MAKING THE MOST OF UCITS IV

M a k i n g t h e m o s t o f U C I T S I V A fl e x i b l e a p p r o a c h b y M a n a g e m e n t C o m p a n y p r o f i l e - J a n u a r y 2 0 1 1

DEPOSITARY/TRUSTEE

N 0 CUSTODY

FUND ADMINISTRATION

N 0

.1

N 0

.1

.9

in Europe

in Europe

Worldwide

€1,150bn

€705bn

€2,379bn

STANDARD & POOR’S

AA-

Figures as at 31 December 2010

CACEIS CACEIS is a global player committed to designing reliable, cutting-edge services and building long-lasting relationships with clients. A member of the Crédit Agricole Group, CACEIS is rated AA-/A-1+ by S&P, which reflects the financial support of its principal shareholder. Through offices across Europe, North America and Asia, CACEIS delivers a compre- hensive set of high quality services covering depositary/trustee and custody, fund administration, cross-border fund distribution support, middle-office solutions and issuer services. CACEIS also provides Management Companies with legal and struc- turing assistance enabling them to register and maintain the registration of their products abroad. This is combined with efficient operational workflow support and commission management, offering various trailer fee models and comprehensive web-based reporting. As at 31 December 2010, CACEIS ranked 1st among fund administrators in Europe with €1,150bn in assets under administration and 9th among custodians worldwide with €2,379bn in assets under custody. CACEIS’s 3,500 highly experienced employees are committed to upholding quality of service in terms of responsiveness, accuracy and expertise.

Introduction

Although the EU investment fund industry has reached an historic level in terms of assets, the reality is that too many small funds still exist in Europe and that the UCITS Directive 1 , unless modernised in 2001 by the so-called UCITS III Directives 2 , was still restrictive and hampered the in- dustry’s efforts to create an efficient single market framework. Removing the various barriers that obstruct the consolidation of the European fund market while harmonising the rules across all Member States has been a long-term project initiated in 2005 by the Green Paper 3 . The UCITS IV Directive 4 , which will be implemented in national laws of all Member States as of 1st July 2011 at the latest, brings additional building blocks regarding the product side, as well as the Management Company side.

solution through UCITS master-feeder structures when business demands duplication of a product range.

A specific focus on the major tools introduced by the new regulation can be found in the fact sheets included with this brochure, with a brief des- cription of their objectives and benefits, their key features, some points of attention, as well as the main questions that Management Companies should address. It should be noted that the power of the UCITS IV toolbox does not come from the different measures taken separately, but mainly resides in the various possible combinations of these tools to offer more suitable opportunities to Management Companies and self-ma- naged SICAVs, depending on their profile. In addition, the cross-border dimension of these elements renders the definition of a strategy more complex but increases the probability of finding the right solution. For instance, the master-feeder structure can be considered for both rationa- lisation and business development strategies. On one hand, transforming a domestic fund into a feeder investing in your “international” flagship platform will enhance the oversight and reduce running costs (pooling benefit). On the other hand, launching an “international” feeder of your existing platform, which was initially designed for domestic distribution, will enhance your distribution capabilities. However, the UCITS IV toolbox is not self-sufficient and reliance on service providers such as CACEIS, with international expertise, in particular in terms of cross-border fund mergers, fund distribution support and project management, is of paramount importance.

The UCITS IV toolbox

The various new tools introduced by the Directive – notably the simpli- fication of the cross-border notification procedure, the European Ma- nagement Company passport, the UCITS mergers, as well as the UCITS master-feeder structures – will undoubtedly provide Management Com- panies with new business and cost saving opportunities, through greater flexibility in fund distribution in Europe and economies of scale. Thus, the new regulation will facilitate cross-border mergers when rationalisation is essential to fund sponsors and will introduce a passportable asset pooling

The 5 tools introduced by UCITS IV

Key Investor Information Document

1 Council Directive 85/611/EC of 20 December 1985 on the coordination of laws regulations and administrative provisions relating to undertakings for collective investments 2 Directive 2001/107/EC relating to Management Companies and the Directive 2001/108/EC relating to products, both dated 21 st January 2002 3 European Commission Green Paper on the enhancement of the European

UCITS IV €

UCITS IV €

UCITS Mergers

Notification procedure

UCITS IV €

framework of investment funds, COM (2005) 314 4 Directive 2009/65/EC of the European Parliament and of the Council of 13th July 2009

