The proposals we made in our submissions to which the attached detailed follow-up information relates were in relation to:

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1 Mr. John Sweeney Attorney, Office of the Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Ave, N.W. Washington, DC Ref Sent by only Dear John, EFAMA S RESPONSE TO YOUR SPECIFIC QUESTIONS Thank you for your detailed and thoughtful questions on some of the central proposals we made in our submissions of 31 January and 7 June We have pleasure in supplying you with what we hope you will find to be useful and substantive answers, including commentary supplied by EFAMA s member national associations in a wide range of European countries. The proposals we made in our submissions to which the attached detailed follow-up information relates were in relation to: Restricted Funds: These would be funds that resolve the very real problem of many distributors being unwilling or unable to enter into a full PFFI agreement by undertaking reasonable procedures to exclude US investment into the fund through contractual commitments agreed to by distributors other than PFFIs. This would offer valuable additional flexibility to funds that, in any event, already choose to exclude US persons as investors; and Local Distributors: Akin to the Local Bank proposal in Notice , distributors that act as FFIs and present a low risk of attracting US investors through the geographic nature of their business should be treated as deemed compliant FFIs, provided that they self-certify their status either directly to the IRS or indirectly via the restricted fund or distributor with which they have a direct account relationship. We continue, of course, to stress the importance of the many other proposals that we included in our 7 June 2011 submission. Such proposals included alternatives to withholding, extending the NEW ADDRESS AS OF 8 JULY 2011: rue Montoyer 47, B-1000 Bruxelles Fax info@efama.org VAT Nr BE

2 P. 2 $500,000 limit applied to pre-existing private individual accounts to entities and deemed compliant status for publically traded funds. As some time has passed since our submissions on these points, we are keen to meet further with you and your colleagues at an early date to work together on a finalised, truly practical model for the European funds industry. We would also repeat our offer of arranging for you to meet industry experts on any individual topic on which you wish to focus. Yours sincerely, Peter de Proft CC: Mr. Jesse Eggert Office of International Tax Counsel U.S. Department of the Treasury 1500 Pennsylvania Ave., N.W. Washington, DC Mr. Michael Plowgian Office of International Tax Counsel U.S. Department of the Treasury 1500 Pennsylvania Ave., N.W. Washington, DC Ms. Joesphine Firehock Office of the Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Ave, N.W. Washington, DC Ms. Danielle Nishida Office of the Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Ave, N.W. Washington, DC 20224

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4 ANNEX EFAMA S RESPONSE TO SPECIFIC QUESTIONS FROM JOHN SWEENEY 1. INTRODUCTION 1.1 In the course of EFAMA s formal and informal discussions with you regarding the implementation of the Foreign Account Tax Compliance Act ( FATCA ), a number of specific additional questions have been raised. This document is responsive to these questions. We have attempted to provide as much detail as possible in responding to these questions and have consulted with experts, including European legal experts and individual European countries funds industry representative associations. In particular, this document contains detailed input in respect of Austria, Bulgaria, the Czech Republic, Denmark, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Norway, Portugal, Romania, Slovenia, Sweden, Switzerland, and the UK, and some input from Belgium, Finland and Liechtenstein. 1 We would note, however, that distribution models vary not only as between different European countries (as to which, see Appendix 2), but also as between individual management companies, so this document has on occasions had to focus solely on the majority position for each country. 1.2 EFAMA is hopeful that these responses provide additional detail that will enable you to understand the funds industry in Europe and the particular sensitivities that necessitate the regulatory proposals EFAMA has made in previous submissions to the IRS and Treasury. We believe that our proposals are responsive to the concerns of the European funds industry and present the most effective way for the IRS to implement FATCA in a practical manner with maximum voluntary participation by the funds industry. 1.3 EFAMA appreciates the efforts the IRS and Treasury have made to be responsive to EFAMA s concerns to date. We are eager to continue this positive dialogue with you, and we stand ready to provide you with additional details at another meeting in Washington, to which we will bring representatives with detailed expertise on the European funds industry. 1.4 In early 2011, EFAMA submitted to the IRS and Treasury draft regulatory language directed towards our proposals. We have set out at Appendix 1 excerpts from this regulatory language for your ease of reference (referred to herein as the EFAMA draft regulation ). We have, however, also refined the draft regulations in certain areas, both in response to IRS and Treasury feedback and further input from our member associations. 1.5 Specifically, our refined draft regulations continue to permit a restricted fund to distribute fund interests both through a Simplified Compliance Distributor ( SCD ) and through a local distributor. We have, however, refined our local distributor category so that a local 1 In this document, we will use the term European Union ( EU ) to denote the area within which principles of European law apply. In fact, there are three countries (Norway, Iceland and Liechtenstein) which are not formally members of the European Union itself, but are members of the European Economic Area. They nevertheless subscribe to and are bound by European law. For simplicity, we will use the term EU in this document. NEW ADDRESS AS OF 8 JULY 2011: rue Montoyer 47, B-1000 Bruxelles Fax info@efama.org VAT Nr BE

5 P. 5 distributor is a deemed compliant FFI in its own right (although its relationships with restricted funds continue to require contractual restrictions on US investment). Further, while we continue to believe that local distributors should not be obligated to enter into a relationship with the IRS, we believe that permitting local distributors to elect to certify their status as local distributors to the IRS, rather than to each FFI with which they do business, could lead to greater efficiencies and should be permitted. The above proposals are summarised in the diagram at Appendix 5. PART A: LOCAL DISTRIBUTORS 2. WILL THERE BE DIFFICULTIES IN REQUIRING LOCAL DISTRIBUTORS TO AGREE TO EXCLUDE US ACCOUNTS? 2.1 Introduction 2.2 We understand that the IRS/Treasury would have greater comfort with the local distributor category if, in addition to the distributor's business model not being conducive to US investors, the distributor is required to enter into an agreement to exclude US accounts (especially if the local distributor would not have to sign up with the IRS). 2.3 Existing contractual protection 2.4 We would note that local distributors may already be bound by US sales restrictions in fund prospectuses and any additional provisions which are imposed in distribution agreements for US securities law purposes (see paragraphs 2.9 and 14 below). 2.5 The EFAMA proposals, as set out in paragraph 1.2 of our letter of 7 June 2011, have also sought to allay the understandable concerns of the IRS/Treasury by: requiring restricted funds to impose an obligation on local distributors to exclude US investors, where practicable, in the additional terms required in the distribution agreements under (4)(ii)(E)(3) of the EFAMA draft regulations; and ensuring that the term local distributors (as used both in the stand-alone local distributor deemed compliant category at (c) and within the restricted funds concept at (4)(ii)(E)(3)) is limited to the distributors which are most likely to be operating on a more local scale (see paragraphs 2.8 to 2.10 below). 2.6 Obtaining agreement from distributors 2.7 Practical issues that could arise with a requirement to obtain contractual agreements from local distributors are not unique to local distributors and are, therefore, addressed in this document in the sections dealing more generally with distributors (see Part G below). 2.8 Local distributors unlikely to be dealing with US investors 2.9 As a general matter, EFAMA believes that the vast majority of distributors that would be eligible for the local distributor deemed compliant category do not accept US investors for practical reasons associated with US securities law and will not begin to do so after the implementation of the local distributor rule.

6 P In light of the practical problems with obtaining agreement from local distributors over and above the proposals in paragraphs 2.4 and 2.5 above, it will be particularly key to ensure that the local distributor deemed compliant category is drafted in such a way as to include only distributors which are highly unlikely, as a result of the nature of their business, to be dealing with US investors. This latter point is exactly what the conditions set out in (c) are intended to achieve and it should, therefore, be sufficient for the restricted fund (or any PFFI further down the chain) to rely on the certification from the distributor that these conditions are satisfied (see in (c)(2)(vii)). It is, therefore, our view that imposing any additional requirements on local distributors would be a disproportionate burden for such distributors and would, in any event, be unlikely to deliver the intended objectives for the US authorities. However, in the interest of giving local distributors the flexibility to streamline the self-certification process, we propose giving local distributors an option to self-certify their status as local distributors to the IRS directly, rather than having to do a separate selfcertification for each fund with which they do business. We would, however, stress that not all local distributors will want to take advantage of this option, and it is important that any direct certification to the IRS remain elective. 3. COULD A SIZE REQUIREMENT BE USED AS AN ADJUNCT TO THE LOCAL REQUIREMENT? WHAT SIZE STANDARD WOULD BE PRACTICAL? 3.1 Introduction 3.2 What would be practical in terms of size will depend on the market within which the local distributor is operating. 3.3 As the IRS/Treasury are already aware, the EU operates as a single market and a rule restricting local distributors to their national markets would not, therefore, work (i.e., because EU laws do not permit EU financial institutions to prohibit account holders or investors from other EU countries). We understand, therefore, that the IRS/Treasury are considering alternative arrangements which will work within the EU. We would also note that several EU member states have special territories which, for historical, geographical, or political reasons (for example, as a legacy of empire ), enjoy special status within the member state in question or the EU as a whole. Some member states may, therefore, have difficulties in imposing a nationality restriction that does not allow some flexibility with regard to these special territories. 3.4 Size requirement 3.5 We consider that it would be difficult to draft a size requirement which would make intellectual sense, would not create administrative difficulties in monitoring, and would be practical across the various European markets. For example, such a size requirement would need to cover all genuinely local distributors which act in an FFI capacity, which may range from independent financial advisers ( IFAs ) to German and Norwegian regional banks and Spanish cajas. 3.6 It may, however, be appropriate to include a requirement that prevents the local distributor rule being misused by personal investment companies ( PICs ), distributed by family and friends, which we understand that the IRS/Treasury view as being high risk from a tax evasion perspective. Several rules could be imposed that would prevent this problem,

7 P. 7 including a diversification requirement or a minimum assets under management requirement. Since some individuals of extreme wealth may have assets as extensive as many legitimate local distributors, we believe that a diversification requirement most appropriately addresses this concern, such as a rule that requires local distributors to have no less than 15 unrelated customers and be open to investment by members of the public (with appropriate allowance for start-up operations). 3.7 Alternative solution 3.8 We believe that a more appropriate way of limiting the deemed compliant category to distributors which are more likely to be operating on a more local scale would be the solution set out in (c)(2) of the EFAMA draft regulations, which requires each of such distributors to certify to the restricted fund or the next entity up the distribution/settlement chain that: (c) (d) (e) (f) it has no branches outside of the country in which it is organized; it is not a member of an affiliated group of companies that includes FFIs operating outside the country in which it is organized; it operates solely in the country in which it is organized; its account holders are predominantly residents of the country in which it is organized (this requirement cannot be made more restrictive in view of the EU and national law restrictions referred to at paragraph 3.3 above); it does not actively market its services outside the country in which it is organized; and it has no less than 15 unrelated customers and is open to investment by members of the public (with appropriate allowance for start-up operations). 3.9 While this solution means that local distributors would still be able to provide services to: residents of other EU jurisdictions in accordance with EU law; and residents of special territories in accordance with national laws, the fact that they and any associated companies/branches would only operate in their country of organisation, and that they would not market their services outside their country of organisation means that such distributors would, in practice, be limited to those operating on a more local scale An alternative way in which such a rule could be drafted would be to provide that the FFI should implement policies and procedures to ensure that it does not open or maintain accounts for non-residents, save to the extent it is required to permit non-resident accounts under a provision of EU or national law with an effective date prior to, e.g., the date on which the local banks deemed compliant category was first announced (or any successor or substitute law). It is our view that putting a time restriction of this nature would deal with any concerns the IRS and Treasury may have that any jurisdiction could attempt to limit the effectiveness of FATCA by passing a law mandating access to US citizens.

