Quarterly Newsletter – Q3 2010
Posted on 8 Oct 2010
UCITS Feasibility Assessment
The Laven group, through its affiliate Laven Financial Services (Luxembourg), has launched a new service which offers in-depth reviews for managers contemplating structuring their strategies as UCITS III funds.
In light of the recent shifts in the asset management industry on both the investor and manager side, and in particular the demand for increased transparency and tougher regulation, managers of offshore funds are increasingly interested in launching onshore operations, particularly in jurisdictions such as Luxembourg and Ireland.
The UCITS III structure represents a seductive combination of transparency with unique access and distribution opportunities to the EU market. It has become particularly popular thanks to investors’ demands for liquidity and strong regulatory oversight.
The Laven group is uniquely placed to assist asset managers and hedge funds willing to relocate or launch regulated collective investment schemes in Europe.
Converting absolute return strategies into UCITS III may be a complicated process, especially for traditional overseas hedge funds. The Laven group can help and perform an in-depth feasibility assessment of the investment strategy and of the types of financial instruments which managers wish to use, in order to assess whether they would fit into a UCITS III vehicle.
Our expertise on the subject together with our strong presence in Luxembourg and Europe will help managers make the right business move.
Our feasibility assessment allows managers to review:
- The eligibility of the assets traded;
- The strategy’s compliance with applicable laws and regulations; and
- The broad risk management implications of the strategy once it is in a UCITS III format.
By choosing Laven, managers will benefit from a wealth of experience and expertise which will prepare them to set up their activities in the EU’s largest fund centres. To date we have assisted numerous clients in a cost effective way with strategies ranging from credit to CTAs and including equity and bond driven strategies.
For further information or our fixed fee analysis, the costs of which are fully recouped when a fund is launched, please contact us on +44 (0)207 838 0010 or +352 (22) 9999 5616 or email us on [email protected] (London) or [email protected] (Luxembourg) or [email protected] (Geneva).
Tackling the European Initiatives on Remuneration
The financial crisis has lead to a massive regulatory response worldwide. Some of the initial hysteria that appeared during the G20 meetings in 2009 has now however eased up and the US in its Restoring American Financial Stability Act signed into law in July 2010 has adopted rather a “business as usual” approach with modest implications for the alternative investment industry.
This reflects the ongoing argument that investment managers were not responsible for the financial breakdown. In Europe however the witch hunt continues with focus currently being on remuneration policies.
Three EU directives
On 7 July 2010 the European Parliament passed a vote on amendments to the Capital Requirements Directive (CRD) regarding bank and building society bonuses. The amendments shall be implemented as of January 2011. Bankers are to receive 30% of their bonus (possibly 20% depending on the size of the bonus) in cash with 40-60% to be deferred by 3 to 5 years. At least 50% of immediate bonuses shall be paid in shares or similar performance-linked instruments.
According to the industry, this is so far the most stringent bonus regime in the world and the swift reaction of the FSA made the UK one of the first EU Member States to follow the bonus requirements of the directive. The Alternative Investment Fund Managers (AIFM) Directive, although still not finalised, shall introduce further restrictions on hedge fund managers’ remuneration. The overlapping rules on bonuses and remuneration as set by the two EU directives as well as the proportionality requirement of CRD which would allow small institutions to adapt the rules to their circumstances, may present interpretation problems in the future, and it has been argued by Peter de Proft, the Director-General of the European Fund Association that there are too many “bits and pieces on remuneration regulation”, according to the FT. More questions on the practical implementation of the directives are anticipated also in light of the UCITS IV directive which should be implemented by Member States by July 2011 and it is expected that the European Commission will harmonise these three legislative pieces before the end of this year.
The FSA’s approach
The FSA is currently updating its Remuneration Policy which will reflect the new EU requirements. A three year deferral will be applied to 40% of the bonus (60% if bonus exceeds £500,000) and 50% of the bonus is to be paid in shares or other non-cash means. The consultation period set by the FSA will continue until 8 October 2010, however the strict bonus rules will be expanded to cover not only the initially proposed 27 largest banks, but further smaller banks and building societies as well as hedge fund investment managers and managers of UCITS. It is expected that more than 2,500 financial services firms will be affected, including UK branches of several overseas firms.
We believe that the strict application of the EU rules by the FSA may seriously harm the future attractiveness of the City for financial services, giving competitive advantage to the pioneering Luxembourg. A circular by the Luxembourgish regulator, the CSSF, on 1 February 2010 is one of the first means in the EU to regulate remuneration policies and especially bonuses. The circular requires leading financial undertakings to establish efficient and reasonable bonuses; however it also gives autonomy in the choice of their remuneration policies, including nature and size of the bonus. It applies to all CSSF regulated entities including fund managers, foreign branches and all Luxembourgish branches of similar entities having their registered office or central administration outside the EEA. Overall Luxembourg has not imposed as strict bonus rules as the UK. Moreover its attractive UCITS legislative environment as well as the prompt implementation of the UICTS IV Directive may add another allurement over London.
