You are on page 1of 60

FINANCIAL SERVICES

Evolving Investment Management Regulation
A clear path ahead? June 2012 kpmg.com

Lead Editors

Charles Muller Partner, Financial Services Regulatory Center of Excellence, EMA region KPMG in Luxembourg

James Suglia Head of KPMG’s Investment Management Sector, Global Advisory

Bonn Liu Head of Investment Management, KPMG’s ASPAC region

Financial Services Regulatory Centers of Excellence
Giles Williams Partner, Financial Services Regulatory Center of Excellence, EMA region KPMG in the UK T: +44 20 7311 5354 E: giles.williams@kpmg.co.uk Jim Low Partner, Financial Services Regulatory Center of Excellence, Americas region KPMG in the US T: +1 21 2872 3205 E: jhlow@kpmg.com Simon Topping Principal, Financial Services Regulatory Center of Excellence, ASPAC region KPMG in China T: +852 2826 7283 E: simon.topping@kpmg.com

About this report This report was developed by KPMG’s network of regulatory experts. The insights are based on discussion with our firms’ clients, our professionals’ assessment of key regulatory developments and through our links with policy bodies. We would like to thank all members of the editorial and project teams who have helped develop this report.

Editorial and project teams
Weronika Anasz KPMG in China Aggie Anthimidou KPMG in the UK Tom Brown KPMG in the UK Rachael Kinsella KPMG in the UK Jonathan Lee KPMG in China Meghan Meehan KPMG in the US Zoë Pope KPMG in Canada Heleen Rietdijk KPMG in the UK Dee Ruddy KPMG in Luxembourg Cara Scarpino KPMG in the US John Schneider KPMG in the US Brittany Spriggs KPMG in the US Mireille Voysest KPMG in the UK

© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Contents
Foreword Executive Summary 01 Global overview Global Perspectives: Investment Management faces a regulatory avalanche Perspectives: EMA – Cross-border challenges and opportunities Perspectives: ASPAC – A diverse region with multiple challenges Perspectives: Americas – A time for change 02 Retail products and distribution – Increased transparency and customer protection EMA – Investor protection comes to the fore ASPAC – The fast pace of change US – A seismic shift 03 Alternative Investments Global hedge funds – Adapting to change A view from Offshore 04 Institutional perspectives EMA – Evolving operations and strategy US – The calm after the storm? ASPAC – Loosening the reins? 05 Governance and responsibility – More than just compliance... EMA – Compliance also creates opportunities ASPAC – Aligning international standards US – New rulings and regulations 2 4 06 Capital Markets – The impacts of market structure changes EMA – Market transparency and integrity US – Restoring investor confidence ASPAC – Growth without systemic risk 07 Tax goes global – Risk management has to follow... EMA Challenges – FATCA, Financial Transaction Tax and more… ASPAC Challenges – Cross-border issues US Challenges – A unique situation 08 Pensions – Increased disclosure and reporting requirements EMA – More than just solvency requirements... ASPAC – Population growth and structural change US – Issues and opportunities 09 List of Abbreviations 10 Acknowledgements

35 37 39

6 9 11

41 44 45

14 17 19 21 24

47 51 53 55 56

25 28 30

31 33 34

© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

with the regulatory agenda focused firmly on the potential lack of capital. So this raises the question: why do surveys and other commentary from the investment management industry show that regulatory pressures. KPMG International provides no client services. like the financial sector as a whole. challenges and costs are the most significant issues currently facing the industry? Wm. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International is a Swiss cooperative. KPMG’s Financial Services Practice In response to economic and regulatory change. . the need for more robust liquidity coverage.Foreword A new regulatory order? Jeremy Anderson Global Chairman. All rights reserved. the structural and systemic issues being addressed under the ‘too big to fail’ agenda and the continuing debate on remuneration. The investment management industry also has issues. is evolving and re-shaping. Postcrisis. David Seymour Global Head of KPMG’s Investment Management Practice © 2012 KPMG International. the investment management industry. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. but the policy response to the crisis remains focused on banks. nor does KPMG International have any such authority to obligate or bind any member firm. the banking industry has been at the forefront of the policy debates. the opaqueness of the derivatives market.

but they will come with costs – and there is still the question of what the end user will bear or be prepared to pay. the challenges that we believe will emerge along the way. KPMG International provides no client services. nor does KPMG International have any such authority to obligate or bind any member firm. considerable amounts of client assets and funds are held and managed by the industry. In addition to economic and systemic pressures. as to how we believe these key themes are being addressed. The proposed structural changes – notably the Volcker provisions in the US Dodd-Frank Act. The investment management industry cannot be viewed in isolation and would certainly feel the impact of any major banking default. There has been a lot of talk about the role the industry plays in ‘shadow banking’ – either through stock lending. Member firms of the KPMG network of independent firms are affiliated with KPMG International. which are either being implemented. the revised Markets in Financial Instruments Directive (MiFID 2). For the investment management industry. Sometimes the day-to-day challenges from individual supervisors within the regulatory bodies across the different jurisdictions create so much work and incur so much cost. some will disagree with our point of view or perceptions. it is easy to forget that the G20 agenda is still the driving force to fundamentally fix the problem. it becomes clear why the pressure from the regulators is so significant. In the melee of the current regulatory reform initiatives across the globe. All rights reserved. rather than address the symptoms – and importantly. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. but in future and strategic planning. Equally. that the original intention of the G20 communiqués is overlooked and forgotten. not only for the day-to-day operations of the business. the investment management industry has its own set of challenges. The investment management industry cannot be viewed in isolation and would certainly feel the impact of any major banking default. Certain legislation is costing substantial amounts of money to implement where there is little direct value creation – the most notable example is the Foreign Account Tax Compliance Act (FATCA). KPMG International is a Swiss cooperative. there is still a public commitment to meeting the G20 requirements within the agreed timelines. this means putting the regulatory change in the context of the G20.Evolving Investment Management Regulation | June 2012 | 3 What are the regulatory challenges for the investment management industry? This conundrum is solved by looking back at the G20 communiqués. the repurchase agreement (repo) market or through money market funds. At the macro-level. There are also the wider investment protection measures. including: • Financial stability • Addressing the inter-connectivity of the financial system • Assessing the policy response to shadow banking • Delivering a fair outcome for consumers. as opposed to looking at the structural failings that have been welldocumented post-financial crisis. Inevitably. It is clear that the industry is an important component of the overall system – after all. these assets are often held by the banks and used to provide liquidity to the market. and European Market Infrastructure Regulation (EMIR) in Europe – may well impact investment returns. Lastly – and in many respects most importantly – the key challenge is now how to deal with this regulation on a practical level. The key challenge is to maintain perspective around the macro-issues and not to be overwhelmed by the day-to-day supervisory approach. but the policymakers are now addressing the issues and we think it is important that the industry is clear about the long-term implications of such change. proposed or are due in the major centers of the world. thoughtful and appropriate manner. Customers are the lifeblood of the investment management industry – and there is recognition that some players have not dealt with their clients’ assets in a balanced. This publication sets out perspectives from our experts across KPMG’s global network of firms. These are designed to improve investor protection and reduce global systemic risk. and what all of this may mean for the industry. There are common themes running through the communiqués from Seoul and Nice. Other regulations are likely to affect the costs of executing transactions for clients. It is important for investment managers to keep this in mind. . © 2012 KPMG International.

but the path to implementation is still fraught with unanswered questions.. Dodd-Frank does not just affect firms in the US. . Countries outside the EU (such as Switzerland or the Channel Islands) will therefore have to decide whether to reform their own rules. In addition. face new regulations based on either existing EU or older local rules. Global emphasis is being placed on increasing market infrastructure and transparency – as well as registration and reporting requirements – to better assess global financial stability. KPMG International provides no client services. A number of countries within the region. From an EMA perspective. Markets in Financial Instruments Directive (MIFID 2) and Alternative Investment Fund Managers Directive (AIFMD).. new regulation consists of updated existing legislation and new directives and regulations. for example Treating Customers Fairly (TCF) – based on the UK regulatory structure already in place – and revisions to the Pension Funds Act (Regulation 28). such as South Africa. while consulting on any further measures. Remuneration controls are being called into question and increased sanctions considered. regional and national regulatory change 2. The current focus is firmly on financial stability. Consumer conduct – to increase investor protection and industry trust 4.. Extra-territorial effects will be felt in response to a number of regulations from multiple regulatory centers. these issues have led to key regulations such as the European Market Infrastructure Regulation (EMIR).. is a key component. The vast. governments are looking to maximize tax revenue – and the industry finds itself a less than enthusiastic agent in this process. All rights reserved. Global regulators continue to develop regulatory policy and implementing strategies to meet the existing G20 commitments. to Europe and ASPAC. Member firms of the KPMG network of independent firms are affiliated with KPMG International. South Africa is another good example. Additional risk management requirements But with this raft of change. Territories such as Canada are likely to feel the effects not just of Dodd-Frank. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Work is underway to improve the transparency of and information on retail products. with its own series of national and global regulations. From an Americas perspective. the diversity of the region and its rulemaking © 2012 KPMG International. The EU AIFMD reforms that mean non-EU based asset managers will only be allowed to market products in the EU that broadly comply with EU rules. At the same time. which will affect capital markets and the financial sector as a whole. KPMG International is a Swiss cooperative. but key European legislation such as AIFMD.Executive Summary Investment managers face a challenging new regulatory landscape. In Europe. nor does KPMG International have any such authority to obligate or bind any member firm. Cross-border implications of global. most issues have been packed into a single piece of law – the Wall Street Reform and Consumer Protection Act (Dodd-Frank). investor protection and transparency of products and markets. fast-paced regulatory reform agenda on a national and global level – and subsequent responses from industry participants – will decide the future shape and success of the sector. non-US countries in the Americas also have stringent local regulatory standards with which to comply. Capital markets reform. Impacts of this all-encompassing regulation will reach far beyond the US – throughout the Americas and beyond. Increased reporting and accountability – to improve transparency 3. From an ASPAC perspective. The direction of travel – towards implementation of regulatory proposals – is clear. opportunities should follow. in particular derivatives trading. Key industry challenges 1.

compliance and clarity – means firms are reviewing and refining business models and operating structures. create challenges for pan-regional market participants. KPMG International provides no client services. Investor information and protection Globally. Key developments include diversification of investment business across geographies and exploration niche specialisms. the AIFMD will require additional capital. India and Taiwan. a large body believes that the systemic risk reporting in the US will lead to greater (full) transparency for institutional investors. Member firms of the KPMG network of independent firms are affiliated with KPMG International. both for their business and the industry as a whole. The US institutional marketplace is likely to see diversification and consolidation. In Europe and beyond. In Europe. nor does KPMG International have any such authority to obligate or bind any member firm. FATCA). aiming to attract greater numbers of external funds and reduce market volatility. that were initially blamed for the crisis. the Future of Financial Advice (FOFA) in Australia. through new institutional capital and the continuous evolution of infrastructure and operational processes. With the growing marketplace and changing demographics in China. To stay on top of the full regulatory change agenda. Especially in Europe. For example. attention is also focused on institutional investors and certain products. with a focus on additional taxation of non-resident investors and companies. New developments from the Commodity Futures Trading Commission (CFTC) are imminent. with requirements being set globally to improve transparency and consumer protection. Insider trading remains a cloud over the sector – likely to lead to even further reporting and risk controls. firms must ensure that their business models and compliance functions take into consideration the full suite of regulatory requirements and the associated strategic implications. investor protection initiatives are rolling out in Hong Kong. will not bring down the financial system. such as hedge funds. Additional capital is also an important part of the puzzle – and will affect managers’ returns. which has potential implications for all global firms. Europe will see a revision of the Savings Directive and new exchange of information clauses in a wide range of bilateral double-tax treaties. although large. and increased reporting and transparency requirements – with important third-country implications. The global hedge fund industry is becoming increasingly institutionalized. Offshore firms have their own specific set of challenges. The volume. The focus of regulation in this area – improved due diligence. institutional regulatory focus remains on exchange-traded funds (ETFs). with increased scrutiny of hedge funds and alternative investment vehicles. this has led to measures that critics say go far beyond the amount of protection institutional investors actually need. Firms must adapt to survive and thrive in this reshaped industry. Singapore. changes to delegation requirements. There is a broad focus on investor protection. Tax has been particularly prominent where authorities are facing unprecedented deficits.Evolving Investment Management Regulation | June 2012 | 5 The global focus on market transparency and stability pervades the regulatory agenda. Regulation from Europe (eg. In the Americas. Dodd-Frank. Population growth and emerging demographic trends continue to re-shape pensions markets. It will be interesting to see if the ‘Living Wills’ debate extends into the investment management sector. additional taxation of the financial sector is being debated – for example. In ASPAC. Pensions are also under increased scrutiny. increasing reporting and regulatory responsibilities. The US Dodd-Frank Act also brings a more rigorous and wide-ranging approach to conduct rules. Australia. Governance. © 2012 KPMG International. Numerous cross-border challenges Investment managers today face multiple challenges and regulatory reforms across jurisdictions – in addition to further demands from both local and international regulators. . alongside demographic change and rapid growth. processes. At the same time. Financial Stability The global focus on market transparency and stability pervades the regulatory agenda. From a manager’s or institutional perspective. KPMG International is a Swiss cooperative. with harsh sanctions foreseen in UCITS 5 and Packaged Retail Investment Products (PRIPS). In Europe and ASPAC. the requirement in AIFMD of a depositary with liability for all funds is the subject of heated debate. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. remuneration and taxes ‘The financial sector should pay for the crisis it created’ seems to be part of the thinking of politicians and regulators. with reviews of existing regimes already underway. Additional capital is also an important part of this overall puzzle – which will in turn have an impact on managers’ returns. rules on asset manager remuneration have been introduced in AIFMD and Undertaking for Collective Investments in Transferable Securities (UCITS). a number of regulations will change the landscape. they are working to widen asset classes. arguing that the investment management industry. The avoidance of tax fraud has led to the ominous FATCA regulation in the US. Alternative investments are under the spotlight in light of financial stability and market transparency. variety and complexity of tax regimes throughout Asia-Pacific continues to prove challenging for firms across the region. will have notable implications for offshore centers. improved transparency and ‘best practice’. These include the Financial Advisory Industry Review (FAIR) in Singapore. All rights reserved. But experience shows that ‘just saying no’ is not enough for regulators – they want evidence to support the industry’s view. Many may think this unnecessary. not just those based in the US. and additional disclosure requirements in Japan. It will be interesting to view which of the jurisdictions impose their own legislation globally. AIFMD) and America (eg. improved risk and portfolio management. the proposed Financial Transaction Tax (FTT) is a controversial political issue throughout Europe and South Africa faces additional national tax challenges in the guise of a new Dividends Tax (DT).

nor does KPMG International have any such authority to obligate or bind any member firm. Middle East and Africa (EMA) Cross-border challenges and opportunities The volume and complexity of the regulatory change being implemented means the coming years will see an untraveled road ahead for the investment management industry. In addition. consumer confidence in the financial services sector remains low and the sustainability of the market has been called into question. KPMG International is a Swiss cooperative. If there are generally only two certainties in life for most. EMA region KPMG in Luxembourg © 2012 KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. taxes and additional regulation. Over 20 international regulatory proposals will affect this industry at the crossroads between banking and insurance – either directly or indirectly. Member firms of the KPMG network of independent firms are affiliated with KPMG International. .01 Global Perspectives – Investment Management faces a regulatory avalanche Perspectives: Europe. Charles Muller Partner. for investment managers there are now three: death. KPMG International provides no client services. Financial Services Regulatory Center of Excellence. The key drivers behind the agenda are the commitments made at the G20. All rights reserved.

Financial risk and regulation: do we need more Europe or less? May 2012 © 2012 KPMG International. collectively employing approximately 80. While Luxembourg and Ireland are the main domiciles for regulated investment funds. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. the wave of reforms comes at a time when big questions are being raised over the UK’s position within the EU. Member firms of the KPMG network of independent firms are affiliated with KPMG International. but also in Germany. which will have implications for investment managers. May 2011 2. Market infrastructure is also undergoing a wave of legislative changes. Consequently. France and Switzerland. Other regulatory trends in the investment management industry EU authorities have shifted their focus towards enhancing investor protection measures. nor does KPMG International have any such authority to obligate or bind any member firm.1). ‘shadow banking’ has been designated as a main priority for the European Commission in 2012. Indeed. They offer investors vehicles through which to diversify risk in a cost-efficient way. All rights reserved. but establishing an appropriate framework in which firms can operate is vital to the sector’s survival – and should be in its interests. Where does investment management sit within the financial services sector? Asset managers play a key role in the functioning of the economy. the financial crisis and the subsequent fall out exposed weaknesses in the existing regulatory framework as well as missing harmonized rules for other types of funds. This review is likely to lead to fundamental new rules for constant Net Asset Value (NAV) money market funds and more restrictions on securities lending by funds. The links between investment management and financial stability are also under close scrutiny by authorities. Regulation may not be popular. With this in mind. ‘shadow banking’ has been designated as a main priority for the European Commission in 2012.100 asset management companies registered in Europe. Speech by Adair Turner. The links between investment management and financial stability are also under close scrutiny by authorities. there are more than 3. European Fund and Asset Management Association (EFAMA) Asset Management in Europe Facts & Figures.000 individuals (without taking into account other related services such as accounting. including improved sales practices – through the review of MiFID 2 – and new harmonized product disclosures in a document similar to a Key Investor Information Document (KIID) for packaged retail investments products in the upcoming PRIPs initiative. These new regulatory initiatives triggered by the 2008 crisis are now beginning to reshape the investment management industry – players should have a thorough understanding of this rapidly evolving environment for optimal business decision-making in the years to come. It is important to start planning now for these new operating models. custodianship. Overall. FSA Chairman. . to ensure that the final provisions do not place unnecessary burdens on their business. KPMG International is a Swiss cooperative. in particular EMIR and MiFID 2. 1. marketing. The use of a veto to protect the UK’s financial services industry has potentially led to a view that the UK is becoming increasingly isolated in Europe and finds it hard to influence the agenda. research. order processing and distribution – some of which take place outside Europe. through large-scale operations. The industry should engage closely over the coming months as crucial policy areas evolve. the UK Financial Services Authority (FSA) is itself asking whether we need ‘more or less Europe’2. auditing. They also provide an essential link between those investors and the borrowers who need funds to finance their activities and developments. asset management itself takes place in big European financial centers – especially in the UK.Evolving Investment Management Regulation | June 2012 | 7 While European regulation for mutual funds UCITS has just celebrated its 25th anniversary. With this in mind. While it is reasonable to assume that the size and scale of the UK sector would mean it holds significant influence over the European regulatory agenda. KPMG International provides no client services. the ability and/or willingness of the UK to negotiate the wider EU regulatory reforms in a persuasive manner will be an area to watch with interest during the course of 2012.

