INDUSTRY BRIEFING SEMINAR

1
INDUSTRY BRIEFING SEMINAR

• hosted by the
• Dublin Funds Industry Association
• Boston
• Friday, September 30th, 2005

2

• Introduction and Opening Remarks
• Gary Palmer, Chief Executive, DFIA
• Liam Manahan, Bank of Ireland Securities
  Services Chairman, DFIA

3
Overview of the Legal and Regulatory Environment
for Investment Funds Dan Morrissey William Fry
Solicitors
4
Legal and Regulatory Environment (1)

• Ireland is a Regulated Domicile
• but non-Irish domiciled administered hedge funds
  account for 30 of all hedge funds globally
• Legal and Regulatory Environment
• the most critical factor in our success

5
Legal and Regulatory Environment (2)

• Key Points from 2004 Fund Promoter Survey
• the regulatory environment is the most important
  factor in choosing domicile
• 92 of respondents would choose Dublin again
• 83 of respondents think Dublin as good/better
  for legal/regulatory/fiscal environments
• 50 of respondents also use Luxembourg

6
Legal and Regulatory Environment (3)

• Environment typified by
• innovation
• commitment
• engagement with Financial Regulator
• engagement with Government
• gt Appropriate but flexible environment
• gt Fantastic Growth

7
Dublin Domiciled Funds - Growth by Volume
20 Growth
18 Growth
Based on Irish Financial Services Regulatory
Authority Figures
September 2005
8
Dublin Domiciled Funds - Growth in Number of
Funds/Sub-Funds
Based on Irish Financial Services Regulatory
Authority Figures
September 2005
9
Range of Investors Covered

• Retail (1990) UCITS and Non-UCITS
• Professional Investors (1990)
• Qualifying Investors (1996)

10
Categories of Dublin Domiciled Funds by
Investment Strategy
Most Conservative
Most Flexible
Qualifying Investor
Professional Investor
UCITS
Non UCITS
Min. Sub Equiv. 250,000 for Investor Min
Net Worth Req for Investor
Min. Sub Equiv. 125,000
11
Dublin Domiciled Funds - Dublin Breakdown of
Categories of Funds
Total Number of Funds - 1,018
Total Number of Sub-Funds - 3,621
Based on Irish Financial Services Regulatory
Authority Figures
September 2005
12
Funds Domiciled in DublinBreakdown of Funds
Under Management - UCITS/Non-UCITS
Based on Irish Financial Services Regulatory
Authority Figures
September 2005
13
Categories of Dublin Domiciled Funds - UCITS vs
Non UCITS Growth Trend
Sub-Funds/Portfolio
Based on Irish Financial Services Regulatory
Authority Figures
September 2005
14
Categories of Dublin Domiciled Funds/Sub-Funds -
Growth Trend
UCITS
Non-UCITS Retail
Qualifying Investor
Professional Investor
Based on Irish Financial Services Regulatory
Authority Figures
Sub-Funds
September 2005
15
Range of Available Legal Fund Structures

• Unit Trusts 1990 - UCITS and Non-UCITS
• Investment Companies 1990 - UCITS and Non-UCITS
• Investment Limited Partnerships 1994 - Non-UCITS
• Common Contractual Funds - 2003 UCITS
• - 2005 Non-UCITS

16
Examples of Innovation

• Money Market Funds
• ETFs
• Multi-Manager
• CCFs and LDIs

17
Innovation - Money Market Funds (1)Total Fund
Assets by Domicile US
Total Fund Assets US103,190.1M
(Constant and Accumulating)
Source Data of iMoneyNet Inc. - European Money
Fund Report
As at 1 July 2005
18
Innovation - Money Market Funds (2)Total Fund
Assets by Domicile Euro
Total Fund Assets Euro 38,035.4M
(Constant and Accumulating)
Source Data of iMoneyNet Inc. - European Money
Fund Report
As at 1 July 2005
19
Innovation - Money Market Funds (3)Total Fund
Assets by Domicile Stg
Total Fund Assets Stg51,844.6M
(Constant and Accumulating)
Source Data of iMoneyNet Inc. - European Money
Fund Report
As at 1 July 2005
20
Innovation - Money Market Funds (4)Top Fund
Players by Assets
US
Euro
Stg
Total Fund Assets US107,747.9m
Total Fund Assets 38,035.4m
Total Fund Assets Stg51,844.6m
(Constant and Accumulating)
Source Data of iMoneyNet Inc. - European Money
Fund Report
As at 1 July 2005
21
Innovation - ETFs (1)ETF Managers by AUM
(rounded)
World USBn Total BGI 150 46 SSgA 80
24 BoNY 28 8 Nomura 17
5 Lyxor 10 3 (SocGen) IndEXchange 9
3 Nikko 8 2 Vanguard
8 2
US USBn Total BGI 133 54 SSgA 74
30 BoNY 28 11 Vanguard 8
3
Europe USBn Total Lyxor 10
25 (SocGen) IndEXchange 9 22 BGI
8 21 Credit Suisse 3 9 Credit
Agricole 3 7
Source Morgan Stanley
September 2005
22
Innovation - ETFs (2)ETF Managers by AUM
(rounded)