UCITS IV €

Management Company Passport

Master-Feeder structures

CACEIS - UCITS IV |  page 1

CACEIS, your partner of choice for a successful UCITS IV strategy

reporting and risk management modules, taking into account the new challenges introduced by UCITS IV. More particularly, CACEIS is the partner of choice in UCITS IV (re-) structuring projects, from designing solutions to implementing best- suited operations, in order to allow clients to take full advantage of this new regulation. We are convinced that no one-size-fits-all solution exists and have designed an offer made up of flexible servicing blocks that may be combined in order to perfectly fit with each client’s specific situation, needs and objectives. In this brochure, we have segmented fund sponsors into five main profiles according to their current situation and their business deve- lopment strategies. Some of these fund sponsors are already intensive UCITS users, others are new entrants to the UCITS world. Therefore, some considerations are not directly linked to new UCITS IV topics, but are simply UCITS-related. However, we have judged it appropriate to cover these points since they are at the forefront of fund distribution strategies today. Furthermore, each asset management group has its own story and the reader may find it useful to adopt certain parts of other profiles. For each defined profile, this brochure examines the Management Company’s objectives and the possible strategies to reach them. We have analysed the many different schemes possible and have chosen

With the countdown to UCITS IV implementation well underway, it is time to consider the business options ahead. CACEIS, having been serving major clients in Europe for two decades has acquired a real expertise in UCITS funds and can assist you in many ways. Taking advantage of its historical presence in the major domestic and international fund centers in Europe and more recently of its strate- gic establishment in Hong Kong, CACEIS has developed an expertise in fund distribution throughout the years and already provides many clients with a broad range of fund distribution support services, such as registration and post-registration services, order gateway and mir- roring servicing, distribution networks, holdings and trailer fee mana- gement through an integrated package registered under the name of Prime TA ® . Moreover, CACEIS can offer a complete oversight and risk management infrastructure, which includes a fully-fledged UCITS com- pliant Management Company. In anticipation of the new UCITS IV requirements and expected trends in the fund industry, our of- fer has been enriched with additional services to Management Companies. We have notably developed a modular offer with regard to the Key Investor Information Document (KIID). We have also enlar- ged the scope of our existing fund structuring, project management,

Our approach by client profile

Management Company with a domestic fund range (incl. UCITS) which wishes to expand distribution to investors outside its domicile

Profile 1

Management Company with various fund ranges domiciled in several EU Member States which wishes to rationalise its f fund activity and centres of excellence

Offshore Management Company wishing to replicate its non-regulated funds in the EU, driven by business opportunity or regulatory requirements

Profile 5

Profile 2

EU Management Company with regulated non-UCITS funds wishing to launch UCITS in order to expand the scope of targeted investors

New entrant into the UCITS market: Non EU Management Company wishing to launch UCITS for distribution regionally or internationally

Profile 3

Profile 4

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Introduction

to only present the most credible or most common scenarios. However, we are obviously more than willing to discuss any other scenario that interests you. The brochure also highlights some major implementation considerations and points of attention.

ged under UCITS IV, and no EU passport for the depositary has been introduced. As under UCITS III, the depositary shall be established in the UCITS home Member State. However, fully aware that the requirements relating to UCITS deposi- taries are an important building block within the UCITS framework for ensuring a high level of investor protection across all Member States, the European Commission intends to present in 2011 a new legisla- tive proposal to update, further harmonise and strenghten the current framework applicable to UCITS depositaries. In this context, the Euro- pean Commission issued a consultation paper on the UCITS depositary function and on UCITS managers’ remuneration on 14 December 2010, with the objective, in particular, to better clarify the UCITS depositary function and ensure consistency between the legislation applicable to the depositaries of UCITS and that applicable to the depositaries of alternative investment funds (cf AIFM Directive as approved by the Eu- ropean Parliament on 11 November 2010). The conclusions from this consultation will serve as a basis for the Commission to review the UCITS Directive in 2011 (UCITS V). These developments are obviously being followed in a very close manner by CACEIS. We trust you will find this publication both relevant and informative. Our Business Development Managers & Engineers, Product Managers, Legal and Fund Structuring experts remain at your disposal for further information and assistance.

New challenges for the fund depositary

The UCITS IV directive brings the fund depositary into the spot- light since under each key measure it plays the role of guarantor for the protection of investors’ interests. It is also a principal information source for the fund Management Company as well as for the Mem- ber States’ financial authorities to ensure compliance with the direc- tive’s requirements. It will undoubtedly be a key player in the more complex UCITS IV environment, especially for cross-border master-feeder structures (e.g. information duties, report of master ir- regularities, etc.), fund mergers (e.g. control of the merging and recei- ving UCITS) and the Management Company passport (e.g. agreement with the Management Company regulating flow of information and procedures to perform functions). All the more as it may provide Ma- nagement Companies and fund promoters with a valuable “one-stop solution” for custody, administration and operational support tools.

