ALFI 2011

September-October 2011 | Special alfi Global Distribution Conference 2011

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3 editorial

Many happy returns Luxembourg’s minister of finance offers his congratulations on the industry event’s 20th anniversary, and strikes a positive note on the future of UCITS in Europe and beyond.

Luc Frieden, Minister of Finance, the Grand Duchy of Luxembourg

Luc Frieden (text), Ëlodie (illustration)

What a great achievement: for the 20th year in a row, the associations of the two largest investment fund communities in the world, the Association of the Luxembourg Fund Industry and the National Investment Company Service Association of the United States, are bringing together fund professionals from all over the world at their annual conference in Luxembourg to discuss global distribution issues.

First of all, I would like to congratulate ALFI and NICSA for this long-standing alliance and for the reputation the conference has acquired around the world over the years.

I am also delighted that in 2011, for the first time, the Hong Kong Investment Fund Association is joining the event. Hong Kong’s presence means that the conference truly reflects the growing global reach of today’s investment fund industry.

Since the first ALFI/NICSA conference 20 years ago, the world of investment funds has undergone impressive internationalisation and integration.

The European UCITS model has encouraged the growth of the cross-border fund industry and this has been successful on a global level. This trend for internationalisation has also been a key factor in the development the Luxembourg investment fund industry. Our financial centre has always been internationally-oriented, and it established itself early on as a domicile of choice for international or cross-border investment funds and, with the global success of UCITS since its introduction 25 years ago, Luxembourg has remained in lead position ever since. As minister of finance, I am particularly proud of the “made in Luxembourg” brand, which European retail funds have carried around the world for more than 20 years now.

I am very confident for the future; the recently updated UCITS legislation will further enhance

the integrated European market for investment funds. I am positive that UCITS IV will considerably boost the competitiveness of the European industry by increasing market efficiency, strengthening investor protection and reducing costs. Similarly, the AIFM directive will foster the development of alternative investment funds, which traditionally have been absent from the European market. This directive, which creates the first regulated alternative investment fund market, represents a welcome opportunity for Europe to create a brand in the alternative investment market as well.

As in previous years, the 20th ALFI/NICSA conference provides a forum for the investment fund community to debate these issues and to explore the common business opportunities they represent. I wish everyone who is taking part fruitful discussions and I look forward to hearing the valuable conclusions.

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Contents ALFI Global Distribution Conference 2011

Editorial 3

Speakers 24

Luc Frieden

Many happy returns

Luxembourg’s minister of finance offers his congratulations on the industry event’s 20th anniversary, and strikes a positive note on the future of UCITS in Europe and beyond.

Looking ahead

The past year in US mutual funds

Rapidly evolving regulation: the challenge

By Theresa Hamacher

By Nathalie Dogniez and Michèle Eisenhuth

26

Venture capital view

Interview

40

View from America

A safe investment

By Gerard Lopez

42

Hong Kong perspective

Positive cooperation

By Sally Wong

28

6

Marc Saluzzi

UCITS in Asia

“Reaching out to foreign authorities outside Europe”

By Freddy Brausch with Christian Hertz

The new chairman of the Association of the Luxembourg Fund Industry is appealing for non-EU regulatory authorities (particularly those from Asia and South America) to be more actively involved.

Exhibition plan

Growing ties

30

Sustaining the momentum

By Paul Schott Stevens 32

Rafik Fischer

“Adding to the same regulatory tsunami”

Interview with an industry veteran 34

The post-crisis environment

Conferences agenda

Cross border distribution

Cross roads or a parting of the ways?

By Lou Kiesch

Asset management

16

Who? Where? Here’s a practical guide.

44

The right regulatory strategy

Picture report 46

2010

Flashback

The previous ALFI/NICSA conference took place on 28 and 29 September 2010 in the Centre de Conférences in Luxembourg-Kirchberg.

By Thomas Seale 36

Cross-border funds

18

The whole programme at a glance.

Luxembourg positioned for the future

By Michael Ferguson 38

Investor protection

At the heart of UCITS

By Denise Voss

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6 interview

Marc Saluzzi

“Reaching out to foreign authorities outside Europe” The new chairman of the Association of the Luxembourg Fund Industry is appealing for non-EU regulatory authorities (particularly those from Asia and South America) to be more actively involved – albeit without voting rights – in the process of drafting new directives and regulations in Europe, to make it easier to export European products outside the EU’s borders.

Jean-Michel Gaudron (interview), Ëlodie (illustration)

Since June, the Association of the Luxembourg Fund Industry (ALFI) has a new chairman in the form of Marc Saluzzi. He succeeded Claude Kremer, who had come to the end of his two terms of office as chairman. With the 2011 Global Distribution Conference in Luxembourg – the twentieth time the event is being held – fast approaching, Saluzzi reflects on the key challenges that the investment fund sector is facing, both in Luxembourg, Europe’s leading centre, and across the continent as a whole.

Mr. Saluzzi, how are you feeling as you take over as chairman of ALFI? “The dominant feeling is one of humility. This is an extremely highprofile position, both in Luxembourg and abroad.

In fact, I received at least as many messages of congratulations from other countries as from Luxembourg, even before the official announcement had been made. This demonstrates the high profile of ALFI and of the collective asset management industry in general.

Most often, after the usual congratulations, the phrase that cropped up most often was ‘good luck’. However, I am very much looking forward to getting down to business and increasingly consolidating the advantage enjoyed by Luxembourg funds. We are obviously starting from a very good position, all the more so as the association is very well structured and the team is stronger than ever before. It will therefore be possible for us to embed investment funds even more firmly within the Luxembourg landscape and within the global collective management industry.

What prompted you to apply for the chairmanship? “It was a very logical step. I have been involved in ALFI’s working groups and technical committees for many years. I have also been a member of the board of directors since 2001. As I had the support of the association’s members, that gave me the desire to put myself forward.

I was also keen to put the experience I had acquired as a global asset management leader within the PwC network between 2006 and 2010 to use for the benefit of Luxembourg as a financial centre. It is clear that I will be returning to the same countries and on the whole will be able to say the same things. This time, however, I will be doing it on behalf of the entire fund industry.

What’s more, I have the full backing of PwC, who will allow me the time I need to carry out this task, which will easily take up 50 percent of my time.

What are the main changes that you have observed within ALFI over the ten years you have been on the board of directors? “It is in the area of infrastructure in particular that things have changed. At the beginning of Rafik Fischer’s chairmanship, for example [between 1998 and 2001] ALFI had only two people working on a fulltime basis. Now the figure is around thirty.

Something else that has clearly changed is the general impact that Luxembourg has. For a long time we were the outsider that nobody was expecting in a cross-border distribution segment that nobody imagined would take on such a scale.

Today, the financial centre and the association enjoy a tremendous reputation outside the country. The election of Claude Kremer as president of EFAMA [the European Fund and Asset Management Association] confirms this.

There are also things that have not really changed that much. For a start, a considerable number of people who were there right at the outset are still with us today. They therefore provide a huge amount of accumulated experience. In addition, the spirit in which everyone works has remained the same. We are all in competition in our day-to-day business, but for a few hours a week we are capable of getting together around a table to develop the financial centre. There is hardly anywhere else where this happens and this is clearly where the country’s strength lies – something that makes up for its small size and limited resources.

This ability to work together is remarkable and has not changed in spite of the association’s size.

It is a real trademark of funds in Luxembourg. To this we must add, of course, the cooperation with the supervisory authorities and the ministry of finance. You really need to travel abroad to realise just how highly developed and dynamic Luxembourg’s sense of togetherness is.

In your opinion, is this spirit of collaboration the key strength of Luxembourg’s fund sector?

“It is one of the founding pillars, certainly. As I mentioned, given the size of the country, if we were divided and did not speak with a single voice, it would be disastrous. We are aware that observers are constantly putting us under the microscope.

And this effective form of collaboration is identified as such by authorities of rival countries, who recognise that if we have, for the time being, won a certain number of battles, it is thanks to this sense of togetherness that has formed part of our day-to-day activities.

We recently met with the minister of finance, Luc Frieden, and he is also calling for greater collaboration between the players operating in the financial centre and the government with its various authorities.

What are the other main pillars that you can identify? “We are always trying to find new arguments, but keep coming back to the same ones. We are an international investment fund centre, in contrast to the United States, France and even the UK. Indeed, and this is another of our strengths, we do not have a local market.

Therefore it is the world, outside the United States, that is our market. This means we have to make an ongoing effort to build the reputation of the UCITS product and the Luxembourg passport. It enables us to benefit from both European and non-European flows of net sales. Depending on the year, between 40 and 50 percent of our net sales originate from outside the European } 8 Union.

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8 interview

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CV

Marc Saluzzi Marc Saluzzi, 48, was elected as chairman of the Association of the Luxembourg Fund Industry (ALFI) in June. He has 25 years of experience in the asset management sector, in Luxembourg and the United States. He originates from France and joined PricewaterhouseCoopers immediately after obtaining his degree from the Institut Supérieur de Gestion in 1986. There he worked his way up through the ranks to become a partner in 1996. Between 2006 and 2010 he also managed the PwC network’s Asset Management activity. Now working full time in Luxembourg, he has been appointed as the partner responsible for the PwC Luxembourg Financial Services practice and is a member of the PwC Luxembourg country leadership team.

He is also a member of the UCI committee of Luxembourg’s supervisory authority, the Commission de Surveillance du Secteur Financier.

He is supported at the head of ALFI by two vice chair persons: Gilbert Schintgen (UBS Fund Management), who had already held functions within the previous team, and Denise Voss (Franklin Templeton International Services), who is also the only woman amongst the 24 members of the association’s board of directors. Julien Zimmer (DZ Privat Bank), treasurer, completes the association’s executive committee. J.-M. G.

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We are therefore obliged to open up to all influences and approaches to ensure that we always derive the maximum benefit. This sets us apart considerably from other centres, with our ability to offer both a high level of sophistication, as well as excellence in the value chain that demands extreme agility and an open-minded approach that is almost unrivalled.

Such an international dimension is clearly essential, just as much as the high degree of cooperation between the supervisory authorities and professional associations. Whether we are talking about lawyers, service providers or fund managers, we are seeing some very high-level people choosing to come to Luxembourg or relocate their services here. This obviously helps to strengthen the sophistication that we offer.

A few years ago we suffered from a certain inferiority complex, when Luxembourg was regarded more as a back office. Today we are much more than that. This is an extremely positive development and we are going from strength to strength.

What is the programme on which you are planning to base your chairmanship? “There will not be any major changes compared with what my predecessors did. The fact is, however, that we will need to adapt to a very different environment. The first reason for this is the veritable flood of regulations that is affecting us and will require a great deal of consideration from both a technical and strategic perspective. By adding more layers of laws and regulations, there is a risk that effects are created that are not necessarily intended.

It is clear that fund managers and custodian banks will have a great deal to contend with! My first priority, therefore, will be to give direction to all these regulatory developments and not take away our momentum.

In particular, all our attention will obviously be focused on the AIFM directive. In contrast to the successive developments that we saw in the area of UCITS, which allowed market players to adapt gradually, the AIFMD is imposing a ‘big bang’ approach and it will be important to be able to manage this effectively. We can say all we like about the hurried manner in which the text has been written and about its broad outlines, but the fact is that it is there and it is pushing the entire alternative industry in a radical way towards a completely regulated model.

It is a model that we are very familiar with in Luxembourg and we can therefore help alternative managers who are not accustomed to it.

Luxembourg’s alternative funds represent at most five percent of global alternative management. In other words, a market share almost three times smaller than in the retail funds segment. If we could even just double this share, that would already be a tremendous step forward.