The AIFMD will undoubtedly have substantial effects on third countries wishing to distribute their funds into Europe or wishing to provide services to European alternative investment fund managers. there is no doubt that. KPMG International is a Swiss cooperative. The harmonization of requirements should enable some firms to rethink their business models to take advantage of cost efficiencies through centralized operations. However. particularly the AIFMD. In addition. in reality. All rights reserved.8 | Evolving Investment Management Regulation | June 2012 Key Regulatory Developments UCITS: Cross-border implications and extraterritorial effects The implementation of UCITS 4 introduced a management company passport for investment managers in the EU. for example the Channel Islands. for those it removes. As a result. While generally thought of as a hedge fund and private equity based Directive. In the current draft. are expected to have a dual regime for institutional/ alternative investments going forward – one fully AIFMD compliant as a qualifying third country and a second non-AIFMD regime for those funds that use private placement or are for non-EU investors. UCITS funds are today distributed throughout the world. © 2012 KPMG International. all nonUCITS funds are in scope. . These also relate to other efficiency measures included in UCITS 4. While its impact is not yet fully clear – largely due to the focus on the production of the required KIID – there is already evidence of consolidation of existing practices to take advantage of cost efficiencies in economies of scale. it also puts others in place. Switzerland. Extraterritorial opportunities and challenges – key regional developments The AIFMD will undoubtedly have substantial effects on third countries wishing to distribute their funds into Europe or wishing to provide services to European alternative investment fund managers. even without these new efficiency gains. from Asia to Latin America. For example. the third country provisions and the requirements for non-EU firms to meet ‘equivalent’ standards may mean that some existing markets are left out in the cold. namely the possibility for cross-border fund mergers and master-feeder structures. Implications for offshore centers Offshore financial centers. Member firms of the KPMG network of independent firms are affiliated with KPMG International. it is for ESMA to decide whether a third country fund meets the equivalence provisions or not. there is a risk that the ‘equivalence’ test becomes another regulatory hostage to political fortune. This should thus create the preconditions necessary to enable asset managers who now require appropriate prudential supervision under the AIFMD to apply for approval of this kind in Switzerland for the first time. It is therefore vital that investment managers remain engaged in the debate so that the future landscape is one in which they are able to successfully operate. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Barriers The reporting and liquidity requirements are likely to mean that some managers may no longer be able to operate costeffectively due to the regulatory cost – which may result in a reduction of ‘boutique’ style firms. UCITS is today recognized as a success story for Europe and beyond. the Directive requires asset managers for collective investment products classed as ‘Alternative Investments’ in the EU to be supervised. As a result. is currently altering its regulation in order to be compliant with EU requirements. In addition. nor does KPMG International have any such authority to obligate or bind any member firm. Opportunities The AIFMD does present some opportunities. and these growing emerging markets continue to offer significant distribution opportunities for UCITS. As a result. The partial revision of the Swiss Collective Investment Schemes Act (CISA) is mainly geared toward harmonizing the applicable provisions of Swiss law with international standards. from the Middle East to South Africa. this should safeguard access for Swiss financial services providers and their products to the European markets. The impact of the Directive on fund managers will largely be dictated by the subordinate measures (implementing measures and technical standards) yet to come. While the Directive seeks to remove some of the barriers to a single EU market for investment products. for example. Alternative Funds: the controversy The AIFMD is possibly the most controversial of the European regulatory measures. KPMG International provides no client services. The lack of a harmonized tax framework around these topics constitutes a major hindrance. New markets are likely to open up in which to offer products and services to professional investors across the EU. the requirements on depositaries are likely to be increased and the conditions on distribution to qualified investors and public investors are to be strengthened.

disclosure and investor protection suggest that these hurdles are unlikely to decline in the short term. All rights reserved. While there is a general consistency around enhanced consumer protection and fair dealing. KPMG’s ASPAC region An Asian Regional Funds Passport is a vehicle whereby countries within the region would recognize one another’s securities laws. the lack of a single coherent framework and increasing focus on enforcement only serve to heighten this challenge. with benefits to the economies. regulatory and taxation requirements across Asia continue to generate a number of challenges for the investment management industry. In the meeting. with an expectation of further development of this work and the possibility of the establishment of a ‘pilot ARFP’ in the future. Member firms of the KPMG network of independent firms are affiliated with KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. KPMG International is a Swiss cooperative. . © 2012 KPMG International. Bonn Liu Head of Investment Management. These vary from the differing languages and cultures. Such complex challenges are likely to continue to test the implementation of a truly region-wide scheme. disclosure and investor protection suggests that these hurdles are unlikely to decline in the short term. significant challenges in establishing such a model in the region exist. These conditions create sizeable barriers to panregional market participants. political and economic diversity – make the development of this muchdiscussed mechanism a difficult challenge. Driven by the differing priorities of regulators in the region and the existing level of sophistication in their local markets. fresh momentum has gathered behind the hotly debated Asian Regional Funds Passport (ARFP) since the November 2011 Asia-Pacific Economic Cooperation (APEC) Finance Ministerial Meeting. to the possible desire of greater protectionism of the domestic industry through the maintenance of barriers to entry. However. product design and administration costs need to be incorporated into their business models. the potential to access the substantial savings pools in the region and allow for greater economies of scale point to improved efficiency and cost reduction. an ARFP would make possible the distribution across national borders of funds created. exploration into such a mechanism was noted ‘in order to develop a sound funds industry and better integrate financial markets with due regard to investor protection’. as incremental compliance. investment management industry and consumers. While UCITS framework can be drawn upon as a starting point. KPMG International provides no client services. Not least. Furthermore. The speed of evolution in the requirements around product distribution. distributed and administered within the region. given the increasing presence of UCITS compliant funds across Asia.Evolving Investment Management Regulation | June 2012 | 9 Perspectives: Asia-Pacific (ASPAC) A diverse region with multiple challenges The diverse legislative. The speed of evolution in the requirements around product distribution. Conceptually similar to UCITS in the European Union. through the level of industry and regulatory sophistication and maturity. An Asian Regional Funds Passport? Given these commonly understood challenges. there remains a wide variety of specific regulatory requirements. local resistance might be anticipated where differences in regulatory and taxation regimes in different jurisdictions distort competition. nor does KPMG International have any such authority to obligate or bind any member firm. the lack of a regional rulemaking body or common currency in the region – and the geographical. Proponents of such a passport highlight the opportunities it would provide to facilitate greater cross-border investment within the region.

In Hong Kong. All rights reserved.3 billion (GBP 1. Japan.10 | Evolving Investment Management Regulation | June 2012 Common ground Irrespective of the future success of an ARFP initiative. (AIJ). the Japanese financial regulators suspended AIJ Investment Advisors Co. it is understood that the Japanese Financial Services Agency (FSA) is considering a wide range of future regulatory options with clarifications anticipated during the course of the year. KPMG International is a Swiss cooperative. 2012. Subsequent reporting by the welfare ministry said that as many as 52 of the 84 pension funds which AIJ was managing were running deficits or will do so soon if AIJ could not return the missing money. Member firms of the KPMG network of independent firms are affiliated with KPMG International. The continued rapid pace of regulatory developments demonstrates that an enhanced regulatory threshold is here to stay for the region’s investment management industry. prospectus disclosures. a Tokyo-based asset manager. In response to the AIJ scandal. In Singapore. The outcome from these considerations has the potential to affect a large proportion of industry participants in the region. The AIJ Scandal On February 24. Australia and Singapore. Efforts to address the lack of transparency in the over the counter (OTC) derivatives market have also gathered pace in a number of the most sophisticated capital markets in region. the Financial Advisory Industry Review (FAIR) represents a comprehensive review of the financial advisory industry in this market. The anticipated growth rates and demographic trends in a number of markets continue to attract the attention of investors and fund management organizations. Increasing numbers of industry participants are now focusing on the region as a key component of their future growth strategy. KPMG International provides no client services. there is notable commonality in the driving forces behind a significant number of reviews of the financial services industries in Asia. efforts to align with the requirements of the G20 communiqué on September 29. Korea. custody rules and pension fund governance. . At the time of writing.4 billion). mitigate systemic risk. fair dealing and ‘Know Your Customer’ (KYC) standards in a number of jurisdictions indicates an increasing awareness of regional ‘best practice’ and the need to closely follow the regulations emanating from Europe and the United States. In retail distribution. Increasing numbers of industry participants are now focusing on the region as a key component of their future growth strategy. and protect against market abuse. © 2012 KPMG International. for one month after reports it could not explain the whereabouts of up to YEN 185. The FSA is also expected to reform some regulations including Financial Instruments and Exchange Law (FIEL) in due course. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. the Japanese FSA required additional reporting from industry participants. which remains an attractive regional hub for a number of investment management companies. nor does KPMG International have any such authority to obligate or bind any member firm. The impact of the AIJ scandal in Japan has placed uncertainty over the future regulatory landscape for investment management business. 2009 are apparent in order to improve transparency in the derivatives markets. the desire to enhance consumer protection. Participants who accept this reality and assess their operating models accordingly will be the best placed to take advantage of the region’s full potential.

There will most certainly be plenty of opportunity for growth.. In the past. John Schneider US Head of Investment Management Regulatory Practice. Many factors are driving change: the outrage of individual investors is an important element. Member firms of the KPMG network of independent firms are affiliated with KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. KPMG in the US Retail challenges Retail distribution also faces a challenging road ahead. Those days are gone. nor does KPMG International have any such authority to obligate or bind any member firm. KPMG International is a Swiss cooperative. The underlying message from regulators is likely to remain – “Not on my watch. Recently. Change and challenge. money market funds and new instruments. Change and challenge will not be long in coming. From now on.” Firms may therefore expect more rigorous reviews from government agencies. Disoriented by so many changes. New regulations will create or significantly expand requirements for registration. clients and shareholders. KPMG International provides no client services. no regulator wants to preside over a period of financial tumult similar to what occurred in 2008. the Securities and Exchange Commission’s (SEC) National Examination Program will schedule the frequency and intensity of its examinations based on the perceived level of risk that a firm’s business activities pose to its investors. With change and challenge.. but also the influence of institutional investors who are pressing for greater transparency. the Investment Company Institute (ICI) challenged government proposals that would dramatically change the ground rules for selling money market funds. however. along with those government officials around the world who are grasping for new sources of revenue to balance their lopsided budgets. such examinations were held at regularly scheduled and expected intervals. . All rights reserved. © 2012 KPMG International. reporting and disclosure... the debate continues between regulatory agencies and retail distributors over issues such as point-of-sale disclosure and fiduciary responsibility. and much of it is likely to be painful. There will be considerable change. and the needs of investors on the other. often comes opportunity. Meanwhile. investment managers will initially feel squeezed between new rules and requirements on one side.Evolving Investment Management Regulation | June 2012 | 11 Perspectives: Americas A time for change Despite the buffeting and pounding that the industry is taking today. there is reason for hope and for planning. Clearly. Much of this scrutiny is likely to be directed at increased transparency and consumer protection with a focus on private funds.

Because of the added costs of moving to daily margining. Some dealers may choose to leave the OTC derivatives business altogether. Some of the many opportunities that may emerge from the sweeping transitions that lie ahead include: • As the costs of operating an asset management firm increase. With change comes opportunity… Perhaps slowly at first. firms may create pooled private vehicles or institutional managed accounts that have a fee structure closer to that of a hedge fund. portfolio accounting and investor reporting. they may start targeting more high net worth individuals and institutions. • In the alternative investments industry. smart managers will find new ways to grow their businesses as they begin to restore confidence among policymakers and investors in the strength – and more importantly. the enduring value – of the investment management industry. with higher margins and greater potential revenue. Once approved. this annuity will create a slew of new planning opportunities for investment professionals. Investment managers will initially feel squeezed between new rules and requirements on one side. confirmation. and that they will have to monitor their trading activities to prove they are complying. and the needs of anxious investors on the other. With this fact in mind. Certain futures commission merchants may actually benefit from the new environment as niche markets for some OTC derivatives become more attractive. for new fee structures and product lines. For example. the US Treasury recently issued proposals that will permit a new form of annuity contract that would represent a sea change in distributions for anyone holding plan assets. nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. © 2012 KPMG International. Having experienced the dangers of relying on a narrow range of products. dealers may choose to stop selling products that currently generate only marginal profits. KPMG International provides no client services. who tend to maintain assets with investment advisors over longer periods. KPMG International is a Swiss cooperative. More advisors will be using smart phones. for the consolidation and regrouping that will result in more stable and diversified revenue streams for many firms. Opportunities to consolidate will also come from smaller firms that are struggling to survive under increased regulatory and cost pressures and are looking to consolidate with larger and stronger firms.12 | Evolving Investment Management Regulation | June 2012 New rules for OTC derivatives At the same time. new regulations are set to transform the OTC derivatives industry from one that was based on bilateral contracts to a more transparent central clearing market similar to the market for futures. many discount brokerage houses – which once targeted the self-directed investor – will move into the role of offering feebased services and investment advice to middle-class investors. diversification and consolidation are inevitable. opportunities will emerge – for new business models. centralized clearing for OTC derivatives and new requirements for reporting trades will add transparency that should remove some of the risk that investors encountered in the 2008 meltdown. if broker-dealers are going to be held to a higher fiduciary standard. This strategy has been especially pronounced among firms looking to make their first stock offerings to the public. • In the US. • Policymakers who make the rules governing pensions have recognized that today’s customers will most likely live longer than their parents and should not be allowed to outlive their assets. They may also choose to start outsourcing certain middle and back-office functions. that financial institutions will be restricted from proprietary trading. . mobile tablets and social media to invite customers and their friends to join the continual interactive conversation and get in on the action. As they identify opportunities and capitalise on them. many firms are now expanding into new asset classes. such as affirmation. but inevitably. To improve their product offerings. Perhaps the most contentious issue for trading professionals is the proposed Volcker Rule issued late last year. KPMG believes it will ultimately be enacted in some form. • In retail distribution. and. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Despite the clamor it has aroused. Member firms of the KPMG network of independent firms are affiliated with KPMG International. many firms will revise their business and operating models.

KPMG is also helping clients draft suggestions to the work groups that are being coordinated by joint teams of regulators and financial institutions. there have been no bank collapses or bailouts. and most Canadian managers are accustomed to regulation.. or that the current business environment will somehow transform itself into a garden paradise of sweetness and light. and KPMG in Brazil has been involved in © 2012 KPMG International. nor does KPMG International have any such authority to obligate or bind any member firm. maintain and grow their businesses as they begin to restore confidence among policymakers and the public at large in the investment management industry. New rules for the investment management industry and the uphill battle to restore its reputation among investors has changed the world of investment management – but the direction of onward travel is becoming clearer. All rights reserved. However. Local regulatory standards are high. which have been in place for some time with more established funds. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. In addition. and the Fundos de Investmento Imobiliários – Real Estate Funds (FIIs). KPMG International is a Swiss cooperative. although there have been some amendments to the Latin America – Spotlight on Brazil In Brazil. These are the Fundos de Direitos Creditórios – Receivable Funds (FDICs). has always been heavily regulated. the financial system in Canada has weathered the global financial crisis relatively well. Regulators insist that real estate assets follow the fair value principles. Key regional developments – Canada and Latin America regulation of asset managers. The asset management industry in Canada will likely be affected by sweeping regulatory changes among its neighbors. which may subsequently be reviewed by the CVM. Member firms of the KPMG network of independent firms are affiliated with KPMG International. investment managers should be able to prepare themselves to do everything possible to control the damage while making the most of every opportunity – and in so doing. considering that regulation is maturing and has been widely viewed as effective. A time for hope.. Canada To date. In recognizing that one cannot have the former without the latter. The recent regulatory drive on FIIs has been to improve the valuation of the assets. At the same time. on how much business is directed to Canada. That is why this report focuses on both change and opportunity. The amount of regulation itself has not significantly increased. concerns have become apparent on the existence of basic documentation for FDICs and on effectively controlling liquidation of the receivables. two categories of funds – both of which focus on specific asset classes – have received increased attention recently. especially in relation to counterparty exposure and leverage. Since the global crisis began. helping clients pre-empt potential control weaknesses. Many managers are preparing to handle any increased burden by hiring in the compliance area. of course. I am not saying that change will be easy or painless. Overall.Evolving Investment Management Regulation | June 2012 | 13 Firms may expect more rigorous reviews from government agencies. Recent fund blow-ups in the FDICs indicate the potential need for stricter controls on underlying assets. This movement is currently underway. one might say that the change in regulation in Canada has been evolutionary rather than revolutionary. the regulatory environment for the fund industry is fairly stable. The effects will depend. and even those hedge-fund-type funds are highly transparent to the CVM (Brazil’s SEC). regulatory scrutiny has increased. . However. primarily Dodd-Frank and AIFMD... KPMG International provides no client services. including the hedge fund segment. But with change – no matter how dramatic or painful – smart managers can find opportunities. monitoring and reporting are reasonably stringent. The amendments cover enhanced registration requirements and a current review of the high net worth/accredit investor thresholds. The asset management industry.

The pre-crisis UCITS 4 had already created a new information tool – the KIID. KPMG International is a Swiss cooperative. The notification procedure has been adjusted in order to enable better cross-border marketing. However. nor does KPMG International have any such authority to obligate or bind any member firm. these positive results did not mask the fact that retail investor trust in financial products remains low. the rules around cross-border activities such as distribution and mergers have been improved. © 2012 KPMG International. especially in Europe. KPMG International provides no client services. UCITS funds are generally set up in order to create a distribution opportunity across Europe. with very detailed requirements regarding length and language – as well as a harmonized presentation of past performance. These types of funds are open to both retail and professional Investors. thanks especially to long-term investments in the US. . Investor information and protection The European Union has built on common G20 decisions to implement an ambitious program relating to the monitoring of systemic risk and the improvement of investor information and protection. Under UCITS 4. Member firms of the KPMG network of independent firms are affiliated with KPMG International. In order to create a level playing field. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Net sales were largely positive.02 Retail products and distribution – Increased transparency and customer protection EMA Investor protection comes to the fore The 2011 Year-end figures from the International Investment Funds Association (IIFA) show that assets under management in mutual funds have peaked at an all-time high – at almost €20 trillion. a new regulation is likely to extend the KIID to all financial products that are offered to retail investors and where the return fluctuates according to the performance of the underlying assets. fees and a controversial synthetic risk/reward indicator. All rights reserved.

Evolving Investment Management Regulation | June 2012 | 15

This new regulation, Packaged Retail Investment Products (PRIPs) targets life insurance products, certificates and notes, as well as alternative investment products (in as far as they can be sold to retail investors according to their home country rules). The upcoming UCITS 5 will primarily focus on lessons learned from the crisis – especially the Madoff fraud, where UCITS funds were also hit. The EU Commission’s draft regulation recognizes that the depositary function should be harmonized and depositary liability should be increased. In addition, the rules for delegating to sub-custodians will be stricter – especially the rules for third country (non-EU) sub-custodians, which may prove a real challenge. Identifying the need to increase consumer confidence, other UCITS 5 topics include rules on remuneration. Has UCITS gone too far? Not currently included in UCITS 5 revision plans, but subject to intensive debate, is the question of the current UCITS framework not going beyond what could be reasonably considered ‘products for retail distribution’. In particular, products launched under the new powers granted in the context of UCITS 3 (also called ‘newcits’ products) have come under scrutiny, for being either too risky or too difficult to understand for the average retail investor. This has triggered several initiatives: the newly created European Securities Markets Authority (ESMA) is working on specific rules for structured products, while the draft revision of MiFID is creating a categorization of UCITS with so-called ‘complex UCITS’ no longer being accessible to execution-only distribution. This categorization is viewed with mixed feelings by some asset managers, who want to preserve the

integrity of the UCITS brand, while others envisage additional categories (for example, socially responsible or ethical UCITS, green UCITS, low-risk UCITS and long-term savings UCITS). ‘Shadow banking’ This year has also seen a growing concern of regulators towards certain fund products in the context of a bigger ‘shadow banking’ discussion. In a Green Paper, the EU Commission focused (among others) on Exchange Traded Funds (ETFs) and money market funds, especially those with constant Net Asset Value (NAV). This debate is reflected at a global level by the work of the International Organisation of Securities Commissions (IOSCO) for the Financial Stability Board (FSB) and ongoing discussions in the US. In its recent paper on money market funds, IOSCO lists potential measures to be introduced to avoid a run on money market funds like that at the end of 2008. On February 21, 2012, IOSCO also issued a consultation containing proposed principles on the distribution of complex financial products to retail and non-retail investors.