It must be stressed that the liability regime of the depositary as regards the safe-keeping and supervision of the fund’s assets remains unchan-

CACEIS - UCITS IV |  page 3

You are •••

USAGE INTERNE EXCLUSIVEMENT

1 2 3 4 5

AManagement Company with a domestic fund range (which may include UCITS) which wishes to expand distribution to investors outside its home country

A Management Company with various fund ranges domiciled in several EU Member States which wishes to rationalise its fund activity and centres of excellence

A new entrant into the UCITS market: A non EU Management Company wishing to launch UCITS for distribution regionally or internationally

An EU Management Company with regulated non-UCITS funds wishing to launch UCITS in order to expand the scope of targeted investors

An offshore Management Company wishing to replicate its non-regulated funds in the EU, driven by business opportunity or regulatory requirements

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Profile 1

USAGE INTERNE EXCLUSIVEMENT

Management Company with a domestic fund range (which may include UCITS) which wishes to expand distribution to investors outside its home country

Client profile & objectives

You are an EU regulated Management Company with a large presence in your home market and you manage both UCITS and non-UCITS funds.

capabilities beyond your domestic borders and seizing new business de- velopment opportunities. Indeed, you are aware that regulated, transpa- rent and liquid products such as UCITS are more and more attractive to investors globally (in Europe but also in Asia, Latin America, etc.). In ad- dition, you believe that investors have a preference for a well established international brand like UCITS rather than for domestic products that have never been distributed abroad, despite their excellent track record on their local market. You target all investor categories, including the retail inves- tors, as you do for your domestic UCITS range. You obviously want to keep your existing domestic clients, while expan- ding your client base cross-border through the use of the UCITS IV tool- box. It will influence your approach.

Your current UCITS range covers a wide selection of traditional strategies, from equity to monetary and bond investment policies in which you have gained extensive expertise and an exemplary track record. Your existing UCITS funds are open to all investor categories, including the retail inves- tors. The UCITS range you manage for your domestic market represents a solid foundation for expanding distribution abroad. However, you have limited experience in cross-border distribution. You have built up your existing organisation (asset management and dis- tribution platforms, operations, risk management, etc.) so that it suits to your domestic market. This structure is efficient and has been responding well to your needs so far. Objectives You now have the objective to increase the assets under management in your existing UCITS funds by extending your distribution

Possible scenarios

To reach your objectives, you may choose between three different ap- proaches.

Possible scenarios

Cross-border distribution of your domestic UCITS using the notification procedure. In some countries, the creation of a local feeder might facilitate the distribution of your UCITS

Scenario 1

Creation, in addition to your domestic UCITS, of a UCITS range in a cross-border distribution centre (e.g. Luxembourg or Ireland) through the use of the Management Company passport

Scenario 2

Creation of a UCITS range in a cross-border distribution centre (master UCITS), while transforming your domestic UCITS range into feeder UCITS

Scenario 3

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Profile 1

Implementation considerations & points of attention

NOTIFICATION PROCEDURE, KIID PRODUCTION & MAINTENANCE AND LOCAL DISTRIBUTION RULES Once you have defined the target markets for your funds (domestic or cross-border range), you will have to face additional challenges to imple- ment your distribution strategy. First of all, you will have to request the registration of your fund(s) in the target countries of distribution.As a Ma- nagement Company already established in a EU country, you will benefit from the UCITS IV simplified notification process, designed to increase cross-border registration efficiency, streamline the cross-border authori- sation process across EU Member States and provide a shorter time to market. However, it should be noted that you will still have to comply with local marketing and distribution laws in the host Member State .As such, you might have to cope with various local distribution requirements if you intend to market your fund(s) in several countries. Producing and distributing the Key Investor Information Document (KIID) will be a real challenge for Management Companies as it is the only compulsory measure introduced by UCITS IV , along with the upgrading of Management Companies with MiFID rules. Furthermore, the KIID will have to be translated into the language of the country of dis- tribution and any material change within the fund will require prompt re- vision of the document. It will inherently necessitate a timely notification to all regulators where the fund is registered for cross-border distribution and throughout its distribution network. Outside the EU, the KIID might not be recognised by local authorities such as in Hong Kong and Singapore, where you will have to produce other “KIID-like“ documents (e.g. KFS, PHS). The KIID will be an inescapable pillar of UCITS IV. • Have you already considered the cost and time-consuming aspects induced by its implementation and maintenance? • Do you have the right capabilities to produce, update on a frequent basis and deliver this new document to distribu- tors and investors? It may be worth considering outsourcing all or part of the KIID drafting and maintenance to a reliable service provider such as CACEIS.

1

Depending of your preferred scenario, the following implementation issues will have to be raised:

Challenges related to cross-border distribution of funds

DISTRIBUTION STRATEGY The first challenge is identifying the right target markets to success- fully sell your funds cross-border. You will have to carry out a cost/ benefit analysis, as well as a thorough market survey to understand the key specificities of each market. The main questions you should ask yourselves are: Is there a local appetite for non-local products in the target countries? Is the domiciliation of our domestic UCITS fund suitable for distribution in the target countries? Would we be better off launching a new UCITS in another domicile to reach these markets? In this case, for which investors and how can we maintain our track record? Which fund distribution channel should be favou- red? How can we develop our distribution network in the target countries? In these aspects, regulatory changes should be carefully monitored. Thus, in the UK, the FSA’s new Retail Distribution Review (RDR) re- gime, which was designed to add further protection for retail inves- tors and is expected to operate from 2013, will undoubtedly change the way the market is structured and operated for retail investments. The RDR will affect any fund that is distributed to retail investors in the UK and change the relationship between retail fund providers, their main distribution channel – UK advisers (IFAs) – and product consumers. You will have to define a precise distribution strategy and have a clear view on which products are going to be marke- ted in which country through which distribution channel.This will require a strict selection and monitoring of the distribu- tors you are going to involve in your fund distribution.