8 P Finally, it is important that the local distributor rule is not merely subsumed into the restricted funds model, but is rather a separate category of deemed compliant FFIs. EFAMA believes that: the FFIs described in this section are of a type that are extremely unlikely to have US accounts (and are not likely to have US accounts in the future); and because of their purely local reach, local distributors are less likely to have the resources and ability to enter into agreements with the IRS. Our proposal would therefore enable funds to distribute, directly or indirectly, through such local distributors even if such distributors have not entered into an FFI agreement. The local distributors should be separate from the Simplified Compliance Distributor ( SCD ) category, which may contain distributors that have an extensive enough reach that they cannot properly be qualified as local distributors but still allows restricted funds to distribute through SCDs, with the requirement that such SCDs must register their status with the IRS. 4. UNDER SECTION II.B.3. OF NOTICE , THERE IS A LIMITED CONCEPT OF "DOCUMENTED FFIS," WHICH INSTEAD OF PASSING INFORMATION TO THE IRS, PASS THEM UP THE CHAIN TO OTHER FFIS. IS IT FEASIBLE TO EXPAND SUCH A CATEGORY TO APPLY TO LOCAL DISTRIBUTORS? RESTRICTIONS IMPACT THIS? 4.1 Introduction HOW DO LOCAL LAW 4.2 We believe that there are significant practical difficulties with a regime that requires distributors, as a standard practice, to pass customer information up the chain to other FFIs. There are two points which need to be considered when answering this question, namely: the extent to which it is desirable to do so, as distributors may be unwilling to provide details of the beneficial owners to the funds for business reasons. the extent to which it is possible under law (EU, local and/or contractual) for distributors to pass information up the chain to other FFIs. 4.3 Business reasons why distributors may be unwilling to provide information 4.4 It will, in many cases, not be possible for funds or their managers to identify US persons that hold accounts or other investments through multiple tiers of foreign entities such as investment vehicles. 4.5 In addition to the sheer administrative complexity and, in many cases, impossibility of providing the information, financial institutions that provide investment services are generally extremely reticent to provide client information to other financial institutions. Customer lists and information are highly valuable property to such institutions. There are significant legitimate business reasons that prevent financial institutions from giving away their customer information to any other financial institution (e.g., a fund or a higher-tier distributor). Indeed, a business goal of a fund distributor will be to protect its proprietary customer information. 4.6 The current QI regime s pooled reporting rules are a recognition of these business realities. Both these points (administrative complexity and the protection of commercially sensitive

9 P. 9 information) were also noted in a 2009 report of the Organisation for Economic Co-operation and Development ( OECD ), produced as part of the OECD project on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors in the context of double taxation agreement benefits for investment funds. 2 The US government is one of the participants of this project, which has been ongoing for many years, not least because of the complexity of the task of taking into account the intermediated landscape and, in particular, the fund environment with its vast distribution channels for the purposes of enabling treaty relief and reporting. 4.7 In light of the above, we anticipate that distributors will not sign up for a regime that requires them, as a general practice, to provide customer information up the distribution chain. While it may be possible to pass some information up the chain (e.g., procedures the distributor undertakes to ensure that it does not maintain US accounts), any such requirements should be restricted to the restricted funds model proposed by EFAMA and not be a precondition to qualification for a stand-alone local distributor rule. 4.8 Whether it is possible to pass information to other FFIs 4.9 Although the below information is provided in specific response to a question regarding local distributors, we note that the issue of legal restrictions regarding passing information to other FFIs arise in contexts beyond merely local distributors. Accordingly, the below discussion is equally applicable to other FATCA issues. Data protection law 4.10 All EU countries are subject to the Data Protection Directive (95/46/EC), which means that they have the same basis for their laws relating to data protection and privacy. Switzerland is also considered by the EU Commission to have an equivalent level of protection by reason of its domestic law. The Data Protection Directive imposes minimum standards for member states to implement (which means that member states are at liberty to impose more onerous obligations in their own jurisdictions). Nevertheless, the following principles apply as a minimum: (c) natural persons have fundamental rights and freedoms, including a right to privacy in respect of processing their personal data; data can only be "processed" if the data subject has unambiguously given his consent. "Process" includes disclosure by transmission; and notwithstanding, processing is permitted if it is necessary for compliance with a legal obligation to which the controller is subject Page 9 of the OECD report of the informal consultative group on the taxation of collective investment vehicles and procedures for tax relief for cross-border investors on Possible Improvements for Tax Relief for Cross-Border Investors (January 12, 2009). For the majority of FFIs, FATCA will not be regarded as imposing a legal obligation to which the FFI is subject, as the FFI will not be subject to US law. If an FFI provides personal data to the US authorities, it will do so on the basis of a contractual agreement that it will have entered into with the relevant US entity which is has entered into to avoid adverse commercial consequences. This is not the same as having to comply with a legal obligation. As a result, the European data protection rules will apply to the disclosure of information to the US authorities.

10 P The data protected under this legislation will include data related to individuals who own a corporate entity (assuming that the FFI holds this information). This issue will affect both funds and investment managers who hold direct client mandates The Directive itself does not prescribe what sanctions ought to be applied in the event of a breach of the rules relating to data protection, and so it has been left to EU member states to determine how they wish to enforce the rules. Nevertheless, the most common position in the EU is that breaches are taken very seriously and can lead to substantial fines. To give an example, in the United Kingdom, the penalty for failure to comply with data protection legislation is a fine of up to 500,000 (from the Information Commissioner) and a potentially unlimited fine from the Financial Services Authority ( FSA ) Following the implementation of FATCA, FFIs will be able to amend their procedures and documentation so that they obtain the consent of their new clients to the transmission of their data to the US authorities. If clients are unwilling to agree to give this consent, the FFIs can choose to decline acting for them In relation to existing clients of FFIs, the position will be more difficult. It is highly unlikely that any existing terms with clients will contain wording under which the client gives unambiguous consent to the transfer of his personal data to the US authorities. The FFIs can ask their existing clients for consent to this, but if the client is unwilling to give his consent the FFI is potentially placed in an impossible situation. The FFI could cease acting for the client, but in some cases (for example, where the client is an investor in the fund and the fund documentation does not give the FFI a right to terminate or redeem the client's interest) the FFI will not be able to do this and would potentially face legal proceedings for breach of contract. If the FFI provides the information without obtaining such consent, it will face regulatory sanctions for breach of the data protection rules In addition to the minimum standard imposed by the Directive, there are also a number of specific local law restrictions which may prevent FFIs from disseminating information relating to individual investors. For example: banking secrecy laws in the relevant jurisdiction (for example, in Austria, Portugal, Sweden and Switzerland) may prohibit dissemination of information. Similar rules may also apply to investment funds (for example, in Switzerland, the Swiss Fund Customer Secrecy rules); and EU member states may have gone further than imposing the Directive's minimum standards. For example: (i) (ii) in Romania, data protection legislation provides certain restrictions in relation to the dissemination of private data in third countries as well as in relation to the requirement for consent by the data owner. In this respect, certain approvals would, therefore, need to be obtained from the relevant authority before information were reported; in Slovenia, the legislation in force provides a strong restriction on dissemination of information on investors. The law, which is explicitly stated to apply to investment funds and fund management companies, provides that a fund management company has to treat all information in relation to

11 P. 11 its investors as privileged information and cannot pass it on to other persons, nor enable other persons to use this information. There are exceptions to the abovementioned rule where there is legal basis in Slovenian regulations for such reporting (for example, where information is reported to the Slovenian tax authority or on the basis of a written court order). The effect on existing contracts 4.16 An alternative approach is to consider whether, if the terms of the existing contract do not allow disclosure, the contract can be amended to permit this Under basic principles of contract law, a contract can only be amended: with the consent of both parties; or if the terms of the contract itself allow it, in accordance with the terms of the contract If an existing contract allows the FFI to amend its terms unilaterally, it may be able to amend the terms to allow the disclosure of information. Even that, however, is subject to rules around variation of contract terms. All EU member states are subject to the Unfair Terms in Consumer Contracts Directive, which provides that a term in a consumer contract which allows one party to vary the terms of the contract on a unilateral basis will be unenforceable unless the contract is being varied for a valid reason which is specified in the original contract. While it will depend on the circumstances of each individual contract, we anticipate that the majority of existing contracts will not contain a term which is specific enough to satisfy this requirement in relation to any changes necessitated by FATCA If the terms of the existing contract do not allow for unilateral variation, the FFI may not be able to comply with the law. In this situation, it could: terminate the contract - but normally there would be a notice period, during which time the FFI might be in breach of FATCA or the contract; or comply with FATCA nonetheless. If it did this, the FFI would be at risk of sanctions from the relevant data protection authorities and being sued for breach of contract by the client. 5. WITH RESPECT TO LOCAL DISTRIBUTOR MARKETING RESTRICTIONS, DO LOCAL REGULATIONS OR LOCAL LICENSING REQUIREMENTS CURRENTLY IMPOSE ANY MARKETING RESTRICTIONS? 5.1 While variations and restrictions across the various European jurisdictions are likely to be reduced over time (e.g., the ability to sell less regulated investments may be impacted in the future due to initiatives such as the EU Directive on Alternative Fund Managers ( AIFMD ) 4 ), there are currently significant variations across the various European jurisdictions in terms of marketing restrictions which may apply under local law. By way of an example, we understand that: 4 The AIFMD came into force on 21 July 2011 and must be implemented in each member state by 22 July The provisions of the AIFMD will not, however, take full effect into 2018.

12 P. 12 (c) (d) (e) (f) in Austria, commercial distributors of financial instruments (including fund units) are required to be licensed by the Austrian Financial Market Authority ( FMA ); in Bulgaria, the previous regulatory framework required that only financial institutions could be retained by the management company to act as fund distributors. New legislation has, however, removed that restriction, and management companies will in the future be entitled to use the services of any third parties to distribute units. Notwithstanding the change in legislation, such third parties will only be able to participate in the settlement process if they are members of the central depository of securities, i.e., other management companies, investment intermediaries, or banks; in the Czech Republic, all distributors need to be licensed by or registered with the regulator. All depositories and companies involved in the settlement process are also required to hold a license issued by the regulator; in Denmark, distributors need to have a concession to act as distributors under Danish law implemented in accordance with EU Directive 93/22/EEC of May 10, 1993, on investment services in the securities field; in Germany, any distributor has to obtain a license, but licensing requirements differ depending on the range of services provided. All distributors are, however, required to conduct adequacy checks as to whether the product is suitable for the investor (for example, in accordance with the Securities Trading Act (WpHG) and the Ordinance specifying rules of conduct and organisation requirements for investment services enterprises (WpDVerOV)). All parties involved in the settlement process for fund shares are required to be credit institutions and, as such, are required to have a compliance department, internal audit and be audited by external auditors, as well as being subject to supervision by the Federal Financial Supervisory Authority (BaFin); in Greece, only management companies, investment firms, credit institutions, and insurance companies qualify as fund distributors; in Ireland, most Irish regulated funds are distributed outside of Ireland and must be generally available to all qualifying investors (although restrictions on investment by US persons often apply). A Qualified Investor Fund ( QIF ) fund can only be sold to qualified investors. In the case of noninvestment funds established in other jurisdictions that are marketed to Irish investors, the Central Bank in its Non-UCITS Notices (NU19.6) would require the fund to be authorized and would require a local facilities agent, which would be a regulated financial services entity, e.g., under the Investment Intermediaries Act of 1995; (g) in Luxembourg, distributors have to be regulated or licensed pursuant to Articles 14, 24-7 and 25 of the Law of 5 April 1993 on the financial sector (as amended); (h) in Norway, any entity registering fund units in the central securities depositary on behalf of another person or entity must be licensed by the Norwegian FSA and undertake certain registration and reporting duties. The aim of this regulation is mainly to ensure AML measures are being taken and to prevent tax avoidance by Norwegian residents investing through foreign nominees;

13 P. 13 (i) (j) (k) (l) (m) (n) in Portugal, there are a number of regulations or licensing requirements which impose marketing restrictions on distributors or entities participating in the settlement chain for funds. For example, IFAs can only receive and transmit orders from their clients, but are unable to take any decision in the name of their clients or manage their portfolios; the Romanian legislation focuses mainly on transparency obligations (for example, reporting and notification), but also provides terms and conditions for distribution. Such terms need to be approved by the Romanian supervisory authority. Furthermore, any distributor other than the fund s management company has to be approved by the Romanian supervisory authority before commencing its distribution activities. All marketing materials have to be approved prior to dissemination by the in-house compliance officer; in Slovenia, the management company usually issues a written authorization to a third party, authorizing such third party to provide the services of marketing on behalf of the management company in question. The marketing of investment funds on behalf of and for the account of a management company, or for the account of a person authorized by a management company, may be conducted only by natural persons who have been authorized by the Securities Market Agency; in Sweden, most distributors are supervised, because they are either banks or subject to MiFID or insurance regulation; in Switzerland, distributors are required to comply with the SFA Provisions for Distributors, which are published in the SFA Guidelines on the Distribution of Collective Investment Schemes (imposed by FINMA): see and in the UK, UCITS and other authorized investment funds must under the FSA s rules be generally available to investors so restrictions which seek to limit the market could be problematic. A Qualified Investor Scheme ( QIS ) fund can only be sold to qualified investors (i.e., corporate, institutional investors and sophisticated individual investors) and a Non-UCITS Retail Scheme ( NURS ) can only be sold to UK retail investors. 6. REGARDING RESTRICTED FUNDS' RELATIONSHIPS WITH DISTRIBUTORS (OTHER THAN LOCAL DISTRIBUTORS), WHAT SORT OF CHECKS EXIST REGARDING THOSE DISTRIBUTORS' PRE-EXISTING ENTITY ACCOUNTS? WOULD IT BE POSSIBLE TO CONFIRM WHETHER AN ENTITY ACCOUNT HOLDER HAS SUBSTANTIAL US OWNERS IF THE AML 25 PERCENT STANDARD WAS USED IN LIEU OF THE 10 PERCENT STANDARD? When an entity invests directly with a distributor, that distributor is currently already obligated to perform AML due diligence (further details on the AML process are provided later in this document). This should improve detection of entity accounts in circumstances where there are 25 percent+ owners.