Implications of MiFID 2
MiFID 2 will require fund distributors to have a greater level of knowledge of their investors in order to be able to sell the UCITS product to retail investors. The same MiFID 2 proposals also address the issue of inducements, which have been increasingly regulated on a national basis – such as the Retail Distribution Review (RDR) in the UK, and similar initiatives in The Netherlands and Denmark. According to European Commission views, independent advisors should be banned from receiving inducements from product manufacturers – a view not necessarily shared at European Parliament level. The requirements only apply to independent advisors. Entities that do not call themselves independent, such as banks or insurers, should still be entitled to receive initial sales and/ or annual retrocession fees. This may result in a disturbance of the ‘level playing field’ in the sale of investment products to retail investors. The MiFID proposals create concerns regarding third country firms operating in the European Union. These firms will have to set up at least a branch in the EU if they want to offer their services to retail clients. For services to professional clients, stricter operating rules will apply. MiFID 2 is still a draft and therefore subject to alteration, but will have a considerable impact on the industry.

© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

16 | Evolving Investment Management Regulation | June 2012

South Africa’s new consumer agenda – Treating Customers Fairly (TCF)

On March 31, 2011, the Financial Services Board (FSB) published a roadmap for its Treating Customers Fairly initiative (a regulatory agenda that is already well-established in the UK). The TCF objective is to achieve six key outcomes for consumers at all stages of the product life cycle, including: • Product design • Marketing and promotion • Advice • Point of sale • After the sale • Complaints handling • The ultimate payment of benefits at claims (or withdrawal) stage TCF is a programme that will apply to the regulation and market conduct of financial services firms. It seeks to ensure that fair treatment of customers is embedded within the culture of regulated firms. TCF will use a combination of market conduct principles and explicit rules to drive the delivery of clear and measurable fairness outcomes. The FSB aims to develop a rigorous supervisory approach with both positive and negative incentives to encourage commitment to TCF. Supervision will be ‘more intensive and intrusive’ than in the past. TCF further seeks to ensure that specific, clearly articulated fairness outcomes for financial services customers are demonstrably delivered by regulated financial institutions. The six fairness outcomes are: • Outcome 1: Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm’s culture. • Outcome 2: Products and services marketed and sold in the retail market

are designed to meet the needs of identified customer groups and are targeted accordingly. Outcome 3: Customers are given clear information and are kept appropriately informed before, during and after the time of contracting. Outcome 4: Where customers receive advice, the advice is suitable and takes account of their circumstances. Outcome 5: Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect. Outcome 6: Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

TCF – Implications for firms Firms who are able to map the six key TCF outcomes to management information, address those outcomes, identify the remedial action taken and then demonstrate appropriate controls and actions, should be well placed to satisfy the supervisory initiatives of the FSB. In other words, TCF management information must measure the extent to which the process is delivering fair treatment – and not necessarily whether the process is taking place. In this way, TCF becomes ingrained into an organization’s culture as envisaged by regulators. Firms should start their TCF journey by identifying where in the business TCF practices are applicable, particularly where a firm makes use of external intermediaries, internally-based client relationship managers and call centers.

This initial scope analysis should be followed by a gap analysis of the available management information. It is clear that the regulatory landscape for financial services firms – including investment managers – will be affected by TCF legislation. Firms should: • Evaluate where the TCF proposals will influence the product lifecycle and identify the business implications. Firms will need to consider the effects of linking their strategies to their TCF culture through visible leadership and defining what fairness means at all points of the lifecycle of each product. • Design a governance structure for TCF characterized by senior management oversight and proactive issue identification and correction. • Determine the impact of establishing mechanisms to ‘prove’ that fair outcomes are being delivered through qualitative management information. • Implement a process so cross-linkages between TCF and other market conduct legislation are flagged. TCF will require regulated firms to consider their treatment of customers and to demonstrate through management behaviors, measures and monitoring that they are consistently treating customers fairly throughout the various stages of the product lifecycle. Ultimately, successful delivery of the six fairness outcomes should ensure that customers’ financial services needs are suitably met through a sustainable industry.

© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Evolving Investment Management Regulation | June 2012 | 17

ASPAC The fast pace of change

The fast pace of change in product distribution, disclosure and investor protection continues across ASPAC. A number of regulators have commenced broad reviews of the financial services industry and regulatory environment, driven by both local market events and emerging standards arising elsewhere in the world. While the stages of reviews vary between jurisdictions, the commonality in the themes of the proposals is clear: with consumer protection and fair dealing coming to the fore, enhancements to investor protection and product disclosure remain high priorities for a number of regulators across the region.

and generally well understood by retail investors – and are likely to have a significant impact on broking firms, banks, insurers and financial advisers. Singapore The comprehensive review of the financial advisory industry by the Monetary Authority of Singapore (MAS), the Financial Advisory Industry Review (FAIR), is expected to have a significant impact on the industry and on the public. The MAS has announced that as part of its consultative approach to engage all stakeholders, a Review Panel will be formed, with representation from industry associations, the investment community, academia, media and consumer bodies. The Review Panel will review and propose recommendations on the five key thrusts, namely: 1. Raise the competence of financial advisory (FA) representatives 2. Raise the quality of FA firms 3. Make financial advice a dedicated service 4. Lower distribution costs 5. Promote a culture of fair dealing The wide-reaching aim of FAIR is to bring about a higher quality of financial advisory services and better outcomes for customers – and by enhancing customer trust, promote sustained growth of the financial advisory industry. On July 28, 2011, MAS also announced new regulations affecting the sale of Investment Products. These requirements clarify the responsibility of intermediaries to assess the investment knowledge and experience of retail customers before selling certain investment products to the customer. The new requirements will apply to Specified Investment Products (SIPs) – which are all investment products other than those defined as less complex

Australia Changes have been proposed to the similarly themed Future of Financial Advice (FOFA) reforms in Australia, introduced in 2011. Following considerable pressure and debate from the industry, the mandatory implementation date for the FOFA reforms has been deferred from July 1, 2012 to July 1, 2013. Although the industry has welcomed the delayed implementation, there are still concerns around the shifting nature of the requirements and the huge technological changes required. Such changes also provide evidence of the challenges that such important industry reforms in the region can potentially expect to face.

Japan Additional disclosure requirements for distributing prospectus and investment management reports in Japan were introduced in order to improve transparency and investor protection. The requirements include enhanced details of the fund structures and source of earnings, and greater breakdown of the source of dividends. As a result of the recent market scandals, the Japanese FSA’s working group is understood to be evaluating the future of investment trusts, investment corporations and trustees (trust banks), with an eye to international regulatory best practice.

© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The FOI has the remit to actively conduct education and awareness programs for financial services enterprises and financial consumers and to establish China Like India. the Financial Ombudsman Institution (FOI) commenced operation in January 2012. fund managers and securities companies to use Renminbi raised in Hong Kong to invest in the Mainland securities markets. Hong Kong Consumer protection remains a focus in Hong Kong. The Renminbi Qualified Foreign Institutional Investor (RQFII) pilot scheme was announced – enabling Hong Kong subsidiaries of qualified © 2012 KPMG International. the likely future direction is clear. an efficient. have been key reforms to protect investor interests. Traditionally. and in equity and debt schemes of Mutual Funds. the likely future direction is clear. Member firms of the KPMG network of independent firms are affiliated with KPMG International. and provide a reliable and trustworthy mechanism for claim resolution. India Similarly. while memories of the mis-selling allegations during the financial crisis remain strong. All rights reserved. In the same month. Other areas impacted by the amendments include the handling of complaints. the introduction of new players is designed to create greater competitive pressure on the fee structures in the marketplace. fair. attract more foreign funds. recording of client orders. allowing Hong Kong retail investors to invest using Renminbi directly into the Mainland equity and bond markets and have access to daily liquidity. Taiwan To enhance financial consumers’ protection in Taiwan. a number of locally incorporated foreign banks are in the process of applying for the fund distribution license first announced in the May 2011 Sino-US Strategic and Economic Dialogue meetings. KPMG International provides no client services. KPMG International is a Swiss cooperative. The extent of regulation over retail distribution increasing in a number of countries and further increases anticipated at the conclusion of this ongoing industry-wide review leave many pan-regional operators facing the challenge of ensuring that their internal compliance function is able to maintain focus on several moving targets concurrently. To facilitate the establishment of the Financial Dispute Resolution Centre (FDRC) in Hong Kong. with the ultimate goal of consumer protection remaining at the top of the agendas of many regional regulators. they have also helped players become more competitive and cost-efficient which should help the long-term growth of the sector. in addition to simplifying the investment process. Work has also commenced in India to widen the class of investors and attract more foreign funds – aimed at reducing market volatility and deepening capital markets. The Indian Government and regulator announced that Qualified Foreign Investors who meet prescribed KYC requirements would be allowed to directly invest in equity shares listed on the recognized stock exchanges and in equity shares offered to public in India. One key proposal requires persons regulated by the SFC or the Hong Kong Monetary Authority to comply with the FDRC Scheme and be bound by its process. the Securities and Exchange Board of India (SEBI) has been at the forefront of investor protection in India.18 | Evolving Investment Management Regulation | June 2012 With the ultimate goal of consumer protection remaining at the top of the agendas of many regional regulators. The FOI is designed to avoid protracted and onerous procedures of court litigation. Although these reforms have impacted the growth and profitability of the sector in recent years. China has taken steps to widen investor classes. Additionally. . No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Greater distribution was also a focus in China where the regulator granted fund distribution licenses to several independent fund distributors. which has a large number of not-so-well financially educated small investors. the majority of mutual funds in China are distributed via bank outlets each year. as one of the region’s most populous nations. reduce market volatility and further enhance capital markets. and reasonable ombudsman mechanism for the hearing of financial consumer disputes. the first four RQFII funds were authorised. reporting of suspicious activities and provision of expert evidence. However. nor does KPMG International have any such authority to obligate or bind any member firm. with the remainder sold via brokerages and by the fund managers themselves. the Securities and Futures Commission (SFC) has proposed amendments to the Code of Conduct for Persons Licensed by or registered with the SFC. While this position is unlikely to be challenged in the short term. Removing entry load and capping exit load.

All rights reserved. The speed at which technology is introduced may be accelerated by the JOBS act (see page 28. . according to American Century’s third annual survey of financial professionals. Advisors predict that. while a quarter of any new investment flows will be allocated to mutual funds by 2013. 1.. According to a recent report in the Financial Times1. and then motivate customers to share messages with their friends and persuade them to join the interactive party. The power of new technology Over the past few years. KPMG International provides no client services. While the potential for reaching customers through social media is exciting. the debate continues between regulatory agencies and retail distributors over issues such as point-of-sale disclosure and fiduciary responsibility. At the same time. affluent investors have been cutting back their allocations to traditional mutual funds and stepping up their interest in exchange-traded funds (ETFs). At all levels of retail distribution. The use of smart phones and mobile tablets for accessing social media content has jumped dramatically among advisors and broker dealers over the past year. traditional wealth managers. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. early adopters caution that success will mean more than just convincing customers to hit the ‘like’ button on Facebook. April 2012 © 2012 KPMG International.. another fifth of these investments will go to ETFs. These brokerages are targeting middle-class investors who find themselves being dropped by the big. Member firms of the KPMG network of independent firms are affiliated with KPMG International. Firms should develop strategies that will help potential customers absorb the messages advisors are trying to communicate. The calm after the storm?) Changing investor behavior In the meantime. A major trade group for investment professionals recently challenged government proposals that would dramatically change the ground rules for selling money market funds. customers are acting on their need for greater flexibility in making investment decisions. many discount brokerage houses – which once targeted the self-directed investor – want to move into the role of offering fee-based services and investment advice. nor does KPMG International have any such authority to obligate or bind any member firm. To keep up with all the changes taking place in the halls of government and among colleagues and customers. Transparency remains only one of the major issues that investment professionals have grappled with over the past year. FTfm Financial Times Special Report – Investing in Foreign Exchange. the ground is shifting. Everywhere we look. KPMG International is a Swiss cooperative. If broker-dealers are ultimately going to be held to a higher fiduciary standard. investment professionals have also made great strides in utilizing the transformative power of technology. a great deal of change is taking place.Evolving Investment Management Regulation | June 2012 | 19 US A seismic shift The call for more transparency in the marketing of investment products to individual customers may continue to grab the headlines and the attention of the public.

3. a group of advisors who should be trusted to keep their eyes and ears focused in several directions at once. All rights reserved. means advisors should be required to provide relevant disclosure for all retail investment products. regulatory agencies will still need astute guidance – and when appropriate. Nor. says ICI. respondents to the ICI survey stated that requiring nongovernment money market funds to build up a modest loss reserve would increase costs to investors and decrease yields. If the floating value were enacted. A recent survey of 203 corporate. failing that. released this year by the ICI4. support – from the investment community. addressed three major concerns among professionals. If the loss reserve proposal became a requirement. support – from the investment community. KPMG International is a Swiss cooperative. nearly three quarters of survey respondents stated they would either decrease or stop using money market funds. simply selling an investment product should not be considered a fiduciary act. nor does KPMG International have any such authority to obligate or bind any member firm. of course. will customers. US House of Representatives Statement September 2011 4. So. a third of survey respondents who now use money market funds would either decrease their use or stop using them. government and institutional investors. KPMG International provides no client services. not just registered funds. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. In the same survey. according to the ICI. Helping investors assess their choices and make informed decisions. Stating that broker-dealers often perform substantially the same function as investment advisors. Improving transparency In the past year.”3 For example. One proposal focuses on changing money market funds from a constant US$1NAV to a floating net asset value. Money Market Fund Regulations ICI. As these debates continue. the Investment Company Institute (ICI) has taken a leading role in shaping the debate over transparency and improving the rules for point-of-sale disclosure by brokerdealers. regulatory agencies still need astute guidance – and when appropriate. in most instances. opponents to the FTC’s redemption holdback provision say it would defeat the liquidity feature of money market funds and make them less attractive as tools for cash management. KPMG believes that enacting final requirements on these and other issues will require considerably more interaction between regulatory agencies and the investment community. should offering financial calculations or similar investment tools for general information purposes. but not “in a way that will…chill legitimate practices. In the same statement. As these debates continue. Still stirring the waters among investment professionals are the FTC’s proposals to change the rules for selling money market funds. April 2012 © 2012 KPMG International. ICI also challenged the need for Financial Industry Regulatory Authority (FINRA) to impose new revenue-sharing disclosure rules on broker dealers who sell registered funds. the ICI has stated that the SEC should move forward to establish new uniform standards for broker-dealers. Finally. .20 | Evolving Investment Management Regulation | June 2012 investment professionals would do well to have a good pair of eyes in the backs of their heads – or. Member firms of the KPMG network of independent firms are affiliated with KPMG International.

insurance companies or university endowments. collaborative working relationship. The world’s hedge fund managers have also been extremely busy over the past four years. The continued divergence of the industry A growing tendency for larger institutional investors to gravitate toward larger managers with more institutionalized operations and brand names with a higher level of recognition within the industry is emerging. The days when hedge funds catered almost exclusively to high net worth individuals and family offices are long gone. adapting to the many changes that continue to take place on the financial and regulatory landscapes. nor does KPMG International have any such authority to obligate or bind any member firm. with respect to transparency. The term ‘institutionalization’ refers to not only the continuing influx of new institutional capital into hedge funds. compliance and due diligence. such as charitable foundations. The hedge fund industry is witnessing a marked shift in types of investors. Today. Investors continue to review allocations and operational requirements. KPMG International is a Swiss cooperative. but also the continued evolution and advancement of hedge funds’ infrastructure and operational processes. The institutionalization of the global hedge fund industry The single most compelling and persistent theme emerging from the recent KPMG hedge fund survey5 results relates to the continued force and momentum with which the global hedge fund industry is becoming increasingly institutionalized. in which managers using different strategies and who would otherwise be competitors. . are coming together to form a mutually-beneficial. KPMG International provides no client services. Member firms of the KPMG network of independent firms are affiliated with KPMG International. The emergence © 2012 KPMG International. Managers are busy refining business models. This division of the industry has been taking place for a number of years now. public and private sector pension funds. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. investors in hedge funds are much more likely to be institutions. there is also a new breed of collaboration referred to as ‘co-opetition’. All rights reserved. At the boutique end of the market.03 Alternative Investments Global hedge funds – Adapting to change The credit crisis continues to recede in the industry’s rearview mirror. but is becoming even more pronounced in the years following the financial crisis. While this appears to be a growing trend. A perhaps related but inverse phenomenon is evident with respect to high net worth individuals and family offices. it does not mean that institutional investors are completely ignoring the smaller players. which appear more likely to allocate assets with the industry’s smaller managers.

