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January 22, 2014

ILA and PwC Funds Day

ILA introduction

John Parkhouse, Chair of the ILA Fund Committee and Partner, PwC

The Fund Governance TimelineBoard Agendas over time

3January 2014

2005“The Age of

laissez-faire”

Today“Governance under

scrutiny”

2020“Compliance-based

governance” ?


Education

• Events

• Discussion Forums

• FAQ

Driving Behaviour

• Survey

• Points of view

Establishing a framework

• “What does good fund governance look like”• “we think....”• Independence• Role of the

Chairman

• Code of ethics

Promoting Luxembourg as a leader in fund governance

• Clear messaging to financial community• Target investor related stakeholder community

4January 2014


Alternatives Sub Committee

Chair – Bill Jones and Michael Hornsby.

Core team of active alternative practitioners to consider two questions :- what specific needs does the alternative industry have which ILA

could/should support ?- how could/should ILA practically do this ?

Fund Governance Survey

- UCITS – as prior years- Alternatives – tailored by Alternatives Sub Committee.

5January 2014


Points of View• Independent Directors

• Roles and Responsibilities of SICAV Fund Boards and the Management Company

• Supervision and oversight of delegates

• Proxy voting and external governance

• Capacity

• Conflicts of interest

• Chairman and Board composition / qualification

• Board meeting conduct and use of committees

• Remuneration of the Board

• Director’s Education and development

Tell us what you are interested in supporting

Tell us what you want on the list

6January 2014


7January 2014


08:30 - 09:00 Welcome coffee

09:00 - 09:10 IntroductionJohn Parkhouse, Chair of ILA Fund Committee and Partner, PwC

09:10 – 09:45 Key note speakerStephen Ross, Partner, Sidley Austin LLP

09:45 – 10:00 FATCA Board BriefingKerstin Thinnes, Partner, PwC

10:00 – 10:20 Audit ReformPierre Krier, Partner, PwC

10:20 – 10:40 Coffee break

10:40 – 11.25 CSSF interviewJérôme Wigny, Elvinger, Hoss & Prussen (moderator)Jean-Marc Goy, CSSF

11:25 – 11:40 EMIR Board BriefingAndrea Gentilini, Director, PwC

11:40 – 12:30 Fund Governance post AIFMDMichael Hornsby, Partner, Ernst & Young(moderator)Michael Delano, Partner, PwCPaul Guillaume, Director, AltraPartnersJohan Terblanche, Partner, Loyens & LoeffWilliam Jones, Senior Partner, MPLGroupHans-Jürgen Schmitz, Managing Partner, Mangrove Capital Partners

12:30 – 13:30 Lunch

8January 2014


13:30 – 14:30 Fund Board priorities for today and tomorrowPatrick Zurstrassen, The Director’s Office (moderator)Andy Mack, Director, Fernden AdvisorsMarc-André Bechet, Director, Banque Degroof

14:30 – 14:40 MiFID & RDRChristophe Saint-Mard, Partner, PwC

14:40 – 15:25 Board oversight of distributionGraham Goodhew, J.P. Morgan (moderator)Marco Zwick, Chief Compliance Officer, SchrodersBirgit Goldak, Partner, PwCAlastair Woodward, Director, AberdeenXavier Briant, Fund Channel

15:25 – 16:00 Coffee break

16:00 – 16:50 Separation of responsibilities between Boards of Funds vs. Boards of Management CompaniesMartin Vogel, CEO, MDO (moderator)Revel Wood, Managing Director, RBSFreddy Brausch, Partner, LinklatersHenry Kelly, Kelly ConsultBill Lockwood, Franklin Templeton

16:50 – 17:05 FAQ UpdateMonique Bachner, Partner, Bachner Legal

17:05 – 17:20 UCITS V Board briefingThierry Blondeau, Partner, PwC

17:20 – 17:30 Wrap upJohn Parkhouse, Chair of ILA Fund Committee and Partner , PwC

As from 17:30 Cocktail

Stephen Ross, Partner, Sidley Austin LLP

Key note speaker

BEIJING BOSTON BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

ILA – PwC Funds Day22 January 2014

Stephen Ross, PartnerSidley Austin LLP London6874389.1

Mind the Gap – The Perception Issue

Carne Global Financial Services survey of 100 institutional allocators to hedge funds• 83% described fund governance standards as an “extremely” important

issue• 91% said they would decline an investment because of weak corporate

governance• 87% agreed the issue of fund governance had increased in importance

since 2008-2009• More than half of respondents believe that current fund governance is in

need of improvement• Top concerns expressed by respondents: (1) independent directors have

too many directorships; (2) directors lack independence; (3) directors lack experience and knowledge; (4) too few full board meetings; (5) too few in-person meetings of directors; and (6) directors fail to focus on key fund risk areas


11January 2014

The “Basics”: Directors’ duties and liabilities

• Power of appointment usually rests with investment manager through founder shares – an inherently strange dynamic!