14 P. 14 PART B: RESTRICTED FUNDS 7. GIVEN THAT, IN SOME JURISDICTIONS, FUNDS MUST LEGALLY PERMIT DIRECT INVESTORS, WOULD IT BE FEASIBLE TO SIMPLY MAKE SUCH FUNDS BE PFFIS AND BUILD THE RESTRICTED FUND PROPOSALS INTO THE PFFI CATEGORY? Although in some jurisdictions funds have a very limited number of direct retail investors, direct retail investment is still a relatively significant stream of business in a number of other jurisdictions (see paragraph 7 below). We anticipate that our restricted funds model is most beneficial to those funds that have a relatively insignificant number of direct investors. While the difference between: having a deemed compliant category for restricted funds but requiring them to meet certain obligations with respect to direct investment; and requiring all funds to be PFFIs but permitting them to be deemed compliant with respect to those relationships that meet the restricted fund requirements, may be somewhat semantic, there is significant concern that if the latter approach is used, funds with little direct investment will have to incur significant expense to build reporting and withholding regimes that will never be used. EFAMA has, therefore, consistently supported an approach wherein restricted funds do not have to impose passthru withholding, but instead deal with any potential problematic direct investment through redemption and, if redemption is not possible, reporting. The key for our funds is the certainty that they do not have to build such expensive systems in circumstances where such systems do not appear warranted. 8. WHAT IS THE QUANTUM OF DIRECT INVESTMENT INTO EUROPEAN FUNDS? 8.1 Whether direct investment into funds is permissible and the quantum of such direct investment varies across the different European jurisdictions. For these purposes, we would note that direct investment is generally understood to mean where the owner of record on the fund register is the beneficial owner, however the fund is distributed. 8.2 In some European jurisdictions, it is not possible to invest directly in funds. For example: in Austria, as fund management companies are not allowed to hold client (funds) accounts, the fund units are held at the first stage by Austrian custodian banks, or the Österreichische Kontrollbank AG); and in Bulgaria, Germany and Liechtenstein, where all fund units are issued in dematerialised form via a central depository. 8.3 In other European jurisdictions, the proportion of direct investment in funds is limited or very limited. For example: in the Czech Republic, almost 90 percent of funds are distributed via banks and the remaining are generally distributed via financial intermediaries, rather than the management company itself;

15 P. 15 (c) (d) (e) (f) (g) (h) in Ireland, while direct investment is permitted, the vast majority of fund investments are made through financial intermediaries; in Italy, almost all fund units are securitized through the issue of a global certificate, which is kept in safe custody by a fund custodian; in Luxembourg and the Netherlands, it is possible to invest directly in funds, although the quantum of direct investment is limited; in Portugal, members of APFIPP (Associação Portuguesa de Fundos de Investimento, Pensões e Patrimónios) reported total direct sales of EUR 2,761 million in 2010 and EUR 214 million in the first half of 2011, but in excess of 90 percent of such direct sales were sales to other portfolios managed by the same management company or belonging to other companies of the same group; in Romania, it is estimated that on average less than 15 percent of funds are distributed directly, although the percentage of direct distribution in each case will depend on the business approach of each management company in relation to direct distribution; in Switzerland, while it is not compulsory to issue fund shares/units via a central securities depositary, the vast majority of fund management companies (administrators) follow this business practice. In a few, rare cases, it is still possible to purchase shares/units other than via the central securities depositary, although this practice may be ceased as a result of the FATCA requirements; and in the UK, in June 2011, only 14 percent of net retail sales of UK authorized unit trusts/open-ended investment companies listed on Investment Management Association sectors were made directly (i.e., through a sales force or tied agent, or private client sales of own funds). It is not possible to provide a split by size of holding, but it is estimated that there are approximately 6.6 million accounts under $50,000 invested in funds, approximately 1.1 million accounts between $50,000 and $500,000, and approximately 40,000 accounts over $500, In other European jurisdictions, there is a more significant percentage of direct investment in funds. For example: in France, 50 percent of the EUR 1.4 billion invested in investment funds is collected directly by the management companies. Stand-alone management companies are, however, required to sell to domestic investors through intermediaries; in Greece, although funds units may be distributed directly by management companies or indirectly via a network of banks, insurance companies or investment funds, or, in the case of ETFs, brokerage firms, the fund register will always show 5 These figures have been extrapolated from data provided by one of the UK s major fund administrators, which covers approximately 40 percent (measured by assets under management ( AUMs )) of the collective investment vehicles in the UK. According to this source, the total number of investors in those vehicles less than 30,000 GBP is approximately 2.6 million, the total number between 30,000 GBP and 300,000 GBP is approximately 435,000, and the total number over 300,000 GBP is approximately 16,000. The estimate at paragraph 6.3(f) above assumes that the data provided is a representative sample of the UK funds industry as a whole and the figures provided have therefore been multiplied by 2.5. Since the date was provided in pounds, a 0.6:1 GBP/USD exchange rate has been used to provide a reasonably close approximation to the $50,000/$500,000 thresholds.

16 P. 16 details of the end-investor (with the exception of ETFs, which may be purchased by a broker). This is because distributors never acquire nominee interests in the units and will, therefore, in the case of an indirect investment, simply relay the identity, status, etc. of the end investor to the management company (having received the consent of the investor to do so as a prerequisite for subscription); (c) (d) (e) in Norway, according to statistics gathered by VFF (the Norwegian Fund and Asset Management Association), 78 percent of funds are distributed directly. In some cases, however, it is the distributor that registers its clients directly in the fund register; in Slovenia, it is estimated that almost 100 percent of funds are distributed directly, although the management companies will use third party distributors to market the funds; and in Sweden, although the majority of distribution is carried out via bank branches, where such branches are selling funds for the management company owned by the bank, such sales will usually be recorded as direct sales. The quantum of direct investment in funds is estimated at 30 percent from households and approximately 10 percent. from corporations. In this respect, approximately 30 percent of the AUM on the fund market comes from salary deductions in respect of pension agreements. 8.5 We are also aware that direct investment is possible in some other European jurisdictions, namely Belgium and Finland, but do not have any information in relation to the quantum of such direct investment. 8.6 Finally, we would note that in Finland, where investment in the fund is made indirectly, there is nonetheless an obligation on the third party nominee to provide the management company with information about the beneficial owners upon request. PART C: DISTRIBUTORS IN GENERAL 9. DO EUROPEAN DISTRIBUTORS UNDERTAKE INFORMATION REPORTING OF NON-RESIDENT ACCOUNTS TO THEIR LOCAL GOVERNMENTS (E.G., PROCEDURES ANALOGOUS TO US 1042 REPORTING)? UNDERTAKE INFORMATION REPORTING FOR RESIDENT ACCOUNTS? DO THEY 9.1 Under the EU Savings Directive, paying agents in the EU are required to notify their home state tax authorities of savings income payments made to individuals, or certain entities, resident in another Member State. It is a harmonisation directive, setting out the minimum amount of information to be reported by the paying agent; member states can impose additional requirements. 9.2 The extent to which distributors report information for resident and non-resident investors to their local government/tax authority, other than in accordance with the EU Savings Directive, varies significantly across the different European jurisdictions. For example: in Austria, Luxembourg, Portugal and Switzerland, we understand that there is no reporting of client information to government bodies; in Bulgaria, the central securities depositary is able to disclose information regarding accounts and holdings to the Bulgarian Financial Supervision Commission for

17 P. 17 supervisory purposes and where required to do so by the court or the public prosecutor; (c) (d) (e) (f) (g) (h) in the Czech Republic, Czech distributors report information to the Czech National Bank in relation to the quantum of assets in client accounts and in accordance with certain transaction reporting obligations for investment companies. Such report is generally available furthermore, both the CDCP and each separate depository know the identity of the client and its country of residence and while this information is not communicated to the tax authorities, it may be requested by them on a case-bycase basis; in Denmark, the issuers and account holder banks are obliged to report to the tax authorities on dividends from the funds. The account holder banks are also required to report to the tax authorities on all purchases and sales of shares along with details on the numbers of shares purchased and sold, and the price of such shares. The banks also are required to report the value of each account holder s shares by the end of the year. Most if not all of these reports are transmitted to the tax authorities via VP Securities, but the regulatory obligation lies on the banks; in France, in addition to reporting to the French Tax Administration in accordance with the EU Savings Directive in certain circumstances, a paying agent has certain specific tax obligations, namely: (i) an obligation in relation to the identification of the customers (Know Your Customer proceedings); (ii) an obligation to determine any situation where the withholding tax applicable on dividend payment to a non resident investor is due; (iii) an obligation to compute and withhold the tax either under the simplified or the standard procedure; (iv) an obligation to remit the amounts of withholding tax to the French Treasury; (v) an obligation to submit a specific tax return where the tax is reported (French form N 2777); and (vi) an obligation to issue for each customer an annual combined fiscal summary named IFU (Imprimé Fiscal Unique) which reports, inter alia, the amount of securities income and gross proceeds paid to customers. For these purposes, the concept of paying agent includes: (x) French issuing companies paying dividends or financial companies centralising payments on their behalf; and (y) financial companies which hold shareholder or other financial intermediary accounts (in such a case, the paying agent is the last French intermediary which ensures income payments); in Germany, in addition to reporting in accordance with the EU Savings Directive, there is also a requirement imposed by the German Foreign Trade and Payment Ordinance to report to the German Central Bank on payments of over 12,500 to foreigners from German bank accounts. Note, however, that such reporting relates solely to the securities and payments, not to the account holders; in Greece, information reporting to the Greek government/tax authority takes place for tax and money laundering purposes; in Ireland, apart from the reporting requirements under the EU Savings Directive, there are obligations for financial institutions to report interest payments made to non-resident account holders. In addition, other information may be required on

18 P. 18 request from the tax authorities, under the tax authorities information gathering powers, or under exchange of information requests made by another jurisdiction under a relevant double taxation treaty. Automatic reporting is also required to be made by entities providing facilities in Ireland for investment in non-irish funds by Irish investors. Legislation has recently been introduced in relation to the return of payments to Irish persons by relevant persons, including investment funds; (i) (j) (k) (l) (m) in Italy, financial intermediaries have since 2007 been required to report information on financial account holders to the Italian tax authorities. Such information is limited to data identification and does not cover the value/balance of financial accounts. The management company is therefore required to report information on both individual and entity shareholders to the Italian tax authorities. Where shares are held in a custodial account, the account holder banks will be required to report information on the custodial account, rather than the fund shares; in the Netherlands, in general, financial institutions, including investment funds, have the obligation to report information (income and assets) of their investors to the Dutch tax authorities. If distributors, such as banks, invest in investment funds on behalf of their clients, the distributors will take care of the reporting for their clients, because only the distributor will be in possession of the relevant client information; in Norway, pursuant to the Regulations on Nominee Registration in Securities Funds Unitholder Registers, where regulated nominees are entered into the unitholder register in lieu of the beneficial owner of the units, such nominees must maintain a list of the unitholders for which they act as custodians, ascertain the identity of the beneficial owners of the units, and record and report certain information in relation to Norwegian tax subjects to the Norwegian tax authorities. The main purpose of the Regulations is to enable determination of Norwegian beneficial owners for tax avoidance purposes. The management company may also enshrine such obligations in the terms of any distribution agreement or general commercial terms. Furthermore, it is optional, but not obligatory for the Norwegian central securities depositary ( VPS ) to report directly to the Norwegian tax authority on behalf of the management company for all Norwegian tax subjects. For residents of other countries, VPS sends a tax neutral statement report to the client at the year end, but it will be up to the client to report to the tax authorities in the relevant country, unless the management company decides to facilitate such reporting; in Romania, pursuant to obligations under the Romanian Fiscal Code, the asset management is required to submit to the tax authority, on an annual basis, in February (for the previous fiscal year), an information statement containing all gains/losses for the transactions performed by all investors. In addition, on a monthly basis, the management company has to report to the National Bank of Romania the total amount of investment in the fund based on the origin country and type of investor; in Slovenia, Slovenian management companies or other authorized financial institutions, which are in the business of settlements, report to the Slovenian tax