. The shift toward increased transparency represents one of the most striking ways that the industry has changed since the financial crisis. This shift demonstrates that. transparency and governance. This all underscores the fact that operational transparency and due diligence are much more important to investors today than they were even a few years ago. continue to drive big operational changes in the world’s hedge funds. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. As investors have demanded more transparency. the hedge fund industry needs to adapt not only its operational policies. compositions of portfolio assets and in order to appeal to institutional investors who are injecting billions of new capital into hedge funds around the world. KPMG International provides no client services. Most hedge fund managers do not see this trend abating anytime soon. hedge funds – particularly the industry’s larger ones have begun adapting their philosophies. A trend toward increased transparency Since the financial crisis investors have become more demanding regarding transparency.22 | Evolving Investment Management Regulation | June 2012 of this trend is just one of the many examples of how the smaller players are successfully adapting to the ongoing changes in the marketplace in order to survive and thrive in a rapidly changing environment. although reluctantly. including growing headcounts and costly investments in infrastructure. but also its very culture. However. Member firms of the KPMG network of independent firms are affiliated with KPMG International. At least part of the reason for this increase in demand for transparency among the largest hedge funds could be traced back to its new investors – large institutional investors such as pension funds. the increased scrutiny and demands from investors (not to mention the dramatic changes taking place in the regulatory environment) continue to drive notable operational changes in the world’s hedge funds. KPMG International is a Swiss cooperative. Just as hedge funds are adapting to accommodate the more stringent requirements of institutional investors.. However. All rights reserved. at the same time. nor does KPMG International have any such authority to obligate or bind any member firm. © 2012 KPMG International. Increased scrutiny and demands from investors. While boutique firms with small staffs and individual investors continue to start up and even thrive in their chosen niches. Adapting to a changing regulatory landscape While the global hedge fund industry is making big changes – both operationally and culturally – the related impacts appear to be dwarfed by those required as part of the industry’s dramatically changing regulatory environment. which require highly comprehensive reporting and due diligence. particularly with respect to due diligence. The continually growing demand for information from investors has led to an increase in the size of the management teams of the firms themselves. many hedge fund firms today are becoming truly ‘institutionalized’ by way of the infrastructure they have built up and the demands of the investors they serve. benefiting from an enhanced degree of transparency. Some firms are clearly becoming more open and forthcoming with key information (including details around positions. those institutional investors are. Implications for the hedge fund industry These growing trends toward increased transparency and renewed focus on due diligence are not without associated growing pains for the hedge fund industry. these changes are not inexpensive to implement. policies and staff headcounts in order to deliver it to them. .

regulators have been working toward a G20 agenda of introducing new registration and reporting rules for hedge fund managers. as hedge fund managers of all sizes. . Such costs will have an impact on start-ups and on smaller fund managers due to the increased regulatory and administrative requirements. strategies and geographies continue to jockey and vie for a competitive edge in a rapidly-changing business environment. In the meantime. Alongside the increased regulatory scrutiny. it becomes clear that they are likely to remain on the regulators’ agenda. KPMG International is a Swiss cooperative. those associated with the continuing wave of regulatory change precipitated by an historic financial crisis. The value of the hedge fund industry to investors. there are a number of important challenges in the years ahead – in particular. All rights reserved. with the AIFMD in the European Union and the Dodd-Frank Act in the United States. Changes to the regulations around short-selling and overthe-counter derivatives clearing have also dramatically affected hedge fund managers. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. there is also increased demand for regulatory compliance by investors. 5. While the hedge fund industry has demonstrated a willingness and ability to adapt to changing market conditions throughout its history. The increased demands placed on hedge fund managers may result in a wave of consolidation in the industry going forward. markets. They are also becoming increasingly required to report to regulators within tight deadlines. The wide-reaching FATCA in the United States is also likely to pose particular problems. The managers and funds are therefore likely to face increased compliance overhead costs. adjusting and adapting.kpmg. The hedge fund industry is now faced with multiple financial regulators around the world who all are setting up regulations aimed at bringing hedge fund managers and their funds into scope. both seeking to increase the flow of information from managers to supervisors. and the broader economy – Centre for Hedge Fund Research Imperial College. nor does KPMG International have any such authority to obligate or bind any member firm. Download at: http://www.pdf © 2012 KPMG International. London. When looking at hedge funds and the increased regulatory scrutiny. Member firms of the KPMG network of independent firms are affiliated with KPMG International.Evolving Investment Management Regulation | June 2012 | 23 Globally.com/Global/en/IssuesAndInsights/ ArticlesPublications/Documents/hedge-fund-value. the global hedge fund industry continues the complex process of assessing. KPMG and AIMA. KPMG International provides no client services.

Diversification of business away from a concentration within any particular region is likely to become a more critical strategy for offshore centers. MENA (Middle East and North Africa) and Far East regions. will also retain parallel regimes for non-EU managers and non-EU investors. Some offshore jurisdictions are operating at record levels of fund numbers and assets under management with new business impacted only by market conditions and not prospective regulation. It remains to be seen.. it could be argued that this period of uncertainty will come to an end and jurisdictions will determine their competitive position. © 2012 KPMG International. the predicted flood of re-domiciliations of funds out of the offshore centers has not occurred. Uncertainty and opportunities. while implementing AIFM regimes. The key difference in this implementation is the lack of a marketing passport – in the initial years. In the complementary AIFMD regimes – both onshore and offshore – it is too early to say whether there will be any cost differentials. KPMG International is a Swiss cooperative. However. the unintended consequences include significantly increased cost to investors. a marked shift in the service provision market and potentially severe restrictions on investment strategies. The right balance will need to be struck between regulatory rigour and drag on performance. while the onshore centers have scale. to mean pressure on returns. Many offshore jurisdictions report a rationalization in the number of funds. the prospects of all funds jurisdictions are now more closely aligned to market conditions – and commentators are split on future direction. and the additional cost of service provision – particularly depositories – will all play their part. All rights reserved. No significant divergences have emerged between onshore or offshore locations in how these reforms are being faced.. . While the AIFMD is clearly a key factor in determining the future of the EU industry and its offshore centers. The offshore centers are likely to follow suit and develop regimes that comply with the EU regulation. whether the passporting regime will function effectively and be particularly advantageous. While this is a valuable aim. the offshore centers have specialist expertise. structuring flexibility and regulatory choice. AIFMD – implications for offshore Those centers wholly within the EU (mainly onshore) will be required to fully implement this new regulation. other EU and US changes are also likely to shape the direction. so how will the smaller centers cope going forward? The answer is diversification of business across geographies – and identifying and deploying services in niche specialist areas where competition does not require scale. with insurers facing increased capital charges for investing in higher yielding but notably illiquid strategies. India and China). Any potential change in laws and regulations causes uncertainty. but these are mostly due to the restructuring of poorly performing funds due to market conditions. Solvency II Solvency II will have a fundamental impact on the investment management industry. Most are already looking towards the BRIC countries (Brazil. however. In the period to the end of 2013. however. branded products and factory efficiency. the compliance and reporting requirements. in particular the AIFMD. It is likely in the short term. at least – for third countries. KPMG International provides no client services. illiquid strategies – but innovation in this space is already playing its part in addressing the potential issues. Member firms of the KPMG network of independent firms are affiliated with KPMG International. The ability of the industry to devise new and more liquid methods of accessing these strategies for insurers will be key. as the onshore centers are following a similar strategy. Despite this. The offshore centers perhaps have more to lose here– due to their specialism in closed-ended. This diversification is not unique. Impacts from the US The Dodd-Frank and Foreign Account Tax Compliance Act (FATCA) reforms in the US are level playing field changes that will affect all jurisdictions in the same manner. However.24 | Evolving Investment Management Regulation | June 2012 A view from Offshore The scale of regulatory change around the globe is daunting for large onshore financial centers. although we will undoubtedly see some nuances between them. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. nor does KPMG International have any such authority to obligate or bind any member firm. or whether cost itself will even be a factor for investors and managers going forward. Russia. The offshore centers. The EU is rapidly deploying regulation with the aim of improving investor protection and increasing transparency. It has been much debated what additional servicing costs the AIFMD regime will bring: the business structural changes that managers may need to make. as rules are finalized and implemented both onshore and offshore.

the minimum capital requirements. All rights reserved. The Directive therefore covers all funds that do not fall under the UCITS directive. it was published in the official journal of the European Union. the EU Directive for Alternative Investment Fund Managers. authorization of the AIFM and conditions for the exercise of activities of the AIFM (inter alia identification of the portfolios and valuation of the assets. liquidity management. KPMG International provides no client services. The aim of AIFMD. In this context. . At the same time. conflicts of interest. KPMG International is a Swiss cooperative. the European Commission is in the process of finalizing draft Implementing Measures. thereby opening a two-year period for implementation by Member States into national law. nor does KPMG International have any such authority to obligate or bind any member firm. was adopted. but also outside. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. It has wide-ranging consequences for asset managers in the European Union. © 2012 KPMG International. AIFMD. the European Securities and Markets Authority (ESMA) has been mandated to provide advice in the following areas: • General provisions of the AIFMD. In July 2011. as European investors will only be allowed to be marketed non EU-funds that comply with most of the Directive’s provisions. Member firms of the KPMG network of independent firms are affiliated with KPMG International.04 Institutional perspectives – Alternative products and distribution EMA Evolving operations strategy In June 2011. risk management. EU based asset managers are restricted in the way they are able to delegate parts of their functions to third country managers and service providers. is to regulate managers of hedge funds – but also all other types of alternative funds – at a European level. delegation of tasks of the AIFM). organizational requirements. At the current stage. following a 2009 G20 decision.

ESMA allows in its advice for competent authorities to review and assess the functional and hierarchical separation of the risk management function – in accordance with the principle of proportionality. however. annual notification. system failures and process management. scale and complexity of the business of the AIFM and of the AIFs that they manage. for example. risks in relation to investors. • Leverage (inter alia level of the leverage and transparency. all AIFMs will need to comply with this requirement.000 for external fund managers. This should be applied to the nature. tasks of the depositary. general requirements on regulation of the depositary in third countries. The fourth requirement is new. There has.000 for internally managed funds 2) 2 bps capital over Assets Under Management (AUM) above the €250 million. However. KPMG International is a Swiss cooperative. which means they will come into force straight after approval by EU bodies and subsequent publication in the Official Journal. Risk Management and Portfolio Management Many respondents to ESMA’s public consultation paper argued that the necessity for a permanent risk management function should be linked to proportionality. been a heated debate in the industry around several potential alterations. In addition. The key areas of focus are: Capital Requirements There will be four requirements to which asset managers will need to adhere: 1) Capital of €125. Member firms of the KPMG network of independent firms are affiliated with KPMG International. following the circulation of an unofficial first version of these implementing measures. products and business practices and risks in relation to business disruption. matters to be disclosed). Although not legally binding. © 2012 KPMG International. The first three requirements should not pose too many difficulties. liability of the depositary).26 | Evolving Investment Management Regulation | June 2012 • Depositaries (appointment of the depositary. interim publication duties on a ongoing basis during the year. All rights reserved. with a cap of €10 million 3) Enough liquid assets to cover the next quarter of fixed overheads 4) Professional liability capital. but in the end. ESMA has provided a non-exhaustive list of the types of risks that would fall within the professional liability risks. as they are based on the current Capital Requirements Directive (CRD) ruling in place in the majority of the EU Member States. provision of information. nor does KPMG International have any such authority to obligate or bind any member firm. the ESMA Final Advice states that the valuation should be performed independently from portfolio management. • Supervision (in particular cooperation agreements with third countries). No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. In particular. intended to cover risks arising from professional negligence. the EU Commission is expected to follow the majority of ESMA’s advice and to justify any amendments it will make. KPMG International provides no client services. as well as strategic and business consequences. These EU institutions are expected to take the form of a ‘Delegated Regulation’. and €300. smaller managers and managers who are managing funds that mainly invest in other assets have a challenge before them. . In the detail – key requirements There is no question about it – the AIFMD will have a significant impact on the operating model of asset managers.

Where there is a delegation of portfolio or risk management tasks to an enterprise in a third country. However. In whose official language the offer documentation is presented d. and • Has the power to take decisions in key areas that fall under the responsibilities of the senior management functions. The AIFMD also aims to increase transparency of AIFs and their managers. Depositary functions Each AIFM will require a depositary. Financial Measures against Money Laundering and Financing of Terrorism. In which the most targeted investors have their domicile c. Member firms of the KPMG network of independent firms are affiliated with KPMG International. both the competent authorities of the originating Member State of the AIFM and the competent authorities for the enterprise must cooperate. A very critical point is the liability of depositaries in case of loss of financial instruments. Third country developments and implications Delegation of Portfolio or Risk Management tasks to enterprises in third countries The requirements regarding delegation are applicable to third country relationships. Not only is there a reverse burden of proof. In addition. in particular in relation to implementation of the general investment policy and investment strategy. Delegation The AIFMD provides an exclusion for letterbox entities. KPMG International is a Swiss cooperative. ESMA’s advice specifies the form and content of information to be reported to competent authorities and investors. . Determination of the Member State of Reference The AIFMD requires non-EU funds to designate an EU Member State of reference in accordance with whose AIFMD implementing provisions a foreign AIFM will be approved or registered. as well as of the information to be included in the annual report. According to ESMA advice. both risk management and portfolio management cannot be delegated completely at the same time. ESMA must be notified at that point. the third country may not be on the blacklist of un-cooperative countries compiled by the working group. Local authorities can apply restrictions if there is a potential to ‘build up’ systemic risk. The ESMA advice includes a definition of a letterbox entity and a clarification that the letterbox provisions do not state that an AIFM cannot delegate its functions. It is important that the third country has concluded double taxation treaties that meet the standards of the Organisation for Economic Co-operation and Development (OECD) Model Convention on avoidance of double taxation. In which marketing is most frequently and forcefully observed. First. the AIFM itself and the prime broker are excluded from acting as a depositary). All rights reserved. Reporting and transparency Transparency requirements and leverage The AIFMD provides for certain leverage restriction rules: The AIFM will perform a selfassessment and must demonstrate that the leverage limits are appropriate. A letterbox entity is considered to exist when the AIFM no longer: • Retains the necessary expertise and resources to supervise the delegated tasks effectively and manage the risks associated with the delegation. ESMA confirms in its advice that the depositary’s core functions of safekeeping and oversight are complemented by the requirement to properly monitor AIFs’ cash flows. the depositaries must be subject to an ‘effective prudential regulation and supervision’ (which have the same effect) and which are ‘effectively enforced’. written agreements must exist between the supervisory authorities regarding cooperation and exchange of information. In which the promotion by the AIFM (or its promoter) occurs b. In addition. The AIFMD regulates the additional requirements for depositaries of non-EU funds in their home jurisdiction. In this context. this should be the country: a. as well as strategic and business consequences. If action is taken by the local authority. but losses resulting from fraudulent behavior or operational failures (including sub-depositaries) are also within scope. Finally. © 2012 KPMG International. KPMG International provides no client services. Depositaries in Third Countries The AIFMD imposes general requirements on depositaries (there must be a written contract and the depositary must be a credit institute or another supervised company.Evolving Investment Management Regulation | June 2012 | 27 There is no question about it – the AIFMD will have a significant impact on the operating model of asset managers. The local authority will assess this selfassessment for viability. nor does KPMG International have any such authority to obligate or bind any member firm. the depositary must be liable by contract to the AIF or the investors of the AIF and expressly acknowledge the delegation provisions. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties.

and then responding promptly but prudently. it must also be acknowledged that they represent merely a moment in situations that are continually evolving. We are therefore advising our firms’ clients to delay changing their advertising and marketing strategies for raising funds from the public at large until the SEC indicates more clearly how it intends to proceed. Paying close attention to developments as they occur with the regulatory agencies. Recently. interpreted and enforced. the CFTC removed or amended many of the exemptions that have been widely relied upon by many firms to avoid the requirement for registering with the National Futures Association. Amending or outright removal of these exemptions will likely create more administrative and regulatory burden for firms that engage in the commodities and futures markets in even limited fashion. nor does KPMG International have any such authority to obligate or bind any member firm. Perhaps a bigger surprise is the large number of people who were not at the center of the case but have been involved or ensnared. The bad feeling lingering from insider trading remains so toxic that any association with it may damage or even destroy a firm. multinational law firm and a former executive who was once a contender to lead that company. Member firms of the KPMG network of independent firms are affiliated with KPMG International.. While firms should employ the most rigorous internal controls to prevent even a suspicion of insider trading. However. KPMG does not expect many firms in the alternative investment arena to start publishing advertisements in the newspapers soliciting capital for their products because these firms may face regulatory scrutiny if this course of action is undertaken. However. Important as these developments may prove. All rights reserved. seeking advice from trusted advisers. They include a lawyer from a distinguished. The effects of recent rule amendments by the Commodity Futures Trading Commission (CFTC) seem more definite. these developments – and others still to come – may also serve to spur new opportunities for firms looking either to absorb or consolidate with smaller firms or to expand their services and thereby create a more stable and diversified revenue stream for future growth. more than 50 people have been convicted or pleaded guilty in the sprawling probe stemming from Galleon. As of January 2012. Key developments The recently passed Jumpstart Our Business Startups Act (JOBS Act) provides an excellent example of a new law where the operational impacts cannot yet be fully predicted. So much still depends on how new regulations are written. the cloud of the current investigations continues to have a profound effect on the industry. this provision would allow alternative investment funds to market their products and raise capital by utilizing the services of the marketing and advertising firms populating Madison Avenue. remain the wisest courses of action. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties.. Companies should always prepare for a range of possibilities.28 | Evolving Investment Management Regulation | June 2012 US The calm after the storm? The alternative investments community has witnessed so much turmoil within the past few years that firms may not have paid close enough attention to a number of recent regulatory developments that could ultimately become more significant to their futures than the drama that has grabbed all the headlines. © 2012 KPMG International. In theory. Investment managers should pay close attention to developments at the CFTC because these and future announcements are likely to affect their regulatory obligations. . The JOBS Act directs the SEC to remove restrictions on marketing and advertising that have historically prevented hedge funds and private equity funds from making general solicitations for capital. KPMG International is a Swiss cooperative. KPMG International provides no client services. For some firms. these regulatory developments will create or expand requirements associated with regulatory registration. Investigations into insider trading continue to soil the image of the alternatives investment industry and affect the manner in which firms conduct their business. Insider trading – a cloud over the industry. disclosure and reporting. That the nowinfamous Galleon case was successfully prosecuted surprises few people who were watching it closely.

because prospective investors will be looking for consistent revenue streams that are more easily achieved by providing a wide range of products.. After the meltdown in 2008. Member firms of the KPMG network of independent firms are affiliated with KPMG International.Evolving Investment Management Regulation | June 2012 | 29 New regulations. KPMG International provides no client services. are strengthening the expectation that diversification and consolidation in the alternative investments community are inevitable. along with the everincreasing costs of running an alternative investment management business. There are still opportunities. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. nor does KPMG International have any such authority to obligate or bind any member firm.. there should also be new opportunities. KPMG International is a Swiss cooperative. and are looking to consolidate with larger and better resourced firms. along with the ever-increasing costs of running an alternative investment management business. This strategy has been especially pronounced among those firms looking to make their first stock offerings to the public. So much will depend on how rules are ultimately written. With the new obstacles and burdens that are being mandated by the regulatory agencies. Diversification and consolidation New regulations. are strengthening the expectation that diversification and consolidation in the alternative investments community are inevitable. . The wisest courses of action are still to pay close attention. © 2012 KPMG International. All rights reserved. many firms witnessed firsthand the dangers of relying on a narrow range of alternatives products. seek advice from advisers who have earned your trust and then plan alternatives for most of the conceivable outcomes. today. Other opportunities to diversify and consolidate may come from smaller firms that are struggling to survive under increased regulatory and cost pressures. Keep in mind that attention-grabbing headlines in the media will not always reflect reality – any new ruling from regulators is merely the latest development in a continuing story. these firms are busily expanding into new asset classes and strategies in an effort to diversify revenue streams. interpreted and enforced.