• Varies across jurisdictions – derived from Articles, Statutes, case law and codes of conduct, but certain established common principles

• Reasonable skill, care and diligence in the performance of duties by reference to expected general knowledge, skill and experience (objective test) and actual knowledge, skill and experience (subjective test). The higher standard applies

• Delegation of course is acceptable but delegation without thorough oversight is usually a breach of directors’ duties

• To whom are duties owed? Usually interests of company/shareholders but can at times be other stakeholders, eg creditors

• Corporate governance codes and legislation for Directors extensive pre-2008• Problems generally lay with enforcement not absence of legislation• Insurance – “losses” arising by virtue of a wrongful act, ie breach of duty,

negligence, error, misstatement, omission, breach of warranty or wrongful trading. Allows functioning even if fund is financial stressed


13January 2014

The “Basics”: Directors’ duties and liabilities

In Common Law, a director of a corporate fund owes fiduciary duties as well as the duty of skill and care. The fiduciary duties can be summarised as follows:

• A duty to act honestly and in good faith in the best interests of the fund as a whole

• A duty to exercise the powers that are vested in him for the purposes for which they were conferred and not for any collateral purpose

• A duty not to put himself in a position where he has a conflict of interest between the business of the fund and his own business interests

• A duty to account to the fund for any “profits” he makes (without the fund’s consent) from his position as a director

• A duty not improperly to fetter his future ability to exercise discretion in the use of his powers as a director

• A duty of confidentiality to the fund in respect of information received or obtained by a director, in that capacity, concerning the fund, its business relationships and opportunities

14January 2014


Regional distinctions – Cayman Islands Statement of Guidance for Regulated Mutual Funds

(“SOG-MF”)

The SoG-MF does not supplement or amend Cayman Islands law; much of it is a restatement of Cayman Islands law, but it does provide a degree of clarity on certain matters in the investment funds context, such as:

• Directors are under a positive, rather than passive, duty to monitor applicable laws and regulations and ensure that the fund is in compliance by requesting necessary information and providing appropriate direction

• Directors are under a general duty to retain sufficient oversight of the fund so as to ensure it is being effectively managed and operated, regardless of the extent to which operational matters are delegated to service providers

• Fund boards should meet regularly, as a minimum at least biannually, and should request the presence of service providers if necessary

• Directors should ensure that they have sufficient time to apply their mind to overseeing the fund

• Directors should exercise oversight of the fund’s compliance with its stated investment strategy


15January 2014

Regional distinctions – IrelandCorporate Governance Code for Collective

Investment Schemes and Management Companies

Key recommendations of the Governance Code are:

• The board of directors retains primary responsibility for the corporate governance of the CIS, regardless of the extent of delegation

• The board of directors should have a majority of non-executive directors, with at least one independent director

• Minimum of three directors in all

• The board should have a good balance of skills and expertise


16January 2014

Regional distinctions – LuxembourgALFI Code of Conduct for Luxembourg

Investment Funds

The Association of the Luxembourg Fund Industry (ALFI) first published its Code of Conduct in 2009, and the Code was revised in 2013. The Code of Conduct operates on the basis of ten principles, which are accompanied by more detailed recommendations as to how the principles should be implemented

Some of the key recommendations include:

• The board should provide independent review and oversight, including effective oversight of delegated functions

• Members of the board should have appropriate experience, and complementaryknowledge and skills

• The board should consider appointing at least one member it regards as independent

• The members of the board are expected to understand the activities of the fund and devote sufficient time to their role

• Board remuneration should be governed by a disclosed policy, and should reflect the responsibilities of the board, the experience of the board, and be fair and appropriate given the size and complexity of the fund


17January 2014

The “Charge Sheet” – some recent insights

A fairly recent case before the Grand Court of the Cayman Islands caused a stir in the word of offshore fund corporate governance (Weavering Macro Fixed Income Fund Limited (in liquidation) v Stefan Peterson and Hans Ekstrom)

The judgment garnered a lot of attention for three reasons:

• Most importantly, it was the first time that the duties of a director had been scrutinised in the context of a conventionally structured offshore hedge fund

• Second, the conduct of the independent directors was particularly egregious (relatives of Fund Manager, minimal review, fictitious minutes of board meetings that were never held, no governance structure)

• Third, the directors were found liable for a staggeringly large amount of money ($111 million plus costs)


18January 2014

The “Charge Sheet” – main insights and “take-aways”

• Directors must satisfy themselves that Offering Memorandum complies with all legal requirements

• Contents of key material contracts to be scrutinised

• Separation of responsibilities between fund administrator and investment manager

• No rubber stamping - continual application of minds and exercise of judgement

• Accounts – “inquisitorial manner” and financial competence

• Regular meetings, agendas, board packs etc

• Availability of D&O Insurance – wilful and knowing breaches


19January 2014

The “Charge Sheet” – another example, Madoff

• Directors of a Madoff group company were sued for breach of directors duties. Not a fund per se but useful insights as a financial sector precedent

• Alleged that directors had followed Mr Madoff’s instructions to pay substantial sums for “research” that was useless to company, and was instead cover for payments to Mr Madoff and a third party

• Directors’ argued that they legitimately relied on Mr Madoff’s standing and experience in financial world, and trusted his judgement

• Directors found not guilty in October 2013

• Directors entitled to attach great weight to Mr Madoff’s views, given his reputation, experience and knowledge, in deciding whether to pay for the research

• There had been no breach of directors’ duty to exercise independent judgement


20January 2014

Madoff Securities – Principle 1

• It is legitimate and necessary for there to be a division of responsibilities in management of a company

• However, directors still owe a duty to act in the best interests of the company by informing themselves of the whole of a company’s affairs

• A director who allows himself to be “bamboozled” or “browbeaten” by a fellow director will breach his duty


21January 2014

Madoff Securities – Principle 2

• A director owes to the company a duty to form an independent judgement as to what is in the best interests of the company

• However, a director may legitimately rely upon the judgement and advice of another director whose reputation, skill, experience and integrity is (or reasonably appears to be at the time) beyond reproach


22January 2014

Madoff Securities – reasons for decision

Distinguishable from Weavering because:

• Although director ultimately followed Mr Madoff’s advice, questions were raised by directors

• Mr Madoff was held in particularly high-regard, and this was considered justified (at the time) because of his industry knowledge and expertise