Luxembourg enjoys a strong position on the international market. How can we ensure this is consolidated? “The UCITS product remains our number one focus and is what makes our centre’s reputation. Indeed, we represent close to 30 percent of the European UCITS industry and 75 percent of cross-border funds with substantial exposure outside Europe. Little by little, however, we are noticing a firmer stance being taken by non-EU supervisory authorities, who have started to ask questions about the development of the regulatory framework since the introduction of UCITS III. This is particularly the case in Asia and South America. We are moving towards a greater regulatory instability that is jeopardising the ability of UCITS to penetrate outside Europe.

It is therefore essential that we invest in efforts to promote ourselves internationally and ensure that we maintain standards for UCITS at the highest possible level. It is also important that in future the European Commission thinks about increasing the involvement of foreign authorities, particularly those in Asia and South America, in the processes of drafting all these legislative changes.

We need to be reaching out to foreign authorities outside Europe. Obviously it is not a question of giving them a vote, but it is important that their views and opinions are at least incorporated into the discussions. Up to now we have arrived in these countries with texts resulting from regulatory processes that have taken several months, and in some cases several years, and want these to be accepted with a click of our fingers. This largely explains the firmer stance that we are currently witnessing. Involving these countries in the legislative process would be extremely worthwhile.

Having said that, it should be noted that nonEuropean fund promoters and managers are showing more and more confidence in the Luxembourg platform. This is very important for the reputation of our centre. Selling UCITS funds to Singapore from Luxembourg is one thing, but when a Singapore bank comes here to set up UCITS with the intention of then selling these on its domestic market, this is sending out an entirely different message. Here we’ve really reached the high water point of credibility. The market still has confidence in us. } 10

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10 interview

Country of origin for funds domiciled in Luxembourg 17.2% Germany

22.7% US

15.1% Switzerland

5.1% Others

1.5% Luxembourg 1.7% Sweden

Source: ALFI

2.1% Netherlands

12.9% UK

5.3% Belgium

8.1% Italy

8.3% France

8

ALFI The Association of the Luxembourg Fund Industry is the representative body of the Luxembourg investment fund community. Created in 1988, today it represents over 1,000 Luxembourg domiciled investment funds, asset management companies and a wide range of service providers such as depositary banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax experts, auditors and accountants, specialist IT providers and communi­cation companies. ALFI’s mission is to “lead industry efforts to make Luxembourg the most attractive international centre for investment funds.” A. G. www.alfi.lu

{ It is important to ensure that the political and

regulatory environment remains appropriate.

Luxembourg organiser

Is the innovativeness of Luxembourg as a finan­cial centre in the area of funds sufficient to consolidate this dominant position? “For a long time we have actually been very much at the forefront in terms of innovation. This has obviously made it possible to sustain the strong growth we have seen over the last fifteen years.

However, in recent years we have hardly had any opportunities to stop and reflect and we have to acknowledge that we have perhaps been a little less active in this area and have not been quite as productive over the past few years.

This is a desire that we need to rediscover. In our roadmap that will be presented at the conference in September we will have some very clear proposals in this area. We need to be capable of using our skills to be innovative with our products and services in order to attract more business here.

It is also important that we have a genuine influence in the governance of the financial centre and ensure that it is well understood what impact the collective asset management industry has today on the Luxembourg economy. We must push our point of view forward more and more and impose it when possible. This also applies at a European level. With the [Luxembourg bankers’ association] ABBL we now share two lobbyists based in Brussels, we have a director general [Camille Thommes] who is asserting our influ-

ence within EFAMA, and at the head of this organisation Claude Kremer, a native of Luxembourg, has just been elected for a two-year term.

Will the presence of Mr. Kremer at the head of this European association directly serve the interests of Luxembourg as a financial centre?

“I am obviously not going to speak for him but I have no doubt that he will carry out his task with complete neutrality and independence. At our level, it is clear that having a former chairman of ALFI at the head of EFAMA gives us a unique opportunity to make an increasing contribution to the European association’s extremely ambitious programme. And we will obviously be doing all we can to help Claude Kremer make his presidency the best it can be.

Whether we are talking about achieving a better level playing field in the financial sphere or the role of the collective management industry in the pensions market, whatever we are able to do to contribute to the debate will be done with enthusiasm and determination.

On 1 July the UCITS IV directive entered into force. From Luxembourg’s perspective, the phase to prepare for its implementation was accompanied by a certain number of questions and even fears. What is the situation now that everything is in place? “UCITS IV aroused considerable expectations within the European fund industry and everyone thought it would be possible to take advantage of all the flexibility offered by the text straight away. There is no doubt that in 2008, before the collapse of Lehman Brothers, certain players thought they would be able to restructure their management companies, establish their master-feeder funds and carry out all of the crossborder mergers necessary to consolidate their ranges from July 2011. Three years later, we have to admit that the environment remains difficult.

Even though we experienced a recovery in 2010, the economic and financial situation is still unstable. We continue to be faced with many challenges in the areas of cost-effectiveness and regulation.

Certain promoters are therefore focusing on one particular aspect of the UCITS directive and not on the others. As a result, we have not in fact seen a tidal wave sweep over the sector likely to fundamentally change the face of the European industry. I think it will take a while for all the flexibility that is offered to be used.

Having said that, the players involved in UCITS IV are starting to envisage solutions that are a good fit with our financial centre and should therefore benefit Luxembourg. At any rate, these are the trends that seem to be emerging from the current considerations. The concerns that we had in 2008 are therefore now a long way behind us. } 12

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Number of Luxembourg funds 3,800 US co-organiser

NICSA

3,700 3,600 3,500

3,400

3,300

Source: ALFI

3,200

10

{ It is nevertheless true that the UCITS directive

remains extremely complicated to implement, in spite of the fact that it was presented following a long consultation process and with the intention of achieving a balance. There is awareness that not everyone moves forward at the same speed and that coordination between the various European supervisory authorities needs to advance further if UCITS IV is to achieve a high degree of effectiveness.

This is in any case a warning that needs to be taken into account, in particular within the context of the AIFMD, for which only two years of preparation remain.

Given this short period and the huge amount of work that remains, is there a risk that the schedule for the AIFMD will be amended and the timetable for its implementation will be put back? “In this area there are two opposing developments. On the one hand, there is the phenomenal political will to find answers to the crisis. It was impressive to see the regulations that had been produced in the area of alternative management barely a year after the collapse of Lehman Brothers.

On the other hand, there is the reality of the regulatory process, and this is clearly extremely complicated. We have to appreciate that with the AIFMD we are moving from virtually nothing to a very high-level international regulatory standard, with provisions that do not even exist in UCITS, particularly as far as the role of custodian banks or remuneration is concerned. In addition, the

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AIFMD will apply to all funds that do not come under UCITS, which creates an additional level of complexity.

Against this background, there is consequently still a risk of things going off track, but the political will is such that the pressure that results could make it possible for these deadlines to be met.

Does Luxembourg have the same kind of fears in view of the AIFMD provisions as was the case for UCITS IV? “The context is different.

Within the framework of UCITS IV there was in particular a fear of certain entities, management companies and/or master funds, relocating to other countries within the European Union. With the AIFMD, there will remain competition for Luxembourg, notably from Dublin, but the risks relate above all to the whole of the alternative industry in Europe and its competitiveness in relation to the US and Asia. The clientele of alternative funds is by and large made up of extremely wealthy individuals who are highly mobile, or financial institutions that can buy their alternative products wherever they like.

A large number of players, such as Dutch pension funds or certain large insurers, have already warned the European Commission against the creation of a regulatory framework that would be too restrictive and would prompt investors to look outside of Europe.

We can very easily imagine a scenario where no further Asian promoters would come here, taking

The National Investment Company Service Association is the leading provider of independent education and networking forums to professionals in the global investment management community. NICSA was established in 1962 as a forum for operations and shareholder servicing professionals in the mutual fund industry. Today NICSA is a network of nearly 10,000 business professionals from within the investment management industry and the firms that support the industry. The association has more than 250 corporate member firms with over 600 member offices operating in major financial centers around the world.

A. G. www.nicsa.org

the view that, compared with other products or other jurisdictions, it would no longer be viable to incur the costs necessary to achieve conformity in order to obtain protection that is not even demanded by institutional investors themselves. This is where the risk relating to the AIFMD lies and it affects the whole of the European market in relation to the rest of the world. Clearly, though, if there is a risk that affects the entire European industry, the Luxembourg model could also find itself in difficulty, particularly with regard to its ability to attract nonEuropean players and their products to our platform. This is in any case the general line of the discussion we are holding within the European Securities and Markets Authority.

Do you feel that you are being heard? “It is still too early to say. The feedback we have already received from the large alternative managers has been quite positive, particularly as far as the implementation of a passport for non-European management companies is concerned. The fear of seeing Europe transformed into an impregnable fortress has receded and there is greater confidence in the system. The other points for discussion are still in the balance.

Does this provide an indication of what the upcoming UCITS V will be like? “At the moment, all that we are sure about is that the regime applied to custodian banks and to remuneration in the AIFMD will be retranscribed there. However, as } 14

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Net Luxembourg assets 2,300

Luxembourg gains: Net asset growth has been strengthening since the spring of 2010.

2,200 2,100 2,000 1,900 1,800 1,700 Source: ALFI

1,600

12

{ many of these subjects will already have been

dealt with within the context of the transposition of the AIFMD, I do not anticipate substantial work in relation to UCITS V. It is, of course, possible that other elements will be added afterwards, even if this only concerns a new definition of eligible assets. In that case, this will be another major evolution that we will need to come to terms with.

Generally speaking, the current developments nevertheless present more opportunities than threats. If we set about things in the right way, it will be possible to move our industry forwards yet again.

Hong Kong co-organiser

HKIFA The Hong Kong Investment Fund Association, founded in 1986, is an industry organization that aims to promote and develop Hong Kong as a major fund management centre in Asia. Its key roles are consultation and investor education.

The HKIFA has 45 fund management companies as full and overseas members, which together manage more than 1,310 Hong Kong Securities and Futures Commission-authorized funds as of the end of January 2011, involving total assets of about US$1,000 billion.

The association also has 60 affiliate and associate members. A. G. www.hkifa.org.hk

In this particularly uncertain environment, has the September conference taken on special importance? “First of all, it will be the 20th anniversary of this conference, which is not an insignificant milestone. We will have the opportunity to look back over everything that has happened over these two decades, in particular with the help of a film and a timeline. Then, for the first time, we will be widening the scope of the conference, as, in addition to NICSA [National Investment Company Service Association], with whom we have been working since the beginning, this year we will also be welcoming the Hong Kong IFA [Investment Fund Association] as a partner. This is a logical next step, following on directly from the opening of an ALFI representative office in Hong Kong and our desire to strike up partnerships with our sister associations in our key distri-

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bution markets. Last year, we therefore signed a memorandum of understanding that makes provision for, in particular, the shared involvement organisation of this September conference in Luxembourg, but also of the one that will take place in October in Hong Kong.

As far as the environment itself is concerned, it is true that we are preparing to deal with a flood of regulations and that the general economic and financial situation is giving rise to a great deal of instability. In the field of finance, however, so many developments are taking place, all the time and in all locations, that this particular moment is no more exceptional than any another. It is simply more intense. I remember the 2001 conference, which was held barely two weeks after the twin towers collapsed in New York. Or the one in 2003, when the dot-com bubble was bursting. We have already come through crises before.

Nevertheless, it is true that the one we have just experienced has left a profound impression, the direct impact of which can be seen in this unprecedented wave of regulations, even though the asset management industry did not cause the crisis. We have identified no fewer than 27 regulatory and legislative developments that are currently taking place and will affect us. One of the panels will involve listing 25 of these developments in 25 minutes. One a minute! More generally, this conference will provide us with an excellent opportunity to stop for a moment and take stock of what has been done and where we are heading.”