KPMG International provides no client services. the fund contributes to efforts to further deregulate capital markets and channel more of the country’s considerable savings overseas. Prepared under the Qualified Domestic Institutional Investor (QDII) scheme. The minimum capital requirements were lowered to JPY 10 million from JPY 50 million and the maximum limit for assets under management set to JPY 20 billion. additional measures were announced in August 2011 by the Securities and Futures Commission (SFC) to enhance the level of the collateral and transparency of domestic synthetic ETFs. Hong Kong In Hong Kong. Where equity securities are used as collateral. which may be the first crossborder ETF. . nor does KPMG International have any such authority to obligate or bind any member firm. Such synthetic ETFs are also required to publish their collateral management policy on their websites. These enhancements are designed to minimise uncollateralized counterparty risk exposure that could arise from the use of financial derivatives in replicating index performance. All rights reserved.30 | Evolving Investment Management Regulation | June 2012 ASPAC Loosening the reins? Exchange traded funds (ETFs) remain an area of focus in China and Hong Kong. © 2012 KPMG International. if the financial institutions conducting the investment management business are made only to Qualified Investors. Relevant ETF managers are now required to top up the collateral levels for all of their synthetic ETFs primarily regulated by the SFC to achieve and maintain at least 100 percent collateralization. Japan Authorities in Japan loosened the regulation upon the investment management business for Qualified Institutional Investors (QII). China The China regulator recently accepted an application from a fund manager to launch an exchange traded fund that tracks the Hang Seng China Enterprises Index. their market value must be equivalent to at least 120 percent of the related gross counterparty risk exposure. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. with a loosening of regulation on investment business in Japan.

measures and projects set up to ensure compliance should make a demonstrable contribution to achieving overall organizational goals. Organizations that ensure a high level of risk control and operate professionally have a head start on competitors that do so to a lesser extent or not at all. non-binding governance standards – both at a European level with the EFAMA Code of Conduct and at a national level – but an overall push by European Regulators towards more binding rules is anticipated. KPMG International is a Swiss cooperative. they will likely have to spend a relatively large share of their overheads on compliance. Compliance should not be an end in itself.. A push toward more binding regulation At present. They would rather focus on setting up investment strategies and market propositions.. All rights reserved. . In the near future. These standards are mandatory – in many cases. nor does KPMG International have any such authority to obligate or bind any member firm. Despite these challenges. organizations will have to professionalize to meet them. Regulators are setting strict standards and compliance is essential to stay in business. it is important to adopt a positive approach to the new requirements. Instead.. Nor is it surprising that – particularly smaller organizations – experience the wave of new rules as a heavy burden. If approached in the right way. Member firms of the KPMG network of independent firms are affiliated with KPMG International. the industry has mostly self-imposed. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. © 2012 KPMG International. for example by relocating to a more favorable regulatory environment.. The financial sector is facing a wave of new statutory and regulatory requirements that will have serious consequences for investment managers. But if organizations go about it in the right way. it should be an integral part of the organization’s behavior.05 Governance and responsibility – More than just compliance… EMA Compliance also creates opportunities. KPMG International provides no client services. It is hardly surprising that starting projects to ensure compliance with the new statutory and regulatory requirement is not initially popular with managers. These days. society tends to punish organizations that would rather avoid the stricter rules. compliance also creates opportunities.

All rights reserved. for some smaller organizations. It may all sound rather abstract. if executives communicate internally that it is essential to regain the trust of clients. a number of clients have learned the hard way what can happen when asset managers give low priority to ensuring a high level of risk control and adequate disclosure. Creating the right corporate culture This involves a wide range of actions. Given the importance of governance to stakeholders. Throughout the finance world. . but the appraisal and remuneration policy continue to be heavily biased towards commercial targets. we would like to emphasise that we do not intend to paint an overly rosy picture of the compliance challenges facing the industry. is what compliance is all about. they will only be effective if behavior on the work floor is in line with this formal framework. promoting responsible investment and sound governance. Common examples are an organization’s corporate culture and its approach to integrity. There will still be challenges ahead. Putting clients first Organizations that use soft controls to put the interests of clients first ensure that this client focus is embedded in the organization. to executives setting the right example. under which prudential supervision is carried out by the Dutch National Bank (DNB) while the other regional regulator. as well as the UN-backed Principles for Responsible Investment (PRI) initiative. this approach cannot guarantee that the organization will regain the trust of its clients – and that. Even if all the formal procedures and checks within the organization have been set up properly. Testing and Reporting (4) People and Culture One key element falls into all four areas – the culture of the organization. This is evident from the Dutch ‘Twin Peaks’ model. In recent years. which is essential to achieve good investment performance. ultimately. Adding value throughout the organization In our view. there is a strong tendency to take a rather formalistic approach to compliance projects. Many investors are attracted to the favorable risk to return ratios for these investments. The policy on compliance should be consistently implemented across the entire organization so that it becomes ingrained in its very fabric. CRISA gives guidance on how institutional investors should execute investment analysis and activities. A voluntary code. How this affects firms now. Institutional investors (eg. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. In short. the cost increase may be so steep that it could contribute to a new round of market consolidation. The approach of KPMG member firms to this value-adding compliance distinguishes four key areas: (1) Governance (2) Policies and Procedures (3) Monitoring. 2012. based on translating laws and regulations into procedures. Asset managers that ensure good measures for risk and disclosure – demonstrably ensuring compliance with the new requirements under the AIFMD – should gain competitive advantage. The UK regulator is currently also changing into the same Twin Peak model as that operated by the Netherlands.. KPMG International is a Swiss cooperative. this is not credible and the organization will not be receptive to compliance measures because its corporate culture has not changed accordingly. while also anticipating the changing attitudes of regulators (who have also moved away from focusing only on ‘hard controls’). KPMG International provides no client services. but the following examples will help illustrate what organizations stand to gain by tackling compliance issues. In fact. This makes these investments much more difficult to value than shares or bonds. That is why it is essential to implement soft controls (also referred to as ‘social controls’ or ‘behavioral controls’).32 | Evolving Investment Management Regulation | June 2012 South Africa – The Code for Responsible Investing (CRISA) CRISA took effect on February 1. • The most obvious example is how clients of asset managers view their products and services. Member firms of the KPMG network of independent firms are affiliated with KPMG International. supervises the conduct of market participants. • Another example is the investment performance of alternative investments.. nor does KPMG International have any such authority to obligate or bind any member firm. the Netherlands Authority for the Financial Markets (AFM). but also give their clients better insight into how it was achieved. pension funds and insurance companies) – as well as their investment service providers (asset managers and consultants) – now have to disclose in their reporting to stakeholders the extent to which the code has been implemented. It is widely anticipated that stakeholders will feature prominently in persuading institutional investors to follow CRISA’s recommendations. and similar changes are underway in South Africa. © 2012 KPMG International.. managers that are first to demonstrate full adoption of the principles and recommendations should enjoy short to medium-term competitive advantage. it is crucial to pay considerable attention to ensuring their correct valuation – not only because it is mandatory under the new requirements. For example. asset managers who have mastered the valuation process should not only be able to deliver better investment performance. from coaching and training programmes. As a final point.. Nonetheless. But those firms that adopt a positive and comprehensive approach should certainly be rewarded for their efforts. it aims to provide investors with the guidance needed to give effect to the King III Report on Corporate Governance. but also because the valuation process helps to create a good understanding of the factors affecting the value of investments. it is crucial to ensure that compliance is viewed by the rest of the organization as adding value – and this can only be achieved by using an integrated approach. but find them more difficult to monitor because market quotations are often unavailable. However.

the Hong Kong Securities and Futures Commission (SFC) proposed a new set of guidelines on anti-money laundering and counterterrorist financing. Turbulence in the region. Some also forecast that the Japanese FSA inspection function will be enhanced to detect frauds and clean off imprudent parties. nor does KPMG International have any such authority to obligate or bind any member firm.Evolving Investment Management Regulation | June 2012 | 33 ASPAC Aligning international standards The region is working to align standards across countries and promote ‘best practice’ in corporate governance and reporting across jurisdictions. have had a significant effect on the objectives of regulators. All rights reserved. with the objective of providing guidance to the industry ahead of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. The objectives of the new standards are to better align Hong Kong with the prevailing international standards and help strengthen Hong Kong’s status as an international financial center. Singapore As Singapore continues to position itself as a regional hub for the hedge fund industry. Furthermore. further increasing scrutiny of the ASPAC investment industry. institutional investors) and other investors may become more restrictive. Hong Kong In September 2011. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. This will enhance the governance framework and responsibility placed on the directors of hedge fund managers. page 9). additional requirements around the need for a risk management framework covering customer assets have been proposed by the MAS. Member firms of the KPMG network of independent firms are affiliated with KPMG International.3 billion) of pension assets) has sent shockwaves through political and regulatory agendas (see Perspectives: ASPAC. © 2012 KPMG International. The AIJ scandal in Japan has sent shockwaves through political and regulatory agendas. KPMG International provides no client services. This could result in a reduced number of pension funds meeting the criteria for QI status and the number of QIs eligible for private placement of securities being reduced. such as the AIJ scandal in Japan. which came into effect in April 2012. requiring investment managers – including best practiced organizations – to provide proof of their fiduciaries and sophisticated internal control environment. where the AUM exceeds SGD1billion the manager will require a dedicated full-time compliance function. This should increase the compliance costs associated with operating in the industry. the ruling parties and the Japanese regulators considering their responses and it is anticipated that the classification of Qualified Institutional Investors (QIs – a term defined to include certain financial institutions and experienced. . The scandal has resulted in government. Japan The February 2012 AIJ scandal in Japan (relating to the disappearance of JPY 100 billion (US$1. KPMG International is a Swiss cooperative.

. which will then have to be updated for subsequent filings. To lower their costs. the first filing is now scheduled for early 2013. the prospect of more in-depth examinations from regulators and due diligence processes from investors should cause firms to examine their supervisory. firms should expect more rigorous review from government agencies. The underlying message from regulators is clearly. who tend to maintain assets with investment advisers for longer periods. They may choose to start outsourcing certain middle and backoffice functions such as affirmation. it will need to be validated prior to filing and then updated regularly. every ruling and pronouncement from a government agency monitoring the asset management industry has made it abundantly clear that no regulator wants to preside over a period of financial tumult similar to the events of 2008. Instead of scheduling examinations at regular intervals. including tips. among other features. Firms facing rising cost pressures may also want to revise their operating models to target more high-net-worth individuals and institutions. complaints and referrals.600 data points. Form PF will have a tremendous impact because the SEC can share its information with other regulatory agencies (although Form PF filing is confidential and not available to the public). Whatever forms are ultimately approved. firms may need to transfer back-office functions offshore or to third-party providers. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. All rights reserved. (The US Chamber of Commerce and the Investment Company Institute are now challenging it in court). so vast amounts of information will need to be gathered from internal systems and external sources as well. This requirement will change if Form CPO-PQR ultimately becomes law.34 | Evolving Investment Management Regulation | June 2012 Americas New rulings and regulations As regulatory demands increase. Over the past year. “It will not happen again on my watch. SEC examiners can draw on numerous sources. scheduling the frequency and intensity of examinations based on the perceived level of risk that the firm’s business activities and affiliations pose to their investors. and investor reporting. As regulatory demands increase.” New demands from regulators are likely to create new cost pressures for asset managers. they cannot be delayed for long if firms expect to plan for growth – and avoid being swamped by the higher costs of new regulations. The SEC also intends to engage in ‘a significant percentage of unannounced exams. To identify higher-risk registrants. To improve their product offerings. nor does KPMG International have any such authority to obligate or bind any member firm. liquidity funds and private equity funds firms should now be planning how they will meet the deadlines for filing the SEC’s new Form PF. © 2012 KPMG International. As a result. In addition. Investment advisors will have to go through similar machinations to file the new Form CPO-PQR. While they are working to lower costs.’ chosen through a combination of risk-based analysis and random selection. many firms are reconsidering their operating models. In the past. but for most of the private fund industry. Although Form CPO-PQR seems less burdensome than Form PF. many firms are reconsidering their operating models. risk. As a result. while also adding limitations on futures and swaps trading by registered investment companies that are exempt from CPO registration. along with venture capital funds. and high-risk sales practice patterns. with higher margins and greater potential revenue. The form contains roughly 1. how can firms also start to generate more revenue? Hedge funds. according to a National Examination Risk Alert issued in November 2011. advisers who managed mutual funds were exempt from registering as commodity pool operators (CPOs). compliance and operations models to ensure they are evergreen and support the firm’s response to changing regulations and investors’ demands. any noteworthy changes in registrants’ business activities. After the information is obtained. however. allowing the cost of bringing these customers on board to be amortized over a longer time. so will the costs of operating an asset management firm. so may the costs of operating an asset management firm. portfolio accounting. which requires a level of detail that many advisors believe is unprecedented. clients and shareholders. CPO-PQR will still require the input and validation of large amounts of data. Investment firms should therefore begin to assess the effects of new rules and regulations on their operating models. confirmation. Certain firms may have to file the Form PF sooner than others do. Private funds with less than US$150 million in assets under management. these firms may look to create pooled private fund vehicles or institutional managed accounts that have a fee structure closer to that of a hedge fund. Member firms of the KPMG network of independent firms are affiliated with KPMG International. Confronting new regulations and revising a firm’s operating model may be tedious prospects. the SEC has instituted a National Examination Program that includes. are not required to report on Form PF. Besides the administrative burden. which was adopted by the CFTC in February 2012. KPMG International is a Swiss cooperative. The CFTC’s ruling also modifies the annual disclosure relief to certain registered CPOs. KPMG International provides no client services.

In the US.06 Capital Markets – The impacts of market structure changes EMA Market transparency and integrity In context. In the UK. nor does KPMG International have any such authority to obligate or bind any member firm. In particular. have led to a wave of regulatory activity in the last three years that will fundamentally impact investment managers. which could cause additional complexity for non-US firms. Member firms of the KPMG network of independent firms are affiliated with KPMG International. the G20 mandated that all eligible OTC derivatives should be centrally cleared and transaction reported by the end of 2012. DoddFrank will have much the same effect. the Government is in the process of breaking up the Financial Services Authority (FSA) and ushering in a new regulatory regime – all taking place in parallel with significant changes elsewhere in the regulatory regime.. the integrity of markets and their ability to service the real economy were key regulatory concerns. This mandate was in order to address a perceived lack of transparency and a build up of systemic risk for which the financial crisis was blamed. EMIR and the Regulation on Short Selling. In 2009 in Pittsburgh. together with the EU Commission’s intent to revisit the Market in Financial Instruments Directive (MiFID) to address consumer protection concerns concurrent to changes in wholesale markets. These measures. . No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. KPMG International is a Swiss cooperative. There are a number of legislative initiatives underway that affect market infrastructure – and subsequently investment managers. are likely to have a fundamental impact on the financial industry as a whole. © 2012 KPMG International. In Europe. together with the new Markets Abuse Directive (MAD). MiFID 2. KPMG International provides no client services.. All rights reserved. the transparency of trading interests. married with substantial extraterritoriality provisions. One of the consequences of the fall of Lehman Brothers in 2008 was an increase in regulatory scrutiny of the way wholesale markets operate.

This will have an effect on the liquidity of fixed income instruments that in turn will lead to an increase in bid/ask spreads. The creation of Organized Trading Facilities (OTFs) – though it is far from clear whether these will be introduced) together with pre-trade transparency requirements. Investment managers should be aware of their reporting requirements – both under EU and US law if dealing with US counterparties – and put in place the required systems and controls to manage their reporting requirements. In order to address liquidity risk. both for CCP and non-CCP transactions. will require all transactions in OTC derivatives to be reported to Trade Repositories. These measures are likely to increase the cost of capital. Investment managers that hold commodity positions will need to build the systems and controls to monitor their positions and ensure that they can be effectively managed. MiFID and the new provisions in Basel are designed to mitigate these. Collateral that does not meet these requirements will carry higher haircuts. New capital and collateral requirements. investment managers should also consider how they connect to CCPs and new trading venues. in particular. © 2012 KPMG International. which will monitor and enforce limits on those positions. settlement systems and data consolidators will impact investment managers. Increased transparency should allow firms and regulators to more accurately monitor counterparty exposures. should also be taken into account. MiFID and EMIR address this through increased transaction reporting. for example. Impacts on investment managers – next steps Investment managers will be seriously affected by changes to market infrastructure – whether directly – through changes to trading venues. . regulated trading venues. Finally. A lack of clear information on counterparty exposures led to a build up of systemic risk. this collateral should carry low credit risk and be highly liquid. irrespective of whether they are centrally cleared. whether they need to become an OTF. leverage. The first did not allow counterparties to know their exposures to others. The impact on the financing structure through. if they internalize any client orders. Credit and Liquidity Risk Management Changes to market structure are ultimately designed to reduce credit and liquidity risk. Notwithstanding the impacts on liquidity of markets. and be more expensive as a result. MiFID will impose new requirements on commodity derivatives. financial counterparties will need to hold more capital under the Counterparty Risk Regime in CRD 4 and collateral (whether initial or variation margin. Traders of commodity derivatives will need to report their positions to trading venues. Changes to market infrastructure Changes to market infrastructure. will ensure that adequate funds are held to cover a counterparty default. All rights reserved. Investment managers should closely monitor their collateral reserves to ensure the most efficient use of own funds and that they continue to meet their obligations under CRD 4. It is important for firms to start thinking about how these changes will impact their business and operating models – and the changes that are required to ensure continued profitability in the years to come. or a Systematic Internaliser (SI). There were two facets to the fall of Lehman Brothers: opaqueness in derivative markets and poor risk management. MiFID 2 will also impose new pretrade transparency requirements to equity-like and non-equity instruments. or both) will need to be posted between parties. KPMG International is a Swiss cooperative. connectivity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. will impact OTC volumes in the cash equities space and may impact the way that investment managers are able to achieve best execution. They should also review their reference data to ensure that they can complete the new data fields that will be required. as demand for highgrade instruments increases in order to cover transactions. For non-CCP transactions. and therefore a likely rise in transaction costs. They may also need to consider. data. including Central Counterparties (CCPs). CCPs will be required to charge higher sums for clearing OTC derivative transactions. EMIR. through increases in collateral and capital charges and the ensuing rise in transaction costs. the second meant that inadequate capital was held and collateral charged to manage the ensuing credit and liquidity risks that arose. systems and controls – and/or indirectly. KPMG International provides no client services. investment managers should consider the amount of cash available for collateral calls in each of the funds they manage. EMIR. An increased drive for transparency The opaqueness of OTC derivative markets was one of the key contributors to the collapse of the financial system in 2008.36 | Evolving Investment Management Regulation | June 2012 Investment managers will be heavily impacted by changes to market infrastructure. nor does KPMG International have any such authority to obligate or bind any member firm. In addition. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties.

