A compact summary of the most recent regulatory developments relevant to the UK asset management industry. This issue includes details on the amendments to the European Venture Capital and Social Entrepreneurship Fund regimes; ESMA statements to firms and investors on initial coin offerings; and FCA's proposals to recognise industry codes of conduct.

BENCHMARKS: ESMA updates Q&As on third country issues

The European Securities and Markets Authority (ESMA) has updated its Q&As on the Benchmarks Regulation (BMR) to include the application of the BMR outside the EU and transitional provisions applicable to third country benchmarks.

Read the updated Q&As »

EuVECA and EuSEF regulations: amendments published in the Official Journal

The text of a regulation amending the European Venture Capital Funds (EuVECA) and the European Social Entrepreneurship Funds (EuSEF) Regulations has now been published in the Official Journal of the EU and will apply from 1 March 2018.

As mentioned in Issue 7 of the Roundup, these amendments form part of the Capital Markets Union (CMU) and are intended to increase the take up of EuVECAs and EuSEFs by:

• Widening the range of managers eligible to set up and manage these funds to include larger managers with assets under management of more than €500 million.
• Widening the range of entities that EuVECAs can invest in to include unlisted companies with up to 499 employees (SMEs) and SMEs listed on SME growth markets.
• Broadening the definition of enterprises that EuSEFs can invest in to include “services and goods generating social return”.
• Prohibiting the imposition by host Member States of administrative procedures, fees and other charges relating to marketing of such funds cross-border.

The new rules also give ESMA an oversight role to ensure that EuVECAs and EuSEFs are consistently registered and supervised.

Read the amending regulation »

Read Issue 7 of the Asset Management Regulatory Roundup »

INITIAL COIN OFFERINGS: ESMA statements

Owing to a rapid growth in initial coin offerings (ICOs) globally, ESMA has issued two statements, one on the risks for investors and one on the rules applicable to firms involved in ICOs. Points to note:

• Depending on how ICOs are structured they may fall outside of the scope of EU laws and regulations intended to provide investor protection.
• ICOs are vulnerable to the risk of fraud or money laundering.
• Where ICOs qualify as financial instruments, it is likely that firms involved in ICOs conduct regulated investment activities and therefore need to comply with relevant legislation such as the Prospectus Directive, the Markets in Financial Instruments Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD) and the Fourth Anti-Money Laundering Directive as implemented.
• Firms will need to give careful consideration as to whether their activities constitute regulated activities; failure to comply with the applicable rules will constitute a breach.

Read the statement for investors »

Read the statement for firms »

MiFID II: ESMA updates Q&As on investor protection

ESMA has updated its Q&As to include new questions on the implementation of investor protection topics of post-sale reporting, record keeping and inducements.

Read the updated Q&As »

MiFID II and MiFIR: ESMA consults on systematic internalisers’ quote rules

ESMA is consulting on amendments to its MiFIR regulatory technical standards to ensure that Systematic Internalisers’ (SIs) quotes adequately reflect prevailing market conditions applicable to EU trading venues.

The consultation closes on 25 January 2018.

Read the consultation paper »

SUPERVISION: FCA industry code of conduct proposals

The Financial Conduct Authority (FCA) has published a consultation paper proposing to recognise industry codes of conduct in order to clarify the standards expected of individuals carrying on non-regulated activities for firms. Senior managers will need to focus on unregulated activities as well as regulated activities in carrying out their responsibilities as the regulator is obviously interested in bringing action for breaches of both.

Read the consultation paper »

Common EU list of non-cooperative tax jurisdictions

Following the release of the ‘Panama Papers’ (and now the ‘Paradise Papers’), and the resulting public concern as to the scale of tax avoidance and evasion and the ability of offshore jurisdictions to facilitate these activities, the European Commission started work on producing a common EU list of non-cooperative tax jurisdictions using a common set of objective criteria. This list is expected to be published by the end of this year once it is agreed with the Member States, together with a list of measures and sanctions to apply to the specified non-cooperative tax jurisdictions.

It is currently unclear which jurisdictions will appear on the list and what sanctions will apply to a jurisdiction specified on the list. It has also been proposed that EU legislation would be introduced to harmonise obligations for tax authorities in the Member States to annually disclose data containing the total value and destination of the money transfers of each Member State to each jurisdiction in that list.

The EU list is expected to be more extensive than the OECD’s list of non-cooperative jurisdictions on tax which only has one country: Trinidad and Tobago. As a result, it is possible that the EU list may include certain common offshore fund jurisdictions.

European Parliament draft recommendation »

Common EU list of third country jurisdictions for tax purposes »

VAT and Research Fees post MiFID II

MiFID II, which comes into force from 3 January 2018, introduces (amongst a whole raft of other measures) a new model under which research provided by a third party to an investment firm must be paid for, and not, as has often been the case, provided without additional charge as part of another service (such as execution or investment management). Under the new “hard dollar” model the research must be paid out of either the firm’s own resources or a research payment account funded by a specific charge to the client and controlled by the investment firm. The changes represent an aim to achieve greater transparency and reduce conflicts of interests.

Updated VAT Treatment

The supply of research is a standard rated supply for VAT purposes. However, historically where research has been bundled together as an ancillary part of an exempt supply (such as the supply of intermediary services in the execution of a trade or where it is provided as part of the management of special investment funds) it has generally been treated as part of that exempt supply.

Following the MiFID II changes, draft HMRC guidance has stated that since a separate charge must be made for research it cannot generally be regarded as an ancillary part of a wider supply and VAT must be charged. However, HMRC accept that the supply of research (such as recommendations to buy or sell assets) may be VAT exempt if it is treated as part of the management of special investment funds (which is an exempt VAT supply) in line with the GfBK decision (Case C 275/11). In effect, in order to be VAT exempt the specific supply of research must be intrinsically connected to the activity that is characteristic of an investment fund management service (i.e. it involves the constant monitoring of the fund’s assets as distinct from periodic or general research) and where the fund must be a special investment fund such as a UK authorised fund.

Changes to the HMRC manuals will be introduced shortly to give effect to this clarification.

Fund distribution resources

Dechert maintains two services designed to assist managers with global fund distribution and registration.

World Compass - A global web-based service offering investment firms 24/7 access to detailed information on fund marketing, separate accounts and beneficial ownership reporting

World Passport - An outsourced solution for fund registration globally for both UCITS and AIFs