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floor plan

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

exhibitors booth n°

company

booth n°

company

1

bnp paribas Securities Services

9

Isiwis

5

cacEIS Investor Services

6

KnEIp

29

citi

37

KpmG

12

confluence

4

2

Deloitte S.a.

27a

14

Diamos Luxembourg S.a.

24

28

Ernst & young

21

17

Eurizon capital

18

Finesti S.a.

36

Funds Europe

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32

booth n°

How to find us?

By bus:

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

company

23

prudential a.m. (Singapore) Limited

13

pwc Luxembourg

By car:

Direct from Solutions 31 and covered Quartalaccess Financial the “place de l’Europe” car park; 22 on avenue Rbc John DexiaF. Kennedy. entry From the “Trois Glands” car park; 38avenue John RbS F.(Luxembourg) via Kennedy and S.a. the place de l’Europe tunnel; 42via rue duRelax max or Fort Thüngen.

aG

milestone Group

46

RR Donnelley

morningstar

7

Société Générale Securities Services

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

16

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

15

State Street

30

multifonds

43

thomson Reuters

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17 plan

Company

Booth number

Company

Booth number

Company

Booth number

BNP Paribas Securities Services

1

Isiwis

9

Prudential A.M. (Singapore)

23

CACEIS Investor Services

5

KNEIP

6

PwC Luxembourg

13

Citi

29

KPMG

37

Quartal Financial Solutions

31

Confluence

12

Loyens & Loeff

4

RBC Dexia

22

2

MDO Services

27A

RBS (Luxembourg)

38

Deloitte Diamos Luxembourg

14

Metrosoft

24

Relax Max

42

Ernst & Young

28

Milestone Group

21

RR Donnelley

46

17

Morningstar

32

Société Générale Securities Services

18

Much-net financial software & services

16

Eurizon Capital Finesti

State Street

15

30

Thomson Reuters

43

NEWSManagers

19

TransPerfect Translations

39

Phoenix Systems

10

UBS Universal-Investment -Luxembourg

Funds Europe

36

Multifonds

Funds Partnership Limited

11 3

HSBC Securities Services (Luxembourg)

7

IFBL

35

PricingDirect

20

IFE / EFE

47

Profidata Group

44

8 45

Why should you be a sponsor or have an exhibition booth at the next event, in 2012? 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 professionals of the fund industry 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.

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18

Agenda Programme day 1 – Tuesday 27th September 2011

Day 1 CEO interviews: post crisis – a stable equilibrium or not?

Registration & breakfast 08.00 – 09.00

11.35 – 12.25

Welcome & introduction 09.00 – 09.20 Marc Saluzzi, Chairman, ALFI, Luxembourg Theresa Hamacher, CFA, President, NICSA, Boston Sally Wong, Chief Executive Officer, Hong Kong Investment Funds Association, Hong Kong

Chairperson’s introduction 09.20 – 09.25 Noel Fessey, Global Head of Fund Services, Schroder Investment Management, Luxembourg

Moderator: Thomas Seale, CEO, European Fund Administration, Luxembourg

Panelists: Joseph C. Antonellis, Vice Chairman, State Street Bank, London Patrick Colle, CEO, BNP Paribas Securities Services, Paris Todd Ruppert, President, Investments Services, T. Rowe Price International, Baltimore Ben Zhang, Managing Director, Haitong International Investment Managers, Hong Kong

Chairperson’s wrap up

Opening speeches

12.25 – 12.30

09.25 – 09.55 H.R.H. Prince Guillaume of Luxembourg

Buffet lunch hosted by

Jeannot Krecké, Minister of the Economy and Foreign Trade, Luxembourg Government, Luxembourg

The future of Europe and of the euro 09.55 – 10.35 Frank Velling, Chief Strategist, Bankinvest, Copenhagen

Refreshment break and visit of the exhibition area 10.35 – 11.05

12.30 – 14.00 Ernst & Young State Street Bank Luxembourg

Chairperson’s introduction 14.00 – 14.05 Noel Fessey, Global Head of Fund Services, Schroder Investment Management, Luxembourg

Keynote speech 14.05 – 14.40 Gerard Lopez, Managing Partner, Mangrove Capital Partners, Luxembourg

Global issues in asset management 11.05 – 11.35 Paul Schott Stevens, President and CEO, Investment Company Institute, Washington

A roadmap for the European fund and asset management industry 14.40 – 15.15

25 upcoming regulations in 25 minutes 15.15 – 15.40 Nathalie Dogniez, Partner, KPMG, Luxembourg Michèle Eisenhuth, Partner, Arendt & Medernach, Luxembourg Francine Keiser, Investment Management Group, Of Counsel, Linklaters LLP, Luxembourg

Refreshment break and visit of the exhibition area 15.40 – 16.10

Cross border success story 16.10 – 17.10 Moderator: Michael Ferguson, Partner, Asset Management Leader, Ernst & Young, Luxembourg Panelists: Catherine Vaughn Deutsch, Managing Director, Global Head of Asset Management and Investors Relations, Highbridge Capital Management, New York Richard Garland, Managing Director, Cross Border Client Group, Investec Asset Management, New York Jörg Knaf, Managing Director, Head of Northern Europe, Natixis Global Associates, Frankfurt am Main Dominik Kremer, Head of European Distributions, Threadneedle Portfolio Services, London

Chairperson’s closing remarks 17.10 – 17.15

Cocktail reception sponsored by 17.15 – 19.30 PwC Luxembourg

Claude Kremer, Chairman, EFAMA

PAPERJAM | September-October 2011 | SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE 2011

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www.pwc.com/lu/asset-management

The AIFMD Making headway together

How can PwC help you?

We have a multi-disciplinary and multi-industry team of professionals in business strategy, operation and structuring, regulatory compliance, tax, remuneration and assurance services ready to assist you: identify and assess the many impacts of the Directive on your organisation and develop an integrated response to the AIFMD. Our team works closely with the PwC European AIFMD working group to ensure knowledge and best practices are shared on a Pan-European basis.

In Luxembourg, our team of Asset Management professionals represents 1200 people.

Our people working alongside you: Marie-Elisa Roussel, Luxembourg AIFM Champion marie-elisa.roussel-alenda@lu.pwc.com +352 49 48 48 2583 Valérie Tixier, Audit Partner valerie.tixier@lu.pwc.com

+352 49 48 48 5797

Xavier Balthazar, FS Consulting Regulatory Partner xavier.balthazar@lu.pwc.com +352 49 48 48 5813 David Roach, Tax Partner david.roach@lu.pwc.com

+352 49 48 48 5707

Michael Daemgen, FS Consulting Regulatory Director michael.daemgen@lu.pwc.com +352 49 48 48 2615 Robert Castelein, Audit Director robert.castelein@lu.pwc.com

+352 49 48 48 6113

© 2011 PricewaterhouseCoopers S.à r.l. All rights reserved. «PwC» refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

20

Agenda Programme day 2 – Wednesday 28th September 2011 a.m.

Day 2 Registration & breakfast 08.00 – 08.45

Refreshment break and visit of the exhibition area 10.25 – 10.55

Chairperson’s introduction 08.45 – 08.50 José-Benjamin Longrée, Managing Director, Citibank, Luxembourg

RMB products: latest trends and opportunities 08.50 – 09.20 Christina FY Choi, Director, Investment Products, Securities and Futures Commission, Hong Kong

50 years of mutual funds in Asia: an assessment and prognosis 09.20 – 09.40 Shiv Taneja, Managing Director, Cerulli Associates, London

The future of UCITS in Asia

The new environment: the regulator’s view 10.55 – 11.30 Interviewee: Jean Guill, Director General, Commission de Surveillance du Secteur Financier, Luxembourg Interviewer: Rafik Fischer, General Manager, Head of Global Investor Services, KBL European Private Bankers, Luxembourg

Focus on investor protection: the way forward as seen by regulators, investor associations and the fund industry. The view from the European Commission 11.30 – 12.25 Tilman Lueder, Head of Unit, Asset Management, European Commission, Brussels

09.40 – 10.25 Moderator: Freddy Brausch, Partner, Linklaters LLP, Co-Chair of the ALFI Legal and Regulatory Committee, Member of the ALFI Board, Luxembourg

Panel discussion Moderator: Denise Voss, Conducting Officer, Franklin Templeton Investments, Luxembourg

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

Panelists: Jella Benner-Heinacher, Managing Director, Deutsche Protection Association, Düsseldorf

Justin Ong, Partner, PwC, Luxembourg

Geoffrey Cook, Partner, Brown Brothers Harriman, Luxembourg

Shiv Taneja, Managing Director, Cerulli Associates, London

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

Camille Thommes, Director General, ALFI, Luxembourg

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Agenda Programme day 2 – Wednesday 28th September 2011 p.m.

Day 2 Chairperson’s wrap up 12.25 – 12.30

Refreshment break and visit of the exhibition area 15.15 – 15.45

Buffet lunch hosted by 12.30 – 14.00 BNP Paribas Deloitte

Chairperson’s introduction 14.00 – 14.05 José-Benjamin Longrée, Managing Director, Citibank, Luxembourg

The history of the Luxembourg fund industry 14.05 – 14.45 Moderator: Marie-Jeanne Chèvremont, Luxembourg Panelists: André Elvinger, Luxembourg Patrick Zurstrassen, Luxembourg

Staying afloat - managing today’s flood of regulation 15.45 – 16.25 Moderator: Jacques Elvinger, Partner, Elvinger Hoss & Prussen, Luxembourg Panelists: Joanna Cound, Managing Director, Government Affairs & Public Policy, Blackrock, London Gerhard Fusenig, Head of Multi Asset Class Solutions, Equities and Fixed Income, Head of Asset Management Switzerland, Credit Suisse, Zurich Stefan Gavell, Executive Vice President, Head of Regulatory, Industry and Government Affairs, State Street, Boston Jean-Michel Loehr, Chief Industry and Government Relations, RBC Dexia Investor Services, Luxembourg

Deep dive into distribution 16.25 – 17.10

Jean Hamilius, Luxembourg

Vision of the future of the Luxembourg fund industry 14.45 – 15.15 Marc Saluzzi, Chairman, ALFI, Luxembourg

Moderator: Lou Kiesch, Partner, Deloitte, Luxembourg Panelists: Sheenagh Gordon-Hart, Client and Industry Research Executive for JPMorgan Worldwide, London Rob Lay, Managing Director, Head of Distribution Partners Europe and Middle East, UBS Global Asset Management, London Markus Miederhoff, General Counsel Europe, Allianz Global Investors, Munich

Chairperson’s closing remarks 17.10 – 17.15

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KII services – Getting the right structure calls for experts When dealing with the KII, the industry is faced with challenges throughout the value chain. Deloitte’s unique concept goes beyond a service and reaches out to the heart of market needs. It is an independent solution that can successfully adapt to the most complex fund structures, while coping with significant volumes and addressing the questions that the KII poses.

For more information, please contact lukiitaskforce@deloitte.lu Deloitte Luxembourg’s app is

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24 speakers Theresa Hamacher, President, NICSA

View from America

The past year in US mutual funds A flurry of new regulations and trends have emerged from the world’s largest investment fund market.

Theresa Hamacher (text), Ëlodie (illustration)

Over the past year, the US mutual fund industry transitioned from recovery mode to growth mode. Fund management companies began to shift their focus away from the after-effects of the credit crisis and toward prospects for the future. Here’s a quick look at key events and trends from the past 12 months: Strong growth – Assets under management rose to $12.4 trillion by the end of May 2011, a 16 percent increase versus the prior year and close to pre-crisis levels (all data is from the Investment Company Institute). The increase reflected both price gains, as stock markets around the world rallied, and cash inflows from more-confident investors. Assets per fund increased at an even faster pace because fund managers continued to rationalize product lines, leading to a slight decrease in the number of funds.