• Worldwide AUM up 8.5 YTD
• V.s 1.8 decline MSCI World Benchmark in USD
  terms
• Europe AUM up 19.2 YTD (US up by 7.8)
• V.s 2.3 decline MSCI Europe Index in USD
  terms
• Europe Top 3 AUM and at 30 June 2005
• Lyxor (Soc Gen) - US9.9 Bn - 24.5 (France)
• IndEXchange - US8.7 Bn - 21.6 (Germany)
• iShares (BGI) - US8.3 Bn - 20.6 (Ireland)

Source Morgan Stanley
23
Innovation - ETFs (3)

• Key Difference
• iShares Fund Family
• domiciled in Dublin
• UCITS status
• most funds listed on 6/7 Exchanges

24
Innovation - Multi-Manager

• Multi-Manager
• Many different structures
• multiple sub-funds - single sub-adviser -
  discrete
• multiple sub-funds - 2/3/4 sub-advisers -
  discrete
• multiple sub-funds - 2/3/4 sub-advisers -
• discrete for active
• fund for passive
• multiple sub-funds - fund of funds

25
Innovation - New

• CCFs
• The new opportunity
• LDIs
• Liability Driven Investments/Pension Liability
  Matching

26
Relationship with Financial Regulator

• Engagement before Formal Consultation
• Dialogue on UCITS III Management Company

27
Fund Authorisation Process

• Change
• Objective
• What has happened
• workshops
• timescales
• outside factors

28
Tax Competitiveness and Treaty Access in the US
ContextPaul McGowan KPMG


29
Irish Tax CompetitivenessFor

• The Mutual Funds Sector

30
Qualified Investor Fund

• For sophisticated investors
• No restriction on type of investments
• No restriction on leverage

31
US/Ireland Treaty

• CIU is a resident (Article 4)
• Withholding Tax
• Dividends 15 (including certain REITS) Article
  10
• Interest 0 Article 11
• Royalties 0 Article 12

32
US/Ireland Treaty

• Limitation on Benefits (Article 23)
• a qualified person includes
• 50 US and/or Irish ownership
• Actively substantially traded
• EU/NAFTA

33
USE of Section 110For Enhanced Treaty Access
Unit Holders
CIU
Hybrid Loan
Small Equity
Other Investments
Section 110 Company
Investments
34
Stock Lending
Lend Stock
CIU
Counter-Party
Manufactured Dividend
Equities
Pay Dividend
35
Use of Parent Subsidiary Directive
Portuguese Co
Italian Co
Dividend
Dividend
Parent/Sub Directive
(
(
Lux Co
(
Treaty
Dividend
(
CIU
36
Benefit from 12.5 Corporate Tax

• Transfer premium profit elements to Ireland
• Capital Risk
• Specialist labour e.g. Advisory/Analytical
• Intangibles
• - Goodwill
• - Brand/trademark
• - Processes
• - Products
• NB Need to balance business/regulatory/tax issues

37
Defer US TaxationSub Part F Implications

• Deferrable income includes
• Banking income
• Certain Income from services
• Active financing exemption
• Active dealer income

38
Defer US Tax on Investment Income

• Actively trade the assets
• Purchase securities under repo agreements
• - convert to financing income

39
Deferral Technique
- High tax/Low tax
US Parent
IrCo
Sub Part F Income
Deferrable Income
V Check the box
IR Partnership
40
Asset Pooling Fund Structures

• Deirdre Power, Deloitte
• Brian McDermott, A L Goodbody
• Kevin Murphy, Arthur Cox

41
What is Asset Pooling?
Existing Investment Structure
Asset Pooling Structure
UK Pension Fund
Irish Company
Dutch BV
Swiss Pension Fund
UK Pension Fund
Irish Company
Dutch BV
Swiss Pension Fund
Economies of Scale
becomes
equals
Common Contractual Fund
Investments
Investments
Investments
Investments
Investments
42
Common Contractual Fund Legal Features

• Established under the law of contract
• Has no separate legal personality
• Investors hold co-ownership rights in assets as
  tenants in common
• Investor liability limited to amount contributed
  for units
• Segregated liability between Sub-Funds

43
Common Contractual Fund Regulatory Options

• UCITS III UCITS investment and borrowing
  restrictions apply
• Non-UCITS-
• QIF No investment restrictions imposed.
• PIF Derogations available from standard
  non-UCITS investment restrictions on a case by
  case basis.

