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Global Investment Fund Industry Hit by A Regulatory Tsunami

By Marc Saluzzi & Susanne Weismüller
Posted: 5th March 2012 09:57

Since the outset of the financial crisis, the financial services industry has been faced with a host of regulatory initiatives, which it has to analyse, comment on as part of consultation procedures and finally put into practice.  The cumulative impact of various regulatory initiatives on the global investment fund industry is uncertain and should be analysed, in order to assess whether the design of effective regulation could lead to possible detrimental effects. This articles aims to highlight the most crucial initiatives, which are often referred to as a real regulatory tsunami.

Regulations for investment funds

The European legislative framework for Undertakings for Collective Investment in Transferable Securities (UCITS), i.e. funds that are mainly marketed to retail investors, was only revised in 2009. Although this revision made many changes that have not yet been introduced into national law in all EU member states, another legislative proposal is expected for mid-2012, which will introduce three further sub-topics for discussion.  The first concerns the role and liability of depositaries with a view to protecting investors.  The EU Commission wants to iron out the existing differences in the interpretation of depositary functions and bring the regulations in line with those of the Alternative Investment Fund Managers Directive (AIFMD).  The second topic proposes the introduction of appropriate remuneration for UCITS managers based on the provisions of the AIFMD and the Capital Requirements Directive (CRD). The third topic covers the idea of harmonising sanctioning regimes with a view to achieve a level playing field in the EU.

The AIFMD harmonises regulations for all investment funds and fund managers not subject to the UCITS Directive, and needs to be implemented into national law by mid of 2013.  Along the lines of the European passport for UCITS funds, this directive includes the introduction of a passport for the cross-border sale of alternative investment funds without any specific approval procedures in the various countries in which they are sold.  After a transition period, non-European funds or fund managers could also take advantage of this measure. Fund managers must register as managers of alternative investment funds by 2014.

The Dodd Frank financial market reform is the US equivalent to the European AIFMD.  However, it may also affect current market practices regardless of the residency of the market players concerned. It establishes amongst other things a comprehensive regulatory framework for the U.S. over-the-counter derivatives markets, which will also impact non-U.S. swap market participants involved in these markets.  Moreover, the so called Volcker rule will significantly limit the proprietary trading, hedge fund and private equity fund activities of investment managers that are affiliated with banking entities.

In December 2011, the European Commission published two further legislative proposals for investment funds, which aim to create a separate framework for social entrepreneurship funds on the one hand, and venture capital funds on the other hand. The new rules aim to facilitate the cross-border fundraising and investments by venture capital funds. Furthermore, the "European Social Entrepreneurship Funds" label is supposed to help investors to identify funds that focus on investing in European social businesses. Once the requirements defined in the proposal are met, managers of social investment funds would be able to market their funds across the whole of Europe.

Other regulatory measures

In addition to the initiatives described above, which apply directly to the fund sector, there are many other regulatory procedures that impact the entire financial services industry.

For example, the green paper on a European corporate governance framework established that corporate governance and social responsibility are fundamental factors in strengthening the confidence of citizens in the single market.  Corporate governance covers procedures governing management and control of companies, and defines a host of relations between a company’s executive management and board and its shareholders and other stakeholders.  The European Commission is expected to publish a legislative proposal by July 2012.

PRIPs is an acronym standing for packaged retail investment products (e.g. certificates, equities and bonds).  After a consultation procedure has been carried out, a parliamentary bill on this subject is expected to be passed at the beginning of 2012.  The purpose of the bill is to standardise pre-contractual information for private investors in order to facilitate comparisons between individual products thereby helping investors make appropriate investment decisions.

The European fund industry is also currently busy with the proposed revision of the Markets in Financial Instruments Directive (MiFID), and the proposal for a regulation on markets in financial instruments which will amend the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR).  The legislative process for EMIR has not yet been concluded. It aims at introducing a number of measures, including:

  • A reporting obligation for OTC derivatives
  • a clearing obligation for eligible OTC derivatives
  • measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives
  • common rules for central counterparties (CCPs) and for trade repositories
  • rules on the establishment of interoperability between CCPs.

Taxation of investment funds

There is currently one main topic with regard to the taxation of investment funds, namely the introduction of a financial transaction tax (FTT), which is seen as compensation from the financial services industry for the national and international problems arising from the bank and government bailouts following the financial crisis.  This tax would be charged on the value of all transfers of equities, bonds, fund units, currencies and derivatives.  Until now, EU member states have disagreed on the question of whether the taxation of financial transactions taking place solely in Europe would harm local financial centres and lead to the transfer of business to financial markets outside Europe.  A consultation procedure carried out by the European Commission has already shown that it will be difficult to find a way for all parties involved to reach agreement.

From a global perspective, the Foreign Account Tax Compliance Act (FATCA) will have a big impact on financial institutions worldwide, including investment funds. FATCA is a US law and is designed to combat tax evasion by US citizens.  The US government hopes to implement and apply its tax regulations efficiently by imposing strict reporting requirements and a threatened 30% withholding tax for non-compliance.  For its part, the financial services industry still hopes to mitigate the future changes in relation to the implementation rules, which have yet to be announced, by preparing extensive opinions on the issue.

There are many other regulatory measures that have to be followed by the different stakeholders (e.g. on short sales and credit default swaps, the Capital Requirements Directive, credit rating agencies, pensions and on the way insurance companies invest in investment funds), so that this article cannot be exhaustive, but aims at giving an overview on the most important upcoming changes.  We can only say that it’s more essential than ever before to keep up to date with current regulatory proposals, and see how this regulation impacts you and your customers. ALFI, for its part, produces analysis and opinion on the various proposals and lobbies regulators worldwide on behalf of its members.


The Association of the Luxembourg Fund Industry (ALFI) is the representative body of the

Luxembourg investment fund community.

Created in 1988, the Association today represents over one thousand Luxembourg domiciled investment funds, asset management companies and a wide range of service providers such as depositary banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax experts, auditors and accountants, specialist IT providers and communication companies.

The Luxembourg Fund industry is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of funds. Luxembourg-domiciled investment structures are distributed on a global basis in more than 60 countries with a particular focus on Europe, Asia, Latin America and the Middle East.  The organization can be contacted at +352 22 30 26 1 or by email at

Mr Saluzzi is the Chairman of ALFI, the Association of the Luxembourg Fund Industry.

Mr Saluzzi has been on the board of ALFI since 2001. He later joined the Strategic Advisory Committee and in 2009 he became Chairman of the ALFI Alternatives Committee.

He brings over 25 years experience in the Investment Management Industry in Luxembourg and in the US. He is French and graduated from the Institut Superieur de Gestion in Paris in 1986. He then joined PricewaterhouseCoopers and became a partner in 1996. Between 2006 and 2010 Mr Saluzzi led the PwC Global Asset Management team. He is now the partner responsible for PwC Luxembourg Financial Services practice and as such a member of the firm’s country leadership team. Mr Saluzzi is a member of the CSSF-OPC Committee, advising the Luxembourg regulator on laws and regulations impacting the fund industry in Luxembourg.

Susanne Weismüller works as a legal adviser at ALFI. She holds a German degree in law with a specialisation in European Law and Public International Law. After completing four years at university, she did the usual two years of postgraduate internships in different legal branches, including three months with the European Court of Justice in the cabinet of the Austrian Advocate General. Before joining ALFI’s legal department on 1st January 2008, Susanne was admitted to both the German and the Luxembourg bar, and started work with a German law firm in Luxembourg specialised in business and tax law. At ALFI, she handles files on regulatory and legal issues and is involved in the work of the association’s technical committees. 

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