Even stronger growth for ETFs – Bucking the trend in traditional mutual funds, the number of ETFs rose to 1,045 – a more than 20 percent

increase. Assets gained an even more impressive 39 percent, breaking through the $1 trillion mark for the first time. This demand-driven growth came despite a Securities and Exchange Commission moratorium on new ETFs using derivatives extensively.

Dodd-Frank follow-through – Regulators continued to develop specific rules for implementation the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC has already adopted new regulations covering whistleblowers – giving them additional incentives to come forward – and investment adviser registration, now a requirement for many hedge fund managers who were previously exempt. Still under development: tougher rules governing brokers’ obligations to their clients, additional requirements for credit rating agencies and greater standardization and required central clearing of derivatives contracts.

Regulators are also drawing up a list of SIFIs – short for “systemically important financial institutions” – those “too big to fail” entities which will be subject to additional scrutiny in future.

Money market fund debate – Whether money market funds will be on the list of SIFIs is an important question for the US fund industry, where these funds account for one-fifth of industry assets. If money market funds are deemed systemically risky, proposals for a floating share price (rather than a fixed $1 per share) or a requi­ red cushion against loss (in the form of a liquidity facility, earnings reserve or capital cushion) are much more likely to be adopted. Defenders of the status quo argue that the importance of money market funds as an alternative to banks for both investors and issuers far outweigh their risk – and that tighter regulation could hobble money market funds to the point where they are no longer competitive.

Shareholder recordkeeping investment – Not all of the compliance challenges derive from Dodd-Frank Act. Tax-law changes are also driving major system investments at transfer agents.

Fund managers have recently upgraded their systems to comply with new cost-basis reporting requirements, which become effective for mutual funds at the start of 2012. These rules require that funds provide redeeming investors – and the IRS – with accurate information on the tax cost of shares sold. After this project is completed, FATCA will be on the agenda. Transfer agents will need to develop systems to identify “foreign financial institutions” among their investor base and to withhold taxes on payments to those who do not enter into agreements with the IRS. Social media presence – But regulation wasn’t everything – one of the most visible trends over the past year was the fund industry’s full-throttle entry into social media. A large and growing number of fund management companies have established a presence on Facebook, Twitter and LinkedIn – looking to attract new investors and top-notch employees, especially from among the younger generations.

They’re moving forward despite the considerable regulatory requirements regarding review and archiving of social media posts.

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

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Finesti is a subsidiary of the Luxembourg Stock Exchange

23/08/11 16:17

26 speakers

Gerard Lopez, Managing Partner and Co-founder, Mangrove Capital Partners; President and Co-founder, Genii Capital

Venture capital view

A safe investment In the current state of uncertainty on the European markets, the main characteristic of venture capital – it is not linked to the stock exchanges – makes it one of the safest growth areas in this period of crisis.

Gerard Lopez (text), Ëlodie (illustration)

For several months now, the debt levels and the budgetary situation of several European countries – Greece, Italy, Portugal and Spain – have had a direct influence on the volume and the nature of investment in Europe. Although this cause and effect relationship is nothing new, the severity of the current crisis requires the adoption of strong, symbolic measures.

Recently, certain voices have called for the total or partial breakup of European community structures. In my opinion, this is an unrealistic scenario. It would be a setback and would have a very unsettling overall effect. A broken-up Europe would make its weaker members even more vulnerable to the effects of the crisis, and would strengthen other world economies. Putting the political and economic unity of the European Union under pressure in an election period would also open the doors to exacerbated nationalism and extremism. This perspective terrifies the

markets and harms investment as well as increasing the risks of state bankruptcy. This boomerang effect would damage the euro even more, weakening a currency that has already fallen quite hard in value. The ensuing spiral would have only negative consequences.

Although the crisis we are currently experiencing is deep, there are reasons to remain positive.

What makes Europe strong – its “fundamentals” – should not be forgotten: namely, it is the biggest consumer per head in the world as well as a strong producer and exporter that is among the most competitive on the planet for high quality goods.

Europe has a long history; its population is well educated and constitutes a powerful economic framework. It is on these fundamentals that we are in a position to build, no matter what the economic and financial situation. The reason? We have now entered the era of economic know-how – where education and smart money are key.

In the current, uncertain climate, the venture capital industry can become one of the essential

components of Europe’s return to the forefront of world affairs: it can open up the possibility of finding a solution to the crisis, and develop into an engine to drive potential growth. Its genetic code constituted of high-level technology and its capacity for invention make it an exceptional zone for investment, isolated as it is from traditional threats.

In the medium and long-term the sector has weathered crises that are cyclical in nature. It is disconnected from the fluctuations of the stock market, and external forces have less influence on the capital invested. In addition, its growth capacity is very high; it is, in fact, easier to grow from 0 to 100 than from 100 to 1,000 just at the very moment when the major groups are adopting defensive policies. Finally, history has shown that those who choose technology enjoy considerable enrichment once the way out of the crisis has been found.

Every difficult time is an epilogue.

Nevertheless, historically, the European Venture Capital Association has lagged behind its US counterpart. Up to now, this situation was driven by three key variables: fewer management teams to manage venture capital; fewer entrepreneurs; and fewer institutional investors to invest in VC funds. Over the last decade, this situation has changed considerably. With the arrival of European VC companies such as Mangrove and others, global investment successes such as Skype and overall stronger VC community were made possible. It should be noted though that the one area in which Europe still lacks is the appetite for VC by institutional investors. This is key.

I am sure that Europe will take the right decisions to maintain its unity and, even if the crisis lasts, it has sufficient resources to fight it off.

Among these, the venture capital industry is one of the safest options to ensure growth, paradoxical as this may seem. It is a tool that investors should seriously consider. This is the path that Mangrove Capital has followed since its foundation, and it is one that allows us to look to the future with confidence.

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8/25/11 2:17:05 PM

B e l g i u m C h i n a C y p r u s G u e r n s e y H o n g K o n g I r e l a n d J e r s e y L u x e m b o u r g M a l t a M a u r i t i u s T h e N e t h e r l a n d s N e w Y o r k S i n g a p o r e U n i t e d K i n g d o m

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28 speakers

UCITS in Asia

Growing ties The European investment fund tool continues to find new favour across the Asia-Pacific region.

Freddy Brausch (text), Ëlodie (illustration)

Originally designed to iron out the discrepancies between the various markets and players within the EU and to allow access to the wider European market, UCITS has exceeded the expectations of its makers and spread out of the EU’s boundaries to become the global brand for distribution of retail funds quasi worldwide (excluding the US). Asia is undoubtedly the best example of the globalisation of the UCITS brand, with 20 percent of the assets under management in all UCITS originating in Asia (a constantly growing figure).

This proportion is even greater for the Grand Duchy, as UCITS distributed in Asia are primarily Luxembourg-based.

While celebrating UCITS’ 25th birthday, let’s give some thought to the drivers for further success of UCITS in Asia and see what the challenges and opportunities are that Luxembourg and Asian industry players may have to address going forward. The success of the UCITS brand in Asia (and more generally) relies on the trustworthiness of its unique combination of premium infrastruc­ture, a strong regulatory framework and far-reaching distribution opportunities. Preserving, enhancing and building on such tools shall be key to the further development of the brand in and from Asia. Three dimensions will be distinguished: Asia for the distribution of UCITS, Asia and investment by UCITS, and Asia for sponsoring and managing UCITS. Luxembourg-Asia: an unrivalled partnership

The largest Asian financial centres demonstrate the success of UCITS in terms of marketshare, with Luxembourg funds accounting for 66 percent of the foreign funds offered in Hong Kong, 73 percent in Taiwan and 69 percent in Singapore, in March 2010.

Thanks to the Memorandum of Understanding signed in 2008 between the Luxembourg and the Chinese financial regulators, Luxembourg UCITS are now eligible for Qualified Domestic Institutional Investor portfolios promoted by banks, fund

managers, and securities firms in the People’s Republic of China. Hong Kong, Singapore, Malaysia and Taiwan also signed MoUs with the Luxembourgish authority. These close relationships are strong arguments and form a solid basis for Luxembourg UCITS continuing to penetrate Asian markets.

As in many other fields, Asian markets have been identified by all the global players as a major source for future growth. As they position their Luxembourg UCITS as flagships for distribution in Asia, key players have started to strengthen their direct presence in Asia to accompany this move. While getting more and more global, these players can rely on global services providers with a strong presence both in Luxembourg and in Asia to support their expansion. The opening of a Hong Kong office of ALFI in 2010 is a clear sign of Luxembourg’s dedication to assisting the development of Luxembourg funds in and from Asia.

Asian regulators are often puzzled by UCITS rules being changed without them being consulted or knowing about it sufficiently well in advance. This concern is legitimate. It is however no easy task to bring them in a discussion where 27 EU countries and three EU institutions already often have a hard time getting to a compromise.

Luxembourg professionals, ALFI in the first place, have been particularly active in helping to bridge the gap by consulting with Asian regulators on a regular basis, collecting their feedback and providing background information and explanations.

Yet, the lack of coordination or different agendas may lead to unfortunate situations such as the recent cumulative and contemporaneous introduction for UCITS distributed in Hong Kong of both the EU Key Investor Information Document and the Hong Kong Key Facts Statement.

The Hong Kong and other Asian regulators expressed some concern around the arrival of ever growing numbers of UCITS funds and portfolios applying alternative-type investment strategies.

Some have suggested that an answer to such concern might be to split the UCITS brand between complex and non-complex UCITS. Consistent with the UCITS construction and preserving the

unity of a strong brand, suggestions from Luxembourg are rather to enhance and adapt risk-management procedures and risk disclosures to properly cover such strategies and assets while preserving confidence in the UCITS brand irrespective of the strategy.

Some Asian players and centres have expressed a desire for a pan-Asian UCITS-like passport.

While this is a legitimate aspiration, one should not minimise the difficulty of achieving such an ambition. The UCITS passport would not have been what it is without the 30 years of European common market construction which preceded the first UCITS Directive in 1985. Supporting infrastructure and conditions are thus required to work out a credible replicate of UCITS in Asia.

Last but not least, it still needs to be determined who will take the lead in coordinating Asian countries around this ambitious enterprise. There are various candidates for the legitimacy of installing this new regulation inside the segmented Asian market. Australia, the fourth-largest asset management industry in the world, has proposed an Asia-Pacific fund passport. Others would like a Hong Kong or Singaporean initiative to take the lead. It is difficult to imagine that the PRC might not also have some ambitions to impose a panAsian standard.

Asia for UCITS investments

There is a long tradition of UCITS investing in Asia but recent and expected developments may create new challenges and opportunities.

UCITS V developments may result in limiting – or making more expensive – investments in emerging markets as custody rules and liabilities are expected to strengthen. Luxembourg players, among others, have been active in lobbying so that the new rules to come do not excessively hinder investments in such markets but final rules are still in the make and the devil may be in the detail.

Luxembourg funds can already invest in the PRC thanks to the 2008 MoU which allows UCITS with Qualified Foreign Institutional Investor status to invest directly in the Chinese market. The route to

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

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9/2/11 2:31:33 PM

29 speakers

Freddy Brausch, Partner, Linklaters

dedicated UCITS investing exclusively in PRC is however not yet open because perceived lack of liquidity of Chinese markets. The basis for investments in China by Luxembourg funds is there, but there remains some way to go.