44
Single Manager v Multinational Pooling
Single Manager Pooling
Multinational Pooling
Company A UK Pension Fund
Company B UK Pension Fund
Company C UK Pension Fund
Common Contractual Fund
45
What is Virtual Pooling?
Existing Investment Structure
Virtual Pooling Structure
UK Pension Fund
Irish Company
Dutch BV
Swiss Pension Fund
UK Pension Fund
Irish Company
Dutch BV
Swiss Pension Fund
becomes
Investments
Investments
Investments
Investments
Investment Pool
46
Virtual Pooling Regulatory Requirements

• Not a collective investment undertaking
• Common service providers and investment mandates
• Disclosure
• Segregation of liabilities derivatives

47
UCITS III

• Kevin Murphy, Arthur Cox
• Brian McDermott, A L Goodbody
• John Donohoe, Carne Global Financial Services

48
UCITS III

• New product opportunities
• Transitional and conversion issues and experience
• Organisation of the management company practical
  implementation and experiences to date
• Risk management process

49
INDUSTRY BRIEFING SEMINAR

• hosted by the
• Dublin Funds Industry Association
• Boston
• Friday, September 30th, 2005

50
The Investment Funds, Companies and Miscellaneous
Provisions Act 2005

• Michael Jackson
• Matheson Ormsby Prentice

51

• Background to the Act
• Process
• Result
• Segregated Liability
• Cross Investment
• CCFs
• Prospectus Directive

52
Background

• Prior to the Act, investment companies
  established as umbrella funds could not fully
  segregate liability between sub-funds.

Class A Shares
Class B Shares
Umbrella Fund plc
UK Equity
Global Equity
53
Background

• Prior to the Act, one sub-fund of an umbrella
  fund established as an investment company could
  not invest in another sub-fund of the same
  umbrella
• Consequences
• More cumbersome structures
• Higher administrative costs
• Certain amount of investor confusion

54
Example of Fund Structure Pre Introduction of the
Act

• Assume
• Year 2000
• Promoter wants to establish Global Equity Fund
  and UK Equity Fund
• Distribution in France and the UK
• Preference for investment company structure
• Preference for an umbrella fund
• Global Equity Fund will use derivatives to obtain
  some equity exposure

55
Example of Fund Structure Pre Introduction of the
Act

• Problems
• Inability to segregate liability between
  sub-funds. To protect shareholders in the UK
  Equity Fund against contamination from potential
  losses incurred through derivatives in Global
  Equity Strategy, need to use subsidiaries or
  separate investment companies.
• Global Equity Fund cannot take its UK Equity
  exposure by investing in UK Equity Fund unless
  separate investment companies are established.
• Preference in France for accumulation shares,
  preference in UK for distributing shares. Old UK
  test based on distribution of the entire
  umbrella. Safer to use separate investment
  companies.

56
Example of Fund Structure Pre Introduction of the
Act
Result
Option 1

• Result

Global Equity Fund (France) plc
Global Equity Fund (UK) plc
UK Equity Accumulation Fund plc
UK Equity Distributing Fund plc
Option 2
Class A
Class B
Class A
Class B
French Umbrella Fund plc
UK Umbrella Fund plc
Global Equity Sub-Fund
UK Equity Sub-Fund
Global Equity Sub-Fund
UK Equity Sub-Fund
Trading Subsidiary France Limited
Trading Subsidiary UK Limited
57
Example of Fund Structure Pre Introduction of the
Act

• Either option results in 4 companies
• Option 2 requires Global Equity to gain UK Equity
  exposure without investing in the UK Equity
  Sub-Fund
• Only UK Funds can be established as UCITS so
  limited distribution opportunities for Global
  Equity

58
Example of Same Fund Structure Post
Implementation of the Act

• Assume
• October 2005
• Same client requirements
• Changes
• UK distributor status rules changed
• Act introduced
• UCITS III (Financial Derivative Instruments)