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Lastly, depending on the target countries of distribution, you might have to appoint local agents. For instance, you will have to appoint a local paying agent and a local information agent if you wish to market your funds in Germany or Switzerland, whereas in France you will be requested to appoint a centralising agent. POST-REGISTRATION DUTIES Once funds are registered, another key challenge will be to maintain that registered status in the various countries of distribution. You will have to cope with a series of specific financial reporting, statistical reporting and publication requirements, with specific formats differing from one country to another and translation requirements. Thus, in Germany andAustria, you will have to provide a specific and com- plex tax reporting if you want your foreign funds to be fiscally as attractive as domestic funds to local investors. Hence the ability of your fund to calculate the relevant figures, such as the publication at each NAV date of the “Aktiengewinn” (equity gain), “Zwischengewinn” (interim profit) and “Immobiliengewinn” (real estate profit) in Germany for fully transparent funds and deliver the relevant tax information to investors via financial data providers and financial newspapers will be crucial to avoid heavy taxation of investors. • Are you aware of the local post-registration requirements in your target countries of distribution? • Have you checked that your fund administrator has an adequate infrastructure and cross-border experience to satisfy local needs (e.g.German and Austrian tax reporting)?

and languages, manual processes, lack of standardisation and difficulties for investors to access reliable and updated information. From a transfer agency prospective, experience of non domestic inves- tors will also be required, as well as the ability to be connected to the major fund distribution platforms such as NSCC in America, AllFunds in Spain, etc. Besides, you will also have to deal with the increasing complexity of your distribution networks, which will make the identification of your distribu- tors, the monitoring of their activity per country and the trailer fee mana- gement much more difficult than in a pure domestic environment. The cross-border registration and distribution of your funds will inevitably require a wide expertise and a more sophisti- cated approach. The assistance of a versatile service provi- der (transfer agent, fund administration, distribution support) sufficiently experienced in the cross-border environment, with specialist capabilities and having a thorough knowle- dge of the specificities of the main countries of distribution of UCITS will be a key factor of success to help you seize the new business development opportunities you have identified beyond your domestic borders. A local presence in Asia of your service provider could also be a real advantage as it would enable you to put a local call centre at disposal of your Asian investors.

Product (re-)structuring and servicing structure strategy

PRODUCT (RE-)STRUCTURING Marketing aspects will be of paramount importance when considering your target product structure. Thus, replacing your existing domestic funds - which fully satisfy your

OPERATIONAL ASPECTS You should not overlook that in a cross-border environment, operational complexity will be exacerbated, due in particular to various time zones

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Profile 1

1

current investors and distributors – by feeder funds of a master fund do- miciled in a cross-border country could have negative impacts and create a potential investors’ flight risk. In addition, you might have difficulties to maintain a perfect track record. Hence you will have to thoroughly ana- lyse the pros and cons of such a scenario from a marketing view point. In general, investors will certainly prefer directly investing in a master fund rather than in a feeder fund, as the master fund will obviously charge less fees than the feeder.With the KIID offering more transparency to investors regarding charges, it will be hard for distributors to conceal these aspects. However, in some countries of distribution where investors have a stron- ger appetite for local UCITS, setting up local feeder funds could be a real advantage to develop your business. It should be noted that outside EU, you will have to take into account the possible local requirements of the target countries of distribution. For instance, it might be forbidden by local regulation to market feeder funds in the country. In Hong Kong, you will have to register both the master and the feeder funds if you intend to sell a feeder fund, which will of course decrease the benefits of such a set up. Other drivers to consider when defining your target product structure will be cost efficiency, tax, regulatory and legal aspects. You will have to ask yourselves a number of key questions, such as, in the case of a mas- ter-feeder structure: Is it a cost-efficient solution (the two layer structure with the associated set up, governance and operating costs should not be neglected and a real cost/benefit analysis should be performed) ? In which country to domicile the master fund? In which country to domicile the feeder funds? (the choice of law applicable to the agreements will be a key issue and will have to be assessed in accordance with the specific features of the Management Company and/or of the funds).What are the tax risks at investors and portfolio level?What are the tax risks at the Ma- nagement Company level if not located in the country of the UCITS? Etc.

