Investment Funds Update: Europe - Issue 4, 2015

May 11, 2015

Dechert's investment funds update discusses the key legal and regulatory updates for the funds industry from the primary European asset management centres and fund domiciles.



Guide on Social Media Published by the AFG

The AFG (Association Française de Gestion), the association representing French management companies, published a guide setting out a framework for the use of social media by management companies. For instance, the guide provides that management companies should (i) implement specific measures such as an ongoing watch, (ii) hold training sessions for their staff and (iii) draft a good conduct guide.

Read the AFG’s “Guide on the use of the social media”.

Update of the AMF Doctrine on French Professional Specialized Funds

The AMF updated its Instruction n° 2012-06 specifying the rules to be followed (i) for the drafting of the prospectus of a French Professional Specialized Fund and (ii) for its declaration to the AMF. The update mainly grants more flexibility to managers in the drafting of such funds’ prospectus and provides additional information which must be communicated to investors.

Read the updated AMF Instruction n° 2012-06 (in French).

Fees Paid in France by Foreign Management Companies

The Decree n° 2015-421 dated 14 April 2015 provided the amount of fees due to the AMF by foreign management companies. Among others (i) a € 2,000 fee per fund or sub-fund shall be paid to the AMF for the registration in France of foreign AIFs; and (ii) a 0.008 per thousandth fee shall be levied on the net assets under management for French AIFs managed by foreign management companies. The rate of such fee will be raised to 0.01 per thousandth on 1 January 2016.

Read the Decree n° 2015-421 dated 14 April 2015 (in French). 

AFG Replies to ESMA’s Call for Evidence on Competition, Choice and Conflicts of Interest in the Credit Rating Industry

The AFG replied to the call for evidence on 27 March 2015, regarding the credit rating industry published by ESMA on February 3rd 2015. The answer pointed out the main concerns of French management companies which mainly concerned (i) requirements for due diligence and use of credit ratings, (ii) independence and quality of credit ratings, (iii) specific disclosure requirements for structured finance instruments and (iv) mandatory rotations and competition between credit rating agencies (CRAs). The AFG recommended for the ESMA not to implement the CRAs Regulation in a manner which would incur additional costs for the management companies.

Read the AFG’s answer to ESMA’s consultation paper.

AFG Replies to ESMA’s Discussion Paper on Share Classes of UCITS

The AFG replied on 27 March 2015 to the discussion paper on share classes of UCITS published by ESMA. In particular, the AFG recommended ESMA to provide management companies with a standardized definition of “investment strategy” as it would help to define the concept of classes of shares. Furthermore, the AFG recalls that curbing the share classes possibilities beyond reasonable boundaries would be detrimental to both the asset management industry and international investors. The answer can be found on the AFG’s website.

Read the AFG’s answer to ESMA’s discussion paper.

Settlement by a French Management Company with the AMF

The AMF published a settlement entered into with a French management company on 2 April 2015. The management company agreed to pay a € 40,000 fine for the infringement of its obligations to (i) ensure orders traceability, (ii) control UCITS’ investment ratios and (iii) set out ongoing and efficient procedures for compliance and internal control.

Read the AMF transaction n° 2015-04 (in French).



BaFin updates FAQ on marketing of funds according to the KAGB

The German Financial Supervisory Authority BaFin published an update to its FAQ on marketing of funds in accordance with the German Investment Code (Kapitalanlagegesetzbuch, “KAGB”) on 20 March 2015. The revised FAQ states, inter alia, that a financial intermediary acting as an asset manager or investment advisor (e.g., private wealth manager) that acquires units or shares in an investment fund on behalf of its clients, is placing these units or shares with its clients. If the ultimate client of the portfolio manager is a retail investor, this will be deemed marketing within the meaning of the KAGB and therefore the relevant marketing restrictions will apply.

Read the full FAQ (in German).

BaFin Updates its Circular on the Interpretation of the KAGB

The German Financial Supervisory Authority BaFin published an update to its circular on the interpretation of scope of the German Investment Code (Kapitalanlagegesetzbuch, “KAGB”) on 9 March 2015. The circular includes, among others, an update on whether German Cooperative Societies according to the Cooperative Societies Act (Genossenschafsgesetz, “GenG”) qualify as investment funds within the meaning of the KAGB. According to the BaFin, Cooperative Societies do not invest their capital in accordance with a defined investment strategy and do therefore not qualify as an investment fund within the meaning of the KAGB.

Read the updated circular (in German). 

German Federal Parliament passes Retail Investors Protection Act

The German Federal Parliament passed the Retail Investors Protection Act on 23 April 2015 which is designed to improve investor protection and the transparency of offerings on the unregulated market. The new legislation, which is subject to parliamentary approval, will, inter alia, expand the prospectus requirement for certain (unregulated) financial instruments, introduce marketing provisions for offerors and introduce a special regime for crowdfunding structures.