• Although the directors’ decision to trust Mr Madoff provided ill-founded, they nevertheless exercised independent judgement in making that decision and applied their minds to the key questions


23January 2014

The “Charge Sheet” – another recent example

• 2008 - fund purchases 25% stake in a coal mining company for $210m• 11 days after completion of purchase (though six months after exchange of

contracts) the Valuation Committee approved an internal report stating the stake was worth $425m

• Between November 2008 and December 2010 Manager received information and tips that the interest in the mine was significantly overvalued, but Manager continued to value the stake at $425m

• Valuation questions and outperformance prompted an SEC investigation• In December 2013 Manager agreed to pay $9m in settlement of the SEC charges• Part of the settlement obliges the Manager to hire an independent consultant to

advise on internal procedures for transmitting information to the Valuation Committee

• SEC described internal procedures at Manager as “inadequate … to ensure that such relevant information was provided … [to the Valuation Committee] in a timely manner or even at all”

• Emphasises need for sound internal policies for dealing with information in a timely manner, and for Valuation Committee to be genuinely independent

• Directors dimension


24January 2014

Current Status – Personal expertise

• Definitely no longer acceptable to have “chums from the golf club”!

• Individual expertise and competence critical• But ….. blend of expertise is most important so that Board as a

whole functions effectively • Should at least one director be financially qualified?• How deep is the available pool of true “independents”• Impact of GFC?


25January 2014

Current Status - Delegation

• Investment management – “delegated not abdicated”

• Not second guess investment choices but ensure:

– Compliance with investment policies and restrictions– Management of credit risks– Freedom from conflict of interest– Operational quality and efficiency– Cost control and expense ratios– Transparency– Shareholder protection

• Valuation of fund assets

• Board responsibility

• Hard to value investments – investment manager role

• Service providers

• Asset reconciliation


26January 2014

Current Status – Independence

• Requirement for “local” directors by regulators, contrasting approaches

• Independent “professional fiduciary service providers” have developed

• Concentration of revenues from a small number of investment management groups – an unaddressed issue?

• Employees of the investment manager as director?


27January 2014

Current Status – Extent of commitments

• CIMA Survey - 90% of investors requested statistics on number of directorships as well as fund background and character checks

• How thinly spread?

• Common strategies and issues, eg SPV’s, “scalable” directorships

• Cayman Islands – average fund director is on 25 boards and over 15% are retained by more than 25 different investment advisors

• CIMA contemplating establishing a public database showing total commitments to fund boards

• Irish Governance Code – comply or explain at or above eight directorships


28January 2014

Current Status – Remuneration

• AIFI Code of Conduct – board remuneration should be “reasonable, fair and adequately disclosed”

• Ranges from say $5,000 pa to $15,000 pa, less “offshore” than “onshore”

• Balance between attractive and competitive remuneration and attracting the right quality of candidate

• Perceived liabilities?

• Who sets it?

• In practice how much pressure is exerted by investors?


29January 2014

Future Trends

Notwithstanding Weavering and the increased focus on offshore fund governance since 2008, perception remains that offshore fund governance is weak

Ernst & Young annual hedge fund survey addresses the perception issue:

• Only 45% of investors believe that boards are carrying out their duties

• Only 36% of investors believe that boards are accountable to investors and funds

• Only 19% of investors believe that boards have sufficient authority and exposure to information to allow them to challenge the management team

• More “prescriptive” regime likely

• How active will investors be in “policing” these issues – retail versus institutional?

• Shortage of talent and available pools of (independent) directors?

• “Things” have progressed and are more robust but some way to go


30January 2014

BEIJING Suite 608, Tower C2 Oriental Plaza No. 1 East Chang An Avenue Dong Cheng District Beijing 100738 China T: +86.10.5905.5588 F: +86.10.6505.5360

BOSTON 60 State Street, 34th Floor Boston, Massachusetts 02109 T: +1.617.223.0300 F: +1.617.223.0301

BRUSSELS NEO Building Rue Montoyer 51 Montoyerstraat B-1000 Brussels Belgium T: +32.2.504.6400 F: +32.2.504.6401

CHICAGO One South Dearborn Chicago, Illinois 60603 T: +1.312.853.7000 F: +1.312.853.7036

DALLAS 717 North Harwood Suite 3400 Dallas, Texas 75201 T: +1.214.981.3300 F: +1.214.981.3400

FRANKFURT Taunusanlage 1 60329 Frankfurt am Main Germany T: +49.69.22.22.1.4000 F: +49.69.22.22.1.4001

GENEVA Rue de Lausanne 139 Sixth Floor 1202 Geneva Switzerland T: +41.22.308.00.00 F: +41.22.308.00.01

HONG KONG Level 39 Two Int’l Finance Centre 8 Finance Street Central, Hong Kong T: +852.2509.7888 F: +852.2509.3110

HOUSTON 1000 Louisiana Street Suite 6000 Houston, Texas 77002 T: +1.713.495.4500 F: +1.713.495.7799

LONDON Woolgate Exchange 25 Basinghall Street London, EC2V 5HA United Kingdom T: +44.20.7360.3600 F: +44.20.7626.7937

LOS ANGELES 555 West Fifth Street Los Angeles, California 90013 T: +1.213.896.6000 F: +1.213.896.6600

NEW YORK 787 Seventh Avenue New York, New York 10019 T: +1.212.839.5300 F: +1.212.839.5599

PALO ALTO 1001 Page Mill Road Building 1 Palo Alto, California 94304 T: +1.650.565.7000 F: +1.650.565.7100