More recent developments, with the so-called “mini QFII”, also open new promising perspectives. They will facilitate investments of offshore renminbi into Chinese capital markets by overseas institutional investors and thus present a great opportunity for the future of UCITS in Asia.

Asia sponsoring and managing UCITS

Over the last three years an increasingly growing number of Asian asset managers have set up

UCITS platforms in Luxembourg. A strong incentive for Asian managers setting up UCITS is the EU passport. Yet distribution beyond EU countries is also key to them when opting for a Luxembourg-domiciled UCITS. Switzerland, South America, the Middle East and Asia itself are among the most popular target countries for Asian managers. UCITS is the “tool” to get there.

Luxembourg has been the place of choice for Asian managers wishing to set up their UCITS, not only because of the brand value, but also because it offers multiple possibilities that can accommodate the needs of each manager. Some managers wish to start big with their own manage­ ment company (or self-managed SICAV) whereas

others prefer to test the market with a compartment on a third-party platform or by hiring a third-party management company for their own UCITS. Asian managers may develop specific strategies in their UCITS but most of the times mirror their home strategies in the UCITS wrapper, adapting to UCITS rules to the extent necessary.

Watch the space, Asia is and will continue to be an essential component of the larger UCITS setup. Some challenges, however also major opportunities, are still ahead of us in the region.

This article was co-written with Christian Hertz, Managing Associate, Linklaters.

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9/2/11 2:31:35 PM

30 speakers Paul Schott Stevens, President and CEO, Investment Company Institute

Asset management

Sustaining the momentum As the asset management industry continues its remarkable growth, it faces opportunities and challenges. Asset managers and their regulators need to prepare for what lies ahead.

Paul Schott Stevens (text), Ëlodie (illustration)

For the past twenty years, ALFI has chronicled a period of exceptional changes in asset manage­ ment. Among the most important is the dramatic rise of global asset managers as financial interme­ diaries.

This was not preordained. It came the way the future always does: one day at a time. You might also say one investor at a time. Today, this fiduciary enterprise boasts a multitude of highly competi­ tive and innovative participants upon which liter­ ally hundreds of millions of investors rely. If the next twenty years are to be as successful, we must continue to keep faith with our investors – one day at a time.

According to a recent tally in Pensions & Investments magazine, the top 500 institutional advisers oversaw just under $10 trillion in 1998. Last year, at more than $29 trillion, that number was three times as large.

Behind these numbers, of course, are countless stories: people young and old, working and retired,

of modest and ample means, turning to us for help as they try to manage some of life’s more impor­ tant and complex challenges. Through us, they access markets and investments, and manage risks, in ways that otherwise would not be possi­ ble for most. And the sheer scale of the invest­ ment capital they entrust to us has, in turn, helped shape our world.

A record of which to be proud, no doubt – and a sobering set of responsibilities. As might be expec­ ­­ted, the global rise of asset management brings challenges, both for us and our regulators, many of which came to the fore during the recent finan­ cial crisis. Let me highlight four.

First, framing expectations. All the products we make available to investors, whether they pursue the simplest or most complex investment strate­ gies, involve risks. As we learned once again in the recent financial crisis, those risks can come from unexpected quarters and have significant consequences.

Thus we need to help investors’ balance their perceptions about our products with market

realities. This issue involves more than our man­ dated disclosures. It challenges us to make more and better educational resources available to inves­ tors, and to find ways to help them make sound investment decisions.

Second, continuing innovation. To a very large extent, finding new ways to serve the needs of inves­­tors has been at the heart of our success.

Unfor­tunately, the financial crisis has caused some to conclude that innovation is dangerous.

Regulation must keep pace with market develop­ ments, yet regulators should take care not to stifle innovation that brings real benefits to investors.

Third, acknowledging the unique role of asset managers. Bank and nonbank financial institu­ tions have long coexisted, each serving a distinct role in financial intermediation. On the heels of the crisis, however, some speak of a need to address the risks of the “shadow banking system”, a term apparently capacious enough to include much of what our industry does. Some regulators are con­ sidering bank-regulatory concepts like prudential oversight and capital requirements for nonbank financial intermediaries, including funds. Banks and nonbank financial intermediaries may share some similarities, but there are critical differences that should be respected. Further, a regulatory res­ ponse that concentrates intermediation in banks would not alleviate systemic risk and, in fact, could increase it.

Finally, our role in retirement provision. One lesson surely to be drawn from the fiscal crises in the EU and the US is simply this: there is a need for greater self-reliance when it comes to long-term financial security. Our global industry has a com­ pelling obligation to help individuals meet this challenge. To that end, we must speak out in favour of mechanisms like defined contribution plans that empower individuals to build a nest egg over their working lives. Addressing these and other issues will test regulators and industry alike.

Thankfully, we have a bright polestar to guide us: the investor. If we keep the investor’s interests at the forefront, our journey forward will be a wor­ thy one.

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

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32 speakers

Rafik Fischer

“Adding to the same regulatory tsunami”

An industry veteran talks about the changing pace of rules and unintended consequences.

Aaron Grunwald (interview), Ëlodie (illustration)

Mr. Fischer, What are the biggest changes in the regulatory environment that you have seen over the past 20 years? “For me, the biggest change was UCITS III. It added additional fund asset classes, it really facilitated cross-border fund distribution, and it was the beginning of the fund management company as we know it today.

It was a substantial piece of legislation. UCITS IV in comparison is minor cosmetics. It’s not really that pace-setting or fundamentally changing the nature of the business. UCITS III did that. It was the most important piece of legislation we had since UCITS I. AIFMD will also change the Luxembourg fund industry, but it is not revolutionary like UCITS III was, as Luxembourg is already well established on the map in the field of alternative investment structures.

Are funds and funds services providers facing a ‘tsunami’ of new regulations today, or just the normal evolution of regulation? “I think we’re overdoing it right now. The pace is too fast.

There are too many different files to undertake at the same time. If you look at the ESMA website, you see 180 pieces of regulatory work are under way. I think it’s simply too difficult for the industry to keep up with it.

When I started, you saw the UCITS legislation and knew pretty well what was coming. Today, nobody is in a position to master all the regulations and the governing circulars. That’s even just the Luxembourg ones, not even speaking about the international ones. It’s become a job for very precise specialists over the past 20 years.

This is causing a problem and there’s a substantial cost involved. Regulations always provide an opportunity to discover waste, launch new products, reshape processes and it’s created huge opportunities for consultants and the legal side of the industry. But it’s a question if there’s always

economic productivity, always true added value to all of today’s new regulations. I find it less and less so over the recent years. The way we implement and complement regulation has gained a momentum on its own. Regulation to an extent becomes self-perpetuating, even self-serving. The proportionality is no longer right. You have the risk that you have more people putting rules in place and auditing and consulting, more people than those actually running the business. You might be building societal risk. What will you do with all the controllers if there’s nothing left to control?

Quality control is important for any industry, but it has to be done a cost that doesn’t stifle the producer. Too many rules kill the regulation, if those who apply the rules are just taking the ‘ticking the box’ approach with a ‘KYA’ mentality.

It kills basic good sense which can only apply if you still have a clear view of the global picture.

Europe is in dire need of more entrepreneurship, compared to Asia and even to an extent compared to the US. It’s not by creating more nitty-gritty rules. The most vibrant part of any economy are the small and medium enterprises that act quick and flexible to adapt to changing environments and market opportunities. But they are no longer able to comply with the huge mass of regulations.

They are no longer in a position to afford the costs and the ensuing legal expenses and reparations if there is a breach.

The costs are too high for SMEs, so they tend to be absorbed by the larger global players. Regulation becomes a weapon for big groups to eliminate smaller players. It favours big global entities and not necessarily the smaller entities.

The need for specialization and outsourcing derives from the fact that people don’t have critical mass any more. This entails fractioning of tasks and the risk of loss of the global picture.

What is the top challenge in investment funds regulation currently? “Right now the biggest one we’re facing is the KIID [Key Investor Infor-

mation Document]. It’s going to generate quite a substantial amount of work and personally I’m not very convinced it gives added value to the industry. It’s information that would make sense if you had direct distribution to the retail investor market. But in the European market today, we’re not truly yet in the field of open architecture.

If a customer is given the KIID by his bank for one specific type of equity fund, he might be able to compare funds, but in practice, he won’t, as he is relying on the advice of his banker. We overestimate the benefits of the KIID. It will have a very limited positive impact. Fact is, most fund groups take a wait and see attitude, and more than 80 percent will only be ready by the [final] deadline in 2012.

Is it a potential risk to the industry? “In the end, we might create fertile ground for increased litiga­tion. If performance is not up to expectation an investor might say ‘I did not get the KIDD or it did not include the right information.’ Assuring the right paper trail and the burden of proof will be heavy for the distributors as well as the fund groups.

Is Luxembourg ready for FATCA, the US reporting requirements? “Right now, no one in Luxembourg is prepared for FATCA. Nobody elsewhere is either. The detailed provisions are not yet available. The [American tax service] IRS has a huge workload in front of them to come out with [the exact rules]. It’s an operational nightmare. I don’t see how we can find the solution except if the American authorities and policy makers are prepared to [change] their view. Here it’s important that the European authorities get on the case, because FATCA is in no way compliant with a substantial amount of European domestic legislation, not to speak of global fund distribution models.

I don’t see a way out as it stands now. We have to lobby, substantially, the national governments as well as the European Commission, to find a solu-

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33 speakers

Rafik Fischer, Director and Head of Global Investor Services, KBL European Private Bankers

tion. There seem to be first indications that the European political classes are at last awakening to the problem and taking it at heart.

As the law stands now, I don’t see how non-US mutual funds will solve the problem, except by no longer having US investors and US investments.

And even then it’s largely impossible in practice to track and prove you have no indirect US investors. It’s unworkable. Even the IRS could never follow up with such a workload!

How is the new pan-EU regular ESMA doing so far? “They have a huge agenda. As internal matters the working procedures need to be fine tuned. On the one hand, decision-making is taking a lot of time, and on the other hand they have too many projects going on at the same time.

However, the idea is basically sound, relying on industry consultations and expert panels to help shape the regulations.

But in my opinion they have the tendency to go too far into detail, whereas before we had principle-based, common sense approach, which is now tending to disappear. In the end, the regu­lations might not be helping to solve the problems.

In the last few years, when problems arose in the fund industry it was generally not a problem of bad or insufficient regulations; it was quite often the problem of people not playing by the the rules.

You can never rule solely by regulation without taking into account sanctioning powers and the rules applying to litigation.

What new regulations would you like the autho­rities to strengthen or improve? “If you look in more detail there are some areas where there are no regulations, such as the appropriateness of the structure of performance fees; what is a fair benchmark is; what about acceptable high water marks.

Those are things that could be subject to additional regulation if you were of the opinion that the industry could not resolve them by themselves.

However, I’m not in favour of adding new layers of regulations. We as an industry are trying to address these issues.

Adding at this moment to the incoming regulatory tsunami that is challenging the investment fund industry, to me, cannot be the desired solution nor the desired outcome.”

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34 speakers

The post-crisis environment

The right regulatory strategy Since the G20 gave an implicit mandate to law makers and regulators to address systemic risk in investment management, we have seen the number of regulatory initiatives multiply.

Regulators argue these reforms do not go far enough and the industry complains these reforms stifle creativity and limit choice.

When asked, nearly half the audience believe that they are not the right approach to manage systemic risk in the investment industry.

Money market funds

Recent discussions in the US have focused on “breaking the buck” for money market funds. Regulators are concerned about contagion risk and are studying ways to reduce the likelihood of a “run” on money market funds. One proposed change would include creating a reserve pool (financed by the money market funds themselves) that could step in and help with providing liquidity in stress scenarios. Given these funds contain €2.7 and €1.1 trillion respectively in the US and EU, the impact of a “panic” could be enormous, creating problems in the commercial paper market, putting thousands of companies into bankruptcy risk. Money market funds are therefore an important element of the so-called “shadow banking” system.