BaFin: “Wash Sales” Can Be Deemed Market Manipulation

The German Financial Supervisory Authority BaFin stated on 15 April 2015 that so-called “wash sales” - transactions where the investor sells a security to claim a capital loss only to repurchase it again for a lower value and “collusive transactions” where securities are sold and acquired according to an agreement between two parties, can be deemed prohibited market manipulation within the meaning of the German Securities Trading Act (Wertpapierhandelsgesetz, “WpHG”). These methods are often employed by investors to recognize a tax loss.

Read the full BaFin statement (in German).

Latest Investment Statistics for Germany

In April 2015, the German Investment Fund Association BVI issued its latest investment statistics report as of 28 February 2015, giving an overview of the net assets and net sales within the German investment fund and asset management markets. The statistics are broken down by asset class and provider. They provide information on net assets and net inflows of investment funds and assets outside investment funds.



Client Monies - New Legislation Adopted and Guidance Issued

The Central Bank of Ireland issued two sets of regulations on 30 March 2015 relating to investor monies held by third parties. These are the Client Asset Regulations and Investor Money Regulations respectively. It also published Guidance for Investment Firms and Guidance for Fund Service Providers to assist in interpreting these Regulations. 

Details are available at the following links:

ICAV Update

The Central Bank has now registered the first wave of ICAVs under the relevant new Irish legislation and Dechert has been actively involved.

Further information on the benefits of attributes of ICAVs, as well as the manner in which they can best be used to target specific categories of investor are included in our related OnPointTicking All the Right Boxes! ICAV Act 2015 Signed Into Law

New Companies Act

A new consolidated Companies Act was passed in Ireland in December 2014 and its commencement is due to occur on 1 June 2015. This will have a number of implications for corporate entities working in the funds environment and service providers in particular.

A copy of the consolidated Act is available here.

Latest Irish Fund Statistics

The latest statistics relating to the funds industry in Ireland are available here.



CSSF Circular 15/611

CSSF circular 15/611 relates to the management of risks related to the outsourcing of systems that allow the compilation, distribution and consultation of management board/strategic documents. The CSSF draws the attention of entities outsourcing these services to the fact that the management board/strategic documents may contain sensitive data, which are not and might never be released to the public, and reminds entities of their responsibility not to disclose any information that is considered confidential under Luxembourg Law.

Read CSSF Circular 15/611.

How the CSSF Ensures Efficient Time to Market - Podcast

Jean Guill, Director General of the Commission de Surveillance du Secteur Financier (CSSF), responds to ALFI questions regarding efficient time to market at the ALFI Spring conference 2015. 

CSSF Circular 15/610

CSSF Circular 15/610 relates to ad hoc data collection within the context of Directive 2014/59/EU, the “Banking Recovery and Resolution Directive” (the “Directive”). The collection of information from credit institutions and subsidiaries of Luxembourg credit institutions having their registered office in a third country aims to help prepare the CSSF for its role of resolution authority in the context of the Directive. The collected information will be used (i) for the preparation of resolution plans and (ii) to calculate the minimum requirements for own funds and eligible liabilities under the Directive.

Read CSSF Circular 15/610 (in French). 

New Law Aims to Improve Stability in the Luxembourg Financial System

The Law of 1 April 2015 establishes the Systematic Risk Board (Comité du risque systématique) and amends the law of 23 December 1998 concerning the monetary status and the Central Bank of Luxembourg, as amended. The mission of the Systematic Risk Board is to coordinate the implementation of a macro-prudential policy which aims to contribute to keeping the stability of the Luxembourg financial system by reinforcing its resilience and by reducing the accumulation of systematic risk, thereby ensuring lasting economic growth of the financial sector.

Read the full legislation (in French).  

ALFI Responds to ESMA's Discussion Paper on UCITS Share Classes

On 27 March 2015 ALFI submitted its response to the ESMA Discussion Paper on share classes of UCITS. Issues addressed in this paper relate to the definition of a share class, the different types of existing share classes in the various Member States of the EU and the possible approaches to developing a common understanding on the share classes that should be permitted.



Enforcement – FCA Fines £13.2 Million for Transaction Reporting Failures

MiFID II – FCA Issues Discussion Paper on MiFID II Implementation Measures

The FCA issued a discussion paper (DP15/3) on 26 March 2015, asking firms for their views on a range of MiFID II implementation measures, including on:

  • The revised inducements standards.
  • Receipt of commissions and other benefits by discretionary investment managers.
  • Disclosure of costs an charges.
  • Changes to complex and non-complex product designations for the purposes of the appropriateness test.
  • Professional client categorisation of local public authorities and municipalities. 

The FCA asked to receive comments by 26 May 2015.

Read the press release "FCA to ask firms for their views on MiFID II implementation". 

FATCA – HMRC Updates to Reporting Requirements

In advance of the 31 May 2015 reporting deadline for returns under Intergovernmental Agreement (IGA) between the UK and the US in relation to FATCA, HMRC has issued new guidance as to which UK entities fall within the reporting requirements. The US Internal Revenue Service has recently clarified that UK financial institutions will not have to submit a return if they do not have any accounts requiring disclosure, and no return will be required from them. However, UK financial institutions that are in a nil return position only because their existing reportable accounts fall below the de minimis threshold of US$50 or US$250,000, as applicable, will still be required to submit a nil return in they wish to elect to treat the accounts as non-reportable.