Evolving Investment Management Regulation | June 2012 | 37 US Restoring investor confidence The financial tumult that began in 2008 highlighted a number of shortcomings in the financial markets beyond the banking sector. investment managers can only plan for alternatives. KPMG International is a Swiss cooperative. KPMG International provides no client services. however. the CFTC has not yet held discussions on how to define different kinds of swaps or the major swap participants. A glaring lack of transparency in the markets for OTC derivatives only worsened the fears of investors and hastened their declining confidence in OTC markets and trading mechanisms. What remains uncertain is exactly when final rules will appear from various regulatory agencies and what these rules will require of OTC trading professionals who are now trying to make far-sighted decisions about which products and customers should be retained in their business models. nor does KPMG International have any such authority to obligate or bind any member firm. they cannot develop permanent © 2012 KPMG International. regulatory authorities in Europe and the US responded immediately and aggressively. Member firms of the KPMG network of independent firms are affiliated with KPMG International. These rules are scheduled for implementation in November 2012. the management of securitized products and counterparty credit risk. as have the major organizations responsible for clearing trades in OTC derivatives. New regulations and requirements will certainly transform the OTC derivative landscape from one based on bilateral contracts. The goal here is to identify any swap that could pose systemic risk based on factors such as size and lack of transparency. to a more transparent central clearing market similar to the market for futures. in particular. Under Dodd-Frank. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. and which ones should not. To restore the confidence of investors. Until these discussions take place. All rights reserved. . New reporting rules The CFTC. the CFTC must also set the rules for defining OTC derivatives as security based swaps or swaps. which has forged ahead to develop new rules for reporting transactions. As of early spring 2012.

so they will be in a better position to negotiate transactions.. banks and government agencies in Japan. futures commission merchants (FCMs) and other clients are building automated interfaces with clearing organizations. firms will have only 60 days to register as swap dealers (if they choose to). and the European Union have voiced concerns that the Volcker Rule will also have a highly damaging effect on international cooperation. In response. Once definitions are established by the CFTC. Adapting to new requirements As the work of regulators continues. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Centralized clearing and new requirements for reporting trades will add transparency that should remove some of the risk that investors encountered in the 2008 meltdown. financial institutions should continue to assess their requirements and actively plan for the Rule’s implementation. and how the process will work for centralized counterparty clearing (CCP). Britain. FCMs will have to provide daily breakdowns of where all assets are from. Meanwhile. and that they will have to monitor their trading activities to prove they are complying. in the short term and perhaps for years to come. The process of adapting to increased regulatory scrutiny and reporting requirements will be filled with complication and uncertainty.000 responses. Therefore. Member firms of the KPMG network of independent firms are affiliated with KPMG International. All rights reserved. many dealers may choose to stop selling products that currently generate only marginal profits.000 responses to the Rule and make final decisions by the originally anticipated deadline of July 2012. Firms in need of direction should now prepare for several alternatives. issued in late 2011. Perhaps the most contentious issue on the table for trading professionals is the proposed Volcker Rule. the US SEC has not yet published all its proposals for regulating the derivative products and transactions for which it is responsible. Of course. . many claiming that the Rule will prevent asset managers from hedging risks. the major clearing organizations have been proceeding on their own paths. for example. Many of these organizations are already clearing interest-rate products. adopting a phased-in approach of its requirements over an extended period. Similarly. critics of the Rule urge delaying its introduction or at the very least. and some are clearing credit default swaps (CDS). hamper banks’ ability to provide adequate liquidity to clients. In addition. since trades handled through CCP will be reported within the same day at the latest. KPMG believes that the Volcker Rule will ultimately be operationalized in some form. KPMG International provides no client services. it is entirely possible that firms which choose to handle products such as interest-rate swaps as well as equity-type swaps will have to follow two sets of rules and deal with two different US regulatory agencies. To compound the difficulties faced by professionals who trade in OTC derivatives. that financial institutions will be restricted from proprietary trading.. as niche markets for certain OTC derivatives become more attractive. The Volcker Rule – a contentious issue. customers can obtain more information on prices. nor does KPMG International have any such authority to obligate or bind any member firm. from now on dealers will have to hedge their activities out of their own resources. KPMG International is a Swiss cooperative. © 2012 KPMG International. Federal agencies soliciting feedback have received more than 17. Perhaps the most contentious issue on the table for trading professionals is the proposed Volcker Rule. Adding to the cost. among others. though they may be long in coming. or create independent entities at home or in the US. Institutions outside the US should determine if they want to register their home country banks as swap dealers. Federal Reserve Chairman Ben Bernanke admits that federal agencies cannot possibly review all 17. Among other requirements. dutifully establishing which products they will clear. Some dealers may choose to leave the OTC derivatives business altogether. The benefits of all these changes. issued in late 2011. Nonetheless. Regardless of what happens next. Certain FCMs may actually benefit from the new environment. are evident. customer by customer. and perhaps impede the global economic recovery. as of early spring 2012. Canada.38 | Evolving Investment Management Regulation | June 2012 solutions. the playing field for OTC derivatives will almost certainly change in ways that will benefit those far-sighted firms that are able to adapt and thrive in an environment of continual change. Echoing these concerns. someone will have to pay the cost of implementing all the systems needed to move from bilateral trading to daily margining. For these reasons.

the industry is facing a game-changing shake up. the Financial Supervisory Agency (FSA) introduced several reforms to avoid systemic risks in the derivatives market. clearing facilities. implementation of the G20 and Basel requirements in respect of OTC derivatives in Asian jurisdictions is not a straightforward matter. the Monetary Authority of Singapore (MAS) has been engaged in ongoing work on OTC derivative reforms carried out by the Financial Stability Board (FSB) and various international bodies such as the International Organisation of Securities Commissions (IOSCO). Other jurisdictions are also looking at how best to implement the requirements in their own market. KPMG International provides no client services. Japan Following the Lehman shock. Current European and US proposals on OTC derivatives will fundamentally change both the operational and economic structure of this marketplace. Hong Kong. By November 2012. All rights reserved. Member firms of the KPMG network of independent firms are affiliated with KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. trade repositories and market intermediaries for OTC derivative contracts. This suggests that some tailoring of the G20/Basel requirements to local circumstances would be appropriate. The proposals address the four key aspects. given local characteristics. Singapore In Singapore. Hong Kong intends to introduce mandatory reporting of certain products to a trade repository being set up by the Hong Kong Monetary Authority (HKMA) and mandatory central clearing through a designated CCP. Hong Kong As an example. including: © 2012 KPMG International. the Committee on Payment Systems and Settlements (CPSS) and the Committee on the Global Financial System (CGFS). In order to implement the FSB recommendations effectively. The FSA’s primary focus seems to be on the growth and expansion of the Japanese market. Several countries in the Asia Pacific region have adopted different strategies for meeting their OTC derivative reform commitments. As a result. The FSA reformed the Financial Instruments and Exchange Law (FIEL) in 2010. MAS proposes to expand the scope of legislation to mandate central clearing and reporting of OTC derivative contracts. This means that there may not be a uniform approach adopted by regulators and jurisdictions will not necessarily be starting from the same place. in Japan. Japan and Korea have all launched consultations or announced measures on OTC derivatives reform. with the following objectives: • Improving the stability and transparency of the settlement of OTC derivative transactions • Strengthening the securities clearing and settlement systems – including those for government bond transactions and stock lending transactions • Consolidating the regulation and supervision of securities companies • Increasing hedge fund regulation • Stabilizing the market with the development of a reporting system for short selling. as well as regulate market operators. but will not introduce initially the requirement for trading on an exchange or electronic trading platform. In fact. as markets are generally small and the transactions conducted tend to be less sophisticated. all specified OTC derivatives transactions will be required to be settled at a domestic CCP. nor does KPMG International have any such authority to obligate or bind any member firm. .Evolving Investment Management Regulation | June 2012 | 39 ASPAC Growth without systemic risk OTC derivative reforms The OTC derivatives market received widespread criticism for its complexity and opacity in the wake of the financial crisis. KPMG International is a Swiss cooperative.

a number of countries have continued to promote developments in the last year to increase the attractiveness of their exchanges to foreign investors. nor does KPMG International have any such authority to obligate or bind any member firm. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. . Japan Driven by similar motives. A clear concern emerging relates to potential conflicts between local requirements and those from other centers. KPMG International is a Swiss cooperative. 2012. securities registration statements and extraordinary reports. \ Singapore In a consultation paper issued in April 2012. Taiwan Taiwan’s targeted expansion of its capital markets and attracting of new listings is being supported by the promotion of a high technology and innovative industry funding platform.40 | Evolving Investment Management Regulation | June 2012 • Standardization of OTC derivative contracts • Mandating of central clearing of all standardised OTC derivative contracts • Moving of OTC derivative contracts trading to platforms. This followed an amendment to the SFA in January 2012 to establish a regulatory framework for credit rating agencies (CRAs). where appropriate • Reporting trades to trade repositories. as well as securities filings and quarterly reports disclosed in English can now be accepted by Japanese regulators in order to lower the hurdles for foreign companies to be listed in Japan – thus widening investors’ choice. CRAs operating in Singapore are now required to apply for a capital markets services (CMS) licence under the SFA to carry on business in ‘providing credit rating services’ within six months from January 17. position and operational risk requirements. Concern would appear to be particularly marked in relation to dealings with US institutions – specifically DoddFrank issues. A clear concern emerging relates to conflicts between local requirements and other centers’ requirements. particularly if there is no international agreement on mutual recognition of CCPs (domestic or regional). All rights reserved. The aim of the consultation paper is to enhance and update the RBC framework. The concern would appear to be particularly marked in relation to dealings with US institutions – specifically to Dodd-Frank issues. the MAS proposes to extend a comprehensive risk-based capital (RBC) framework to all capital markets services licence holders (the ‘CMSL holders’) under the Securities and Futures Act (SFA). Member firms of the KPMG network of independent firms are affiliated with KPMG International. and will include enhancement in the areas of financial resources and counterparty. Plans include: • Relaxation of qualification restrictions for foreign enterprises seeking listings • Abolishing restrictions on the use of funding raised by foreign issuers • Opening up Hong Kong listed enterprises for secondary listings • Targeting primary listings for foreign issuers in the technology sector © 2012 KPMG International. KPMG International provides no client services. in Japan. Representatives of CRAs who engage in preparing credit ratings in Singapore must be appointed and registered under the Representative Notification Framework under the SFA. Other regional developments In addition to the OTC derivative reforms.

While we do not expect these national rules to deviate materially from FATCA. Consequently. Spain and the United Kingdom) to agree on specific bilateral arrangements. KPMG International provides no client services. Germany. Developments like FATCA in the US and plans around the Financial Transaction Tax (FTT) in Europe will have a number of key challenges for the investment fund industry: • perating models need to change O • anagement responsibilities to M investors and governments are increasing rapidly • he development of an overall T tax compliance policy becomes more and more difficult FATCA – still some way to go… The recent FATCA announcements by the US authorities aimed at meeting the request for a more proportionate treatment of the investment fund industry have been welcomed. . Italy. nor does KPMG International have any such authority to obligate or bind any member firm. It appears that the main feature of those agreements involves an information exchange process on an inter-governmental level. the conditions to meet exemptions – or the so-called ‘restricted statutes’ – are still too tight to reflect the complexity of the industry’s global distribution models.. Managing international tax risks and opportunities has become more of a focus for the investment management industry. Uncertainty remains around some aspects.. rather than an individual organization disclosing directly to the US authorities. EMA challenges FATCA. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. a national framework might be more flexible in interpretation for specific country requirements during the implementation process. KPMG International is a Swiss cooperative.. The European Commission is encouraging the negotiations of the five EU countries concerned and has expressed its wish that these © 2012 KPMG International. However. The countries entering into intergovernmental agreements should transpose FATCA rules into their national laws.07 Tax goes global – Risk management has to follow.. All rights reserved. such as the treatment of umbrella funds and the joint statement made by the US and certain EU countries (France. Member firms of the KPMG network of independent firms are affiliated with KPMG International. the industry requests for simplified rules for products that are unlikely to be used for tax fraud have not yet been adequately addressed. Financial Transaction Tax and more.

Spain. In addition to the opportunity to obtain refunds and increase the investment return for all unit holders. The Aberdeen case In 2009. while many others are under increasing pressure to consider refunds – especially from the ECJ (eg. Australia is discussing the possibility to exempt Australian sourced income from tax – to the extent that an exchange of information agreement is in place with the investment fund’s country of residence. All rights reserved. Tax reporting – operational challenges Investors have been pressurised by their national tax authorities to invest in fund products that produce tax reporting in line with their national laws. nor does KPMG International have any such authority to obligate or bind any member firm. Whether the inter-governmental approach will be a positive move or not will depend on the content of the agreements. KPMG International is a Swiss cooperative. or the conclusion of derivatives agreements. The risk therefore remains that asset management groups acting around the globe are likely to be obliged to monitor different set of rules rather than just one agreement with the US authorities. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. This decision provides a solid basis for all investment funds. Portfolio taxation Operational (withholding) taxes contain more challenges than in the past. Sweden). © 2012 KPMG International. unless unfavorable lump sum taxation systems apply. France) – and from their national courts (eg. where the industry is facing unexpected retroactive claims from individual countries’ tax authorities – strengthening the need to approach taxes globally from a risk management perspective. It appears that nearly 40 countries have raised interest in the intergovernmental initiative.01 percent in the case of derivative agreements FTT would not only be due in the case of sale or purchase of portfolio investments. The FTT is designed to cover a wide range of financial transactions. the European Court of Justice (ECJ) decision in the Aberdeen case (C-303/07) was a milestone judgment for the abolishment of discriminatory taxation of cross-border dividends. Funds being established in non-qualifying territories risk paying a higher withholding tax. the number of countries signing up and the global reach of the asset manager. Management should no longer consider tax as a purely operational issue. Member firms of the KPMG network of independent firms are affiliated with KPMG International. The industry is facing multiple tax challenges. Germany.1 percent for financial transactions other than those related to derivatives agreements • 0. executives should carefully evaluate their options. but also on subscription and redemptions of the fund units. The intention is for the FTT to be issued on transactions involving financial instruments carried out by at least one EU based financial institution. Management should no longer consider tax as a purely operational issue. but should instead respond with a global tax compliance strategy. KPMG International provides no client services. Recent surprises have highlighted uncertainties on portfolio taxation. the industry should rightly fight – in the interest of investors – for funds to be exempt from FTT. Given the objectives stated in this draft Directive and the fact that the invest funds would be doubletaxed. 2011. such as the purchase and sale of financial instruments. protective claims have to be filed in order to safeguard the right of the fund to ask for a refund. In order to fulfil expectations of all participants. The production of investor tax reporting is not only a matter of cost to investment managers but also a clear need to be successful in certain markets. Boards should document the decisions taken in this respect and closely monitor developments in the relevant jurisdictions. The draft Directive provides for a minimum level of FTT of: • 0. Some states are also actively promoting an extended exchange of information in order to grant access to pure domestic tax exemptions. The industry is facing multiple tax challenges. In fact. Some countries have already begun to grant reimbursements on this basis. but should instead respond to the challenges with a global tax compliance strategy. For example. taking into account global regulatory developments and viewing operational and strategic options across the business. . UCITS or nonUCITS to reclaim withholding taxes unduly suffered in the Member States where they have made investments.42 | Evolving Investment Management Regulation | June 2012 agreements be open to all EU member states. given the dynamics of the topic. global tax reporting solutions seem today to be the best solution to the issue. the European Commission issued a proposal for an EU-wide tax on financial transactions. Financial Transaction Tax (FTT) On September 28. taking into account the global regulatory developments and viewing operational and strategic options across the business.

The key challenges that should be addressed by regulated intermediaries include: • Developing and implementing changes to investment management administration systems to cater for the change in legislation • Implementing processes and controls to address the requirements of the new DT legislation • Developing an efficient basis for reporting DT information to SARS • Managing the risk of ‘over-deduction’ of DT • Considering the need for external tax specialists where an organization does not have in-house tax specialists • Communicating the implications of the changes to clients • Training of client service staff in respect of the new legislation • Ensuring that clients qualifying for exemption from DT complete the necessary forms and submit these to SARS as appropriate • Amending client statements and tax certificates to cater for DT withheld. a company declaring a dividend or a regulated intermediary (i. KPMG International provides no client services. Implications for firms The change in legislation presents a number of significant challenges for companies and regulated intermediaries – including Investment Management Companies. KPMG International is a Swiss cooperative. not the company paying it. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. nor does KPMG International have any such authority to obligate or bind any member firm. Under the new legislation (implemented on April 1. . 2012). specifically in the areas of client service.Evolving Investment Management Regulation | June 2012 | 43 The new Dividends Tax will affect the investment management industry in South Africa. Member firms of the KPMG network of independent firms are affiliated with KPMG International. All rights reserved. administration and system development.e. and • To make South Africa a more attractive international investment destination by eliminating the perception of higher corporate tax rates (STC is an additional corporate tax) coupled with lower accounting profits (STC has to be accounted for in profit or loss). Organizations should manage the implementation of the required changes as a high priority – and with the support of the necessary specialists either within the organization or in the form of external advisors. The new DT will affect the investment management industry in South Africa. © 2012 KPMG International. a withholding agent interposed between the company paying the dividend and the beneficial owner) will have the responsibility to withhold DT and pay it over to the South African Revenue Service (SARS) on behalf of the shareholder. administration and system development. STC is a tax levied on dividends declared by South African companies whereas DT is a withholding tax levied on dividends receivable by shareholders. is liable for the tax relating to the dividend. legislation has been enacted annually to provide a legislative foundation for the implementation of DT. Collective Investment Schemes and Linked Investment Service Providers. The main objectives behind the change to DT were: • To align the South African system of taxing distributions by companies with international practices where the recipient of the dividend. specifically in the areas of client service. South Africa – facing particular tax challenges… Since an announcement by the Minister of Finance in 2007 that Dividends Tax (DT) would replace Secondary Tax on Companies (STC).

futures. China Taxation of non-resident investors in Chinese funds continues to be a hot topic. non-resident investors are in general not permitted to make a direct investment in a resident fund. While it is clear that QFIIs are subject to withholding tax (WHT) on dividend and interest income derived from China. KPMG International is a Swiss cooperative. and options will incur a 20 percent tax from next year and that local institutional investors who earn in excess of NT$500. but is not limited to. Based on the 2012 budget announcement. . other than a trust that enjoys certain tax exemptions. Important questions around how the tax on realized gains will be determined. Historically.000 will face a 12 percent levy. nor does KPMG International have any such authority to obligate or bind any member firm. Recently. The exclusion list includes. Taiwan Along similar lines. the list of specified income will be revised. WHT on such gains has not been collected in practice because the taxation rules regarding gains on the disposal of ‘on market’ securities by QFIIs have never been clarified. All rights reserved. the ‘designated investments’ list – the income from which is granted tax exemption when derived by approved fund vehicles managed by Singapore based fund managers – will be rationalized and streamlined. distributions made by a trustee of a real estate investment trust that is listed on the Singapore Stock Exchange and distributions made by a trustee of a trust who is a resident of Singapore or a permanent establishment in Singapore. In an attempt to raise revenue © 2012 KPMG International. and redistribute returns from trading more equitably among the nation. it was reported that individual investors who earn more than NT$3 million annually from trading stocks. 2012 from designated investments will be considered as specified income – and hence qualify for tax exemption under the respective fund vehicles tax incentive scheme – unless the income or gains fall within the exclusion list. overseas investors into Taiwan without offices and direct business operations in Taiwan are expected to remain exempt from the proposed capital gains tax on stock transaction proposed to the Cabinet in April 2012. how it will be collected and when such regulation will be effective from will be closely monitored. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. except for an investment made through a Qualified Foreign Institutional Investors (QFIIs) scheme.44 | Evolving Investment Management Regulation | June 2012 ASPAC challenges Cross-border issues The variations in tax regimes in jurisdictions across the region – particularly the basis on which nonresident individuals or entities are taxed when investing into some countries – remain a complex challenge for potential international investors to navigate. In addition. the State Administration of Taxation (SAT) has been drafting a tax regulation to clarify the WHT treatment on such gains realized by QFIIs. as an exclusion list. Member firms of the KPMG network of independent firms are affiliated with KPMG International. From the Chinese regulatory perspective. such that all income derived on or after February 17. KPMG International provides no client services. the position of Chinese taxation on the gains realized from the disposal of shares by the QFIIs has limited case history. \ Singapore The Singapore Government has announced in the recent 2012 budget an additional round of liberalization aimed at simplifying the tax rules to stimulate the fund industry.