Nearly half of the audience agreed that these funds should be further regulated.

ETFs

Thomas Seale, CEO, European Fund Administration

Thomas Seale (text), Ëlodie (illustration)

As we enter the post-crisis environment, a key question becomes: “What is the right regulatory strategy?” During a recent regulatory panel session held at the Annual Fund Forum International conference in Monaco, the audience of about 400 industry players was polled on five critical regulatory topics.

Investor protection

The European Commission, regulators and industry bodies have spent much time over the past 24 months on regulation: UCITS IV, AIFMD, UCITS V, PRIPs, MIFID II, etc. Finding a consensus and a level playing field across multiple products has not been easy.

Much of this legislation has required the creation of measures to protect investors’ interests at the product level. However, critics of this approach say regulators should focus more on how products are marketed and should, for example, focus more on distribution rather than product.

During the session, 60 percent of the audience said these measures will significantly increase costs and bureaucracy with only a small gain in investor protection.

Complex vs. non-complex

One of the fastest growing segments amongst UCITS funds are those employing sophisticated inves­tment strategies. Recently we have heard criticism that these products may tarnish the UCITS brand and that certain regulators are autho­rising the UCITS label for products which are too complicated and risky. The European Securities and Markets Authority says that it will look into the matter.

When questioned, a near majority of the conference audience said that UCITS should be split into “complex” and “non-complex” categories.

G20: Dodd Frank and AIFMD

We have also witnessed two important pieces of legislation which will impact the alternative sector: Dodd Frank in the US and AIFMD in the EU.

Finally, the topic of Exchange Traded Funds subject was raised. According to the Basel-based Financial Stability Board, the growing ETF market poses potential systemic risk. Notably, for swap based ETF products, investors may be exposed if the (swap counterparty) bank defaults. Therefore, problems at those banks which are most active in swap based ETFs may constitute a powerful source of contagion and systemic risk. Concerning “physical” ETFs, as they engage in securities lending, they may create similar counterparty and collateral risks to synthetic ETFs. Fifty-nine percent of the audience believe that ETFs pose some contagion risk.

While the conference poll was not scientific, the results should give industry players and policy makers pause for thought: are we pursuing the right regulatory approach?

Being the largest fund domicile in Europe and the worldwide number one in cross-border fund distribution, the Luxembourg industry intends to stay very active in the regulatory field in order to find the right balance of investor protection, controlling systemic risk and regulatory “cost”.

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36 speakers

Cross-border funds

Luxembourg positioned for the future The Grand Duchy’s investment fund heritage has prepared it for the challenges ahead.

Michael Ferguson (text), Ëlodie (illustration)

Luxembourg and Ireland have dominated crossborder investment fund distribution over the last 25 years; Luxembourg alone has a market share of around 80 percent. A key question for the crossborder investment fund centres today is: what must they do to continue to maintain this position and possibly increase it going forward? To answer this question, it’s probably best to first look back and examine the critical drivers in getting it to its current leading market position, and examine whether these still continue to be relevant, or whether new ones are emerging. While I will focus on the Luxembourg perspective, most of the arguments are also relevant for Ireland.

The key drivers of the past

Luxembourg was the first EU country to recognize the potential of UCITS and led the way in being the first country to transpose the initial UCITS Directive way back in 1988. It has also led the way in the transposition of all subsequent directives. Transposition, however, was in each case only the first step – the clarification of how these directives should be interpreted and operate in practice was at least as important. The early transposition and the related practical clarifi­cation enabled the international investment management community to innovate their products and operating models. It also resulted in the service providers and the regulator gaining deep and early expertise in product innovation, including and the servicing of the new investment techniques utilized by investment managers to innovate their products, and product approval.

Having been the first mover, Luxembourg has natu­­rally attracted and built up over the last 25 years deep skills in such areas as fund structuring and set-up, fund administration, depositary and custody services and, above all, distribution. Distribution support services, covering not just the EU but the whole of Europe and, importantly, Asia

and Latin America have become critical in order to develop a true international platform.

Luxembourg quickly evolved to provide the complete “toolbox” consisting of an array of regulated investment fund vehicles with flexible features to cater for all investor types and all asset classes.

Built up over many years, Luxembourg’s brand and reputation is rooted in the DNA of the country and its government – in particular, its attitude and its focused approach towards the investment fund industry (one of strong encouragement and support), its consistency and certainty on legislation including taxation.

This brand and reputation have enabled two critical things to happen in Luxembourg: first, it has encouraged the international asset management players to set up substantial operations in Luxembourg and, second, enabled “made in Luxembourg” investment fund products to gain unrivalled access to an international investor base.

The drivers of the future

First mover advantage is and will continue to be important especially when one considers recent directives, such as UCITS IV, where many of its provisions are geared at simplifying and reducing the costs of creating, managing and distributing investment funds. However, first mover advantage can be somewhat diluted because cross-border centres, such as Luxembourg, are to some extent dependent on the pace at which other EU countries implement the directives in order to ensure the fund sponsors and the underlying investors gain the full benefits of the new provisions (e.g., cross-border UCITS master-feeders and mergers). Many of Luxembourg’s main EU “export” markets tend to be slower in implementing these new legislative measures.

Deep support services will continue to be a criti­ ­cal defining criterion in the selection of a fund domicile centre. The level of sophistication of ser­ vices such as risk management, distribution sup-

port (especially for the high growth markets such as Asia) and product development expertise (to fit and grow with the development of new products, such as alternative UCITS and ETFs) will continue to be important. With the decoupling of the fund and management company domiciles, service provider due diligence and oversight along with client relationship management will become ever more important.

Brand and reputation is and will continue to be probably the overriding credential. Put very simply, each fund sponsor who wishes to deepen and/ or expand its international distribution will ask themselves whether the domicile of the fund help, hinder or be of no relevance.

Apart from UCITS IV, the much debated AIFM Directive is also likely to favour international cross-border platforms for alternatives, and may facilitate the development of a global professional investor “AIF” brand, reflecting the global success of the “UCITS” brand. Whilst Luxembourg is well placed to leverage its UCITS experience, it will need to make further investments in the areas of infrastructure, approval process, training and marketing, in order to be well placed to repeat its UCITS success.

Investors, and especially retail investors (especially in case of UCITS), may influence the crossborder model going forward. Currently, European retail investors’ tastes vary: in certain countries retail investors tend to be very comfortable buying cross-border funds (e.g., Germany and the Nether­lands) whilst in others (e.g., the UK and France) they still prefer domestic domiciled funds.

Institutional investors are not “stuck” on a parti­ cular country domicile, but more concerned about issues such as quality of regulation, costs (including any tax leakage), quality of support service, time to market and sophistication of the available “toolbox”.

The newly introduced Key Investor Information Document may prove to be an interesting device in highlighting the differences between the “cost”

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37 speakers

Michael Ferguson, EMEIA Regulated Funds Practice Leader, Ernst & Young

of domestic and international fund platforms of the same fund sponsors for similar products. This can only increase the pressure on the product manufacturers to attempt to gain further economies of scale and reduce cost. This may very well be achieved by having “mega” investment fund platforms catering for both domestic and international investors. Emerging competition in the form of an Asia-Pacific passport for investment funds has been the subject of much speculation over the last year. Whilst there are the obvious infrastructure, legal, tax and cultural challenges to overcome in order to turn this concept into reality, the biggest challenge is probably the protectionist nature of the majority of the countries involved. However, this will not prevent bilateral arrangements

between certain of the countries (there have already been some examples) and overt measures being taken by certain governments to promote local players (for example, Taiwan and Korea). Ultimately the most cost-efficient solutions will win out in spite of the artificial barriers which are put in place – the only issue with this is that, in the meantime, the underlying investor ends up paying the price of what is on offer.

Conclusion

The current established cross-border platforms will continue to dominate and expand for the foreseeable future, driven by the need of the fund manufacturers to leverage “mega” UCITS platforms to serve both a domestic and international

clientele on a cost-efficient basis. However, the established cross-border platforms will need to constantly focus on the quality of infrastructure and costs to protect their market positions, in particular. In addition, there must be much more direct engagement with the non-European regulators in order to ensure their concerns regarding regulatory and other chances are listened to and addressed. Finally, should the established crossborder domiciles wish to repeat their UCITS success with the AIFM Directive, they will need to make a substantial investment in infrastructure (including the regulatory approval process), training, marketing and need to build a series of bilateral recognition agreements with the non-EU alter­native investment management centres.

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38 speakers Denise Voss, Conducting Officer, Franklin Templeton Investments

Investor protection

At the heart of UCITS Europe’s mutual fund regime has put retail investor rights at the centre of each stage of its evolution.

Denise Voss (text), Ëlodie (illustration)

Investor protection is a cornerstone of UCITS and one of the main reasons for its success, from its inception in the mid-1980’s as a savings vehicle for European citizens to its position today as a globally recognised brand. Created to help individuals with limited knowledge of investing save for the long-term, many elements of investor protection are embedded in UCITS: clear rules for diversification and risk, supervision and enforcement of those rules by regulators, cooperation amongst regulators, disclosure and transparency of information to prospective and current investors, etc.

Shortly after the onset of the current global financial crisis the profile of investor protection was raised during the G20 gatherings of 20082010, where the scope of financial regulation was increased and supervision and cooperation strengthened. In the EU this resulted in a pro-

gramme of reforms of the financial sector with a fundamental objective of greater consumer and investor protection.

In Luxembourg the government, regulators and financial industry associations have been active participants in responding to initiatives to help restore investor confidence in financial services and products. The financial regulator CSSF has, for a number of years, required a “long-form report” – a detailed review by the external auditor of the UCITS’ policies, procedures and practices. With the advent of UCITS III the role of the conducting officer was introduced to provide boards with an additional layer of oversight in protecting fund investors’ interests. CSSF Circular 11/508 introduced the strengthening of rules under UCITS IV in respect of organisational requirements (a risk management function, complaints handling, etc), conflict of interests and rules of conduct (e.g., setting up procedures and policies to ensure inter alia acting in the best interests of UCITS investors).

ALFI has taken investor protection to heart. In addition to ensuring that the investor’s point of view is heard during fund industry conferences, two visible signs are the ALFI Code of Conduct and its acclaimed “Investor Centre”. The Code was created in 2009 with the purpose of providing boards of directors with a framework of high-level principles and best practice recommendations for the governance of Luxembourg investment funds, thereby ensuring a strong base to support protection of investors and their investments. The Investor Centre on the ALFI website recognises that education is also an important building block for investor protection and intends to serve as an easy-to-understand guide to the world of funds and investment, to explain how investment funds work, the different types of funds as well as the rules and safeguards that apply.

The only mandatory element of UCITS IV, the Key Investor Information Document, is intended to help assure investor protection. The KIID is a short document that aims to describe the fund in terms that investors should find straightforward and easy to grasp, to improve understanding among retail clients of how funds operate and what risks they entail, and to help investors more easily make comparisons between various UCITS. The future of the retail fund industry in Europe is UCITS V, a directive that is expected to focus entirely on investor protection: the depositary framework, remuneration of investment managers and an EU-wide framework for sanctions.

All of this reform and regulation does have a cost, however, given the multitude of regulations that are in the process of being introduced, the cost to implement them, and the cost of ongoing compliance. The KIID will cost more than one million euro to implement for some fund promoters and the fund industry is undoubtedly looking at higher compliance costs over the next five to ten years. That being said, the trend is clear and the financial services industry has been given its marching orders for its part in re-establishing investor trust and ensuring an increasingly high level of investor protection.