59
Example of Same Fund Structure Post
Implementation of the Act

• Result

• Result

Class A Accumulating Shares
Class A1 Stg Distributing Shares
Class B Accumulating Shares
Class B1 Stg Distributing Shares
Equity Umbrella UCITS plc
Global Equity Sub-Fund
UK Equity Sub-Fund
Cross Investment
60
Example of Same Fund Structure Post
Implementation of the Act

• One legal vehicle
• Global Equity takes exposure to UK equity
  positions by investing in UK Equity Sub-Fund
• UCITS Status

61
Process

• Industry lobby for change in legislation citing
• client demand
• UCITS issues re investment restrictions

UCITS Fund of Funds plc
ABC UCITS Umbrella Fund
20
20
Equity Fund
Bond Fund
Unless segregation of liability 20 reduced to 10
62
Process

• Structures already in place through DFIA and IFSC
  Funds Group. Involvement from industry,
  Regulator, Department of Finance, Department of
  An Taoiseach, Department of Enterprise Trade and
  Employment
• Necessary amendments drafted by industry reps
• Meetings with relevant Departments to explain and
  discuss
• Agreed text presented to parliamentary draftsman
• Bill produced and given priority status
• Arrangements made for President to sign into law
  expeditiously and for commencement order to be
  signed

63
Points to Note

• Segregated Liability
• Deemed by law to apply to all umbrella funds
  established as investment companies since 30 June
  2005
• Terms implied by law into every contract
• Umbrella funds which had commenced to trade prior
  to 30 June 2005 can elect to convert

64
Points to Note

• Conversion process
• Special resolution of the members required
• Notice of meeting must be accompanied by audited
  accounts which include statement of assets and
  liabilities of each sub-fund and which are not
  more than four months old
• Notice must be copied to all relevant creditors
  and published in a national newspaper
• Creditors comprising 1 in number or value may
  apply to the Irish High Court for an order
  preventing the resolution from taking effect

65
Points to Note

• In considering any such application, the Irish
  High Court shall have regard to
• the terms of any agreements or arrangements with
  the creditors
• the course of dealings with the creditors
• the conduct of the fund or its delegates towards
  the creditors
• any representations made
• the extent to which it is reasonable for the
  creditor to expect to have recourse
• any other relevant matters

66
Points to Note

• All letterheads and agreements in writing to
  include the words An umbrella fund with
  segregated liability between sub-funds

67
Cross Investments

• Waiver of management fee?
• No layering

10
Fund A
Fund B
68
Alternative Investment Funds

• Donnacha OConnor, Dillon Eustace
• Maire OConnor, McCann Fitzgerald

69
Alternative Investment Funds in
IrelandDonnacha OConnor Dillon Eustace
70
INVESTMENT FUNDSLEGAL AND REGULATORY FRAMEWORK
IN EUROPE

• Single market framework UCITS, ISD, CAD
• IOSCO standards, CESR
• National implementation
• Regulatory principles

71
INVESTMENT FUNDSREGULATORY APPROACH

• UCITS/ISD framework
• Eligibility and regulation of operators
• Anti-fraud rules - valuation, conflicts, records
• Minimum activities in the State
• Client Asset Protection
• Trustee oversight
• Portfolio regulation - diversification
• Disclosure - prospectus, accounts, unit price

72
INVESTMENT FUNDSELIGIBILITY REQUIREMENTS

• Promoter/Sponsor
• Investment Manager
• Irish service providers
• Prime Brokers
• OTC trading counterparties

73
HEDGE FUNDSIRISH PRODUCT DEVELOPMENT

• 1990 Non-UCITS retail and Professional Investor
  Funds
• 1997 Qualifying Investor Fund, Euro 250,000,
  investor quality requirements, practically no
  investment restrictions
• 1998 Long Term Capital Management hedge fund
  collapses. Hedge Funds manage US311 billion
• 2000 Prime Brokers appointed to Irish hedge
  funds. Irish single strategy hedge funds emerge.
• 2002 Retail fund of hedge funds
• 2002 Luxembourg Circular 2/80
• 2003 Hedge funds manage more than US600 billion
  world-wide
• European on-shore developments
• 2004 UCITS III, Rule 203(b)(3) - 2
• 2005 Non-UCITS CCF, protected cell,
  cross-investment, CESR advice on UCITS III
  eligible assets, Commission Green Paper.
• Hedge funds break US1 trillion AUM.
• Shift to regulated industry, changing profile of
  investor

74
PROPERTY FUNDS

• Overview
• Recent surge in interest in regulated property
  schemes
• Specific promoter and industry submissions on
  permitted investments, layering, custody etc
• Expected overhaul by Financial Regulator of
  property fund rules
• Legal / Regulatory Structures
• Non-UCITS Retail / PIF / QIF
• Corporate, unit trust or CCF
• Closed-ended / Open-ended
• Current FR Notice out of date