19 P. 19 authority on management of conducted sales and other transfers of property of investment fund units. The duty of reporting applies only for natural persons. In the event of non-residents, the tax authority is given only the name and surname of the person, but the country of residence and the address of the investor are not disclosed. Slovenian management companies and other authorized financial institutions also report to the Slovenian Central Bank on transactions and balances of owner investment units for non-residents. The information in such reports is displayed, in the case of natural persons, collectively in individual country groups and, in the case of legal entities, individually. The turnover of payments or payouts to or from investment funds is displayed accumulated for each month (all payments per month, all payouts per month); (n) (o) in Sweden, where distributors/platforms act as nominees they are responsible for reporting to the tax authorities. For residents, such reporting applies to capital gains/losses tax on dividends or tax imposed on pension/insurance savings in funds. For non-residents, we understand that they only report tax on dividends; and in the UK, there is automatic reporting of interest earned by investors. Although there is no automatic reporting of other investment returns, the UK has wide-ranging information-gathering powers which can be triggered at the behest of the UK tax authority. PART D: UMBRELLA/SUB-FUNDS 10. ARE SUB-FUNDS TREATED AS SEPARATE ENTITIES FOR PURPOSES OF CHAPTER 3 WITHHOLDING? 10.1 EFAMA has previously stressed the need to apply FATCA at the sub-fund level, rather than at the umbrella fund level. As the below discussion demonstrates, whether sub-funds are treated as separate entities under local law is a very nuanced and, at times, ambiguous question. It is necessary that FATCA be applied with clarity and consistency to umbrella/subfund structures regardless of jurisdiction. Such a rule can best be achieved through applying FATCA at the sub-fund level, i.e., by deeming the sub-fund to be an entity for Chapter 4 purposes even in those jurisdictions where it may not be regarded as such under local law The IRS and Treasury have issued little, if any, guidance that pertains to the treatment of subfunds as separate entities for the purposes of Title 26, Subtitle A, Chapter 3 (Withholding of tax on non-resident aliens and foreign corporations) The limited IRS guidance which exists does, however, appear to indicate that sub-funds are not treated as separate entities. In particular: in P.L.R , which was a ruling by the IRS that an FCP (a type of European contractual fund arrangement) is a business entity eligible to make a check the box election, the FCP in question was an umbrella/sub-fund structure. While the PLR did not directly address the implication implications of the sub-funds, it is notable that the discussion of whether there was a business entity eligible to make a check the box election focused on the umbrella, not on the sub-funds; and

20 P. 20 in P.L.R , which was a similar ruling by the IRS in respect of an umbrella fund which was not a contractual arrangement, the check the box election analysis also focused on the umbrella, not on the sub-funds We would note, however, that individual sub-funds are, nonetheless, identified in documentation accompanying the Form W-8IMY The treatment described above in paragraph 10.4 is consistent with our proposal, in our submissions in respect of Notice , that FATCA should be applied at sub-fund level rather than at umbrella level on the grounds that: (c) although sub-funds may not be separate legal entities or separate units, the operational reality of the funds industry is that funds are almost always marketed, distributed, and sold at the sub-fund level; the sub-fund (and not the umbrella) is usually regarded an entity for tax purposes (for example, for UK corporate/income taxation of the fund, German tax reporting, and the application of the EU Savings Directive), and investor taxation will typically follow the principle that each investment in different sub-funds within an umbrella is a separate holding for investor tax purposes; and a decision to apply FATCA at the umbrella level may lead funds employing an umbrella/sub-fund structures to split the umbrellas; that is, to organize its subfunds that are not invested in US assets under a separate legal entity in order to protect those investors investing in funds that do not hold US assets from potential FATCA withholding We have provided further information below in order to give you a better picture of the use of umbrella/sub-fund structures within Europe The concept of umbrella funds exists in Austrian 6, Danish, Dutch, French, German, 7 Irish, Italian, Luxembourg, Slovenian, Swiss, and UK law. There is no prohibition under Bulgarian law on establishment of umbrella funds, although the absence of specific rules permitting their establishment means that, in practice, management companies will generally refrain from establishing such funds. In the case of self-managed corporate funds, it will be the umbrella fund itself which has the legal authority to bind both the umbrella and sub-funds. Note that, for these purposes, it is the umbrella fund which usually has the legal authority as the sub-fund is merely an economic entity. In the case of funds structured as unit trusts, it will be the trustee of each sub-fund which will have the legal authority to bind the fund. In the case of contractual funds, it will generally be such management company which has the legal authority to bind both the umbrella fund and the individual sub-funds. Where the fund management is otherwise delegated to a fund management company, as a practical matter, it will be the fund management company which will have the power to bind the umbrella fund and the individual sub-funds, as agent for the company or authorized unit trust. As a general rule, there is complete segregation between sub-funds, such that each sub-fund is 6 7 Note that the implementation of UCITS IV was the first time that umbrella structures were permitted under Austrian law. Note, however, that in Germany, the concept only applies in relation to SICAVs, which are a minor group of corporate type funds.

21 P. 21 handled as a stand-alone fund. There are, however, a number of national variations across the various jurisdictions as illustrated below: (c) (d) (e) (f) (g) in Austria, income and expenses of each sub-fund will be isolated to relate solely to investment units in such sub-fund, assets in each sub-fund will be protected against exposure to liabilities of another sub-fund or the umbrella fund and centralized expenses will be allocated proportionally. There will be separate reporting requirements for each sub-fund; in Denmark, income and expenses of each sub-fund are isolated to relate solely to investment units in such sub-fund (save that there is both joint and several liability for centralized expenses), assets in each sub-fund are protected against exposure to liabilities of another sub-fund or the umbrella fund and the division of centralized expenses is regulated by the statutes of the fund, such that sub-funds will usually only be liable for their own expenses and their share of the centralized expenses. In terms of accounting, the sub-funds produce individual accounts; in France, a fund may have two or more compartments if its rules so provide. Each compartment gives rise to the issuance of shares representing fund s assets which are allocated to it. Assets of a given compartment may only be used to meet that compartment's debts, commitments and obligations and only benefit from that compartment's receivables. Separate accounts are maintained in the undertaking for collective investment in transferable securities' books for each compartment; in Germany, income and expenses of each sub-fund are isolated to relate solely to investment units in such sub-fund, assets in each sub-fund are protected against exposure to liabilities of another sub-fund or the umbrella fund and centralized expenses are (where allocated) allocated proportionally. Assets, liabilities, income and expenses of a sub-fund are accounted for in the same way as for normal funds (i.e., the sub-funds are regarded as independent separate funds); in Ireland, income and expenses of each sub-fund are isolated to relate solely to investment units in such sub-fund, assets in each sub-fund are protected against exposure to liabilities of another sub-fund or the umbrella fund, and centralized expenses of the umbrella fund are allocated proportionately to sub-funds or applied to a specific sub-fund, to the extent that the expenses concern such specific subfund; in Italy, each sub-fund constitutes an independent pool of assets, separate from the assets of the management company and from those of each unitholder as well as from any other sub-funds or funds managed by the same company or SICAV. Consequently, Italian regulations provide that the management company/sicav must comply with accounting requirements separately for each sub-fund; in Luxembourg, income and expenses of each sub-fund are isolated to relate solely to investment units in such sub-fund, assets in each sub-fund are protected against exposure to liabilities of another sub-fund or the umbrella fund and centralized expenses of the umbrella fund are allocated proportionately to sub-funds (save to the extent that the expenses concern only specific sub-funds);

22 P. 22 (h) (i) (j) (k) in the Netherlands, each sub-fund is represented by a separate class of shares. Each sub-fund represents a separate pool of assets and is separately administered. From an economic point of view, each sub-fund is treated as an independent separate fund. There is no segregation of liabilities between sub-funds within the same umbrella; in Slovenia, income and expenses of each sub-fund are isolated to relate solely to investment units in such sub-fund, assets in each sub-fund are protected against exposure to liabilities of another sub-fund or the umbrella fund and centralized expenses of the umbrella fund are allocated to the sub-fund in accordance with the rules of the umbrella fund, with costs relating exclusively to the business of an individual sub-fund being charged solely to such sub-fund and mutual costs being divided in equal parts or in the ratio of the average net value of sub-funds. In terms of accounting, the annual and semi-annual report of the umbrella fund will include the aggregate balance sheet and income statement of the umbrella fund, which is used solely for reporting requirements. An individual annual report for each subfund of the umbrella fund will also be produced; and in Switzerland, there is complete segregation between sub-funds, such that each subfund is handled as a stand-alone fund; and in the UK, income and expenses of each sub-fund are isolated to relate solely to investment units in such sub-fund. Assets in each sub-fund are not, however, protected against exposure to liabilities of another sub-fund. Centralized expenses of the umbrella are allocated proportionately to sub-funds. For direct tax purposes, each sub-fund is regarded as a separate fund in its own right; sub-funds are therefore taxed individually on their respective profits Umbrella funds are not currently permitted under Czech, Greek, Norwegian, Portuguese, Romanian and Swedish law. There are, however, proposals to implement provisions enabling umbrella funds in Romania in the draft of the legislation implementing the UCITS IV Directive in Romania, which is expected to be brought into force by the end of the year Note, however, that transitional provisions may be required to address the issue of existing investors switching between sub-funds, as industry practice is generally to allow such switches to occur on an STP basis. While for new investors entering the umbrella after 1 July 2013 this can be addressed by demanding the same documentation standard across subfunds, the issue of investors who entered the umbrella fund before 1 July 2013 is less clear. PART E: CENTRALIZED COMPLIANCE OPTION 11. DOES IT WORK TO HAVE THE ASSET MANAGER BE THE CENTRALIZED CONTACT FOR COMPLIANCE, IN ADDITION TO FOR PURPOSES OF REGISTRATION? ALTERNATIVELY, IF THE ASSET MANAGER DOES NOT HAVE ACCESS TO THE REQUIRED INFORMATION, WOULD IT BE FEASIBLE FOR THE ASSET MANAGER TO CONTRACT THIS WORK OUT TO A SERVICE PROVIDER (E.G., THE CUSTODIAN)? 11.1 We understand the rationale for having a centralized point of contact for registration would be to simplify the registration process, i.e., there could be a single schedule containing details of 100 funds.