SERVICING STRUCTURE In addition to your product (re-)structuring strategy, you will have to define your servicing structure strategy. It will require the analysis of the diffe- rent scenarios that could bring added-value and efficiency to your whole structure, as well as research into the most appropriate location/choice of providers for fund administration, the depositary function, transfer agency and your Management Company. As an example, in the case of cross-border master-feeder structures, the ap- pointment of different providers for the master fund and the feeder funds may create operational difficulties. However, in that matter you should keep in mind that the transfer agency and fund administration location will depend upon the delegation rules applicable at the Management Company’s level, which might vary from one EU country to another, whereas the fund depositary will necessarily have to be located in the country of domiciliation of the fund. The choice of your cross-border fund administration and transfer agency centre will be crucial to make your project become a success, due to the broad expertise and more sophisticated approach required in a cross-bor- der environment. Furthermore, the use of the European Management Company passport will influence your choice of target financial centre. Indeed, it might be worth thinking about the potential operational efficiencies and cost sa- vings that you could make by relocating your existing domestic Mana- gement Company to another EU country. This analysis should investigate fiscal issues (notably with regard to VAT applicable on management fees), double tax treaties benefits and possible tax exemptions. It should be noted that new tax risks and additional complexity could emerge if the Management Company and the service providers are not located in the country of the UCITS but it should be balanced with the benefits of the increased flexibility gained through a consolidated cross-border management business model.

CACEIS - UCITS IV |  page 11

requirements, by opposition to a single traditional UCITS marketed on a cross-border basis. UCITS IV reinforces rules on monitoring, controlling, analysing and reporting risk, bringing them more into line with those that go- vern the investment banking industry. Thus, new structures will often necessitate new delegation arrangements and trigger new monitoring tasks and reporting flows. You will have to decide whether you intend to handle risk management and the compliance controls by yourselves or if you prefer to delegate these activities to an expert service provider, owing to the complexity that they represent. … Ideally this partner should also be able to accompany you until the implementation step to make sure your project is a success. Master-feeder funds for example are already well-known structures in France and you could benefit from the precious experience of a leading service provider such as CACEIS.

You will have to create an optimal product and servicing structure. In this context, engaging an expert partner able to advise you will be a key benefit...

Challenges related to the implementation of your tar- get product and servicing structures

The main challenges you will face when implementing your target product and servicing structures can be split into three categories: • Project management • Risk management • Reporting In the case of cross-border master-feeder structures, you will have to implement a concept which has not been tested yet, in particular in terms of accounting and reporting. The double layer structure will ine- vitably create an overhead of exchange of information and oversight

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SAGE INTERNE EXCLUSIVEMENT

Profile 2

USAGE INTERNE EXCLUSIVEMENT

Management Company with various fund ranges domiciled in several EU Member States which wishes to rationalise its fund activity and centres of excellence

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Client profile & objectives

• Domestic requirements and characteristics, such as political and tax barriers, cultural reasons and investors’ appetite for domestic products.

You are an internationally active Management Company already esta- blished in various EU countries, with one or several UCITS structures per domiciliation country. You have also set up one local Management Company per fund domicile across Europe. You now face the issue of activity dissemination in various European jurisdictions and product duplication under different labels, forms and legislations. In an ideal world, your portfolios would be precisely tailored to the risk/reward profile of each type of investor with no need to duplicate structures because of tax or regulatory barriers. To date, attempts to achieve this ideal have rarely been successful. Those fund sponsors who have tried to fine-tune their offerings have often found them- selves with a large number of very small portfolios which cannot be managed cost-effectively. On the other hand, sponsors or asset managers who have resisted a customised approach have usually been left with a small number of larger portfolios which are only well-suited to a limited market segment. Indeed, at product level, situations occurred where there was a need for maintaining a certain degree of plurality or diversity in the vehicles used, being for regulatory, tax or marketing reasons lying on the distri- butor/investor side, such as: • M&A processes by which you have inherited a similar product range, difficult to merge into your existing platform because it is located in another jurisdiction or offered under specific branding to a distinct distribution network; • Product characteristics that were non-compliant with previous UCITS directives and that required you to launch various regulated local non-UCITS platforms; • Regulatory constraints that entailed, for time-to-market reasons, the set-up of a domestic product rather than capitalising on your flagship and the distribution facilities offered under UCITS; • Negotiating power of some of your distributors/clients who have im- posed their branding;

Because of this product proliferation in many European countries, you have been obliged to put in place an oversight model with a presence in these countries, as imposed by the previous UCITS directives. As a consequence, you may find it difficult to have a global picture of your distribution network, and the multiplicity of local transfer agency models and providers tends to hinder your capacity to implement an efficient in- centive policy. Objectives As you have already developed significant business both at European and international levels, you mainly intend to use the UCITS IV toolbox to ra- tionalise your product ranges and improve your oversight and distribution processes, rather than for product development.You also intend to reduce your costs by finding economies of scale at the fund management level. At the same time, you obviously want to preserve your current client base and development strategy. To reach your fund range rationalisation objectives, you may choose between two different tools under the new directive or mix between them: • Using cross-border mergers to reduce the number of funds and centra- lise asset management in one key country in EU. • Using master-feeder structures - independently or in conjunction with fund mergers – in order to exploit economies of scale, limit fund fees and increase the size of your structures. Besides, the Management Company passport could allow you to li- mit the number of Management Companies you have and thus avoid having one entity per fund domicile. If you also have non-UCITS funds in your range of products, potentially supervised by the same Management Possible scenarios