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

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40 speakers

Looking ahead

Rapidly evolving regulation: the challenge The investment management industry is facing a raft of regulatory proposals to restore investor confidence in financial services, and investment managers will need to understand the totality of the regulatory requirements and the strategic implications to stay ahead of the game.

Nathalie Dogniez and Michèle Eisenhuth (text), Ëlodie (illustration)

Following the financial crisis, the investment management industry in Europe is coming to grips with multiple wide-ranging regulatory reforms impacting both the manufacture and distribution of investment funds. These regulatory reforms present considerable challenges for the industry with investment managers left to make sense of the scope and operational implications of complex and sometimes overlapping regulations. Here is a brief overview of five.

UCITS IV

The UCITS IV implementation period came to an end on 1 July 2011 and the improved regulatory framework introduced by UCITS IV has in effect opened up new opportunities for UCITS structures. The fund industry has already taken up the European passport for management companies, notwithstanding the regulatory constraints and practical issues involved in applying specific national rules to the management company and to the fund.

The reinforcement of existing regulatory requirements imposed on management companies, such as organisational requirements and rules of conduct, has improved their business models and made operational structures even more efficient. It is clear that Luxembourg management companies have met the challenge despite generally delegating part of their functions to service providers and it is obvious that they will continue to re-think their current business models.

Distribution of UCITS in the EU has also been facilitated by the new notification procedure, notwithstanding the specific marketing requirements of each European country. However, some technical issues still need to be dealt with, such as the potential overlap of two concomitant registration procedures for the same fund.

However it is clear that Luxembourg funds are currently focusing on implementing the Key

Investor Information Document, facing the challenge of fitting all relevant information into two pages and ensuring effective delivery of the KIID to the end investors. Disparities in the EU regarding the implementation dates of the KIID may however raise practical issues for cross-border distribution of UCITS. UCITS V

Although UCITS IV has only recently been introduced into Luxembourg law, eyes are already turning to UCITS V, with its new rules, notably on remuneration policies and depositary bank liability.

The motto of this fifth installment in the UCITS series is clearly strengthening investor protection.

One of the main goals of UCITS V will be the tightening of the role and liability of depositary banks, i.e., the banks’ liability should not be affected if they have entrusted their safekeeping functions to a sub-custodian. The banks do not understand why they are to be considered liable to a degree comparable to insurance companies.

In this regard, pan-European regulator ESMA is currently preparing an exhaustive list of cases where the depositary bank’s liability could not contractually be engaged. Thus a compromise between the need to protect retail investors and the need to enhance and develop the UCITS industry needs to be achieved in order to maintain consistency with the AIFMD [see below], provided that the same features apply.

Furthermore, the European Commission suggests modifying the UCITS directive so that remuneration policies can be harmonised across the financial sector with a view to providing protection against excessive risks taken by individuals which could jeopardise financial stability. ALFI has welcomed the sets of principles insofar as the specificities of the asset management sector shall be taken into account.

AIFMD

The Alternative Investment Fund Managers Directive was adopted on 8 June 2011 and must be

implemented into domestic law by 22 July 2013.

International promoters and asset managers have already started to consider the upcoming opportunities for new fund launches. At the same time, an increasing number of off-shore funds are being transferred to Europe. While these funds could transfer to various jurisdictions in the EU, Luxembourg often comes out on top with its ability to combine structuring flexibility, investor protection and tax neutrality.

While it is quite impossible to replicate the terms and conditions of off-shore alternative investment funds in a French, German or English legal, regulatory and fiscal environment, Luxembourg’s investment fund product and service offerings come closest within the EU. The Luxembourg government recently adopted a bill amending the law of 13 February 2007 on specialised investment funds. This bill already reflects some of the policy directions taken by the directive. With the implementation countdown ticking ahead, promoters and asset managers quickly need to start to assess their business models on the basis of the new sets of organisational and operational requirements. Only in limited cases will AIFMD compliance be optional or elective.

PRIPs

In 2011 the European Commission stepped up efforts to bring forward the Packaged Retail Investment Products initiative that will impose stricter rules around how retail investment products are sold across the European Union. The objectives of PRIPs are to provide investors with a better understanding and improved comparability of products, and to create a level playing field across the different sectors making up the retail investment market.

In its preparatory documents the Commission proposed a wide definition of PRIPs which would capture all investment funds and structured products in any form, although the scope of the regime will be defined in the legislation. The reform is taking a two-pronged approach. First is the intro-

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41 speakers

Michèle Eisenhuth, Partner, Arendt & Medernach, and Nathalie Dogniez, Head of Investment Management, KPMG Luxembourg

duction of harmonized sales rules using the EU’s Markets in Financial Instruments Directive pro­ visions on conflicts of interest, inducements, appropriateness, suitability and disclosures as a benchmark for a PRIPs regime. Second is introducing a common set of pre-contractual disclosure rules.

The PRIPs initiative has received broad support from across the funds industry as there is a belief that UCITS have been subject to a harsher regulatory regime compared to other retail savings products. The Commission is currently in the process of fine-tuning legislative proposals that we expect will be published in the first quarter of 2012.

FATCA

In March 2010 the US government enacted the Foreign Account Tax Compliance Act which will

put in place an extensive new withholding and reporting regime impacting all non-US financial intermediaries investing directly or indirectly in the US economy. In order to combat tax evasion

by US persons, the US will require all Foreign Financial Institutions to make additional efforts to identify and report US taxpayers, at the risk of being imposed a punitive 30 percent withholding tax in the case of non-compliance. One of the most controversial elements of the new law lies in the fact that the regime virtually covers all business models which would not usually be classified as financial institutions, including investment funds and their distributors.

The revised FATCA deadlines outlined in Notice 2011-53 will become effective in 2014 and the timescale is tight. At present only a general frame­ work has been published and the guidance issued

addresses mainly banks as the legislation was written for the banking industry. Investment managers are eagerly awaiting detailed regulation on the practical implementation of FATCA, but the Internal Revenue Service and the US Treasury are releasing guidance on a piecemeal basis and a lot of uncertainty persists. Notices 2010-60 (27 August 2010) and 2011-34 (8 April 2011) are quite vague on the actual consequences of FATCA for funds as well as for their distributors, despite the fact that numerous associations representing the fund industry worldwide have provided comments and suggestions. Nevertheless, given its far-reaching reporting requirements it is crucial for investment managers to think through the strategic implications of FATCA as a matter of urgency and build a compliance model to become FATCA compliant.

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42 speakers

Sally Wong, CEO, Hong Kong Investment Funds Association

Hong Kong perspective

Positive cooperation Increased cooperation between Asian and European bodies will help the funds industry grow across markets.

Sally Wong (text), Ëlodie (illustration)

UCITS have been recognized as a brand of excellence for funds, with a robust framework for protecting investor interest. Whilst it sets up a single regulatory regime across the European Union for open-ended funds, we are glad that Asian as well as many non-European investors can enjoy the fruits of success as they are increasingly being distributed outside EU. Indeed, according to an EFAMA report in May, more than 40 percent of UCITS sales take place outside Europe nowadays, mainly in Asia and Latin America, but increasingly in the Middle East as well.

In Hong Kong, UCITS market penetration has been extremely successful. It accounts for the lion’s share of the market for authorized funds. In 1995, there were about 430 European funds authorized for sale in Hong Kong. Now, the number has reached about 1,500, accounting for almost 80 percent of the total number of authorized-funds in Hong Kong.

Three years after the global financial crisis, retail fund sales in Hong Kong have, by and large, been on the upward trajectory – despite some ups and downs – since 2008. Had it not been for the open and pragmatic regulatory framework which makes offshore funds distribution possible, Hong Kong investors probably would not have been able to access such a full range of products that spans across the whole risk spectrum. Luxembourg represents the most important fund origin centre, accounting for 60 percent of the total number of Hong Kong authorized-funds. Similarly, we see that they also account for an increasingly important share in other Asian markets.

In Hong Kong, the fund industry has been grappling with a whole raft of regulatory changes.

After the Lehman minibond saga, the Hong Kong Securities and Futures Commission undertook a major revamp of the regulatory framework by introducing a raft of new requirements to enhance the framework for retail investment products, including mutual funds.

The fund industry has worked very closely with the regulators and distributors to ensure that the new measures are implemented in a seamless manner. A key area is the Key Facts Statement, which is very similar to the KIID introduced under UCITS IV. In the best interest of investors, we believe that producing both documents would only add confusion to investors and undermine the objective of enhancing transparency. After detailed discussions with the authorities, we are glad to see that an optimal outcome is arrived at. With due consideration of the global distribution nature of UCITS, the European Commission clarified that the KIID requirement would not apply in non-EU countries, and regulators in non-EU countries can decide that a document reflecting the KIID has to be provided when funds are marketed in their territories, but the choice of format remains theirs. As Asia and other non-EU jurisdictions have become increasingly important for UCITS products, it is important for the European authorities to allow sufficient flexibility when they formulate new rules and policies on UCITS. We are keen to maintain close dialogues with our European counterparts to ensure that our needs and requirements are factored in during the deliberation process. We believe that only by so doing will UCITS continues to be vibrant and relevant to the non-EU markets.

China

Over recent years, fund managers have increasingly turned their focus to Asia, in particular China, in view of its huge growth potential. We believe that this trend will only continue to grow as the region’s high savings rates, the sovereign wealth assets and the increasing availability of institutional mandates provide a solid base for the growth of the asset management business in the region.

The first RMB-denominated fund was launched in August 2010. So far, there are about half a dozen authorized funds and they primarily invest in “dim sum” bonds. With the continuing development of the market and as the investable universe expands, we believe that a wide array of RMBdenominated funds will be offered to cater to the demand of investors.

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

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european alternative investment funds conference

private equity hedge funds

no plain vanilla! real estate funds Programme Highlights: Favourite future fund domiciles Impact investing and private equity: allies or antagonists?

The future of the real estate asset class

AIFMD: what will change – for PE, for Hedge Funds Delegation of portfolio management Buyers’ panel Private placement regimes

For details visit www.alfi.lu (events section) or contact events@alfi.lu

www.alfi.lu

centre de conférences kirchberg, luxembourg november 22nd & 23rd, 2011

44 speakers

Cross border distribution

Cross roads or a parting of the ways?

Limited standardisation or the first steps towards a level playing field.

Lou Kiesch (text), Ëlodie (illustration)

As the market has progressively geared up for and is now getting to terms with the new Simplified Notification Procedure introduced for UCITS under the UCITS IV Directive that came into force on 1 July, it is perhaps not an inopportune time to reflect on where this market has come from, and more importantly where it may be going in coming years.

For the industry is facing today an unprecedented level of debate, change and legislation, both at the technical level, the practical means by which funds are registered in other jurisdictions, and at the macro level as to the nature of the UCITS product itself.

With UCITS IV fresh on the statute books, market professionals are already wrestling with the implications of AIFMD, PRIPS, MiFID II, Dodd Frank and FATCA, to name but a few, without considering the overlap effect of other directives on investor compensation, corporate governance, etc., or the Market Abuse Directive and the already drafted UCITS V. Steven Maijoor, chair of trade group ESMA, noted recently that “according to the European Commission’s autumn 2010 Consumer Markets Scoreboard, the market for investments, pensions and securities is one of the three markets most likely to be failing consumers across the EU.” And within that focus, asset managers and fund products are in the spotlight.

The share of unitised funds of the overall pension market has diminished from approximately 16 to 13 percent, with investors drawn paradoxically to more opaque products offered through less transparent distribution channels.