23 P We would note, however, that the term asset manager is not always used consistently in the funds industry and may refer to the entity which has the responsibility for the management of the fund, which is also (frequently) referred to as the fund manager. Moreover, in practice, it is common (and in some markets ubiquitous) that the investment manager activity is carried out by another party, frequently on a sub-contracted basis on behalf of the fund manager. The position is complicated further because in many markets much of the day-to-day administration is in turn sub-contracted to entities commonly referred to as administrators, while the responsibility for investor registration is frequently sub-contracted separately to entities commonly referred to as transfer agents We assume in this response that by the term asset manager you mean what, in the European market, is more frequently referred to as the fund manager, i.e. the entity formally responsible for most of the activities carried out on behalf of the fund, such as investment management and fund administration. The fund manager may not, however, always be the appropriate contact for compliance purposes as many fund managers have a limited role in the operations of a fund and would not have responsibility for compliancerelated matters for the fund itself (as such matters would normally be for a separate administrator or trustee). If the IRS/Treasury are, therefore, proposing to make the asset manager into a centralized contact for compliance, this should only be optional. We anticipate that many in the funds industry will be eager to take advantage of a process that allows them to streamline their FATCA compliance process, but due to the various fund management structures, in order for such a process to be usable by a wide segment of the funds industry, the process will need to provide maximum flexibility. Moreover, provisions will be required to deal with a change in fund administrator. 12. REGARDING THE CENTRALIZED COMPLIANCE OPTION QUESTIONS, DOES IT MAKE SENSE TO HAVE THE ASSET MANAGER (OR WHOEVER ELSE SERVES AS THE CENTRAL POINT OF CONTACT) ALSO FORMULATE THE GROUP'S FATCA POLICY AND OVERSEE COMPLIANCE (I.E., THE MANAGER WOULD FUNCTION AS MORE THAN JUST A CENTRALIZED CONTACT)? Such a process could also be a useful tool in streamlining FATCA compliance, both for the funds industry and for the IRS. However, for the same reasons outlined above in section 11 such a process will only be useful for a large segment of the funds industry if it provides similarly extensive flexibility. Further, funds are only likely to take advantage of such an option if its use does not taint certain funds that would otherwise not need to enter into an FFI agreement and does not lead to cross-contamination of liability as between funds. For example, if this option is used, funds that are eligible for deemed compliant treatment or are low-risk funds should not be required to become PFFIs. PART F: PRE-EXISTING ACCOUNTS 13. DOES THE REDEMPTION OPTION FOR NON-RESPONSIVE ACCOUNT HOLDERS WORK FOR PRE-EXISTING ACCOUNTS? IN WHAT RESPECTS IS THE ANSWER DIFFERENT DEPENDING ON THE JURISDICTION? 13.1 There are two points which need to be considered when answering this question, namely: whether there are any local law restrictions on redemption of fund units; and

24 P. 24 whether the FFIs have a contractual right to redeem units/shares or, alternatively, to make a unilateral amendment to the terms and conditions of the contract to enable them to redeem such units/shares We understand that there would be no local law restrictions on redemption of fund units in Austria, the Czech Republic, Denmark, Ireland, Romania, Sweden, Switzerland and the UK. In particular: (c) (d) (e) in Austria, it should be possible to redeem shares in accordance with common banking rules on client relationships in the case of misconduct; in Ireland, there is nothing in local law that restricts redemptions of fund units, but the FFI will only be able to redeem units if it has an existing right to do so under the terms of the contract with the customer; in Romania, although the right of ownership is protected under both the constitution and common law, no restrictions should apply in the case of forced redemption provided that a clause permitting such redemption is set out in the fund prospectus, as approved by the Romanian supervisory authority; in Switzerland, there is clear legal authority for enforced redemptions on the Collective Investment Schemes Act; and in the UK, there is nothing in local law which restricts redemptions of fund units, but the FFI will only be able to redeem units if they have an existing right to do so under the terms of the contract with the customer. Under the terms of a typical contract, a fund can typically only redeem units in the fund without the investor s consent in limited circumstances, such as in the event of: (i) (ii) a breach of contract by the investor. This is unlikely to assist where the client fails to co-operate on FATCA issues; or a breach of law by the investor. This may assist in the case of clients who are breaching US law by investing in the fund, but it will depend on whether the wording of the fund documentation is wide enough to support this interpretation. In some funds, the documentation may include wording which allows for units to be redeemed where this is necessary to avoid material taxation or pecuniary disadvantages to the fund as a whole. However, this wording is by no means found universally There are, however, a number of jurisdictions in which there are local law restrictions on redemptions of fund units, namely France, Germany, Greece, Italy, Norway, Portugal and Slovenia. Details of the restrictions in question are set out briefly below: France: According to Article L of the French Consumer Code, only a legitimate reason (motif légitime) may justify a refusal to sell a service to a consumer (as opposed to a professional). The application of existing court cases to publicly traded funds is rather unclear and, as such, it is difficult to be certain whether the existence of the FATCA regulation could legitimate a refusal to sell;

25 P. 25 Germany: There are restrictions under German law which would prevent a German fund (or other entity in the settlement cycle) electing to redeem fund shares in the event that it were discovered that a US investor had acquired shares. These restrictions arise as a result of the strict differentiation, according to common German civil law principles (in the German Civil Code), between contractual obligations and legal ownership (including legal ownership of securities). Such differentiation means that a breach of a contractual obligation will not affect legal ownership; thus, an investor could not be required to redeem fund shares as a result of a distributor breaching its contractual obligations. In other words, in Germany, legal ownership of a property is acquired solely as a result of delivery of the property, independently from the type of contractual obligation or whether the obligation exists or not. For the avoidance of doubt, there are rules to compensate unjust enrichment but they would not be applicable in this context. Two examples of application of the German rules follow: (i) Example 1: A US investor buys fund shares on a secondary market from a third person and deposits them with an account holder bank which has a restricted distribution agreement with the fund. The fund/distributor/account holder bank cannot force the investor to redeem the fund shares; and (ii) Example 2: A US investor buys fund shares directly with its account holder bank which has a restricted distribution agreement with the fund. The fund/distributor/account holder bank cannot force the investor to redeem the fund shares. The account holder bank is, however, obliged to adhere to the agreed sales restrictions. In a case of breach of duty, claims for civil law damages arise from the provisions of the German Civil Code in general. A breach of duty could according to the relevant legal provisions also result in the right of the investment company to terminate the distribution agreement; (c) (d) (e) Greece: Greek law does not permit the repurchase of fund units by the fund without unitholder consent; Italy: it is a moot point whether Italian funds would be entitled to redeem fund shares in the event that it were discovered that a US investor had acquired fund shares; Norway: Under Norwegian law, the management company has no power to redeem units without client instructions/prior agreement nor to pass the proceeds on to a third party (i.e., the IRS). If there is a breach of law and the management company is instructed to do so, it can freeze the client s account and/or move the investment to a money market fund in order to reduce the client s risk while an investigation is ongoing. The management company has no legal basis to withhold tax or hold cash on behalf of the client or any other party without approval from the FSA, on the grounds that it is only authorized as a management company, not a financial institution;

26 P. 26 (f) (g) Portugal: There are no clear restrictions on redemptions under Portuguese law but, as it stands, there is some doubt as to whether it would be possible to enforce a redemption. In fact, this would be a new situation that is not foreseen under Portuguese law, where it is anticipated that redemption of units will be requested by the unitholder, save in the case of exception situations like the liquidation of the investment fund; and Slovenia: Slovenian law, which applies to both investment funds and management companies, does not allow management companies to terminate a business relationship with an investor. It is, therefore, only possible to redeem funds units on the basis of a request by the investor for payment Finally, where redemption is possible under national law and the terms of the contract, a grace period would still be necessary where a change of address notification is received in order to allow providers the opportunity either to redeem the investor out of the fund or to establish the investor s status as non-us under FATCA. PART G: ACCOUNT VERIFICATION 14. DO THE FUNDS KNOW EVERY DISTRIBUTOR IN THE CHAIN, AND ARE THEY ABLE TO FORCE INFORMATION UP THE CHAIN? 14.1 Appendix 2 sets out details of the two main European distribution/settlement models (and a number of their variants) One of the premises on which the restricted fund concept was founded was the assumption that there would (where practicable) be back-to-back contractual provisions imposing US selling restrictions throughout the distribution/settlement chain, which would enable a system of checks and balances to be operated In this respect, we proposed that the fund will be protected, provided that the only FFIs holding its shares/units are either: PFFIs, in which case no contractual provisions will be required; or non-pffis with which the fund has entered into a distribution agreements imposing US selling restrictions and in respect of which there is a requirement to impose similar provisions on sub-distributors up until the point in the chain when the shares/units are acquired by a PFFI (see (4)(ii)(E)(3) of the EFAMA draft regulations) Funds are, therefore, as a general rule, likely to be protected under both the German and the UK models and their respective variants (see Appendix 2), as: in the German-type models, the shares/units are usually held directly either via a centralized securities depositary or via account holder banks which will (subject to resolution of any legal restrictions under EU or national law) be registered as PFFIs, which means that the disjunction between the distribution chain and the chain of legal ownership will not affect the fund s status as a restricted fund; and

27 P. 27 in the UK-type models, there is unlikely to be any disjunction between the distribution chain and the chain of legal ownership prior to the first level of PFFIs (e.g., platforms or account holder banks) It is anticipated, therefore, that there are unlikely to be circumstances in which the management company will not be able to identify the entities in the distribution/settlement chain under our proposal up until the earlier of: the ultimate investor; or the first FATCA-compliant FFI in the chain We have the following comments in relation to specific jurisdictions: (c) (d) (e) in Austria, all fund units are required to be held via fund custodian banks or the Österreichische Kontrollbank AG. Provided, therefore, that such banks and/or the fund custodian becomes a PFFI, the above requirement should be satisfied; in Bulgaria, fund shares/units are issued in a dematerialised form via a central depository of securities. However, such central depository would not be able to register as a PFFI because it is strictly regulated by law (the Law on Public Offering of Securities and the Ordinance on the Activity of the CDS) and, as such, only entitled to disclose information about accounts and holdings to the securities regulator or, pursuant to a court order, to certain other institutions. A change of law would therefore be required to enable the central depository to enter into an agreement with the IRS and/or carry out any reporting of the information required under FATCA; in the Czech Republic, fund shares/units may be settled directly, via a central securities depositary or via a separate depositary operated by a bank (usually a member of the same group as the Management Company. It is anticipated that the management company will be able to identify the entities in the settlement chain as the depositaries are able, upon request, to force their members to disclose investor residence; in Denmark, Germany, and Switzerland, fund shares/units are almost always issued in a dematerialised form via a central securities depositary. It is generally anticipated that either such depositary or, in the case of Denmark, the account holder banks registered with such depositary will register as a PFFI. In Italy, fund units are almost always securitized through the issue of a global certificate held by the fund custodian (which is expected to register as a PFFI). Since fund shares are held by the fund custodian, fund shareholders cannot have custody accounts with fund distributors. Even if the fund custodian makes material redemption and distribution payments to the fund shareholders, it would be problematic to treat it as the paying agent for FATCA purposes because the fund custodian acts on behalf of the management company; as a consequence, as provided for the application of the EU Savings Directive to Italian funds, the management company should be treated as the paying agent for FATCA purposes. Under current Italian law (which is likely to change following implementation of the UCITS IV Directive), Italian management companies will also be aware of the identity

28 P. 28 of the ultimate beneficial owners, save where the shares are held by portfolio managers that are acting in agency capacity on behalf of investors; (f) (g) (h) (i) (j) in Luxembourg, local distribution, i.e. distribution to investors in Luxembourg, is mainly done by Luxembourg banks or regulated wealth managers, whereas (the much bigger part of) cross-border distribution is done by (a chain of) appointed distributors (banks, custodians/brokers, fund supermarkets or other distributors). Comparable to AML/KYC procedures, the management company could conclude a contract with the first distributor in the chain by which the latter agrees to comply with existing investment restrictions. In case of a distribution chain, the respective next distributor would have to be bound by a corresponding contract with the respective previous distributor. Indeed, the management company would probably only know the first distributor in the chain. If there is a distributor with PFFI status closer to the investor, the management company would be able to rely on its reporting duties. If not, it would be up to the management company to ensure that the investment restrictions are met. It is anticipated that banks and other large financial institutions will register as PFFIs; in Portugal, this requirement may not be satisfied in a minority of cases where subscriptions or redemptions of the fund units are made through an IFA; in Slovenia, all investors invest directly in funds; in the UK, the legal owner on record with the fund will invariably be either the ultimate beneficial owner (an individual, life company or pension fund), a broker/ifa (who should be FFIs under the FATCA definitions) or a platform provider (which will also be an FFI). Many platforms would prefer to become local distributors. Many IFAs and brokers may act as nominees and will be very reluctant to become PFFIs but they should meet the local distributor tests on the first scenario and some on the second; and in Romania and Sweden, it is anticipated that the management company will be able to identify the entities in the distribution/settlement chain and impose back-to-back US sales restrictions up until the earlier of the first PFFI in the chain or the ultimate investor As the foregoing discussion shows, funds and their management companies may not know the identity of every distributor in the chain because the distribution/settlement models, as a general rule, only enable funds and their management companies to have clarity on the next distributor in the chain. In EFAMA s restricted funds model, however, protection would be provided by the back-to-back sales restrictions where distribution is not through a PFFI. 15. IF THE DISTRIBUTION CHAIN CAN BE KNOWN TO THE FUND, WHAT CERTAINTY CAN THE DISTRIBUTOR GIVE TO THE FUND THAT THE DISTRIBUTOR IS ENFORCING THE RESTRICTIONS? IS SOME SPECIFIC METHOD FOR ENSURING THIS CURRENTLY ALREADY BEING USED? 15.1 US sales restrictions 15.2 EFAMA has already provided details of the sales restrictions which may be contained in prospectuses and the provisions which may be imposed in distribution agreements, for