SAN FRANCISCO 555 California Street San Francisco, California 94104 T: +1.415.772.1200 F: +1.415.772.7400

SHANGHAI Suite 1901 Shui On Plaza 333 Middle Huai Hai Road Shanghai 200021 China T: +86.21.2322.9322 F: +86.21.5306.8966

SINGAPORE 6 Battery Road Suite 40-01 Singapore 049909 T: +65.6230.3900 F: +65.6230.3939

SYDNEY Level 10, 7 Macquarie Place Sydney NSW 2000 Australia T: +61.2.8214.2200 F: +61.2.8214.2211

TOKYO Sidley Austin Nishikawa Foreign Law Joint Enterprise

Marunouchi Building 23F 4-1, Marunouchi 2-chome Chiyoda-Ku, Tokyo 100-6323 Japan T: +81.3.3218.5900 F: +81.3.3218.5922

WASHINGTON, D.C. 1501 K Street N.W. Washington, D.C. 20005 T: +1.202.736.8000 F: +1.202.736.8711

Sidley Austin refers to Sidley Austin LLP and affiliated partnerships as explained at www.sidley.com/disclaimer.

World Offices

Kerstin Thinnes, Partner, PwC

FATCA Board Briefing

FATCA

• U.S. law to enhance tax compliance and tax transparency.

• As per today, 19 countries signed Intergovernmental Agreements (IGAs) with the U.S.A. – much more will follow (incl. Luxembourg).

• Based on IGA, FATCA obligations will become integral part of each signing country’s local law.

• FFI (Foreign Financial Institution) definition is broad: «Financial Services» (incl. Banks, ManCos, or Insurance Companies) or «Investment Entity» in a broad sense will be directly or indirectly impacted.

• Entry into force as from July 1, 2014 (phased introduction).

• International developments (EU and OECD) to be considered.

ILA and PwC Funds Day33

January 2014

! = Priority tasks= Starting point

Key deadlines, tasks & prioritiesA focus on main dimensions

ILA and PwC Funds Day 34January 2014

Presenter

Presentation Notes

Analysis of FATCA status (as a first step, not only status quo but also future developments) Our service offering (e.g. for PE hedge fund structures: not only analysis of Luxembourg vehicles but also overall structure, in case of country-specific issues we work closely together with our network partners; for small promoters we can provide one/two-hour FATCA workshops) All banks are in scope & have to register (for QIs: QI will continue to exist/already familiar with the subject/some additional requirements / handling the matter very well / open issue: interaction (double reporting?)) Should we mention the following: Registration of sponsored investment entities in case of US accounts Registration of certain Non-Reporting FIs is discussed (RDCFFIs under the final regulations)

Pierre Krier, Partner, PwC

Audit Reform

EU Audit Reform

• Further regulation for statutory audits in the EU after over 2 years of intense discussions

• Scope:- Statutory audit of Public Interest Entities (PIE) in the EU- No extra-territorial impact outside EU - in principle

• PIE:- EU incorporated entities listed on a EU regulated market- Credit institutions- Insurance undertakings- Any other entity designated by a Member State as a PIE

listed and unlisted


Presenter

Presentation Notes

ECON : The Economic & Monetary Affairs Committee is a committee of the European Parliament, in charge of giving a recommendation to the JURI. JURI : Legal Affairs Committee, in charge of giving legal advice to the European Parliament. Both are committees of the European Parliament. The ECON have proposed a scope for PIE‘s, and the JURI will confirm/adjust/change this proposal and report their decision to the EP.

What about UCITS/AIF?

• Listed funds in scope of the PIE definition

• “Entities governed by the law of a Member State whose transferable securities are admitted to trading on a regulated market of any Member State …”

• A number of funds are listed for marketing purposes and because of investment constraints of institutional investors

• Non PIE Management Company of a PIE entity also in scope of legislation


Presenter

Presentation Notes


Mandatory Audit Firm Rotation

• Principle: 10 year rotation for all PIE

• Renewal:- 10 additional years if tender- 14 additional years if joint audit

• MS options:- Set a duration of less than 10 years for first audit period and/or not

permit a renewal period

• Patchwork of rules across the EU: parent company might follow the rules of the country of its EU subsidiary with the shortest rotation period


Presenter

Presentation Notes


Mandatory Audit Firm Rotation

• No extra-territorial impact outside EU-in principle

• Transitional provisions:- Rotation within 6 years for existing audit engagements ≥ 20 years- 9 years for 11-20 year engagements- Engagements < 11 years, rotation rules as foreseen in legislation

apply


Presenter

Presentation Notes


Blacklist of Non-Audit Services (NAS)• 70% cap for NAS fees

• Restrictive blacklist of prohibited NAS:

- Tax services (compliance & advisory)

- “Services that involve playing any part in the management or decision-making process of the audited PIE”

- “Services linked to the financing, capital structure and allocation, and investment strategy of the audit client”

• MS option to allow certain NAS if no direct or immaterial effect on the audited financial statements

• Clean period: prohibition one year prior to taking-up the audit to render services related to design/implementation of internal control or risk management procedures in connection with preparation of financial information and financial IT systems


Presenter

Presentation Notes


Audit Committee (AC)• Composition:

- Non-executive members of administrative/supervisory body

- Members appointed directly by shareholders

- Majority of members to be independent from entity

- At least one member having competencies in accounting and/or auditing

- AC as a whole to be competent in the business sector of their entity

• Remit:- Monitor:

o Outcome of statutory audit

o Financial reporting process

o Internal control and risk management framework

o Internal audit work

- Review independence of statutory auditor

- Responsible for external audit selection procedure


Presenter

Presentation Notes


Audit Committee (AC)• Relationship AC-External audit:

- Reporting to AC on audit findings, scope of audit work, materiality levels applied, going concern issues, non-compliance with laws and regulations

• AC exemptions:- UCITS/AIF:

o Operate in strictly defined regulatory frameworko Specific controls exercised by their depositary


Presenter

Presentation Notes


Expected timeline adoption process

Trilogue JURI vote Approval by Council Application

Agreement in Coreper/Council EP Plenary Entry into forcetrilogue vote vote

October -December

2013

17 December

2013

18 December

2013

21 January

2014 March 2014

April 2014

July2014

July2016


Presenter

Presentation Notes


Transition period

• Legislation applicable 2 years after entry into force (mid 2016), except mandatory audit firm rotation having specific transitional provisions


Presenter

Presentation Notes


Coffee break

Moderator :Jérôme Wigny, Elvinger, Hoss & PrussenPanel :Jean-Marc Goy, CSSF

CSSF Interview

Andrea Gentilini, Director, PwC

EMIR Board Briefing

EMIR, the derivatives market revolution


What and why is EMIR for?How EMIR can reduce and monitor systemic risk

EMIR reshapes the derivative market introducing new obligations for counterparties of an OTC transaction

CCP Clearing obligationStandardised

OTC derivatives

BilateralclearingCCP

Reporting obligation*

Systemic risk related to OTC trades

ESMA

Systemic risk reduction Systemic risk monitoring

“As is”

“To be”

… E

MIR

…

Trade Repository

OTC Trade

Clearing Member

* For all types of derivatives (including ETD)


Since private persons cannot be considered “undertakings” they can be considered out of the scope of the regulation

Who is within the scope of EMIR?Financial, non financial counterparties and private persons

EMIR applies :

• (Directly) to any entity established in the EU which has entered (is a legal counterparty to) a derivatives contract, and

• Indirectly to non-EU counterparties trading with EU parties

Financial counterparty means [EMIR, Art.2(8)]:• AIF managed by AIMFs (Dir. 2011/61/EU)• Assurance undertaking (Dir. 2002/83/EC)• Credit Institution (Dir. 2006/48/EC)• Institutions for occupational retirements provision

(Art.6, Dir.2003/41/EC)• Insurance undertaking (Dir. 73/239/EEC)• Investment firms (Dir. 2004/39/EC)• Reinsurance undertaking (Dir. 2005/68/EC)• UCITS, and where relevant its ManCo

(Dir. 2009/65/EC)

Non Financial counterparty means [EMIR, Art.2(9)] : an undertakings established in the Union other than those listed in Art. 2.(1) [i.e. CCPs] and 2(8) [ i.e. Financial counterparties]

EMIR identifies two main categories of counterparty to a derivatives contract:


Who has to clear?

Standardised OTC derivative Non-standardised OTCderivative

Financial Counterparties(FC) Central clearing obligation Risk Mitigation Techniques*

Non-financialcounterparties above

clearing threshold(NFC+)

Central clearing obligation Risk Mitigation Techniques*

Non-financialcounterparties below

clearing threshold(NFC-)

Certain Risk Mitigation Techniques**

Certain Risk Mitigation Techniques**

Note: * Timely confirmation, mark-to-market valuation, portfolio reconciliation and compression, dispute resolution and collateral exchange** Timely confirmation, portfolio reconciliation and compression, dispute resolution


Who has to report what?

Standardised OTC derivative

Non-standardisedOTC derivative

Exchange traded derivatives

Financial Counterparties(FC) Reporting

obligation to trade repositories

No threshold applicableNo intra-group exemptions

Non-financialcounterparties above

clearing threshold(NFC+)

Non-financialcounterparties below

clearing threshold(NFC-)


Clearing obligation – Key dates

1 Dates are based on the ‘Minimum’ and ‘Maximum’ scenarios defined by ESMA in its EMIR timeline 2 ESMA will specify the date of entry into force of clearing obligation, including any phase-in

EMIR Areas

•Timely confirmation•Mark-to-market/Marking-to-model

•Dispute resolution•Portfolio Compression•Portfolio Reconciliation

•Collateral exchange (including margin requirements)

•Clearing via CCPs

15 March 2013

15 September 2013

To be defined

15 May 2014 (min.) 16 March 2015 (max.)1,2

Central Clearing

Risk Mitigation Techniques(RMT)

Clearing(OTC)

Provisions


When will EMIR be enforced?Reporting obligation – Key dates

Reporting obligation for backload trades

16 Aug. 2012 12 February 2014Not in scope of reporting

Within 3 years after its specific reporting start date

Within 90 days after its specific reporting start date

OTC Derivative contract conclusion OTC Derivative contract maturity

Time to report data…

Reporting obligation starting date

Reporting starting date is 12 February 2014 for all derivative contract types.

EC has rejected the ESMA proposal to delay the reporting obligation for ETDs to 1 January 2015.


Roles and responsibilities

Fund /Management

Company / Asset

manager(counterpart

role)

ObligationsWho is

responsible?

Most of the activities can be delegated to 3rd party, but the ultimate responsibility remains at the Fund / Manco level

Delegation ?

•Central clearing• Select CCP Clearing Member(s) • Identify derivatives in scope• Implement operating model

EMIR reshapes the derivative market, with new obligations on market players in the fund industry.