75
PROPERTY FUNDS

• Permitted Investments
• direct property assets residential office
  retail etc.
• property securities
• nascent property derivitatives market
• fund of funds
• exposure to development land now limited to 50
  of portfolio
• exposure to single properties / issuers / funds
  limited by reference to retail / PIF / QIF
  categorisation

76
PROPERTY FUNDS

• Investment Mechanics
• subsidiaries / SPV / partnerships / other
• intermediate vehicles allowed
• extent of layering under discussion
• JVs / Co-investment permitted
• funding methodologies / exit mechanisms

77
PROPERTY FUNDS

• Structure Features
• invariably closed-ended
• partly-paid / commitment approach
• carried interests / waterfalls
• independent valuer
• valuations prior to acquisition

78
PROPERTY FUNDS

• Custody
• Industry concerns re taking title to property
  assets (asbestos, environmental liabilities etc.)
• Submissions with regulator to refocus
• custody on supervision, not taking title
• Initial focus on QIF structure

79
VENTURE CAPITAL FUNDS

• Overview
• Potential for greater development
• Structures suitable / have worked well
• Legal / Regulatory Structures
• Non-UCITS retail / PIF / QIF
• Corporate, unit trusts, CCFs
• Investment restrictions above
• categorisations

80
VENTURE CAPITAL FUNDS

• Structure Features
• closed-ended
• partly paid / commitment approach
• carried interests / waterfalls
• SPVs for tax treaty access
• Intermediate vehicles
• EVCA valuation guidelines
• semi-annual valuations

81
VENTURE CAPITAL FUNDS

• Investment Mechanics
• direct
• wholly-owned subs / SPVs / partnerships
• layering under discussion
• JVs / Co-investments accepted
• question mark over loans

82
Máire OConnor McCann Fitzgerald
Listing Hedge Funds on the Irish Stock Exchange
83
Overview

• Why List ?
• Irish Stock Exchange Statistics
• Typical Master/Feeder Structure
• Hedge Funds Listing Conditions
• Continuing Obligations
• Timing and fees
• Current Developments at the Irish Stock Exchange

84
Why List ?

• Institutional Investors
• French funds of funds
• Exchanges ongoing oversight role
• Continuing obligations
• Most hedge funds list on the Irish Stock Exchange

85
Irish Stock Exchange Statistics
4135 funds (incl. sub-funds) listed on the ISE as
at end-August 2005
2
5
5
23
48
17

• Source Irish Stock Exchange monthly report
  August 2005

86
Typical Master / Feeder Structure
87
Hedge Funds Listing Conditions

• Professional Investors
• Prime Broker criteria
• Investment Restrictions
• Transferability/ Compulsory Redemption
• Independent Directors
• Financial Information

88
Continuing Obligations

• NAV notification (Administrator)
• Interim (unaudited) and annual (audited)
  accounts
• Market Abuse Directive
• General obligation of disclosure

89
Timing and Fees

• Typical timescale 4 Weeks
• Indicative Cost 15,000 - 20,000
• Irish Stock Exchange Annual Charges 2,000

90
Current Developments atthe Irish Stock Exchange

• Structured products
• Revised Derivatives rules

91
Financial Reporting Statements

• Tony Weldon
• PricewaterhouseCoopers

92
Financial Reporting Changes

• Agenda
• Scope of changes
• Main effects
• Dealing with the changes

93
Financial Reporting Changes- Scope

• Preparation of dealing NAV unaffected!
• Applies twice per year half-year and full-year
  financial statements for investors

94
Financial Reporting Changes-Scope

• Two standard setters, but the effect is the same
• (except for timing)
• Within two years, all will have to comply

95
Financial Reporting Changes- Main Effects
96
Financial Reporting Changes Main
EffectsPricing of Investments

• Fair value
• Bid prices for long positions
• Asked prices for short positions
• Valuation techniques where no active market
• May impact NAV difference between trading NAV
  and financial statement NAV
• (remember- only for financial statements)

97
Financial Reporting Changes Main
EffectsTreatment of transaction costs

• At present, include in cost, deduct from proceeds
• New expense separately
• No impact on NAV reclassification between
  captions in income statement

98
Financial Reporting Changes Main
EffectsRecognition basis for interest income

• Fixed income funds / money market funds
• Premiums and discounts on purchase of securities
• Most currently amortize on straight line basis
• New requirement for effective yield basis
• New requirement consistent with US GAAP
• No impact on NAV reclassification between
  captions in income statement