29 P. 29 example, a restriction on sales to US persons, a requirement to notify such restriction to investors, and a requirement to inform the fund and (where possible) redeem shares/units where such restriction is breached Further information is set out below in relation to the use of US sales restrictions across a number of European jurisdictions: (c) (d) (e) (f) in Austria, US sales restrictions are usually contained in both fund prospectuses and sale/distribution agreements. Distribution agreements also include rules which require the distributor to indemnify the management company against any damage and liability directly or indirectly suffered as a result of the distributor breaching the terms of the sale agreement; in Bulgaria, US sales restrictions are not currently included in fund prospectuses or distribution agreements. This position may change as a result of the new legislation which has been passed and/or concerns in relation to FATCA; in the Czech Republic, US sales restrictions are usually contained in distribution agreements and may, exceptionally, also be included in fund prospectuses; in Denmark, US sales restrictions are usually contained in fund prospectuses; in France, as a consequence of the qualified intermediary regime, the legal and commercial documentation of French funds already integrates US sales restrictions; in Germany, US sales restrictions are, as a general rule, included in both fund prospectuses and distribution agreements. As a general rule, contractual sales restrictions with regard to the distribution of shares/units are legally binding for the distribution partner under principles of German civil law. The distribution partner of the management company is, therefore, obliged to adhere to the agreed sales restrictions. In case of breach of duty claims for civil law damages arise from the provisions of the German Civil Code in general. A breach of duty could according to the relevant legal provisions also result in the right of the management company to terminate the distribution agreement. According to basic principles of the German civil/contract law, it is neither mandatory to explicitly state legal consequences in a distribution agreement in case of breaches of duty, nor to explicitly link them to concrete duties (e.g., sales restrictions) directly. All regulated investment services providers are required to continually audit their services by compliance and/or internal audit department. Furthermore, both banks, which are the main distributors in Germany, and investment services providers are audited externally and supervised by the Financial Supervisory Authority. Although there is not a specific audit on sales restrictions, samples are taken within the regular supervision of any kind of advisory services. However, we do not anticipate that funds will need to use the restricted funds model in Germany because the distribution/settlement model in Germany results in distribution that is almost exclusively through PFFIs; (g) in Greece, US sales restrictions are currently contained in Greek subscription documentation, but not in fund prospectuses;

30 P. 30 (h) (i) (j) (k) (l) (m) (n) (o) (p) in Ireland, US sales restrictions are usually contained in the fund prospectus. Such restrictions would usually also be reflected in distribution agreements; in Italy, US sales restrictions are currently contained in fund prospectuses, but not usually in distribution agreements. Distributors would, however, be bound by the terms of the prospectus. IN any event, under current Italian law, such distributors are not permitted to subscribe as nominees on behalf of the investors; in Luxembourg, fund prospectuses usually contain US sales restrictions, which are reinforced by provisions in the distribution agreements; in Norway, US sales restrictions are included in prospectuses, but there is not necessarily a specific clause in the distribution agreement requiring distributors to comply with such restrictions. Distributors are, however, required to comply with the terms of the prospectus, which will include the US sales restrictions. A specific clause could be included, if required, in future distribution agreements. Management companies will follow up regularly with their distributors to confirm compliance with agreements and may be able to request auditor confirmation of such compliance as part of routine audits of the distributors practices. Where distributors register their clients directly into the management companies databases, the management companies will continuously monitor such entries to ensure that there are no US persons and address any issues arising with the distributor in question. It is worth noting, however, that in the case of direct registrations by distributors, the only clue as to whether a person is a US person that will be visible in the client system will be the person s address or passport, as registered for AML purposes, and the management company in question will not be able to uncover any other criteria regarding who is a US client under FATCA. in Romania, US sales restrictions are not currently contained in Romanian fund prospectuses or distribution agreements. Due to concerns in relation to FATCA, it is anticipated that this position will change in the future; in Slovenia, US sales restrictions are not currently contained in fund prospectuses or distribution agreements. As all funds are distributed directly, however, this should not give rise to any issues from a FATCA compliance perspective; in Sweden, companies are now beginning to put US sales restrictions in fund prospectuses. They may also give an automated warning that funds are not permissible for US investors when someone tries to acquire fund interests online; in Switzerland, generic US sales restrictions are usually contained in Swiss fund prospectuses and distribution agreements. Once the IRS publishes final guidance on funds, SFA will include a standard US sales restriction in its model fund prospectus/model distribution agreement; and in the UK, US sales restrictions are usually contained in UK fund prospectuses and distribution agreements No specific policing is carried out down the chain to ensure enforcement of sales restrictions. Such sales restrictions are, however, taken very seriously by funds, management companies

31 P. 31 and distributors. The distributor might typically be asked to give representations and warranties regarding the identity of the investors (and, for example, a representation that there are no US persons involved with the fund); if the distributor breaches those representations and warranties, it will open itself to a claim for damages AML rules Introduction 15.6 European Funds are covered by Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing. This Directive is commonly referred to as the Third Money Laundering Directive. 8 It is widely recognised that the Third Money Laundering Directive puts the EU in the forefront of anti-money laundering measures. The Money Laundering Directive sets minimum standards which all EU member states must incorporate into their domestic law; it is then open to individual member states to impose additional requirements if they wish We have chosen in this response to summarise the manner in which the UK has decided to transpose the Third Money Laundering Directive. Under the UK Regulations which implement the Directive, firms are obliged to undertake customer due diligence measures on a risk-sensitive basis on both customers and beneficial owners and to maintain appropriate and risk-sensitive policies and procedures, including training of relevant staff to prevent money laundering and terrorist financing Moreover, the UK s Proceeds of Crime Act adopts an "all-crimes" approach with respect to the predicate offenses that give rise to the proceeds of crime. All firms in the regulated sector are required to make a report to the authorities if they know or suspect, or have reasonable grounds to know or suspect, that their products or services are being used to harbour or move the proceeds of crime. The predicate offenses include tax evasion, irrespective of where in the world the offense takes place. Note that tax evasion in this context can be a stand alone offense, i.e., even if the source of the funds were otherwise perfectly legitimate, if the funds had arisen from a taxable activity, and tax had not been paid in respect of that activity because of tax evasion, this would give rise to a reportable offense under the UK s anti-money-laundering rules. Thus, by way of example, if a US taxpayer had built up capital as a result, in part, of failure to declare taxable transactions to the US authorities, this would give rise to a reportable offense even if the business or other activities which gave rise to the taxable events were completely legitimate, and no offense other than tax evasion had occurred. This approach is not, however, a requirement of the Third Money Laundering Directive and other EU member states may not have a similar approach to the UK The legal obligations are supplemented by Financial Services Authority rules (SYSC 6.3) 10, which require the firms it regulated to maintain appropriate senior management systems and controls to prevent the firm or its products/services being used for the purposes of financial crime, including money laundering. These rules include requirements for a firm to nominate

32 P. 32 a "Money Laundering Reporting Officer" ( MLRO ) with responsibility for the oversight of the firm's AML activities and reporting under the Proceeds of Crime Act. In addition, firms must appoint a senior manager or director with operational responsibility for the establishment of effective AML controls (including training) - this person may or may not also be the MLRO Among other things, the UK Regulations impose obligations on all firms in the UK financial sector to establish the identity of customers. These obligations are derived from the Directive and thus will apply in all EU member states The customer due diligence ( CDD ) obligations for AML purposes involve two key components identification of the customer and beneficial owner, and understanding the nature and purpose of the relationship with the customer (the EU directive also includes monitoring for suspicious activity under its definition of CDD, whereas the UK imposes this as a separate obligation under the Regulations) In some instances firms are able to apply simplified due diligence ( SDD ). In particular, a firm is not required to undertake CDD on a customer that is itself a financial institution and subject to AML regulation and supervision in the UK, EU or a third country where the AML regime is equivalent to that imposed under the EU directive. In practice, this means, for example, that fund managers are usually under no obligation to undertake CDD on platform providers or their underlying customers. Typically, neither the platform provider nor the broker or IFA is required to carry out CDD. Note that the rationale for this is simply to avoid duplicative reporting for AML purposes. A key aspect of this is that the funds will be sourced from a UK bank account Where an investor opens a UK bank account, and thus gains access to the UK banking system for the first time, the UK bank would be required to carry out CDD (unless the funds have been directly transferred from a bank in another EU country or have been transferred from a country where the AML rules are regarded as equivalent to the EU rules, in which case normally only SDD would be required - because CDD would have been carried out in that other country). The rigorous AML control processes arise at the point at which money moves from a third country where there may be limited rigour in the AML process to one where the rigour is equivalent to the EU. 11 This, of course, has similarities to the anti-duplicative reporting approach taken by FATCA in that it is only the PFFI closest to the investor who has to carry the main FATCA obligations, including the requirement to obtain detailed information on investors and to impose pass-thru withholding on recalcitrant account holders Once the investor has opened a UK bank account they will have entered an AML-compliant closed system. Once money enters that closed system, only SDD will usually be required unless there are special circumstances which give rise to AML red flags. The passport for entry to that closed system is, however, that rigorous checks are carried out at that point of entry This approach has an impact on the extent to which fund managers actively seek information from the customer concerning the nature and purpose of the relationship, which might reveal more about the customer's background and tax status. Typically firms will only do this 11 For equivalent countries please see:

33 P. 33 where there is an obvious red flag such as the amount invested being very high (undefined in terms of a specific value, but usually not less than six figures). If, however, the source of funds for an investor does not come from within the AML compliant closed system, for example where the funds are sourced from countries where AML rules are not regarded as equivalent to the EU rules or where the investor seeks to invest using cash, then CDD would be required to be carried out by the entity with which the investor is dealing directly, be that a broker or IFA, a platform provider, or the entity which acts on behalf of the fund (typically the fund manager, transfer agent, or administrator) Note, however, that in practice the first point of entry into an EU/EU equivalent AML procedure will be a bank which will have carried out CDD. In most cases, it would be expected that the bank concerned would also be a PFFI. Thus an investor should already be caught by the FATCA reporting rules. In the rare circumstances where this is not the case, it is very likely that this will be in circumstances where the broker/ifa, platform provider or fund will have to carry out CDD. We therefore suggest that the FATCA anti-duplicative reporting rules should be amended so that where there is a PFFI which has had to carry out CDD on an investor, then the fund, platform provider and/or broker /IFA should be able to regard the investor as FATCA compliant, even where that information is not held within the fund management investment and distribution chain The AML obligations above are enforced in the UK on a day-to-day basis under the supervision regime of the FSA they are considered both in the course of its regular supervision visits to regulated firms and through targeted thematic reviews which the FSA conducts periodically of specific industry sectors and/or aspects of financial crime. The FSA is empowered to bring criminal prosecutions for non-compliance with AML obligations, although to date it has used only its own enforcement tools, including the imposition of financial penalties. 16. REGARDING THE ACCOUNT VERIFICATION QUESTIONS WHETHER FUNDS CAN FORCE INFORMATION UP THE DISTRIBUTION CHAIN, IS THERE IS ANY SORT OF CONTRACTUAL PRIVITY BETWEEN A FUND AND A DISTRIBUTOR THAT IS NOT IMMEDIATELY BELOW THE FUND IN THE DISTRIBUTION CHAIN? FURTHER, REGARDING WHETHER FUNDS CAN FORCE INFORMATION UP THE CHAIN, WOULD IT BE POSSIBLE SPECIFICALLY FOR FUNDS TO GET INFORMATION ABOUT WHAT PROCEDURES LOWER-TIERED DISTRIBUTORS ARE UNDERTAKING TO ENSURE THAT THEY DO NOT HAVE US ACCOUNTS? 16.1 Generally, contractual privity exists only with respect to the persons with whom the contract is entered into. 12 Although, in theory, you could have multi-party agreements involving more than one person in the chain, that would be unusual because it will not usually be known who the other persons in the chain will be. Where you have bilateral contracts, only the parties to that contract will have enforceable rights against each other One way of giving protection to the fund in this situation would be for it to ensure that the contract with the next distributor in the chain includes provisions: specifying what information the distributor needs to provide the fund about its approach to US accounts (including, for example, details of its procedures); and 12 The EU contains over 30 different legal systems, so there may be some local variations to this principle.