•Reporting obligation• Report to TR all transaction required data

•Risk Mitigation Techniques• Agree with counterparties on:

timely confirmation procedureportfolio reconciliation proceduredispute resolution procedureportfolio compression procedureexchange of collateral

• Report to NCA unconfirmed transactions and outstanding disputes

• Daily valuation of OTC derivatives (MtoM/MtoModel)

• Documentation and approbation of valuation models


Moderator :Michael Hornsby, Partner, Ernst & YoungPanel : Michael Delano, Partner, PwCPaul Guillaume, Director, AltraPartnersJohan Terblanche, Partner, Loyens & LoeffHans-Jürgen Schmitz, Managing Partner, Mangrove Capital PartnersWilliam Jones, Senior Partner, MPL Group

Fund Governance post AIFMD

Agenda

► Overall structural and legal considerations Johan Terblanche

► Managing potential conflicts – practical considerations Michael DelanoPaul Guillaume

► Governance challenges in a PE / RE context Michael HornsbyHans-Jürgen Schmitz

► Governance challenges in a Hedge Fund context William Jones


57January 2014

Governance of AIF and AIFMInternally managed illiquid assets AIF

Initiator / General Partner

Investors

Compliance

Risk management

Distributors

Administrator, transfer, domiciliation agent

Delegates

Internal audit

Holding company

(SPV)

Underlying asset

(indirectly held)

Underlying asset

(directly held)

Investments

Auditor

Service providers

Lawyers

Depositary

Paying agent(s)

Investment adviser

AIF investment company Board of Directors

Portfolio management

Valuation


58January 2014

Governance of AIF and AIFMExternally managed illiquid assets AIF

Investors

Group initiator and sponsor

Holding company

(SPV)

Underlying asset

(indirectly held)

Underlying asset

(directly held)

Investments

Internal audit


Delegates

Auditor

Service providers

Lawyers

Depositary

Paying agent(s)

Investment adviser

Compliance

Risk management


Valuation

AIFMBoard of Directors

AIF investment company Board of Directors

Distribution


59January 2014


Initiator and sponsor

Third party Sponsor

Management companyBoard of Directors

Investors

AIF common fund

Compliance

Risk management


AIFMBoard of Directors

Valuer


Delegates

Internal audit

Holding company

(SPV)

Underlying asset

(indirectly held)

Underlying asset

(directly held)

Investments

Auditor

Service providers

Lawyers

Depositary

Paying agent(s)

Investment adviser

Distribution


60January 2014


Initiator and sponsor

Investors

AIF common fund

Compliance

Risk management

AIFM and management companyBoard of Directors

Distributors


Delegates

Valuer

Internal audit

Holding company

(SPV)

Underlying asset

(indirectly held)

Underlying asset

(directly held)

Investments

Auditor

Service providers

Lawyers

Depositary

Paying agent(s)

Investment adviserPortfolio management


61January 2014

The portfolio management processFunctional perspective

Luxembourg AIFM

BoardPortfolio management

process

Investment Advisor

Investment Committee

External Service Providers

Lega

l

Due

Dili

genc

e

Bro

kers

AIF 1

Board or Management Company

SPV 1 SPV 2

► Understand investor mandate and strategy

► Identify target assets► Qualify target assets► Develop deal structure► Make recommendations

► Instruct the investment advisor► Review investment advice► Ensure compliance with

investment process and fund documentation

► Approve steps in the investment process and make final decision

► Appoint AIFM /portfolio manager

► Evaluate performance ofAIFM / portfolio manager

► Dismiss AIFM / portfolio manager

► Review and ratify portfoliomanager decisions

► Implement detailed dealstructure

► Maintain ongoing compliance

AIF 2


62January 2014

The portfolio management processProcess perspective

Investment Advisor AIFM AIF or management company Holding structure

Identifies investment

opportunities

High-level review of selection and approval of due diligence budgetStructuring:

► Financing► TaxDue diligence: ► Tax► Legal► Financial► Business

Formal recommendation

Formal compliance and

risk management checks

Investment committee

Qualify proposed investments

Request for advice on

investment opportunities

Information to AIF Board


Approval


Incorporation of holding structure

Completion of financing structure

Issue of instructions in

relation to holding structure


63January 2014

Risk profile► Identification► Measurement► Monitoring and

reporting

1.Re-/Define model to measure risk

2. Gather relevant risk input data

3.Analyze and consolidate data

4. Measure risk and compare against risk limits

5. Escalate results and report to stakeholders

5.1. Analyze reports prepared by the RMC

5.2. Execute mitigation action/Escalate to the BoD

5.3. Prepare reports to BoD, investors, regulator

4.1. Analyze results4.2. Identify anomalies4.2. Set up remediation

plan and identify owner

3.1. Check quality of input data3.2. Consolidate gathered data

2.1. Determine necessary information

2.2. Identify information owners

2.3. Set up instructions and templates

2.4. Establish communication protocols

1.1. Define the model to measure risks and update risk limits

1.2. Define risk monitoring and re-assessment frequency

1.3. Define triggering events to launch risk management process

1

23

4

5

Risk Management – Available resourcesEY Risk Management Framework


64January 2014

Thank you.

Moderator :Patrick Zurstrassen, Chairman, ecoDaPanel : Andy Mack, Director, Fernden AdvisorsMarc-André Bechet, Director, Banque Degroof

Fund Board priorities for today and tomorrow

Funds Board PrioritiesFor Today & Tomorrow

with Marc-André Bechet, Director, Banque DegroofAndy Mack, Director, Fernden Advisors& Patrick Zurstrassen, Chairman, ecoDa

[Moderator]

ILA & PwC Funds Day

2014

January, 22nd, 2014

Priority questions (1/3)

1. How to have sound governance board work deliver good value to the funds investors?

2. Is the executive line separating the management role from the board oversight role generally well understood by all governance participants?