99
Financial Reporting Changes Main
EffectsClassification of investors capital and
of distributions to investors

• Conventional treatment investors capital is
  equity and distributions to investors are
  distributions
• New treatment investors capital is debt and
  distributions to investors are interest expense
• Both changes are reclassifications no effect on
  NAV
• But will affect total reported income

100
Financial Reporting Changes Main
EffectsDetermination of functional currency

• Stricter rules for determining functional
  currency which is currency of measurement
• E.G. raise USD capital and invest in JPY
  securities measure in JPY rather than in USD
• No impact on NAV reclassification
• Not likely to have a major impact

101
Financial Reporting Changes Main
EffectsDisclosures in financial statements

• Some changes to current practice
• Inclusion of gains in income section of income
  statement
• Classification of investments at fair value
  through profit or loss
• Changes to certain disclosures in relation to
  risk
• Not greatly more complex than present requirements

102
Financial Reporting Changes Main EffectsSummary

• Most changes are to presentation only
• Only change which may affect calculation of NAV
  is pricing of investments
• Only affects financial statements twice per year
  no impact on regular NAV calculation
• Show reconciliation of trading NAV to financial
  statement NAV in footnotes?
• Other changes present challenges to preparers of
  financial statements systems not currently
  configured to capture information

103
Financial Reporting ChangesDealing with the
changes

• Perceived difficulties in implementation
• Positive response from legislators
• Permission of use of other GAAPs in preparing
  statutory financial statements
• GAAPs permitted are US, Canadian, Japanese, any
  other prescribed
• Maximum flexibility given to sponsors of Irish
  funds

104
Financial Reporting ChangesDealing with the
changes

• Development of understanding of changes
  interpretation of aspects of standards
• Debate among industry, accounting firms, standard
  setters
• Preparation by administrators

105
Financial Reporting Changes

• DFIA taking a leading and proactive role in
  dealing with all issues and co-ordinating
  industry efforts

106
EU Round-Up - Implications and Opportunities

• Maire OConnor, McCann Fitzgerald
• Donal OSullivan, Ernst Young
• Gary Palmer, DFIA

107
Máire OConnorMcCannFitzgerald
Prospectus Directive Opportunities
108
Overview

• Purpose and Scope
• Continuing Obligations
• Home Member State
• Home Member State Why Ireland ?

109
Purpose and scope

• Harmonise drawing-up, approval and distribution
  of prospectus when
• Securities are offered to the public in the EU
• Securities are admitted to trading on a regulated
  market in the EU (listing)
• Applies only to closed-ended investment funds

110
Purpose and scope - continued -

• EU Passport
• Definition of closed-ended investment fund
• Public offer broad definition
• Exemptions
• Listing no exemptions

111
Continuing Obligations

• Annual Information Report
• Further issues of securities (10 ) New
  Prospectus

112
Home Member State

• EU issuers
• Non-EU issuers
• Key Points for non-EU issuers
• Take care in deciding - where to list fund -
  where to make first public offer in EU
• Notify home member state prior to December 2005

113
Home Member State Why Ireland?

• Stream-lined dual listing and PD review
• Timing 4 Weeks
• Indicative Cost 15,000 20,000

114
EU Taxation of Savings DirectiveIssues and
Experience

• Donal OSullivan
• Ernst Young

115
Taxation of Savings Directive

• Commenced on 1 July 2005
• Quick Recap
• Update on implementation in affected countries
• Issues and Experience
• Business Questions that need to be addressed

116
Countries in scope
EU Member States Austria Germany
Netherlands Belgium Greece Portugal Denmark I
reland Spain Finland Italy Sweden France Luxemb
ourg United Kingdom Cyprus Lithuania Czech
Rep Malta Estonia Poland Hungary Slovak
Republic Latvia Slovenia
Dependent Territories Anguilla Isle of
Man Aruba Jersey British Virgin Islands
Montserrat Cayman Islands Netherlands
Antilles Guernsey Turks and Caicos
Islands Gibraltar
Countries Adopting Similar Measures Andorra San
Marino Liechtenstein Switzerland Monaco
117
Implementation Timetable
1/1/04
Data collection procedures operative
Transitional period ends
Legislation to be in place in Member States
3 yrs 15
3 yrs 20
35
1 year
30/6/04
1/7/05
withholding tax
withholding tax
withholding tax
End of fiscal year when last 3rd country or USA
implements exchange of information on request
First start date
E. Council determined 3rd country readiness
(including withholding tax)
118
EU Taxation of Savings DirectivePaying Agent
Pays Interest to EU Individual

