearly relevant to
foreign funds investing in Australia. Such
funds should be undertaking an IMR review
to assess historical exposures to Australian
tax and to determine whether the various
conditions associated with the concessions
are met.
Looking forward, there is also an opportunity for foreign funds to consider whether
they should engage an Australian resident
fund manager with a view to relying on the
indirect IMR concession.
The above is a simplified overview of the
new regime. We would welcome the opportunity to discuss further how this could
benefit your fund. □
* Widely held entities include large pension funds and funds
where no member supplies more than 20% of the assets.
Source: Excerpts taken from Deloitte’s summary to AIMA
Australia members.
The Citco Group of Companies (“Citco”) is a worldwide group of independent financial service providers, established in over 40 countries and serving the
world’s elite hedge funds, private equity and real estate firms, institutional banks, Global 1000 companies and high net worth individuals. Companies of the
Citco Group provide global alternative investment fund administration, custody and fund trading, financial products, and corporate and trust planning solutions.
AMERICA
Citco Fund Services (USA) Inc.
Tel: +1 201 793 6177
newyork-fund@citco.com
For questions about
these articles contact
your relationship
manager or Spotlight
editor Diana Arakelyan at
darakelyan@citco.com
Spring 2016
EUROPE
Citco Fund Services (London)
Limited
Tel: +44 207 290 1350
london-fund@citco.com
ASIA
Citco Fund Services
(Singapore) Pte Limited
Tel: +65 6571 1298
singapore-fund@citco.com
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