maintain their businesses as they begin to restore confidence among policymakers and the public in the investment management industry. The stories that will likely result from this time of sweeping transition are just beginning. KPMG International is a Swiss cooperative. As a result. However. FATCA is being driven by a hard deadline of January 1. As one example. deep breaths and repeat certain guidelines that are easy to enunciate but often hard to keep mind: • Maintain your perspective • ay close attention to what is P happening in the centers of world finance • arve out alternative paths C for your business that can be instantly set in place and pursued. Working together. witness the reaction among policymakers and the public. they should be prepared to do all that is possible to mitigate difficulties and capitalise on opportunities. Despite this haste. the long-term capital gains rate is supposed to go up. As a result. tax professionals should be preparing US companies to confront similar legislation that may be adopted in retaliation by other countries. All rights reserved. by the end of 2012. KPMG International provides no client services. 2013. for some. © 2012 KPMG International. paying close attention to the behavior or regulatory agencies may help to evaluate the full impact of FATCA.. but only as long as the US Congress takes no action. seeing light at the end of this long and twisting tunnel is quite a challenge. As the regulatory agencies clearly need guidance from the industry on the real-world impact of new and proposed regulations. FATCA will penalise foreign financial institutions and entities that refuse to disclose the identities of certain US persons. and in so doing.Evolving Investment Management Regulation | June 2012 | 45 US challenges A unique situation In a time of sweeping transition. Perhaps most important in a time of such sweeping change. where emotions are running so high that they evoke the period after the Great Depression. tax professionals need to understand various complex markets and regulatory environments around the world.. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. who will have to grapple with regulations written for the banking industry (which is structured very differently). no one can say. with minimal penalties for non-compliance? At this point. who will have to grapple with regulations written for the banking industry (which is structured very differently). What if Congress decides to extend the current low capital gains rate? Companies who are now making plans on how to respond. whatever policymakers decide. even the most burdensome legislation is seldom chiselled in stone. investment managers can easily become disheartened as they survey events as portrayed in the media. Everyone in the financial services community is following the development of relevant legislation throughout the world. and extend these events to their worst possible conclusions. these deadlines have been missed or delayed. for either alternative. both tax professionals and their clients should take a few long. may be able to provide better service to individual customers than their competitors. At the same time. . These stories are far from over. More than ever. Among other impacts. the Internal Revenue Service (IRS) does seem to be listening to the concerns of the financial services industry – that FATCA has broad implications for investment managers. tax professionals should draw upon a broad base of knowledge when they make recommendations to clients. tax professionals should be working closely with trade groups who liaise with legislators to resolve many of the problems that may be caused unintentionally. FATCA has broad implications for investment managers. As one example. It is more important than ever to make alternative plans that are carefully considered and ready to apply to your business. Admittedly. Do the inevitable difficulties of many companies with FATCA mean that initially the Internal Revenue Service (IRS) may have a light enforcement period. the upcoming FATCA legislation may affect how tax professionals advise their cross-border clients and how certain transactions are structured. For example. Many of these regulations are being put forward under tight deadlines. How these rules are interpreted and enforced may be more revealing – and more significant to the industry – than how those rules have been written. in a situation as unique as this. product mix and who their customers will be. Member firms of the KPMG network of independent firms are affiliated with KPMG International. This includes the two-month session of Congress anticipated in the immediate aftermath of the November 2012 elections. tax professionals and their clients should plan for almost any eventuality. investment managers and tax professionals should also pay close attention to how regulatory agencies are preparing to enforce the regulations they are creating. However. Managers will need to make complex and farreaching choices. nor does KPMG International have any such authority to obligate or bind any member firm. such as cost.

KPMG International provides no client services. KPMG International is a Swiss cooperative. the paper states.” The EU Commission has therefore repeatedly hinted that they were working on a specific new harmonized long-term savings regime and that plans could be revealed by the end of 2012. nor does KPMG International have any such authority to obligate or bind any member firm. Member firms of the KPMG network of independent firms are affiliated with KPMG International. and whether the rules applicable to retirement insurance products should also apply to pension funds. firms should determine their capital requirements using the Solvency Capital Requirement formula. sustainable and safe European pension systems’. the EU Commission wants to increase cross-border portability of pension schemes and is working on a revision of the Institutions for Occupational Retirement Provision Directive (IORP) directive. 2012. “there is a need to improve the quality of financial products for individual retirement savings not linked to employment. This formula will be a risk-based approach. © 2012 KPMG International.08 Pensions – Increased disclosure and reporting requirements EMA More than just solvency requirements… On February 16. In essence. All rights reserved. “with the aims of further facilitating the cross-border activity for IORPs and modernizing their supervision. taking into account the different types of IORP in Member States”. When the Insurance Directive becomes effective on January 1. . Although mostly concerned with social topics such as securing the financial sustainability of pension systems. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. as this has implications for capital requirements. the EU Commission published a white paper containing a proposed ‘Agenda for Adequate. such as third pillar schemes and other financial products used to supplement the incomes of the elderly. Solvency II: impacts on insurers Solvency II will require firms to place a greater emphasis on risk management. 2014. At the same time. the white paper also focuses on developing complementary private retirement savings. Safe and Sustainable Pensions’ which also reflected the results of the wide-ranging consultation launched by the 2010 EU Commission Green Paper ‘Towards adequate. which should take into account the operational risks and those risks inherent in the assets and liabilities of the balance sheet. maintaining the adequacy of pension benefits or raising the pension age. One of the most hotly debated rules in this context is the question of solvency rules.

markets and investment portfolio – are likely to affect the solvency of the firm. firms should be able to potentially optimize capital and mitigate the capital requirements imposed by the directive. Solvency II and capital requirements Assets Liabilities Sponsor covenant + PPS Excess of assets over liabilities Component 3 Capital requirements (SCR and MCR) Component 4 Risk buffer Component 7 Component 2 Contingent assets Component 6 Best estimate of liabilities Technical provisions Financial assets Component 5 Component 1 Component that may or not exist Component that always exists This will place a greater importance on risk management. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. After years of ‘will they. including understanding risks. markets and investment portfolio – are likely to affect the solvency of the firm. based on a different set of rules. at the end of 2011 we had a consultation paper from the European Regulator. The key focus of the discussion is that funds will need to determine their required solvency levels. the European Insurance and Occupational Pensions Authority (EIOPA). or Pensions Directive. This gave its response to the request from the Commission on how to incorporate Solvency II requirements into the Institutions for Occupational Retirement Provision Directive (IORP). won’t they’. KPMG International provides no client services. Solvency and pension funds Even though Solvency II for insurers is not yet fully complete. Many strategic decisions and including products. The European Commission is pushing towards imposing capital requirements onto pension funds and possibly using a holistic balance sheet approach – an approach which aims to itemise and account for all assets and liabilities – the balance sheet approach focuses on integrated balance sheet management. . The European Commission is working on a revision. which could bring pension funds into a regime similar to Solvency II. the European Commission has turned its attention to pensions. Pension funds generally do not run significant short-term liquidity risks – but at present many funds do run very significant amounts of equity. KPMG International is a Swiss cooperative. They may have to hold back additional capital to offset risks such as short-term market volatility. The proposal of the European Commission is expected at the end of 2012.Evolving Investment Management Regulation | June 2012 | 47 Many strategic decisions – including products. having risk models working together with capital models. however. longevity and operational risk. currently a vast amount of discussion is taking place with major pension fund Member States around the inclusion of pension funds in the Solvency II-style Directive. All rights reserved. Member firms of the KPMG network of independent firms are affiliated with KPMG International. interest rate and inflation risks – and requiring the funds to hold back capital may have an impact on © 2012 KPMG International. By implementing the appropriate risk management systems and internal controls. nor does KPMG International have any such authority to obligate or bind any member firm.

EIOPA has stated that. However.48 | Evolving Investment Management Regulation | June 2012 contributions or result in a collapse in pension solvency. The next step in this process is for an impact assessment to be carried out. or any other aspect of the proposals. as investment strategies would have to focus on de-risking approaches. . and that ‘continuing to use valuations and risk assessments that deny economic reality is not an answer’. working through the national pensions regulators in seven countries. nor does KPMG International have any such authority to obligate or bind any member firm. In response. solvency requirements. • A common EU approach is a clear goal. However. EIOPA has proposed the ‘Holistic Balance Sheet’ as a means of measuring pensions solvency in the same way for the various different types of pensions (see chart on page 47). Given that the parameters for measuring this do not appear to have been set yet. One is employer support for the future funding of schemes – this applies to most pensions in the UK and some in the Netherlands. there are currently no proposals on how to place valuations on sponsor covenants. a more risk-based approach on required solvency levels can prevent the kind of underfunding situations that may be currently seen across Europe. The common threads from the great majority of the 150 published responses to the European consultation argued that: • The first question is whether – not how – Solvency II should be mapped across to pensions • Impact assessments should be carried out before considering any such proposals further • There are features that do not apply to insurers in the two countries that account for over 80 percent of defined benefit pension liabilities in the EU – the UK and the Netherlands). the two main messages from the EU Commissioner and EIOPA are that: • No parameters have yet been set. asset managers are faced with increasing demands for transparency and faster data delivery by insurers and pension funds. and in particular against cross-border schemes (a concept the EU is keen to promote. All rights reserved. KPMG International is a Swiss cooperative. However the direction of travel is clear as the Chairman of EIOPA has stated that ‘valuations should be market consistent’. nor on pension protection schemes. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. for discount rates.000 billion in the UK alone). would increase the stated liabilities of pensions by huge amounts (by up to £1. Member firms of the KPMG network of independent firms are affiliated with KPMG International. The other is the conditionality of some pensions benefits (pension increases in most schemes in the Netherlands) • The variety of social and tax laws across EU member states militates against a common EU approach to pensions. of risk-free discount rates and extensive solvency capital requirements. This would have a knock-on effect on capital markets. this is clearly a challenging task. this should be complete by September 2012. despite a lack of employer demand for them) • A full Solvency II approach. KPMG International provides no client services. Resulting from the requirements in Solvency II. © 2012 KPMG International.

UK defined benefit schemes are on a (long) path towards a selfsufficiency approach to funding and investment. Investment managers will therefore be required to provide more detail on the investments they manage and apply look-through for funds they manage. from their side. should be able to assist insurers and pension funds in their adjustment to the directive with a portfolio optimization process. On investment risk. nor does KPMG International have any such authority to obligate or bind any member firm. Local regulators are placing lower capital requirements on short-term instruments and derivatives – and with the long-term investment view of insurers and pension funds. There is therefore to reduce their levels of investment risk. this could result in increased attention towards. asset managers are faced with increasing demands on transparency and faster data delivery by insurers and pension funds. There is therefore continued pressure on institutional investors to reduce their levels of investment risk. In general. there is a clear statement that trustees are expected to assess how the employer could realistically be expected to support any higher level of contributions if the actual investment return falls short of that assumed. it is at this stage currently not completely clear where the actual requirements will end up and what the scrutiny of the local regulators will be. This will become quite relevant to insurers as additional capital charges will apply if the asset manager is not able to provide look through to underlying assets in investment portfolio and therefore unable to inform the insurer on the risk profile of the investment portfolio. All rights reserved. derivative overlays – in order to achieve duration matching. there is a clear expectation that insurers and pension funds must assess the real ability of participants to support a higher level of contributions in the event that actual investment returns fall short of assumptions. KPMG International provides no client services. The wider implications of Solvency II Solvency II will affect both insurers and asset managers. investment managers could be looking at considerable impacts on investment strategy – with increased disclosure requirements for their investment portfolio. As a result of the requirements in Solvency II. Assets should be categorized.Evolving Investment Management Regulation | June 2012 | 49 A view from the UK Pension scheme funding The UK’s Pension Regulator issued a new statement on ‘scheme funding’ in April 2012. It is clear that Asset Liability Management (ALM) will become more and more important. in view of the ‘challenging market conditions’ faced by pension schemes having current actuarial valuations. It becomes quite clear that the institutional clients of asset managers are faced with a difficult dilemma – longterm liability versus short-term liquidity requirements. As the requirements with regard to capital charges and investment portfolios are still evolving. who should be able to provide innovative solutions such as the structuring of products. As different asset classes have different capital charges. Member firms of the KPMG network of independent firms are affiliated with KPMG International. for example. Regarding investment risk. Asset managers. . whereby packaging higher risks and returns in structured instruments in order to have a lower capital requirement place upon by the insurer. This risk-based review of the assets and investments. © 2012 KPMG International. Portfolio optimization and assessment of each component could help insurers to understand the risk drivers of their overall portfolio composition. asset managers need not only to be able to perform an ALM process. allocation of assets and rebalancing their investment portfolio. The thrust of this statement is that trustees and employers should not attempt to weaken their technical provisions because of low government bond yields and that employers should continue to give appropriate priority to pension scheme funding alongside other demands for their free cash flows. With duration mismatches attracting a higher capital charge under the interest rate component of the Solvency Capital Requirement (SCR) calculation. could lead to re-allocation of assets to certain type of asset classes because of the capital weightings place upon them. Going forward. as capital charges rest on certain types of assets depending on their nature and duration. This may lead to longer deficit recovery periods as higher deficits are recorded. they should therefore review their investment portfolios and each investment portfolio should be subdivided into various categories to reflect the risks attributable to every type of asset. which should enable institutional investors to assess capital efficiency. The capital management required by insurers and the complexity of investments and investment portfolio decisions may create new and different propositions from asset managers. As insurers will need to review the risk they are taking. but also have robust and efficient Risk Management in place in order to address the many risk concerns of their institutional clients. KPMG International is a Swiss cooperative. insurers and possibly pension funds should review the risk of investments and the capital requirements placed upon them by regulators. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties.

Investments that comply with Regulation 28 are excluded from the calculation of investment limits. Opportunities include additional investment choices when considering the mix between lower risk investments and higher risk-return innovative products. Investment managers should also be able to present retirement funds with a broader product offering. linked insurance policies. All rights reserved. Certain principles have. however. 2011. been introduced to strengthen the investment decisionmaking process. Investment governance Regulation 28 remains rules-based. taking into account environmental. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Funds are encouraged to engage with their third party investment managers to discuss the changes to Regulation 28 and to better understand the controls implemented at the investment manager to ensure compliance and good governance.50 | Evolving Investment Management Regulation | June 2012 Specific pensions challenges in South Africa In addition to the broader solvency challenges in the EMA region. The government’s objective with the new regulation is to ensure that fund monies are invested responsibly. KPMG International is a Swiss cooperative. • Subject to certain exceptions. which dates back to 1956. 2011 were required to apply for extensions before May 31. Regulation 28. provided they obtain a Regulation 28 compliance certificate from the investment manager at the end of the financial year of the fund and a report from the auditor of the investment manager confirming the accuracy of the compliance certificate at the end of the financial year of the investment manager.500 active retirement funds in South Africa. has been subjected to a number of amendments. Revision to Regulation 28 Regulation 28 of the Pension Funds Act (Regulation 28) imposes limits on the investments of retirement funds. the South African pensions industry is facing a number of regulatory challenges. The changes cater for innovations in financial markets and seek to support economic development. Examples include collective investment schemes. Challenges for funds may include not being able to achieve full compliance in the short to medium-term. Investments limits The amendments include a number of changes to the categories of assets in which funds can invest. 2011. more rigorous due diligence and monitoring of investment managers and additional trustee training on investment and governance related matters. The amendments emphasise the fiduciary responsibility of trustees to invest member funds in a long-term sustainable manner. Implications for firms The amendments to Regulation 28 present both new challenges and opportunities to retirement funds when making investment decisions. Over the past few years. even if third parties are appointed to manage the investments of the fund. The amendments also include the following important changes: • Compliance with Regulation 28 will now have to be monitored at an individual member level (subject to certain grandfathering provisions) as well as at an overall fund level. Funds may exclude these assets. nor does KPMG International have any such authority to obligate or bind any member firm. due to a perceived lack of investment expertise among the trustees of the approximately 3. © 2012 KPMG International. The revised Regulation came into effect on July 1. The amendments also make it clear that. KPMG International provides no client services. guaranteed long-term insurance policies and other investment products managed in terms of Regulation 28. Funds that could not re-adjust their holdings by July 1. intended to protect retirement funds against making imprudent investments. These include the lifting of exchange controls – which now allows funds to invest up to 25 percent of their assets offshore – and legislative changes to prohibit the industry from exploiting loopholes. funds should take a ‘look through’ approach when reporting on underlying assets backing investments. Member firms of the KPMG network of independent firms are affiliated with KPMG International. . and possible improvements to investment and governance policies. that the fund retains ultimate responsibility for compliance with Regulation 28. possible changes to compliance monitoring processes. social and governance issues.

combined with the additional challenges of both global and local regulation and interaction between jurisdictions. Australia As part of the Australian Federal Government’s comprehensive review of the superannuation system. The significant structural changes arising from the recommendations of this review will continue to be under scrutiny to assess the quantum of any potential efficiency gains. Further tranches of legislation covering rules for the charging of financial advice. detailed the enhanced trustee obligations for MySuper products including trustee duties to promote the financial interests of MySuper members. develop an investment return. The increase of the minimum registered capital requirements from RMB100m to RMB 300m for trust companies – and no less than RMB 500m for pension funds – are expected to limit the growth in the number of EA managers. However. Revisions of the regulations over the management of Enterprise Annuities (EA) funds became effective in May 2011. as one of the long horizon institutional investors. Additionally. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. and risk target for MySuper members to be incorporated into the investment strategy. All rights reserved. KPMG International provides no client services. © 2012 KPMG International. which detailed key design aspects of MySuper. China China’s National Social Security Fund. it is expected that China may soon allow pension funds run by provincial governments to invest up to 30 percent of their assets in the stock market (local pension funds are currently prohibited from investing in the stock market). Member firms of the KPMG network of independent firms are affiliated with KPMG International. Recent developments have created opportunities for investment managers in the region. These provisions included defining a MySuper product. the new simple. released one month later. the fees that may be charged and the basis on which those fees can be charged to members of a MySuper product. announced that it might invest more in the stock market. . the prohibition of deducting commissions from members’ accounts and disclosure requirements for MySuper products. low-cost superannuation product that will replace existing default products from July 1. annually assess sufficiency of scale. by increasing the potential investment allocation in fixed income and stocks. The diverse region faces numerous challenges within individual countries. 2013. including greater flexibility and potential for increased returns. which manages the country’s biggest pension fund. The second tranche of MySuper legislation. are expected. KPMG International is a Swiss cooperative. The regulations change to the eligibility requirements for an EA investment manager. nor does KPMG International have any such authority to obligate or bind any member firm. investment allocations and the collective EA program. amongst other things.Evolving Investment Management Regulation | June 2012 | 51 ASPAC Population growth and structural change Market growth and an ageing population are key priorities for the ASPAC pensions industry. it should provide investment managers with greater flexibility and the potential to achieve improved returns. in November 2011 the government released the first tranche of legislation containing the MySuper provisions.