Additionally there is a widely held view that the range of products made eligible for UCITS under UCITS III has created an environment that could damage the success of the product

itself. These concerns were voiced by Jean-Baptiste de Franssu, former chair of EFAMA, when he described complex UCITS as “a traffic accident waiting to happen”.

Certain regulators are actively considering differentiation between complex and non-complex UCITS. These reflections, although undoubtedly sincere in the desire to protect investors, have a certain national dimension, even protectionism as the paradigm becomes not only how to ensure the development of the product but to deliberately block foreign “imports”.

So has the industry come to a parting of the ways? Has investor confidence shrunk so far, have the boundaries of product been pushed so far, that the UCITS brand itself might be in question?

And how can regulation and innovation successfully co-exist in a domain where market innovation will always be ahead of regulation.

And this at a time when globally the world is facing one of its greatest ever financial challenges, that of how to sustain pensions and by implication growth in the light of an aging population in the developed world. For the “pension crisis” is of an order that suggests the banking crisis of 2008 is child’s play in comparison; expressed in net present value terms, the pension funding gap facing most of the developed world will take debt to GDP levels to the region of 300 percent. And it will only be through the use of every efficiency that the private sector can bring to the effective management of savings that the problem can begin to be tackled.

Because the challenges to be met will not go away with the Simplified Registration Process.

They are both fundamental and specific and on both counts go right to the heart of the question of distribution. On the one hand there is the contradiction between the drive towards a harmonised internal market and the barriers of national protectionism, and on the other the genuine debate around the appropriateness of the asset

categories now eligible within UCITS. But beyond UCITS there is also AIFMD, which will bring harmonisation to non-regulated products for the nonretail market, complete with a passport. And there are Packaged Retail Investment Products which are also aimed at bringing disclosure and transparency to other products, following on the model of the UCITS KIID (described recently by Mr de Maijoor as “the benchmark”).

2013 with its twin key deliverables of the AIFMD passport and potentially the first impacts of PRIPs will level the playing field between harmonised regulated products and other investment vehicles. Then cross border registration will have come of age.

It is possible to see emerging a comprehensive pallet of products. And the theme that runs through them is the need to channel saved investible income into the most appropriate vehicle for the investment requirements of the relevant stage in the savings life cycle.

This is no longer a parting of the ways, this is a true cross roads. It is the intersection of supply and demand on a scale that has rarely been seen before. The right distribution strategy can serve the needs of the very fabric of society, as well as the commercial ambitions of manufacturers of financial products.

With the Simplified Notification Procedure there is a tendency currently to assume that cross border registration can be codified, automated, streamlined, and what once required local lawyers and specialists can now be commoditised and expressed as so many euro per package.

But at a time when legislation has introduced a “simplified” procedure for cross border distribution, the requirements for successful distribution have become potentially so complex. For successful distribution strategies in the future will require greater understanding of local markets, which sectors of national economies are regulated by

paperjam | September-October 2011 | Special alfi Global Distribution Conference 2011

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45 speakers

Lou Kiesch, Regulatory Consulting Partner, Deloitte Luxembourg

which regulatory authority, and what are the tax and other implications of each case. For what was originally a search for return has become an obligation, and that will fit into whatever defined contribution system evolves to tackle the problem.

And the only way that these challenges may be met is that same intellectual capital and savoirfaire that built UCITS, but multiplied ten-fold.

To leave almost the last word to Mr. de Franssu, “financial products circulate freely across Europe, but in every market, they are going to be distributed in a different way.”

The challenge is to find the means to regulate intelligently without over-regulating, to allow the

development of innovation and not the propagation of abuse, to distribute best in breed and best practice but avoid systemic risk.

The creation of ESMA is to be applauded, as at last there is a regulator, other than a national regulator, that has genuine power. ESMA has the right to advise, to query, to caution, and even to ban and sanction products and practitioners too cavalier for the public good. With the right pragmatic but meaningful regulation, the growth in cross border distribution that has characterised the development of UCITS over 25 years, can be extended to other unitised products and play a meaningful role in the extension of the global economy.

And in this Luxembourg, as it was from the outset in UCITS, continues to show the way. The close co-operation between regulator and industry bodies such as ALFI has always allowed a maximum of pragmatism but within a prudent and controlled environment. The same precepts of intelligent but rigorous supervision, industry innovation, and a collective commitment to the pursuit of individual goals within a broader collective context can be expected to bring to UCITS IV and V, and to AIFMD a similar dynamism and leading role in shaping the future of world markets that has characterised Luxembourg’s commitment to the mutual fund industry.

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46 picture report – flashback 2010 Charles Muller (ALFI)

José-Benjamin Longrée (Caceis Bank Luxembourg)

Alexa Lam (Securities & Futures Commission, Hong Kong)

Campbell Fleming (Threadneedle Asset Management, London)

Michael Ferguson (Ernst & Young)

Jon Griffin ( JP Morgan Asset Management Europe)

Martyn Cuff (Allianz Global Investors Europe, Munich)

Claude Kremer (ALFI)

Patrick Zurstrassen (The Directors’ Office)

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47 picture report – flashback 2010

Theresa Hamacher (NICSA)

Alexander Bender (Diamos AG)

Luc Frieden (Minister of Finance)

2010

Flashback The previous ALFI/NICSA conference took place on 28 and 29 September 2010 in the Centre de Conférences in Luxembourg-Kirchberg.

Etienne Delorme (photos) More photos can be found at www.paperjam.lu

Lucien Thiel (Chamber of Deputies)

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48 picture report – flashback 2010

David Kubilus (State Street Bank Luxembourg)

Oded Weiss (Multifonds)

Geoffrey Cook (Brown Brothers Harriman)

Muhammad Hossen (RBC Dexia Investor Services)

Felipe Pecanha (BTG Pactual)

Stephen Haswell (MFS Investment Management)

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Inside September-October 2011 | Special alfi Global DiStribution conference 2011

on u ti o n ti tr ib D iS aS So c ia b al G lo c e in ifa al fi fe r en & h K c o n h n ic Sa w it

Personalities cited B

Cover Ëlodie This publication is a special supplement to the September-October 2011 edition of paperJam.

Bender Alexander Benner-Heinacher Jella Brausch Freddy Brunwasser Dimitri

C

6 20 20, 28 48

Chèvremont Marie-Jeanne Choi Christina Colle Patrick Cook Geoffrey Cound Joanna Cuff Martyn

22 20 18 20 22 46

D

www.paperjam.lu

de Franssu Jean-Baptiste 44 Dogniez Nathalie 18, 40

E

Eisenhuth Michèle Elvinger Jacques Elvinger André

Phone (+352) 29 66 18-1 Fax (+352) 29 66 19 E-mail publishing@maisonmoderne.lu Web www.maisonmoderne.lu Postal address P.O. Box 728, L-2017 Luxembourg Offices 10, rue des Gaulois, Luxembourg-Bonnevoie

Published by

Editorial staff

Ferguson Michael Fessey Noel Fischer Rafik Fleming Campbell Frieden Luc Fusenig Gerhard

18, 36, 46 18 6, 20, 32 46 3, 6, 47 22

Editorial director, editor in chief Jean-Michel Gaudron Coordination Aaron Grunwald Copy editors Cynthia Schreiber, Cathy Weber Illustrations Ëlodie

MM Editorial Design S.A.

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© MM Publishing S.A. (Luxembourg) All rights reserved. Any reproduction or t­ ranslation, in whole or in part, without prior written permission by the editor is strictly prohibited.

Her work has been exhibited in France and overseas including the gallery nucleus, LA and La Gallery, Montreal.

Her illustrations are always drawn by hand, then they are digitally enriched. But she makes sure that they keep one side “handmade” that is close to her ♥.

H

Hamacher Theresa Hamilius Jean Haswell Stephen Hertz Christian Hossen Muhammad

18 22 22 46 20

O

Ong Justin

P

Pecanha Felipe

Ruppert Todd 18, 24, 47 22 48 28 48

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Keiser Francine Kiesch Lou Knaf Jörg Krecké Jeannot Kremer Claude Kremer Dominik Kubilus David

20

48

18

R

18 22, 44 18 18 6, 18, 46 18 48

L

Lam Alexa 46 Lay Rob 22 Loehr Jean-Michel 22 Longrée José-Benjamin 20, 22, 46 Lopez Gerard 18, 26 Lueder Tilman 20

Maijoor Steven Miederhoff Markus Muller Charles

44 22 6, 46

S

Saluzzi Marc Schott Stevens Paul Seale Thomas

T

Taneja Shiv Thiel Lucien Thommes Camille

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6, 18, 22 18, 30 18, 34

20 47 6, 20

V

Vaughn Deutsch Catherine 18 Velling Frank 18 Voss Denise 20, 38

W

Weiss Oded Wong Sally

Z

Zhang Ben Zurstrassen Patrick

48 18, 20, 42

18 22, 46

Organisations cited A

ABBL 6 ALFI 3, 6, 18, 20, 22, 28,

30, 38, 40, 43, 46 Allianz Global Investors Europe, Munich 22, 46 Alter Domus 27 Arendt & Medernach 18 Atoz 31 Axa I.M Benelux 11

B

Bankinvest Blackrock London BNP Paribas Securities Services Brown Brothers Harriman Luxembourg BTG Pactual

18 22 18 20 48

C

Caceis Bank Luxembourg 46 Cerulli Associates London 20 Cetrel Securities 49 Chamber of Deputies 47 Citibank 20, 22 Credit Suisse Zurich 22 CSSF 38 CTG 39

D Ëlodie is a French illustrator based in Paris specializing in fashion illustration and portraiture. Illustrator for La Marelle, she designed a range of stationery and objects from her illustrations. She works as well for magazines such as french Cosmopolitan, So’Chic magazine, and Paulette magazine.

Garland Richard Gavell Stefan Gordon-Hart Sheenagh Griffin Jon Guill Jean Guillaume of Luxembourg Prince H.R.H.

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MM Publishing S.A. Director of publication Mike Koedinger

Layout and Graphic

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18, 40 22 22

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Deloitte 23, 44 Deloitte Luxembourg 22 Deutsche Protection Association (DSW) Düsseldorf 20 Diamos 47

E

EFA 9, 18, 34 Efama 6, 18, 42, 44 Elvinger Hoss & Prussen Luxembourg 22 Ernst & Young 2, 18 ESMA 6, 32, 34, 40, 44 European Commission Brussels 20 European Venture Capital Association 26

F

Facebook Finesti Franklin Templeton Investments Fuchs

G

Genii Capital

24 25 20, 38 21

26

Haitong International Investment Managers 18 Highbridge Capital Management 18 Hong Kong Investment Funds Association 3, 6, 18, 20, 42 Hong Kong Securities and Futures Commission 42

IG Market 35 Internal Revenue Service 40 Investec Asset Management 18 Investment Company Institute 18, 24, 30 IRS 24, 32

22, 46

L

Lehman Bros.

LinkedIn Linklaters

Natixis Global Associates 18 Nicsa 3, 6, 18, 24, 47

Pensions & Investments 30 PwC Luxembourg 6, 19, 20

R

RBC Dexia Investor Services, Luxembourg

22, 48

Schroder Investment Management (Luxembourg) 18 Securities and Exchange Commission 24 Securities and Futures Commission Hong Kong 20, 46 Services, Schroder 18 State Street Bank 18, 22, 48

T

T. Rowe Price International 18 The Directors’ Office 46 Threadneedle 18, 46

K

KBL European Private Bankers Luxembourg Kneip KPMG Kurt Salmon

N

S

I

JP Morgan

Mangrove Capital Partners 18, 26 MFS Investment Management 48 Multifonds 48

P

H

J

M

20, 32 13 18, 52 15

U

UBS Global Asset Management

22

6, 42 24 18, 28

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