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Profile 2

The following scenarios can be considered:

Possible scenarios

Merger of your local UCITS into a UCITS range in a cross-border distribution centre (e.g. Luxembourg, Ireland) or in a country which has recently positioned itself in cross-border distribution (e.g. France, UK)

Scenario 1

Merger of your local UCITS into a UCITS range in a cross-border distribution centre (e.g. Luxembourg, Ireland) while keeping your domestic UCITS range

Scenario 2

2

Creation of a UCITS range in a cross-border distribution centre, while transforming your domestic UCITS range into feeder UCITS of the master UCITS in Luxembourg or Ireland

Scenario 3

Creation of local feeder structures, the master being a UCITS in a cross-border distribution centre (e.g. Luxembourg, Ireland)

Scenario 4

Creation of local feeder structures, the master being a UCITS in a cross-border distribution centre (Luxembourg or Ireland) while keeping your domestic UCITS range

Scenario 5

Company as your UCITS funds, then the use of the Management Com- pany passport becomes more complex. You might also review your distribution network to enhance your funds’ market penetration.

Finding a partner whith legal and operational expertise that is able to discuss your rationalisation strategy, lead and coordinate the implementation of your strategy will be a key success factor.

Implementation considerations & points of attention

PRODUCT SIDE On the product side, the ideal rationalisation would be to remain with a global platform domiciled in a single jurisdiction. Indeed it would present the most cost-effective solution at governance, over- sight and operating levels. However, various factors (e.g. distribution requirements, tax hurdles) may make this a non-realistic short-to medium-term goal. Therefore, alternative scenarios might have to be considered to im- prove your current model (e.g. master-feeder structures, operating hubs).

Main challenges

The main challenge is undertaking any restructuring move while dealing with older products and an existing infrastructure, in order to preserve your current client base and development strategy. The complexity is high at product and Management Company level and both are closely interdependent. The implementation timeline is another important factor in terms of distribution risk and cost.

CACEIS - UCITS IV |  page 17

MANAGEMENT COMPANY SIDE On the Management Company side, the maximum level of rationalisation achievable would consist in keeping a single entity in charge of the over- sight of all your UCITS wherever they are domiciled.The main challenge is for one entity to handle the oversight and reporting regulations in force in each UCITS domicile. Necessary cooperation with the domestic depositary banks must be taken into account. For various reasons, this target might be difficult to achieve. In the his- tory of your company, you have built-up specialised centres in various countries where you intend to keep talented teams. In addition, the exis- tence of specific local non-UCITS product range might require to keep a domestic substance. Furthermore your strategy as regards to structuring and domiciling a Ma- nagement Company is closely linked to your product strategy and has to be designed with many factors in mind, mixing actual and intangible topics, such as current legal and operational set-up, existing agreements with supervisory authorities, social and tax matters, branding considera- tions, positioning regarding home and host countries, delegation flexibi- lity, product structure (single fund or master-feeder structure).

1. DISTRIBUTION DRIVEN STRATEGY In certain strategic countries where you run a high risk on non-captive investors due to addiction to changes, due to low appetite for new structures such as feeders, or simply because you want to or have to leave substance, you may decide not to process to product restructu- ring. This would typically be the case if you want to maintain a fully fledged product infrastructure in your home market and a vehicle do- miciled in an international centre for cross-border distribution. It is sim- pler: The products, specially designed for a given market, meet all local expectations perfectly and no impact on investors is anticipated. From a medium to long term perspective however, the increased cost of run- ning duplicate structures in several jurisdictions may be detrimental to your competitive positioning and marketing consistency. The plurality of providers or infrastructures may prevent you from achieving efficient management of your distribution network. UCITS IV may help you to realise economies of scale and rationali- sation. By using the European Management Company passport, you could rationalise the various Management Companies on the one hand and, by using the delegation authorisations, build-up a hub strategy for other activities which relate to your UCITS products and which are un- der the Management Company responsibilities, such as administration and distribution. “Light” transfer agency solutions exist in order to avoid possible de- legation rules hurdles. On the asset management side, asset pooling solutions can be considered but may be difficult to implement on a cross-border basis. In this context, the rationalisation driving the Management Company location should take each domestic delegation rule into consideration. 2. COST-DRIVEN STRATEGY The cross-border mergers facility is seen as the ultimate UCITS IV tool in terms of product range rationalisation. It allows not only asset ma-

Possible strategies

In our view,the product development and distribution strategies should be the starting point. The Management Company strategy and organisation of operations would logically be mapped to product organisation. Finally, restructuring and project management should be considered.