3. Is there sufficient clarity on the roles and duties of funds directors?

ILA and PwC Funds DayJanuary 2014

Priority questions (2/3)

4. Are funds directors remaining focused on their governance duties in the light of the increase in regulatory burden?

5. How to distinguish between individual specialist knowledge[including on legal matters] and collective general knowledge? In other words, should good fund directors be also good portfolio managers or rather good fund lawyers?

6. Are funds boards efficiently monitoring their delegations?Aren't we applying too much forms over substance? Are delegation control processes improving or losing momentum?

ILA and PwC Funds DayJanuary 2014

MiFID & RDR

Christophe Saint-Mard, Partner, PwC

MIFID II and RDR : common objectives

Strengthen investors protection and restore confidence;

Avoid conflict of interests regarding adviserremuneration;

Increase professionalism and quality of advice.


Presenter

Presentation Notes

To a product for which a distributor Interest of the investors to get a product that fits its need inappropriately influence the advice

RDR : key points

As from 1st January 2013, ban of commission on advisedsales to retail investors;

As from 6th April 2014, ban of commission on non-advisedsales (platforms providers);

Applicable for all type of investment advice (independent or not);

Principle of legacy assets;

The principle is that retail investors should pay for advice and agree on it.


Presenter

Presentation Notes


RDR–What Fund Board should focus on

74

<<<<<<<<<<<

Manufacturing Distribution

• Comply with RDR rules:• Adapt accordingly your

distribution agreements

• Are your distribution strategy andchannels in the UK still the mostappropriate ?

• Review your practices regardingincentives/benefits given to yourdistributors /advisers in the UK ?

• Only notify for marketing the FCAwith the products that are relevantfor UK distribution.

• Develop own and direct to customer,guided self-serve propositions.

• Comply with RDR rules:• Creation of share classes clean

of commissions

• Maintain competitiveness:• Ensure your management

fees are competitive whilemaintening acceptablemargins

• Regarding platforms, creationof «super clean share class»?

• Your client strategy:• Keep or not clients in the

legacy share classes ?

• New direct to customer propositions(on-line services) and adviserswebsites.


MIFID II: key points

Vote foreseen by European Parliament mid of February 2014 with an entry into force mid 2016;

Possibility for Member States to introduce additional national requirements in the area of inducements;

Ban of inducements applicable:- for independent advice and discretionary portfolio management and; - for all type of investors;

Adsd complexity label for UCITS;

Obligation to inform the client about the cost of advice to pay.


Presenter

Presentation Notes


MIFID II –What Fund Board should expect to focus on

76

<<<<<<<<<<<

Manufacturing Distribution

• Clearly identify your distribution channels(independent advisers, discretionaryportfolio managers, non-independentadvisers, platforms, execution only…)

• Comply with MIFID II rules:• Adapt accordingly your distribution

agreements where applicable

• Develop own and direct to customer, guidedself-serve propositions.

• Depending on additional nationalrequirements, review your distributionstrategy in each Member State.

• For products that will be labelled as complex,educate and communicate on productsfeatures.

• Comply with MIFID II rules:• Creation of share classes clean of

commissions marketed by independentadvisers and/or through discretionaryportfolio managers

• Maintain competitiveness:• Ensure your management fees are

competitive while mainteningacceptable margins

• Creation of at least 3 type of productsdepending on the way they are marketed:

• product marketed by independentadvisors and/or through discretionaryportfolio managers;

• product marketed by non independentadvisors;

• execution only

• New direct to customer propositions (on-lineservices) and advisers websites.


Moderator :Martin Vogel, CEO, MDOPanel : Revel Wood, Managing Director, RBSFreddy Brausch, Partner, LinklatersHenry Kelly, KellyConsult SàrlBill Lockwood, Conducting Officer, Franklin Templeton Investments

Separation of responsibilities between Boards of Funds vs. Boards of Management Companies

ILA and PwC Funds Day 2014

Separation of responsibilities between Boards of Funds vs. Boards of Management Companies

- Martin Vogel, CEO MDO Services SA, Luxembourg, Moderator

- Revel Wood, Managing Director, RBS

- Freddy Brausch, Linklaters

- Henry Kelly, Kelly Consult

- Bill Lockwood, Franklin Templeton

January 2014

Delegations / Appointments

Model 1 – FCP model

Model 1 – FCP model Model 2 –1model

Company Investment Company

Board of Directors

Shareholders

delegation

Senior management in charge of the day-to-daymanagement

Shareholders/Investors

Board of Directors

Appointment Delegation 1

Management Company

Delegation 2Depositary

Admin. Mgt. Marketing

Article 26(1) of the 2010 Law : SICAVs shall be subject to the provisions applicable in general to public limited companies, insofar as the 2010 Law does not derogate therefromCommon Fund (FCP) : Article 7 of the 2010 Law : the management of a Common Fund shall be carried out by a ManCoArticle 27(1) […] SICAV which has not designated a ManCo […], no equivalent provisions to those which exist for the FCPCircular 12/546 : supervision of the delegated activities to third-parties (I.7)

Functions

Shareholders

Board of Directors

ManCo

See Law of 1915

- Right to vote - Right to participate in distributions- Right to participate at shareholders meetings (e.g. appoint/remove the directors)- Right to receive information

See Law of 1915

- Management of the company(all acts necessary or useful for the realisation of the corporate object of the company except those which are by law or by articles of association reserved to the AGMof shareholders)- Representation of the company- Preparation of the financial statements and otherdocuments- Convening of the general meeting of shareholders

UCITS : Law of 2010, Appendix II

AIFMD : article 125.1 of the 2010 Law (includingsubdelegation)

Moderator :Graham Goodhew, Director, J.P. MorganPanel : Marco Zwick, Chief Compliance Officer, SchroedersBirgit Goldak, Partner, PwCAlastair Woodward, Director, AberdeenXavier Briant, General Secretary, Fund Channel

Board oversight of distribution

ILA and PwC Funds Day 22 January 201482

Distributor Due Diligence – Why Now?