34 P. 34 requiring the distributor to include similar contractual provisions in any contracts it conclude with further down-line distributors and so on (unless one of the down-line distributors is a PFFI, in which case no restrictions further down the line are required) Although the fund would not have rights against the down-line distributors, it would be able to ask the distributor to take action under its contract with the next down-line distributor and so on until the relevant distributor provided the necessary information. CONTRACTUAL ARRANGEMENTS AND UNIT TRUSTS 17. WHERE CONTRACTUAL FUNDS ARE TREATED AS ENTITIES FOR FATCA PURPOSES, IS THERE SOMEONE THAT CAN SIGN AN FFI AGREEMENT/BE RESPONSIBLE FOR FATCA COMPLIANCE? 17.1 There will, in all cases, be a person who is able to bind a unit trust or a contractual fund/subfund as otherwise it would not be able to conduct its business. As a general rule, it will be: the trustee in the case of funds established under trust law; and the management company or similar regulated entity in the case of funds established under contract, which have the authority to legally bind a unit trust or a contractual fund/sub-fund with respect to its FATCA obligations. Trustees may act as trustees for a wide range of unit trusts and management companies may manage a number of different contractual funds. Each unit trust and contractual fund will, however, constitute a separate collective investment vehicle with a distinct asset pool and its own distinct set of investors, and in both cases, the trustee or management company will only be acting in its capacity as legal representative of the unit trust or contractual fund in question We would, however, note that the fact that there is always a person who is able to bind a unit trust or contractual fund/sub-fund does not, of course, mean that the fund will necessarily be the correct person to enter into the FFI agreement for example, where it is not the fund which will have the relevant information in relation to investors (see Appendix 2 below) We have considered below three key issues: (c) the current US tax law which applies to funds not constituted as bodies corporate, contractual funds, and unit trusts; the treatment of UK unit trusts; and the treatment of other European contractual funds Current US tax law applicable to funds not constituted as bodies corporate, contractual funds, and unit trusts 17.5 Treas. Reg. Sec (the check the box regulation) permits any eligible business entity to elect its classification for US tax purposes as either a corporation or an entity disregarded as separate from its owner(s). The IRS has ruled in one case that an FCP (a type

35 P. 35 of European contractual fund arrangement) is a business entity eligible to make a check the box election (P.L.R ) Under the check the box regulations, an election must be filed with an authorized signature, defined as the signature of any officer, manager, or member of the electing entity who is authorized (under local law or the entity s organisational documents) to make the election and who represents to having such authorisation under penalties of perjury. While P.L.R did not address who would be an authorized signatory for a check the box election made by a contractual fund such as an FCP, the regulations require that such person would have the legal authority to do so. Thus, the above-quoted regulatory language may serve as a useful guide for draft language that could be used to determine who has authority to bind a contractual fund or sub-fund without a distinct legal personality with respect to its FATCA obligations Treatment of UK unit trusts 17.8 A unit trust is a specific form of trust, which has trustees who act in the interests of the investors, owning the investments in the unit trust on their behalf. It is a requirement, under UK regulatory law, that the trustee of an authorized unit trust is a body corporate, incorporated in the UK or elsewhere in the EU. In practice, the trustees of other unit trusts are invariably bodies corporate too. Such bodies corporate are invariably parts of banking groups and will typically be FFIs. Such a corporate trustee will invariably act as trustee for a wide range of unit trusts An authorized unit trust is taxed in the UK as if it is a distinct body corporate, and is subject to UK corporation tax. The tax assessment is levied on the trustees in their capacity as trustee of that unit trust. By contrast, income of an unauthorized unit trust is regarded as income of the trustees (in that capacity) and not as income of the unitholders Further information in relation to UK unit trusts is set out at Appendix 3 below Ireland has unit trust legislation which is similar to the UK Treatment of European contractual funds We have set out below details in relation to the treatment of contractual funds across a number of European jurisdictions, including details of the entity which is able to legally bind such funds: in Austria, funds are always established in the form of contractual funds. They have no legal personality and only the management company has the authority to bind the fund; in Bulgaria, mutual funds may be established as contractual funds. They have no legal personality and are merely treated as pools of specific assets managed by a management company, which acts on their behalf and for their account. There is, however, a deeming provision in the law, which provides that they will nonetheless be treated as the issuers of their units;

36 P. 36 (c) (d) (e) (f) (g) (h) in the Czech Republic, mutual funds may be established as contractual funds. They have no legal personality, but are considered to be taxable entities. The management company has the legal authority to bind the fund; in Denmark, there are, as yet, no contractual funds. It is, however, anticipated that a new statute on contractual funds will be introduced shortly. The future type of contractual fund will have no legal personality and is expected to be tax transparent. The management company will have the legal authority to bind the fund; in Germany, funds are generally established in the form of open-ended contractual funds. German contractual type funds are pools of assets for the collective investment of capital which operate in accordance with the principle of risk spreading. They are (like corporations or other entities) vehicles within the meaning of the German Corporate Tax Act. Thus, the funds are subject to tax in Germany. Being subject to tax, German contractual funds: (i) are defined as domestic investment companies in the tax law; (ii) have to fulfil tax obligations such as the filing of tax returns and participation in the levying of withholding tax on distributed earnings; (iii) are resident persons according the US/German double tax treaty and are, as such, capable of claiming WHT refunds (Art. 28 VI); and (iv) have the right to bring actions before the courts. German management companies are the legal representatives of such funds and will act on their behalf. Thus, any action is taken by the management company, which is entitled to act in its own name to dispose of assets belonging to the funds in accordance with the German Investment Act and the contractual terms and conditions, and to exercise any rights attaching thereto. The investor itself is not entitled to claim any right from the assets held by the fund and has no partnership rights. The share in the assets of the fund may not be disposed of in any other way than by transfer of the fund share/unit by the investor, i.e., the investor is, for example, not entitled to ask for surrender of the assets held by the fund or for liquidation of the fund. The fund must be kept separate from the management company s own assets. The fund shall not be liable for liabilities of the management company. The management company may satisfy its claims for remuneration and for reimbursement of expenses incurred in connection with the transactions effected for the collective account of the investors only out of the fund; the investors shall not be personally liable; in Greece, the majority of regulated funds are constituted in the form of an openended contractual fund. The contractual fund does not have legal personality (being solely a pool of assets) and the management company therefore represents the unitholders and acts on behalf of the fund for tax purposes; in Ireland, funds may be formed as Common Contractual Funds ( CCF ), which are tax transparent funds and are mainly used as pension pooling vehicles. The CCF is a contractual fund with no legal personality and must be managed by a management company, which has the legal authority to manage and bind the CCF; in Italy, funds are most commonly organized as contractual arrangements (so-called FCIs or fondi comuni di investimento ). The do not have legal personality and must be managed by an authorized management company. They are, however, treated as being liable to tax for Italian tax purposes;

37 P. 37 (i) (j) (k) (l) (m) (n) (o) (p) in Luxembourg, one of the ways in which funds may be established is in the form of an FCP. An FCP is always a contractual vehicle with no legal personality (i.e. it enables undivided co-ownership of assets). The management company will have the legal authority to bind an FCP; in the Netherlands, there are several types of contractual funds (namely, the Dutch equivalents of limited partnerships and funds for joint account). The funds for joint account ( fonds voor gemene rekening ) is a specific fund regime that is formed by the manager, the custodian (and/or depositary) and the participant. The custodian (and/or depositary is a separate legal body that is the legal owner of the assets within the portfolio. The only function of the custodian (and/or depositary) is to hold the portfolio on behalf of the participants. The manager will have the legal authority to bind the fund; in Norway, funds are always established in the form of contractual funds. Each fund is established by Articles of Association which are approved by the FSA and which appoint a management company. In spite of their contractual status, funds are always regarded as legal entities and have their own organization number in the Register of Business Enterprises, can enter into agreements in their own name, and can be subject to law suits. Since, however, the funds have no governing body or employees, it is the management company which has the legal authority to bind the fund and which acts as the board; in Portugal, there exist both open-ended and closed-ended contractual structures, both of which are always regarded as non-entities under Portuguese law. It is the fund management company which will have the legal authority to bind such structures; in Romania, open ended investment funds may be established through civil company convention. Such funds have no legal personality. It is the fund management company which will have the legal authority to bind such structures; in Slovenia, funds may be established in the form of unit trusts, which are always regarded as non-entities under Slovenian law. It is the fund management company which will have the legal authority to bind such structures; in Sweden, funds may be established as contractual arrangements, owned by their unitholders. Such funds are non-entities, save for tax purposes, where they have legal personality. It is the management company which will have the legal authority to bind such funds; and in Switzerland, funds may established in the form of FCPs, which are always regarded as non-entities for Swiss purposes. It is the management company (administrator) which will have the legal authority to bind such funds.

38 P. 38 US PERSONS 18. IF THE SEC DEFINITION OF US PERSON IS USED FOR PRE-EXISTING ACCOUNTS, HOW WOULD THIS BE IMPACTED BY THE SOPHISTICATED INVESTOR RULES? IN PARTICULAR, WOULD SUCH DEFINITION EXCLUDE PERSONS MEETING THE SEC STANDARDS FOR SOPHISTICATED INVESTORS? 18.1 There is no overlap between the Securities Act safe harbours for offshore sales (Regulation S) and sales to accredited (sophisticated) investors (Regulation D), and each safe harbour is separately perfected. The safe harbours are not, however, mutually exclusive an issuer may rely on either or both and there is additionally some definitional overlap between the two. Further details are set out below Issuers do not mix and match the individual components of placements to offshore investors and accredited investors. They do, however, mix and match offerings pursuant to: the Regulation S safe harbour, for which they must be satisfied that the offerings are only being made to offshore investors which are also, in the case of certain categories within Regulation S, non-us persons (as defined in Regulation S); and the Regulation D safe harbour, for which they must be satisfied that the offerings are only being made to accredited investors. As such, both safe harbours are often used in the same transaction, and separate representations and warranties received from the different categories of investors with respect to their status as either non-us persons buying offshore or accredited investors As stated above, there is some definitional overlap between the Regulation S and Regulation D safe harbours. In particular, the definition of US person as used in Regulation S provides that a partnership or corporation organized outside the United States by a US person principally for investing in unregistered securities will be deemed to be a US person for Regulation S purposes unless it is organized and owned by accredited investors (i.e. sophisticated investors) who are not natural persons, estates or trusts. This does not, however, imply that perfection under Regulation D is being brought into Regulation S; it simply intended to ensure that corporate investors, such as banks, which would otherwise be deemed to be US persons, will be carved out of the definition of US persons and will not, therefore, need to meet the requirements of Regulation D, other than the relevant accredited investor definition In light of the above, if the SEC definition of US person were used for pre-existing accounts, such definition would include non-us partnerships or corporations organized and owned by US natural persons, estates or trusts, whether or not they constitute sophisticated investors. It would, however, exclude non-us partnerships or corporations organized and owned by US corporate investors, such as banks, which meet the relevant accredited investor definition. PLATFORMS 19. PLEASE PROVIDE FURTHER BACKGROUND INFORMATION IN RELATION TO PLATFORMS Platforms are one of several types of intermediary holder of fund units in a number of EU jurisdictions, including Germany, Luxembourg, Norway, and the UK. There is no single, generally agreed definition of a platform and business models vary significantly both within

39 P. 39 countries and between countries; more commonly, the label platform is used to describe a range of types of non-advised agency businesses. Many platforms offer their services on to, or via, intermediaries, but a small number of platform providers have made their business-toconsumer interface a key part of their offering. Services provided by platform providers, as well as being technology services, involve a range of regulated activities; for example, aggregating customer orders and, in some markets, arranging custody for their investments The key aggregation feature that is common to all platforms means that they will invariably act as nominees and thus will be FFIs given the very wide definition of FFI in section 1471(d)(5) as an entity that holds financial assets for the account of others as a substantial portion of its business. While this definition primarily seeks to describe conventional custodial business, it clearly includes nominee-type business. Please see Appendix 4, which deals with the role of platforms in the UK, Luxembourg, Swedish, and Norwegian markets. 20. OTHER ISSUES It is common practice in certain European markets that banks, IFAs, and other third party distributors market and distribute fund shares/units to investors without ever acting in a nominee capacity. In this respect, the third party distributor may help the investor to fill out the offering documents and will fulfil the identification procedure with respect to the investor. If the investor finally decides to acquire the fund shares/units, the third party distributor will send the documents either to the FFI with which the investor has or will open a custodial account for its fund units or which otherwise holds the fund shares/units on the investor s behalf. Under current arrangements, however, documentation is not always sent to the FFI, although the FFI may have access to such documentation on request and may also undertake a secondary electronic check on such business. The FFI with which the investor has or will open a custodial account for its fund units or which otherwise holds the fund shares/units on the investor s behalf should generally be permitted to rely on the information and/or documents provided by the third party distributor, unless the FFI knows or has reason to know that the information or documentation is not reliable. Notice requires that the PFFI retains a record of the name of the employee that has reviewed the documentary evidence. As a distributor is not an employee, this requirement should be extended to any other reliable third party who has reviewed the documentary evidence.