At product level, the following three principal models can coexist and be combined in order to match your organisation and objectives:

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Profile 2

nagement, distribution and operating processes to be improved, but also your governance, product development and marketing efforts can be centralised on a single platform. It also simplifies KIID production. On the other hand, the fund merger facility is seen as the most ag- gressive solution. Indeed, depending on your current set-up, one can anticipate tax impacts at investor, fund and Management Company levels. In addition, it creates uncertainty on investors’ retention rate. This solution is to be kept in mind for a medium to long term objective, but should already be considered in certain circumstances where you are sure your investors will follow your restructuring decision, for non- strategic markets or small non-profitable funds. The timeline has to be taken into consideration, and restructuring could already take place under UCITS III between funds located in a same jurisdiction, at a lower cost and with little impact on investors. 3. MITIGATING STRATEGY Without aiming for the efficiency of processes and the cost optimisa- tion of a single product range, restructuring your cross-border product range into a master-feeder platform may provide you with a material

cost improvement compared to Strategy 1, whilst lowering the risk of losing investors compared to Strategy 2. As such, a mitigating strategy can be built as a transitory or target solution. Cost-wise, master-feeder structures allow managers to realise econo- mies of scale on the major portion of the activity relating to a fund’s assets. Judiciously combining the passport for Management Compa- nies with the local regulations regarding delegations will allow further savings on operations, risk monitoring and governance, without totally removing duplication (KIID, governance, depositary functions, etc.). Transforming funds into feeders allows managers to keep the exiting relationship between domestic funds and local investors. Precise as- sessment of local investor appetite for feeder structures should howe- ver be performed. Structuring solutions can help smooth the una- voidable duplication of cost inherent in double layer structures and safekeep local tax benefits. From a marketing viewpoint, showing investment performance on a look-through principle basis will be essential. In addition, particular at- tention should be paid to distribution constraints that may be imposed by non-EU countries.

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Profile 3

USAGE INTERNE EXCLUSIVEMENT

New entrant into the UCITS market Non-EU Management Company wishing to launch UCITS for distribution regionally or internationally

Client profile & objectives

retail subscribers. The confidence of the local regulator in the UCITS whole structure is critical to its success.

You are a Management Company established outside the EU (e.g. in Asia or in Latin America). You have developed your expertise in mana- ging plain vanilla or alternative funds in your domestic market. You have no experience with UCITS structures but have observed that worldwide distribution of UCITS continues to grow. Their level of pe- netration in international investment markets means that they are beyond doubt recognised as the world’s most internationally distribu- ted investment fund product. Contrary to UCITS, your domestic funds are difficult to sell in neigh- bouring countries, due to fragmentation of the market and competition between the various domiciles. Neither can they be distributed in the EU. That is why you view UCITS as a real alternative or a substitute product to your domestic funds. In your market, UCITS funds are appreciated for their regulatory cer- tainty, liquidity and transparency, which give them a definite advantage compared to other vehicles. In other words, the fact that UCITS are EU- regulated funds make them attractive within the EU, but also in Asia (where Hong Kong is a central point from which to market funds to many different Asian countries), South America, the Middle East, Swit- zerland and Eastern Europe, where some local regulators have already authorised the sale of UCITS to a broad pool of investors, including

Furthermore, from an investment policy view point, you are convinced that UCITS funds are flexible enough to give sufficient latitude to your portfolio managers to develop sophisticated and high return strategies and thus ssophisticated investment policies that UCITS products can attract higher allocations than the unregulated vehicles using the same strategy. You have built your existing organisation (asset management platform and distribution capabilities) in and for your domestic market. This struc- ture is efficient and responds well to your current needs. Objectives You want to develop your business and enter the UCITS market by launching a structure in a well established cross-border EU domicile (e.g. Luxembourg or Ireland). Indeed, you consider that the branding and in- ternational reputation of these fund domiciliations is a key advantage for distribution at a global level. Possible scenarios You may have two different approaches concerning your existing local funds: You could either keep them for domestic distribution or replace them by your new UCITS range domiciled in a cross-border distribution centre.

The possible scenarios to consider are:

Possible scenarios

Creation in addition to your local fund (e.g. Asian fund, Latin American fund) of a UCITS range in a European cross-border distribution centre (e.g. Luxembourg or Ireland)

Scenario 1

Creation of a UCITS range in a cross-border distribution centre (e.g. Luxembourg or Ireland) to replace your local fund (e.g. Asian fund, Latin American fund) and distribution of your European UCITS both in Europe and outside Europe (e.g. Asia, Latin America)

Scenario 2

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Profile 3

Implementation considerations & points of attention

In order to fully comply with the new regulatory framework, it is strongly recommended that you work with an expert partner able to advise you and accompany you at all the stages of implementation of your new UCITS structure.