GlobalisationLuxembourg UCITS distribute globally. Promoters are always looking for new markets to go into, the destinations become increasingly exotic.

Regulation

Governance Investor protection is high on the agenda of AM industry to restore trust.

CSSF Circular 12/546 on ManCos, CSSF Regulation 12-02

Presenter

Presentation Notes

Added efficient


Oversight responsibilities

CSSF 12/546

Ch. 5.2.9

Ch. 7

UCITs are responsible for performing initial and ongoing due diligence and monitoringof service providers used:

• Internal controls/governance at service providers;

• Selection of service providers - initial and formal due diligence;

• Ongoing monitoring of all delegated functions, including distributors, includingaccess to information and documentation.

• For delegated activities : responsibility remains with the Fund/ManCo;

• Control obligations cannot be delegated;

• Initial and ongoing due diligence is required.

Applicable the distribution network :

Due Diligence is required on operational aspects including misselling and to ensure thatdistributors comply with Luxembourg equivalent AML/CTF laws and regulations

83


Regulation CSSF No 12-02 of 14 December 2012

Why

New

Spirit

• Provide more detailed measures on implementation of the existing AML/CTF laws and regulations ;

• Formalization of all measures, documentation and evidencing are key;

• Policies and procedures as well as relevant processes and documents, including customer identification documents, need to be kept up-to-date.

• Enhance the Luxembourg AML/CTF regulatory framework designed to protect the Luxembourg financial centre;

• Reply to the 3rd Financial Action Task Force (FATF) AML/CTF mutual evaluation report of Luxembourg issued in February 2010;

• Investor protection while defending Luxembourg’s investment FundModel using «Omnibus accounts».

• Inclusion of specific measures applicable to the investment fund:- Distribution Due Diligence (initial and ongoing);- Enhanced Due Diligence on Omnibus accounts.

84

Coffee break

FAQ Update

Monique Bachner, Partner, Bachner Legal

The nature of the ILA FAQ for Directors of regulated funds (“ILA Funds FAQ”)

The ILA Funds FAQ….

• is deliberately in the form of “frequently asked questions” and not recommendations

• Is based on real-life questions asked by directors of Luxembourg funds, (especially overseas directors).

• is for the practical guidance of fund directors in day-to-day situations

• aspires to combine current Luxembourg practice with international “best practice”

• However, the circumstances of every fund, asset class and jurisdiction will differ & will also change over time - and their directors need to continually adapt

• concentrates on Corporate Governance NOT Compliance (it is not a checklist)

The ILA Funds FAQ will continue to be adapted and improved over time.

87January 2014ILA and PwC Funds Day

Presenter

Presentation Notes


The structure of the ILA Funds FAQ - 3rd edition, 20141. Luxembourg Fund Structures2. Board Composition and Organisation3. The Role of ManCo, AIFM and Fund Directors4. Functioning of the Board5. Delegation and diligence on delegates and service providers6. Director time availability and remuneration7. Liabilities8. Insurance and Indemnities9. Listed Funds10. Director Induction and Education11. Industry Guidance and resources12. Bibliography

Appendix 1 Example Quarterly Board Meeting Agenda – UCITS FundAppendix 2 Checklist of other potential Board Meeting agenda items to considerAppendix 3 Sample Action Points TableAppendix 4 Sample Errors and Breaches LogAppendix 5 Sample template: Status of agreementsAppendix 6 Checklist of Policies and ProceduresAppendix 7 ManCo conflicts between concurrent functionsAppendix 8 Assessing appropriate adherence to the ALFI Code of Conduct

3rd edition should be available Q2 2014=> in the meantime 2nd edition (2011) remains available from ILA Secretariat


Presenter

Presentation Notes


UCITS V Board briefing

Thierry Blondeau, Partner, PwC

UCITS V - Timetable

• EU Commission proposal – 3 July 2012

• EU Parliament position – 3 July 2013

• Council position – 10 December 2013

• Trilogues discussion – January/February 2014

• Final adoption – March/April 2014 (?)

• Go live – First semester 2016 (?)


January 2014

Depositary Bank – Council version (4/12/13)

• Clarify who is eligible to act as depositary;

• Clarify the UCITS depositary safekeeping function;

• Clarify the depositary’s oversight duty;

• Introduce delegation rules;

• Reinforce liability regime and ban of discharge.


January 2014

Remuneration – Council version (4/12/13)

• No 100% cap on fund manager bonuses and performance fees still allowed;

• Identified staff to which the remuneration policy applies aligned with AIFMD;

• Disclosure of remuneration practices in the annual report and not in the KIID;

• At least 40% of the variable remuneration is to be deferred;

• At least 50% of the variable remuneration must consist of equity.


January 2014

Sanctions regime – Council version (4/12/13)

• Pecuniary sanctions can be up to at least twice the amount of the benefit deriving from the breach;

• Or for legal persons up to at least EUR 5,000,000 or where so provided under applicable law up to 10% of its total annual turnover;

• For natural persons up to at least EUR 1,000,000;

• ESMA to publish an annual report on all sanctions imposed (history of 5 years);

• Whistleblowing is encouraged.


John Parkhouse, Chair of the ILA fund committee and Partner, PwC

Wrap up

Cocktail

Thank you

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