Under the new guidance, holding companies and treasury companies are no longer defined as financial institutions. They will now be classified as Non-Financial Foreign Entities, and either "active" or "passive", depending on the activities carried out. The HMRC will issue further guidance on this subject.

Read the guidance

Background: The Foreign Account Tax Compliance Act (FATCA) is a US law aimed at tax evasion by US tax residents using foreign accounts. It includes certain provisions on withholding taxes and requires financial institutions outside the US to pass information about their US customers to the US tax authorities, the Internal Revenue Service (IRS). Failure to meet these new reporting obligations would result in a 30% withholding tax on the financial institutions. The FATCA provisions impose new and substantial burdens on UK businesses in identifying US taxpayers, and registering and reporting information to the IRS. Significantly for UK institutions the Data Protection Act precludes UK businesses from passing the required information to the US.

Enforcement – FCA Fines £13.2 Million for Transaction Reporting Failures

The FCA fined Merrill Lynch International (MLI) £13.2 million on 22 April 2015 for incorrectly reporting 35,034,810 transactions and failing to report another 121,387 transactions between November 2007 and November 2014.

The fine was calculated on the basis of £1.50 per line of incorrect or non-reported data, rather than the £1.00 per line used in the three most recent FCA transaction reporting cases, because the FCA viewed the past fines as not high enough to achieve credible deterrence. The final level of the fine included a 30% reduction for settlement at an early stage of the investigation.

Read the press release "FCA fines Merrill Lynch International £13.2 million for transaction reporting failures". 

Enforcement - FCA Fines £126 Million for Custody Rule Failings

The FCA fined the London branch of the Bank of New York Mellon and Bank of New York Mellon International Ltd, collectively, £126 million on 14 April 2015 for failing to comply with the rules in the FCA’s Client Assets sourcebook (CASS).

The FCA found that, between November 2007 and August 2013, the banks failed to arrange adequate protection for safe custody assets by, amongst other things:

  • Failing to implement adequate organisational arrangements for safeguarding client assets.
  • Maintaining records and accounts on a global, rather than entity-specific level.
  • Failing to conduct external reconciliations between the banks' records and accounts and those of affiliate group companies appointed as sub-custodians.
  • Failing adequately to identify proprietary assets, resulting in commingling of bank and clients' assets, and using some client assets without consent to settle other clients’ trades.
  • Failing to implement (until 2011) CASS-specific governance arrangements.
  • Failing to provide (until March 2012) CASS-specific training to employees with operational or oversight responsibility for custody assets.
  • Having inadequate CASS resolution packs.

Read the press release "FCA fines The Bank of New York Mellon London branch and The Bank of New York Mellon International Limited £126 million for failure to comply with the Custody Rules".

Enforcement – FCA Fines Deutsche Bank £227 Million for LIBOR and EURIBOR Misconduct

The FCA fined Deutsche Bank AG £227 million on 23 April 2015 for misconduct in relation to LIBOR and EURIBOR in the period up to December 2010 and for failing to deal with the FCA in an open and cooperative way, by giving the FCA misleading information about its ability to provide a report commissioned by the German regulator BaFin.

In this matter, the FCA had worked closely with US regulators which issued the following additional fines concurrently with the FCA’s: $800 million by the US Commodities Futures Trading Commission, $775 million by the US Department of Justice and $600 million by the New York Department of Financial Services.

Read the press release "Deutsche Bank fined £227 million by Financial Conduct Authority for LIBOR and EURIBOR failings and for misleading the regulator".



Capital Markets Union

European Commission published a speech by EU Commissioner Jonathan Hill on 17 April 2015, in which he highlighted the benefits of the proposed CMU.

Points of interest from the event include:

A more detailed action plan and timetable for the CMU will be published by the Commission in summer 2015.The Commission is "pushing forward" to make quick progress on early projects, specifically securitisation and revising the prospectus rules.Support in the European Parliament for the CMU has been positive.

Read the full speech.  


ESMA updated its Q&A on EMIR on 27 April 2015, with new answers regarding the technicalities of reporting transactions in derivatives to trade repositories.

Read the revised Q&A. 


ESMA issued a consultation paper (“CP”) on 23 April 2015, on draft guidelines specifying criteria for the assessment of knowledge and competence of persons in investment firms that provide investment advice or information about financial instruments, investment services or ancillary services to clients.

The consultation paper proposes that such criteria should be met by attaining an “appropriate qualification” and “appropriate experience” and sets out the areas of knowledge and competence that persons need to be assessed against.

Read the full consultation paper. 

Money Market Funds

The European Parliament (EP) agreed its position on Money Market Fund Regulation (MMFR) on 29 April 2015 following the plenary vote. A key change here is the removal of the proposed capital buffer from the MMFR.

Read: Report on the proposal for a regulation of the European Parliament and of the Council on Money Market Funds


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