It is not certain to what extend the EU bonus rules will be more than just a burden as banks in the UK have already started to raise the basic salaries in order to increase bonus caps and avoid deferrals and higher taxes. The fact that the US, although linking the amount of remuneration to risk together with Switzerland and many Asian jurisdictions, have not yet decided to adopt onerous limits on bonuses, further lowers the effectiveness of the EU’s strict remuneration rules. As Eddy Wymeersch, Chairman of the Committee of European Securities Regulators said, there is a need for “transatlantic harmonization in financial services”.
For further information on establishing remuneration policies, please contact Alexandra Tzalla of Laven Legal Services Ltd at[email protected].
Laven Partners Continues to Provide Updates on AIFM Directive
In September, we sent our fifteenth update on the AIFM Directive. The process seems to be never ending…
Despite its challenging workload this summer, on 27 August the Belgian Presidency published a new compromise proposal on the AIFM Directive. The compromise is however still to be reviewed by the European Council. Despite this long awaited development, the Belgian compromise has failed to tackle some of
the most controversial issues of the Directive, in particular the provisions relating to the marketing of third country funds. This issue was left by the Belgians to be discussed further by the Trilogue.
There are 5 significant points in the Belgian proposal:
1. The ambiguity surrounding the question of depositaries’ liability – stemming from the Spanish compromise – has been amended with a clearer definition, but the depositary’s strict liability has not been removed. According to the Belgian version, the depositary will be liable in case of negligence as well as intentional failure to properly perform its obligations and this liability shall not be affected by delegation;
2. The compromise would, according to HFM Week, legalise passive marketing whereby investors are allowed to invest into third country funds as long as the investment is based on their own initiative, i.e. there has been no active marketing or promotion by the fund’s manager;
3. The new European regulator, ESMA, has been given more power notably in taking over all of the responsibilities originally held by the Committee of European Securities Regulators;
4. With regards to the marketing of third country funds in the EU, the Belgian proposal has not addressed this issue and merely states that this will be discussed during the Trilogue. However HFM Week reported that the private placement rules may remain in force for the next five years (the “transitional period”) after which they would be replaced by an EU passport; and
5. Finally, with regards to the issue of an EU passport for third country managers, the Belgians propose this to be embedded within one specific Member State, which will become the fund’s “home” Member State or literally a base for future marketing activities. In practice this would mean that when marketing in other Member States the third country fund manager would be prudentially supervised by the home Member State.
The Belgian proposal has started a new wave of discussions within the industry and it remains to be seen how the new version will be perceived by the European Council. Michel Barnier, the European Commissioner for Internal Market and Services, told the HFM Week that discussions about the Directive were in the “last strait”. Despite the legislators’ strong belief in being able to meet the September deadline, Reuters France has recently reported that Member States have been unable to reach an agreement over the Belgian proposal as some issues were not covered. Further discussions about the final text of the Directive will take place during the Trilogue meeting on 15 September. The final Parliamentary vote on the Directive has therefore been delayed until October.
The Directive has been shaping the industry for several months now although the final version is still unknown. By significantly reducing the freedom and flexibility previously awarded to hedge funds, the draft Directive has motivated several fund managers to take steps towards preparing for the regulatory consequences of the Directive. Lately, we have seen an increased interest in UCITS III structures and some see this as an attempt by managers to gain access to EU clients whilst avoiding the burden/uncertainty of the Directive. An increased conversion of traditional absolute return hedge fund strategies into UCITS vehicles may lead to new, more complex NewCITS vehicles. The regulatory changes in the EU together with changes in investors’ appetite may thus lead to a transformation of the industry.
With the last minute pressure taken off EU legislators and lobby groups pushing their way, we may have to wait for at least another month to find out more about the final version of the Directive. We hope the extended negotiations will lead to a more realistic Directive, one that brings regulatory opportunities to improve the industry’s standards rather than one that creates unpractical regulatory and cost burdens.
EU regulatory body moving to London
On 2 September the EU approved the set up of the three new EU regulatory superpowers to be based in London, Paris and Frankfurt. The new bodies will oversee banks, insurance companies and securities market trading and will even have authority over the regulation and risk management of financial services providers. The European Systemic Risk Council will also be established to monitor possible financial risks and possible hazards to financial stability.
The aim behind these bodies is to increase the strength of financial oversight in the EU as well as to promote larger harmonisation in regulatory approaches. The daily supervision will still remain in the hands of national regulators and the EU bodies will only directly supervise credit rating agencies in the EU. Nevertheless some see the creation of the supervisory bodies as an attempt by the EU to regulate the City, thus limiting its position as a global financial centre.