• Any economic operator who pays interest to, or
  secures the payment of interest for the immediate
  benefit of, the beneficial owner.
• In a chain of economic operators, the last
  economic operator is the paying agent

UCITS
Economic operator
Economic operator
interest
interest
interest
Paying agent
Beneficial owner

• Definition of PA does not correspond necessarily
  to contractual definitions or other definitions
  existing for local tax or regulatory

119
EU Taxation of Savings DirectiveTypes of Interest

• Interest paid relating to debt-claims
• Interest accrued/capitalised at the
  sale/redemption of the debt claims
• Income deriving from interest payments
  distributed by certain funds
• Income realised upon the sale/redemption of
  shares or units of certain funds

Debt-claims

Funds
120
EU Taxation of Savings Directive What are
Interest Payments?Dividend Payments 
The test to follow is set out in the flowchart
below
EU UCITS
Dividend payment
Is more than 15 of assets of fund investment in
debt securities?
No interest payment
No
Yes
How much of the dividend is comprised of interest
income?
Must report the above interest income
For third country funds there is no 15 asset
test and therefore one must immediately proceed
to calculating how much of the dividend payment
is comprised of interest income. For Dependent
Territories if they include in their legislation
the 15 assets test other EU countries may
recognise this.
121
EU Taxation of Savings Directive What are
Interest Payments?Redemption Payments
The test to follow is set out in the flowchart
below
All Funds
Redemption payment
Is more than 40 of assets of fund investment in
debt securities?
No interest payment
No
Yes
How much of the redemption gain is comprised of
interest income?
Must report the above interest income
122
EU Taxation of Savings Directive Identifying the
Paying Agent
UCITS
Clearing System
Financial Institution
Investors
Irish TA/PA
Paying Agent
123
EU Taxation of Savings Directive Summary of
implementation in affected countries

• Appendix contains summary of
• Reporting or withholding jurisdiction
• Legislation Status
• Guidance Notes status
• Ernst and Young Regular EUSD bulletins contain
  more detail

124
Issues and Experience

• Implementing legislation, regulations and
  guidance notes in most, but not all,
  jurisdictions
• Large Institutions have big budgets to address
  complex issues
• Intended to counter tax evasion what happens
  when tax authorities do not receive substantial
  tax revenues and see the large level of financial
  products which are outside scope
• Look out for 2007!

125
Issues and Experience

• Issues and differences arise on
• Establishing who and where final paying agent is
  located
• Ascertaining funds in scope
• Assessing the debt content of those funds in
  scope
• Jurisdictions may interpret Directive differently

126
Investment fundswhich rules will an FPA refer
to?
Payments of savings income
Bond Fund A (domicile other country e.g.
Bermuda)
FPA (x) In scope
IBO in scope (country Z)
local country
Paying agent
Bond Fund B (domicile y in scope)
FPA (y) In scope
home country
home country

• FPA (x) will need to assess whether or not funds
  A and B are in scope, by reference to relevant
  rules
• Fund A will be determined by reference to local
  country rules
• Fund B may be determined by reference either to
  local country or home country rules

127
Issues and Experience

• Information reporting to data providers big issue
• Do you report in Switz, Lux, Austria, Belgium
• Or lose sales?
• Cost/benefit?
• Mechanism for Reporting Taxable Income Per Share
  or TIS

128
Illustration of the Challenges in practice
Fund A
PA X (in scope)
payments
PCB Third Party Paying agent - Y
IBO
distributed to
payments
Private Client Bank

• Are EUSD obligations in respect of Fund A being
  correctly handled by Y? Does it impact on
  competitiveness of Fund A?
• Paying agent Y may require information in
  respect of A to satisfy its EUSD obligations who
  will provide this?

129
Issues and Experience

• Hedge Fund Issues
• Cayman /BVI in scope as jurisdictions but most
  funds out of scope in key markets only 1/2 of
  funds in scope
• Bermuda out of scope as a jurisdiction but
  significant number of funds could be in scope in
  key markets
• Re-domiciliation of Bermuda Funds to Cayman and
  BVI happening

130
Issues and Experience

• At product level the impact of the Directive
  should be a key consideration in product
  development
• E.g. Cayman feeders likely out of scope. Bermuda
  feeders likely in scope
• Cayman Bond issue in scope. Cayman fund wrapped
  around bonds may not!
• Interest returns can be structured to escape the
  Directive
• Addressing Investor Appetite W/H, Reporting or
  Exclusion