Both of these steps can be seen to be encouraging a greater proportion of the countries’ assets to meet the requirement needs of the increasing middle class populations. While much remains unclear at this stage. The ranking system is used by the CPF so that CPF monies are invested into funds that enhance the value of CPF members’ funds. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Singapore The Singapore Central Provident Fund (CPF) remains a widely studied system by countries seeking to reform their current pension arrangements. which allow flexibility and leave the choice to scheme members to withdraw their accrued benefits either in a lump sum or gradually. There is growing support for increased external oversight. regardless of the intentions of the employer that had selected the original provider in the first place. . the Indian government announced that foreign direct investment would be allowed into the pension fund industry for the first time. The attraction to tap into CPF monies in view of client management. nor does KPMG International have any such authority to obligate or bind any member firm. similar to what is allowed in insurance companies. \ India In November 2011. the expected changes are likely to have an impact on the number of market participants in the future. including ongoing review of managers receiving mandate and investment portfolios. reporting and progressive restrictions on wrap fees with the hurdles to obtain CPF approval means that managers may experience additional challenges in tapping into CPF monies as a source of investors.52 | Evolving Investment Management Regulation | June 2012 In Japan. From January 2011. © 2012 KPMG International. performance. while much remains unclear at this stage. KPMG International provides no client services. Hong Kong The Hong Kong regulator has introduced a proposal allowing the withdrawal of Mandatory Provident Fund (MPF) benefits. whereby those funds that enjoyed grandfathered admission will now have to comply with the latest and most stringent criteria on measures such as investment return. All rights reserved. KPMG International is a Swiss cooperative. The government has allowed foreign players to hold stakes of up to 26 percent in Indian pension fund managers. This has enabled the country to raise the share of fund assets to GDP from current level of 5 percent to 17 percent. The expected introduction of portability in the MP is also expected to force providers to reduce their fees through allowing employees to move their MPF from one provider to another. fees and investment process review. the expected changes are likely to have an impact on the number of market participants in the future. Japan The fallout from the AIJ Investment Advisors investigation in Japan is having an immediate impact on a number of companies who are reviewing their controls over risk management of corporate pensions. the CPF will require all funds to adopt the revamped and stricter conditions that have been implemented progressively. Member firms of the KPMG network of independent firms are affiliated with KPMG International.

included its failure to monitor © 2012 KPMG International. which now require a description of the arrangement made between the payer and covered service provider. Big changes ahead. Spurred by this new focus. They are asking if the fees they are paying are too high and setting up alternative structures so fees can be reduced. government plans are also scrutinizing expenses for investment management. Member firms of the KPMG network of independent firms are affiliated with KPMG International. What is perhaps less obvious is the fact that new rules and regulations should also create opportunities for investment advisors who keep a sharp eye on the concerns of legislators and policymakers. these rules extend the deadline for providing initial disclosures to covered plans from the original April 1. The new rules will attempt to create more transparency. Among other features. Sixty days after the July 1 deadlines. The final 408(b) (2) regulations generally retain the basic structure and content of the interim regulations. 2012. While Fidelity maintains that its fees and compensation from the retirement plan are reasonable and that its violations are merely technical. While much of this information has already been reported in prospectuses. fiduciaries must report to plan participants about indirect fees. and most importantly. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Providers should be advised that. The new rules will reinforce the seismic shift in transferring responsibility and risk from providers to investors.Evolving Investment Management Regulation | June 2012 | 53 US Issues and opportunities Issues both large and small continue to shake up the marketplace for pension products in the US. many of which are quite complicated. KPMG International provides no client services.. The violation of fiduciary duties by ABB. they should err on the side of caution.. In early April. so that fiduciaries can determine if these fees are reasonable. One notable change focuses on initial disclosure requirements for indirect compensation. The most imminent change in the rules that govern pensions concerns the final Employee Retirement Income Security Act (ERISA) 408(b) (2) regulations published by the US Department of Labor in February 2012. All rights reserved. such emphasis on indirect fees will undoubtedly generate questions and concerns among participants. on the needs of their customers. or their fees could be at risk. the rules require that covered service providers report on indirect fees by July 1. a judge in a US district court ruled that Fidelity Investment and ABB Inc. if they are in doubt about whether or not to report a particular indirect cost. Increased reporting requirements No one questions the importance of dealing decisively with new reporting requirements in an environment where previously unnoticed costs are being scrutinized and sometimes opposed. Clearly. 2012 to July 1. high-level rules from government agencies cannot always be easily applied to specific fee situations. including indirect expenses. nor does KPMG International have any such authority to obligate or bind any member firm. KPMG International is a Swiss cooperative. Information gathering and distribution The new rules on indirect costs will require that service providers accumulate and disperse massive amounts of information over the next several months. violated federal law by causing ABB employees and retirees to pay excessive fees in their 401(k) plan. the judge in the case ruled that Fidelity breached its fiduciary duties to the plan when it used float income – interest earned from plan assets – to pay for bank expenses that should have been borne by Fidelity. the sponsor of the plan. service providers should be ready to provide alternative structures of their own. which policymakers and consumers are demanding. Providers are already discovering that general. Much of the impact of new rules and regulations is already well understood – they will define vital roles and responsibilities among asset managers and investment managers. . Since indirect costs have not always been clear to fiduciaries.

KPMG International provides no client services. The Treasury’s recent proposals state that individuals can defer a substantial portion of the assets in their 401(k) plans to an annuity that does not have to be distributed until the individual reaches age 85. The future for pensions will almost certainly create tumult and uncertainties that at times may generate create more heat than light.. All rights reserved. in theory. this change should enable plan fiduciaries. Recently. the future for pensions will almost certainly create tumult and uncertainties that at times may generate create more heat than light. After all. At the same time. such widening will carry major legal and reporting implications. DOL is now reviewing its definition and a decision on final regulations is expected. If actually passed. . the US Treasury recently issued proposals that will permit a new form of annuity contract. policymakers who decide the rules governing pensions have recognized that today’s customers will most likely live longer than their parents. participants and IRA holders to receive the impartiality they expect when they rely on the expertise of advisors. Member firms of the KPMG network of independent firms are affiliated with KPMG International. the regulations defining who was acting as a plan fiduciary were drawn very tightly. For all these reasons..2 million and Fidelity to pay US$1. The judge in the case has ordered ABB to pay US$25. Longevity In the US and around the world. the Department of Labor (DOL) issued regulations that will widen the definition of fiduciary. At the same time. KPMG International is a Swiss cooperative. nor does KPMG International have any such authority to obligate or bind any member firm. the rule would represent a sea change in distributions for anyone holding plan assets and will likely create a slew of new opportunities for investment planning professionals. © 2012 KPMG International. and should be allowed to outlive their assets.7 million for losses. More prosaic perhaps than court cases. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. the future also promises an intriguing array of opportunities. the future also promises an intriguing array of opportunities for those professionals who are able to discern what policymakers and customers will require of them and then act creatively to provide solutions. especially for asset management and investment management. DOL’s widening of the definition of fiduciary was much broader than the benefit community had anticipated and generated considerable response among investment professionals. Therefore. When the ERISA was introduced in 1975.54 | Evolving Investment Management Regulation | June 2012 recordkeeping costs and to negotiate rebates from Fidelity on behalf of the plan. sometimes much longer. government agencies continue to define roles that will heavily influence the activity of investment managers for years to come.

KPMG International provides no client services. Member firms of the KPMG network of independent firms are affiliated with KPMG International.Evolving Investment Management Regulation | June 2012 | 55 Abbreviations AFM AIF AIFM AIFMD AIMA ALM ARFP ASPAC APEC AuM BCBS BRIC CCP CDPs CFTC CISA CGFS CMS CRAs CPF CPOs CPSS CRD 4 CRISA CVM DB DFA DOL DUFAS EA EC ECJ EFAMA EIOPA EMA EMIR EP ERISA ESG ESMA ETFs EU FA FAIR FATCA FCMs FDRC FIEL FINMA FINRA FOFA FOI FSA Netherlands Authority for the Financial Markets Alternative Investment Fund Alternative Investment Fund Manager Alternative Investment Fund Managers Directive Alternative Investment Management Association Asset Liability Management Asian Regional Funds Passport Asia-Pacific Asia-Pacific Economic Cooperation Assets under Management Basel Committee on Banking Supervision Brazil. nor does KPMG International have any such authority to obligate or bind any member firm. Russia. Social and Governance European Securities and Markets Authority Exchange Traded Funds European Union Financial Advisory Financial Advisory Industry Review (Singapore) Foreign Account Tax Compliance Act Futures Commission Merchants Financial Dispute Resolution Centre (Hong Kong) Financial Instruments and Exchange Law Swiss Financial Market Supervisory Authority Financial Industry Regulatory Authority Future of Financial Advice Financial Ombudsman Institution (Taiwan) Financial Services Agency (Japan) FSA FSB FSB FTT FDICs FIIs G-SIFI ICI IFA IIFA IM IMD 2 IMF IORP IRS ISAE IOSCO JOBS Act KIID KYC LDI MAD MAS MENA MiFID MMOU MPF NAV OECD OTC PRI PRIPs QDII QII RBC RDR Regulation 28 RMB RQFII RRP SAAM SAT SCR SEBI SEC SFA SFC SI SIF SIPs UCITs WHT Financial Services Authority (UK) Financial Stability Board Financial Services Board (South Africa) Financial Transaction Tax Fundos de Direitos Creditórios Fundos de Investmento Imobiliários Global Systemically Important Financial Institution Investment Company Institute Independent Financial Adviser International Investment Funds Association Investment Management Insurance Mediation Directive 2 International Monetary Fund Institutions for Occupational Retirement Provision Directive Internal Revenue Service International Standard on Assurance Engagements International Organization of Securities Commissions Jumpstart Our Business Startups Act Key Investor Information Document Know Your Customer Liability Driven Investment Market Abuse Directive Monetary Authority of Singapore Middle East and North Africa Markets in Financial Instruments Directive Multilateral Memorandum of Understanding Mandatory Provident Fund Net Asset Value Organisation for Economic Co-operation and Development Over the Counter Principles for Responsible Investment Packaged Retail Investment Products Qualified Domestic Institutional Investor Qualified Institutional Investor Risk Based Capital Retail Distribution Review Revision to section of the Pension Funds Act (South Africa) Renminbi Renminbi Qualified Foreign Institutional Investor Recovery and Resolution Planning Swiss Association of Asset Managers State Administration of Taxation (China) Solvency Capital Requirement Securities and Exchange Board of India Securities and Exchange Commission Securities and Futures Act Securities and Futures Commission (Hong Kong) Systematic Internaliser Specialized Investment Fund Specified Investment Products Undertaking for Collective Investments in Transferable Securities Withholding Tax © 2012 KPMG International. . KPMG International is a Swiss cooperative. All rights reserved. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Middle-East and Africa European Market Infrastructure Regulation European Parliament Employee Retirement Income Security Act (US) Environmental. India and China Central Counterparty Clearing Credit Default Swaps Commodity Futures Trading Commission Collective Investment Schemes Act Committee on the Global Financial System Capital Markets Services Credit Ratings Agencies Central Provident Fund (Singapore) Commodity Pool Operators Committee on Payment Systems and Settlements Capital Requirements Directive 4 Code for Responsible Investing in South Africa Comissão de Valores Mobiliários (Brazil’s Securities Commission) Defined Benefit Dodd-Frank Act Department of Labor (US) Dutch Association for Fund Managers Enterprise Annuities European Commission European Court of Justice European Fund and Asset Management Association European Insurance and Occupational Pensions Authority Europe.

co.au Seiji Kamiya KPMG in Japan T: +81 3 3548 5106 E: seiji.co.topping@kpmg.gg Graham Jung KPMG in the UK T: +44 20 7694 1282 E: graham.rietdijk@kpmg.fr Gustaaf Kruger KPMG in South Africa T: +27 2 1408 7044 E: gustaaf. All rights reserved.lu Gerard Gaultry KPMG in France T: +33 1 5568 7030 E: ggaultry@kpmg.kamiya@jp.uk © 2012 KPMG International.guernsey. .uk Heleen Rietdijk KPMG in the UK T: +44 20 7694 4510 E: heleen.m.liu@kpmg.au Simon Topping KPMG in China T: +85 2 2826 7283 E: simon.co.uk Georges Bock KPMG in Luxembourg T: +35 222 5151 5522 E: georges.muller@kpmg.com. nor does KPMG International have any such authority to obligate or bind any member firm.56 | Evolving Investment Management Regulation | June 2012 Acknowledgements We would like to acknowledge the contribution of our colleagues from across our global network of member firms who helped develop this report: ASPAC John Bataxis KPMG in Australia T: +61 3 9838 4567 E: jbatzaxis@kpmg.leonard-appleton@kpmg.uk Andrew Podd KPMG in the UK T: +44 20 7694 4199 E: andrew.com Jonathon Lee KPMG in China T: +85 2 2143 8550 E: jonathon.co.lim@kpmg.lu Richard Pettifer KPMG in the UK T: +44 20 7311 5749 E: richard.co.com.kruger@kpmg. Member firms of the KPMG network of independent firms are affiliated with KPMG International.uk Pheng Lim KPMG in the UK T: +44 20 7694 5394 E: pheng.brown@kpmg.com Bonn Liu KPMG in China T: +852 2826 7241 E: bonn.co.co.za Pedro Jose Gonzalez Millan KPMG in Spain T: +34 9 1456 3553 E: pjgonzalez@kpmg.com Jacinta Munro KPMG in Australia T: +61 3 9288 5877 E: jacintamunro@kpmg.podd@kpmg.com EMA Tom Brown KPMG in the UK T: +44 20 7694 2011 E: tom.pettifer@kpmg.uk Chris Leonard-Appleton KPMG in the UK T: +44 (0) 20 7694 5800 E: chris. KPMG International provides no client services.lee@kpmg.se Neale Jehan KPMG in the Channel Islands T: +44 14 8174 1808 E: njehan@kpmg.martin@kpmg.uk Charles Muller KPMG in Luxembourg T: +35 2 22 5151 7950 E: charles.co.es Sven Höglund KPMG in Sweden T: +46 8723 9777 E: sven.g.uk Jonathan M Martin KPMG in the UK T: +44 20 7311 4630 E: jonathan.fr Roseline Glaizal KPMG in France T: +33 1 5568 8766 E: rglaizal@kpmg.co.jung@kpmg.hoglund@kpmg.kpmg.au Sean Hill KPMG in Australia T: +61 3 9288 6948 E: seanhill@kpmg. KPMG International is a Swiss cooperative. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties.com.uk Sally Rigg KPMG in the UK T: +44 20 7694 5271 E: sally.rigg@kpmg.co.bock@kpmg.

uk Edward Snieder KPMG in the Netherlands T: +31 2 0656 7941 E: snieder.com Joaquin Lira KPMG in Chile T: +56 2798 1203 E: jlira@kpmg. nor does KPMG International have any such authority to obligate or bind any member firm.schreurs@kpmg.co.williams@kpmg.jeroen@kpmg.nl Marc Simon Visser KPMG in the Netherlands T: +31 2 0656 7055 E: visser.edward@kpmg.sienkiewicz@kpmg. .marcsimon@kpmg.ca John Schneider KPMG in the US T: +1 61 7988 1085 E: jjschneider@kpmg.co. KPMG International provides no client services.nl Llewellyn Smith KPMG in South Africa T: +272 1408 7346 E: llewellyn.nl Markus Schunk KPMG in Switzerland T: +41 4 4249 3336 E: markusschunk@kpmg.com John Hubbe KPMG in the US T: +1 21 2872 5515 E: jhubbe@kpmg.smith@kpmg.br Peter Hayes KPMG in Canada T: +1 41 6777 3939 E: phayes@kpmg.com James Suglia KPMG in the US T: +1 61 7988 5607 E: jsuglia@kpmg.nl Giles Williams KPMG in the UK T: +44 20 7311 5354 E: giles. Member firms of the KPMG network of independent firms are affiliated with KPMG International. All rights reserved.uk Teresa Sienkiewicz KPMG in the UK T: +44 20 7311 5738 E: teresa.com.za Jeroen Van Nek KPMG in the Netherlands T: +31 2 0656 7360 E: vannek.Evolving Investment Management Regulation | June 2012 | 57 Americas Dee Ruddy KPMG in Luxembourg T: +35 222 5151 7369 E: dee.com Gordon Sharp KPMG in the UK T: +44 20 7311 3194 E: gordon.sharp@kpmg.lu Gerben Schreurs KPMG in the Netherlands T: +31 2 0656 7949 E: gerben.co.com Oliver Cunningham KPMG in Brazil T: +55 11 2183 3115 E: oecunningham@kpmg.uk Juan Pablo Carreño KPMG in Chile T: +56 2798 1260 E: juancarreno@kpmg.com © 2012 KPMG International.ca Jim Low KPMG in the US T: +1 21 2872 3205 E: jhlow@kpmg.co. KPMG International is a Swiss cooperative.com James Loewen KPMG in Canada T: +1 41 6777 8427 E: jloewen@kpmg.ruddy@kpmg. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties.

kpmg. ASPAC region KPMG in Japan T: +81 3 3548 5106 E: seiji.co.com Jim Low Partner Financial Services Regulatory Center of Excellence. there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.brown@kpmg. Designed by Mytton Williams Publication name: Evolving Investment Management Regulation Publication number: 120789 Publication date: June 2012 .com Simon Topping Principal Financial Services Regulatory Center of Excellence.anderson@kpmg.com Contact us Jeremy Anderson Global Chairman.kpmg. All rights reserved.topping@kpmg.com Bonn Liu Head of Investment Management KPMG’s ASPAC region T: +85 2 2826 7241 E: bonn.com/regulatorychallenges The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. KPMG’s Financial Services Practice T: +44 20 7311 5800 E: jeremy. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.liu@kpmg.kpmg.uk Tom Brown Head of Investment Management KPMG’s EMA region T: +44 20 7694 2011 E: tom. EMA region KPMG in the UK T: +44 20 7311 5354 E: giles.kamiya@jp. logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. a Swiss entity.lu Wm. Although we endeavour to provide accurate and timely information. Americas region KPMG in the US T: +1 21 2872 3205 E: jhlow@kpmg.co. Member firms of the KPMG network of independent firms are affiliated with KPMG International.co. ASPAC region KPMG in China T: +85 2 2826 7283 E: simon.uk Charles Muller Partner Financial Services Regulatory Center of Excellence. Global Advisory T: +1 61 7988 5607 E: jsuglia@kpmg. David Seymour Global Head of KPMG’s Investment Management Practice T: +1 21 2872 5988 E: dseymour@kpmg.com Seiji Kamiya Partner Financial Services Regulatory Center of Excellence. nor does KPMG International have any such authority to obligate or bind any member firm.muller@kpmg. EMA region KPMG in Luxembourg T: +35 222 5151 7950 E: charles. Produced by KPMG’s Global Financial Services Practice in the UK. © 2012 KPMG International Cooperative (“KPMG International”). No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. Printed in the UK.com fsregulation@kpmg.uk www.williams@kpmg. The KPMG name. KPMG International provides no client services.co.uk Giles Williams Partner Financial Services Regulatory Center of Excellence.com James Suglia Head of KPMG’s Investment Management Sector.com John Schneider US Head of Investment Management Regulatory KPMG in the US T: +1 61 7988 1085 E: jjschneider@kpmg.