Your main challenge will be to transfer your expertise to a new regu- latory and distribution framework. You will notably have to thoroughly understand the UCITS regulatory (eligible assets, investment restric- tions, risk management constraints, etc.), tax and operational environ- ment (flexibilities and constraints). Furthermore, you have no European presence yet.

Besides, if you choose to replace your existing local fund by your new UCITS structure, you will have additional re-structuring tasks and have to register the UCITS fund in your domestic country outside Europe. Investors’ flight risk at the time of the change of structure from local fund to UCITS should obviously taken into account. SERVICING STRUCTURE Domiciling your EU Management Company, as well as the transfer agency and fund administration, in the country of domiciliation of your UCITS will be the more efficient servicing structure, except for specific constraints (e.g. fiscal). It will notably enable you to work with a single regulator. However, as a non-EU Management Company, you may not intend to build a new structure from scratch in an EU country in an environment you are not familiar with. Consequently, you will probably be interested in a comprehensive packaged servicing structure solution inclu- ding a third-party Management Company having the substance, the staff and the adequate tools and a full service provider (trans- fer agency, depositary, fund administration, support to distribution) already set up in a cross-border UCITS distribution centre and strongly experienced in the UCITS market. It would allow you to save both time and money, gain efficiency and ensure you are fully compliant with the new environment you are entering into (in particular in terms of risk

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Challenges related to entering the UCITS market

PRODUCT STRUCTURING Whatever the scenario chosen, you will have to select the domiciliation of your future UCITS fund according to various criteria (cross-border distribution centre, regulator, legal, tax and marketing aspects, etc.) and then to create it. You should keep in mind that UCITS are regulated structures requiring to go through a full authorisation procedure before being launched, as the regulator of the country of fund domiciliation want to legitimately know “what is behind”. You will have notably to produce a prospectus, a KIID and constitutional documents for your UCITS fund. Once your UCITS is launched, you will also have to file frequent reporting with the regulator. It will certainly be necessary to find a partner who is sufficiently experienced to help you define the optimal product structure to set up and assist you in creating your own UCITS in a cross- border centre. Close relationships of this partner with the local regulator could be a key advantage to rapidly create your new product.

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and oversight management and in terms of MiFID requirements). Based on your current organisation, you will probably pilot your UCITS from your headquarters. Depending of your geographical location, the time difference could require additional flexibility from your service provi- der (e.g. online reporting, local presence in your time zone, etc.).

retail fund providers, their main distribution channel – UK advisers (IFAs) – and product consumers.

You will have to define a precise distribution strategy and have a clear view on which products are going to be marketed in which country through which distribution channels.This will im- ply a strict selection and monitoring of the distributors you are going to involve in your fund distribution. NOTIFICATION PROCEDURE, KIID PRODUCTION & MAINTENANCE AND LOCAL DISTRIBUTION RULES Once you have defined the target countries where you want to market your UCITS, you will have to face additional challenges to implement your distribution strategy. First of all, you will have to request the registration of your UCITS in the target distribution countries by using the UCITS IV simplified notification process. It should be noted that you will have to comply with local marketing and distribution regulations in the host Member State .As such, you might have to cope with different local distribution requirements when marketing your UCITS in various countries. Producing and distributing the KIID will be a real challenge since it will have to be translated in the language of the country of distribution and any material change within the fund will require prompt revision of the document. It will demand timely notification to all regulators where the fund is registered for cross-border distribution and throughout its dis- tribution network. Outside EU, the KIID might not be recognised by local authorities such as in Hong Kong and Singapore, where you will have to produce other “KIID- like“ documents (respectively the KFS and PHS). Lastly, depending on the target countries of distribution, you might have to appoint local agents. For instance, you will have to appoint a local paying agent and a local information agent if you wish to market your funds in Germany or Switzerland, whereas in France you will be requested to appoint a centralising agent.

Working hand in hand with an expert European partner able to offer you a full “welcome package” to enter the UCITS market will be a key factor of success.

Challenges related to cross-border distribution of UCITS

As already described in the context of the client profile 1, you will have to face a number of issues when marketing your new UCITS around the world. DISTRIBUTION STRATEGY The first challenge will consist in identifying the right markets to target to successfully sell your funds cross-border. You will have to carry out a cost/benefit analysis, as well as a thorough market survey and understand the key specificities of each market. The main questions you should ask yourselves are: •Is there a local appetite for non-local products in the target countries? •Is the domiciliation of our UCITS fund suitable for distribution in the tar- get countries? For which investors? •Which fund distribution channel should be favoured? •How to develop our distribution network in the target countries? In these aspects, regulatory changes should be carefully monitored. Thus, in the UK, the FSA’s new Retail Distribution Review (RDR) regime, desig- ned to add further protection for retail investors and expected to operate from 2013, will undoubtedly change the way the market for retail invest- ments is structured and operated.The RDR will affect any fund that is dis- tributed to retail investors in the UK and change the relationship between

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