131
Investment funds in scope or out of scope
overview
I.B.O (country B)
Payments from fund
UCITS equity fund
PA (country A) in scope
Out of scope
In scope
UCITS bond fund
In scope
research required
Out of scope
Research required
other country bond fund (e.g. Bermuda)
EU domiciled non UCITS bond fund
Dependent/3rd Country bond fund (e.g. Cayman)
132
Issues and Experience

• Until level playing field there will be
  uncertainty/mobility in the market

133
Irelands Approach

• Legislation and Guidance Notes implemented on
  time
• Industry Paying Agents adapting well to the new
  requirements both reporting and commercial
• Ireland flexible in interpretation of
• Final paying agents
• Funds in or out of scope and
• Assessing what is or is not debt

134

• Financial Institutions Prepare for the Directive

Impact Analysis
Strategic/solutions
Say 1/7/15
31/3/06
1/7/05
1/1/04
31/12/05
3/6/03
Withholding obligations apply for withholding
territories
Full compliance with reporting and
documentation obligations for reporting
territories
GO LIVE DATE
Directive Issued
End of first Irish Tax year
Data collection Procedures operative
Transitional Period Ends
Further Versions of Guidance notes, e.g.
UK, Switzerland, Germany
Outstanding guidance notes, e.g. Italy ?
Implementing legislation, regulations and
guidance notes in most, but not all jurisdictions
First Reporting Deadline
135
Strategic Questions

• How do you compare to your competitors?
• What is your policy in respect of publishing data
  on specific products or funds?
• Have you addressed the positive impact on your
  customer base for products that are out of scope?

136
Operational Questions

• Has your programme management team confirmed that
  your business was ready at 1 July 2005?
• Has senior management assured the implementation
  of the EU Savings Directive programme?
• Have you updated your specific impact
  assessments/procedures to reflect changed
  customer profiles, new products and revised tax
  authority interpretations?

137
Customer Strategy Questions

• What is your business policy in respect of
  customer communication on EU Savings Directive?
• How does that business policy reconcile with your
  money laundering obligations?
• Have you adequately trained your customer facing
  (i.e. account opening) staff?

138
Risk Questions

• Who is taking responsibility for ensuring tax is
  withheld and paid over in withholding countries?
• Who is taking responsibility for meeting the
  reporting deadlines in reporting countries?
• What is your risk policy with regards to fines
  and penalties imposed by tax authorities?
• Has your programme management team sought advice
  in respect of technical interpretative issues?

139
The components of an EUSD implementation programme
The EUSD impacts Process, Technology, People,
Products as well as Customers.
140
What are the implications of some of these
challenges
People
Processes
Customers
Products
Technology
141
Action Plan

• Independent assurance and validation
• Benchmarking and market practice
• Outsourced risk over technical interpretations
• Turning your significant investment into a
  positive feature of your products
• Innovative planning opportunities

142
Green Paper on the enhancement of the EU
Framework for Investment Funds
Gary Palmer DFIA

143
Green Paper On Enhancement of the EU
Framework forInvestment Funds

• Published 14 July 2005
• http//europa.eu.int/comm/internal_market/securiti
  es/ucits/index_en.htm
• Open hearing Brussels 13 October 2005
• Contributions to the Commission by 15 November
  2005
• Feedback report on Public Consultation early 2006

144
Making Existing Legislation Deliver

• Priority Actions-
• Eliminate uncertainty surrounding recognition of
  funds launched during transition from UCITS 1 to
  UCITS III (CESR Guidelines)
• Simplify notification procedure for passporting
  funds
• Promote implementation of Commissions
  recommendations on use of derivatives and the
  simplified prospectus (improve risk mgt fee
  transparency)
• Clarify the definition of eligible assets which
  can be acquired by UCITS

145
Making better use of the current framework

• Two areas identified
• The Management Company Passport
• Distribution, Sales and Promotion of Funds

146
Long Term Challenges

• Five areas identified
• Towards a cost-efficient industry
• Greater consolidation through cross-border fund
  mergers
• Fund pooling
• Fund custody and depositary services
• Improve fragmented infrastructure/organisation of
  fund administration cross border arrangements

147
Long Term Challenges

• Maintaining high levels of Investor Protection
• Competition from substitute products
• Europes alternative investment market
• -Private Equity Funds
• -Hedge Funds
• Modernising UCITS Law

148
INDUSTRY BRIEFING SEMINAR

• hosted by the
• Dublin Funds Industry Association
• Boston
• Friday, September 30th, 2005