The agreement on the EU regulatory bodies is still to be vetted upon by the European Parliament’s plenary session, presumably on 22 September. It has however been reported that they will vote in the affirmative – as Michel Barnier told the Financial Times the “political consensus on the creation of a European financial supervisory framework” has been reached. If the proposal passes the vote, the supervisory bodies would be established as of January 2011.
Laven in the Press
Laven Discusses the Popularity of new Hedge Fund Managers on Thomson Reuter’s Insider
Jerome Lussan, CEO of Laven Partners, appeared on Thomson Reuters’ insider on Friday 27 August, commenting on the reasons why some investors prefer to invest in new hedge fund managers and the importance of operational due diligence in this respect.
Jerome pointed out that several investors have been dissatisfied with past hedge funds’ structures and strategies, and in particular since the 2008 crisis, and that this has directed them towards new talent in the hope to increase their returns.
Jerome said that investors are increasingly aware that operations, meaning the team and the firm’s structure, lead to the long-term success of investment strategies. Although many of the most successful new managers come from the biggest investment banks and hedge funds, Laven’s extensive experience in operational due diligence has repeatedly shown the added value of due diligence to ensure solid operations and discipline are in place. A new manager will be exposed to a new environment and may not be as successful as when surrounded by colleagues at a proprietary trading desk in a bank. Access to information may also be limited once a new manager is away from the bank’s trading floor.
Investors should also understand that by investing in new talents, they are putting their money into a small firm and they must also focus on other team members just as if making an investment into a private company rather than just the trader, to make sure that the firm’s business is run efficiently.
To view the full interview, please click here.
Increased Emphasis on Market Abuse Training
Fighting market abuse has been a regulatory priority since the FSA’s Business Plan 2007/08 and the regulator has since significantly increased its activities in enforcement and financial crime prevention. The FSA’s Director of Enforcement and Financial Crime, Margaret Cole, said in June 2010 that over the last two years the FSA has achieved “record totals of fines and prohibitions as well as records for highest fines“.
The FSA has promised to pursue more criminal cases and levy higher civil fines to boost deterrents in its battle against market abuse. The focus of the FSA’s policy is increasingly changing from a principles based regulation to being an enforcement-led regulator.
Firms are required to work towards the prevention of market abuse with the help of a number of methods, including:
- Internal compliance strategies;
- Tailored training and staff policies; and
- Maintaining records of trainings.
Following the FSA’s pursuance of more enforcement action, firms are recommended to be vigilant and ensure staff are sufficiently aware of their market abuse obligations.
Laven Partners is therefore offering vital market abuse training seminars tailored to client’s needs and for varying sizes of groups,starting at £850 per session (prices vary depending on number of delegates and length of seminar).
Our seminars are interactive and practical and also review a number of recent case studies allowing participants to fully understand the market abuse regime and ensuring firms meet their regulatory obligations. Further, such training will have a direct impact on any defence you may have to raise against a market abuse accusation.
Should you require further information on our training services, please do not hesitate to contact us at [email protected] or on +44 (0) 207 838 0010.
Laven Partners at Due Diligence for Fund of Funds and Hedge Funds and GAIM Ops Europe conferences
The summer is officially over and we can now look forward to the autumn filled with interesting conferences. Laven Partners would especially like to draw your attention to the Due Diligence for Fund of Funds and Hedge Funds conference taking place on 20 October in London and to GAIM Ops Europe which will take place in Dublin between 26 and 28 October.
Due Diligence for Fund of Funds and Hedge Funds
With the changes in investors’ appetite after financial frauds such as Madoff and growing regulatory scrutiny, due diligence is one of the hottest topics within the alternatives industry right now. Jerome Lussan, CEO of Laven Partners, will be chairing this one day London conference, while Max Ferri, Manager of Laven’s Operational Due Diligence department, will be speaking on a panel on ‘Due Diligence on the Manager or Fund, or Service Provider?‘
GAIM Ops Europe
The Laven Partners’ consultancy team including Jerome Lussan, Max Ferri and Robert Mirsky will also share their expertise and practical experience in operational due diligence at the GAIM Ops Europe conference in Dublin.
Lussan says: “A few years ago, operational due diligence was still terribly underrated. However more recently investors are finally realising the value of thorough due diligence – this is further evidenced by the success of these events. We look forward to having some interesting discussions at the London and Dublin conferences.”
Please note that Laven Partners contacts’ will be entitled to 20% discount for both conferences, simply by quoting the following VIP Codes in the entry forms:
Due Diligence for Fund of Funds and Hedge Funds: VIP Code KM2272AD
GAIM Ops Europe: VIP Code XU2188JA
We look forward to seeing you at the events this autumn!