40 P. 40 APPENDIX 1 EFAMA DRAFT REGULATIONS SELECTED EXCERPTS 1. INTRODUCTION 1.1 In order to facilitate your understanding of our proposals as they relate to the specific questions you have asked, we include selected excerpts from the draft regulatory language EFAMA submitted in spring of These excerpts only include language relevant to the specific questions addressed in our responses. 1.2 Further, we have updated these excerpts to reflect further refinement of our positions. Specifically, we have refined our local distributors rule (see (c)) so that it is no longer subsumed into the SCD category. 2. EFAMA DRAFT REGULATIONS General Rules. [Reserved. Note: included in the general rules should be a provision making clear that a Participating FFI that has a Qualified FFI as an account holder may treat the Qualified FFI as not having any substantial U.S. owners] Information Reporting. [...] (c) Requirement for the deduction and withholding of tax on withholdable payments. [...] (d) Passthru payments. [...] (e) Consolidated registration procedures. Where an entity ( Manager") or other agent is responsible for the management of multiple FFIs or is authorized to act on behalf of multiple FFIs, the FFIs and the Manager may adopt procedures in accordance with this section in order to enter into FFI agreements or to register for Deemed Compliant FFI status (as defined in ) (e)(2) (1) If a Manager or other agent and two or more FFIs that it manages or acts as an agent for ("Consolidated FFIs") elect the benefits of this section, the Manager may submit an FFI agreement on behalf of the Consolidated FFIs. Such agreement shall include all the information otherwise required for an FFI agreement. (2) If a Manager or other agent and two or more Deemed Compliant FFIs and/or Exempt FFIs that it manages or acts as an agent for ("Consolidated DCF" and Consolidated Exempt FFI, respectively) elect the benefits of this section, the Manager or other agent may submit a Deemed Compliant FFI registration on behalf of the Consolidated DCFs or on behalf of Consolidated Exempt FFIs. Such registration shall include all the Where a Manager or other agent submits multiple FFI agreements and/or Deemed Compliant FFI registrations in accordance with this paragraph (e), the Manager or

41 P. 41 other agent may consolidate the agreements and registrations into one master agreement and/or registration document covering all the FFIs on whose behalf it is submitting agreements and/or registrations. In so doing, if certain required documents (such as sample distribution agreements) are identical for multiple FFIs, the Manager or other agent may submit one representative document, provided that it clearly identifies to which FFIs the document is applicable. (3) intend to qualify as PFFIs. Fund C is publicly traded within the meaning of (ii)(D). Funds D and E are both restricted funds within the meaning of (ii)(E). Both Funds D and E use identical standardized distribution agreements. Fund F is an exempt entity within the meaning of Analysis. Because Funds A and B intend to qualify as PFFIs, each must enter into a PFFI agreement with the Commissioner. Because Funds C, D, and E are Deemed Compliant FFIs and Fund F is an Exempt FFI, they must register as such with the Commissioner. Funds A and B may agree with X that X will submit an FFI agreement on their behalf (although each may choose to submit its own agreement), and Funds C, D and E may agree with X that X will submit a Deemed Compliant FFI registration on their behalf (regardless of what the other funds and the management of X choose to do). Fund F may agree with X that X will submit an Exempt FFI registration on its behalf (although Fund F may choose to submit its own agreement). X may submit one consolidated submission that covers all FFI agreements, Deemed Compliant FFI registrations, and Exempt FFI registration. The submission must clearly identify each Fund on whose behalf the submission is made, must identify whether each fund is entering into an FFI agreement or registering for Deemed Compliant FFI status, and must include all other information required to enter into an FFI agreement or register for Deemed Compliant FFI status. In submitting a sample distribution agreement for Funds D and E as required by (ii)(F)(v), X may submit one sample distribution agreement on behalf of both Funds D and E, provided X clearly indicates that the sample distribution agreement applies to both Funds D and E Deemed Compliant FFIs. --- Deemed Compliant FFIs. -- (1) In general. [Reserved] (2) Application to Diversified Investment Vehicles A DIV (as described in (c)(1)) will be treated as a Deemed Compliant FFI if it satisfies all the requirements of paragraph (4) of this section. (3) Consequences of Deemed Compliant FFI status 14. A Deemed Compliant FFI will be deemed to satisfy the requirements of section 1471(1) if it complies with the procedures described in paragraph (4) of this section. A DIV that is treated as a Deemed Compliant FFI is subject to limited reporting requirements as described in paragraph (4) of this section. A Deemed Compliant FFI is not required to deduct and withhold a tax of 30 percent on passthru payments made to an account holder. 13 We have created a new term here that is defined below. Essentially, a DIV is a fund for collective investment. 14 Reiterates that a deemed compliant FFI has no obligation to withhold on passthru payments and is subject to limited reporting (3)

42 P. 42 (4) Deemed Compliant FFI requirements. (i) A DIV will be treated as a Deemed Compliant FFI for purposes of section 1471 if it satisfies each of the following requirements: (ii) Requirements. (A) The DIV is a regulated entity (as defined in paragraph (4)(ii)(A) of this section). (B) The DIV satisfies the diversification requirements of paragraph (4)(ii)(B) of this section. (C) The DIV is publicly traded or widely-held (as defined in paragraph (4)(ii)(C) and (D), respectively, of this section) or is a restricted fund (as defined in paragraph (4)(ii)(E) of this section). (D) The DIV registers with the Commissioner for Deemed Compliant FFI status in accordance with paragraph (4)(ii)(F) of this section. (E) The DIV satisfies the continued compliance requirements specified in paragraph (4)(ii)(G) and (H) of this section. (F) The DIV satisfies the publication requirements specified in paragraph (4)(ii)(I) of this section. (A) Regulated. [...] (B) Diversified. [...] (C) Publicly traded. [...] (D) Widely-held [...] (E) Restricted fund. 15 (1) Holdings of units in the fund are limited as follows: a. Direct accounts may not be owned by specified United States persons nor United States owned foreign entities; and 15 This section embodies EFAMA s proposal with respect to funds that exclude U.S. investors (4)(ii)(E)(1)

43 P. 43 b. Indirect accounts may only be held by or through-- I. Simplified Compliance Distributors as defined in ; or II. Qualified FFIs (as defined in (6)). c. Example. Facts. An investment fund is organized in a jurisdiction in which fund units are securitized in one global certificate, which is held by a centralized securities depositor. The centralized securities depositor is a participating FFI. Ultimate beneficial owners of fund units keep their units in safe custody with a custodian bank, and no ultimate beneficial owners hold their fund units directly from the fund. Analysis. In this example, no fund units are held in direct accounts. All fund units are held through the centralized securities depositor, an indirect account which is a participating FFI. Because the centralized securities depositor is a participating FFI, it is a QFFI. Therefore, investment in the fund is appropriately limited for the fund to qualify as a restricted fund. This is so regardless of whether the custodian banks are QFFIs, as it is sufficient that the centralized securities depositor is a QFFI. (2) Transitional rule. A DIV is treated as meeting the requirements of (ii)(E)(1) with respect to accounts in existence on or before December 31, 2014 if it has procedures in place as described in (ii)(E)(3)(I) below. (3) The DIV complies with the following additional requirements: a. Procedures applicable to direct account holders. I. Verification of direct accounts. A. Direct accounts of beneficial owners in existence on December 31, A DIV that has procedures in place to prohibit investment by U.S. persons, as that term is used in 17 C.F.R (k), 16 will be treated as having verified its direct account 16 This is the SEC definition of U.S. persons as already in use (4)(ii)(E)(3)(I)(A)

44 P. 44 holders that are beneficial owners of the DIV are neither specified United States persons nor United States owned foreign entities, provided the DIV certifies to the Commissioner that, in the customary exercise of its due diligence responsibilities in accordance with applicable knowyour-customer and anti-money laundering laws, the DIV does not have knowledge of any direct investors that are U.S. persons as defined for purposes of 17 C.F.R (k). B. Direct accounts of beneficial owners opened after December 31, a) The DIV must obtain a declaration by the direct account holder that the direct account holder either: (i) is neither a specified United States person nor a United States owned foreign corporation, or (ii) is a low risk entity (as defined in ). The DIV may rely on this declaration to verify the status of a direct account holder unless the DIV knows or has reason to know that the declaration is not reliable on its face (4)(ii)(E)(3)(I)(B) b) The DIV is considered to have reason to know that a declaration that an account holder is not a specified United States person nor a United States owned foreign corporation is unreliable if, based on electronically searchable information maintained by or on behalf of the DIV and associated

45 P. 45 with the account, there are indicia of U.S. status including, but not limited to, a U.S. mailing address, U.S. bank account, U.S. identification documents such as a passport or driver's license, or written/oral communications originating in the United States, and within 90 days of the DIV s request, has not received from the account holder a statement that reasonably establishes that the account holder is neither a specified United States person nor a United States owned foreign entity has been furnished to the DIV. C. Accounts of intermediaries. -- A DIV will be treated as having verified that its account holders that are not beneficial owners of the DIV if the accounts are held by intermediaries that are Qualified FFIs or Simplified Compliance Distributors. 17. D. Subsequent change in status. -- If a direct account holder is neither a specified United States person nor a United States owned foreign entity at the time the account is established, but subsequently the DIV determines that the account holder has become a specified United States person or United States owned foreign entity, the DIV must report the change in status to the Secretary. 17 Based on self-certification rules to be provided in the regulations (4)(ii)(E)(3)(I)(D)

46 P. 46 If the DIV determines that a direct account holder is a specified United States person or United States owned foreign entity but the DIV had previously concluded, based on incomplete, false or misleading information, that the direct account holder was not a specified United States person or United States owned foreign entity, the DIV must, to the extent permitted by law, redeem the account. II. Application form. For accounts opened after December 31, 2014, when a new client relationship is established, the fund must require the client to complete an application form including the following information. A. For individual investors, the declaration described in section ((ii)(E)(3)(I)(B) that the client is not a U.S. citizen, U.S. permanent resident, or U.S. tax resident. B. For corporate investors other than low risk entities, confirmation that the investor is not a United States corporation and that it a) Does not have any substantial United States owners within the meaning of section 1473(2); b) Is not an FFI and is excepted from the definition of an NFFE pursuant to section 1472(c); or c) Is a Qualified FFI or a Simplified Compliance Distributor, and does not, and will not in the future, hold its interest in the fund on behalf of a specified United States person or an NFFE with substantial United States owners (4)(ii)(E)(3)(II)(B)(c)

47 P. 47 C. For Low Risk Entities, confirmation that the entity qualifies as a low risk entity under the definition relevant to the investor. D. For other investors, confirmation that the investor: a) Is a Qualified FFI (other than a PFFI) or Simplified Compliance Distributor and does not, and will not in the future, hold its interest in the fund on behalf of a specified United States person or an NFFE with substantial United States owners; b) Is a PFFI; or c) Is not an FFI and does not, and will not in the future, hold its interest in the fund on behalf of a specified United States person or an NFFE with any substantial United States owners. b. Procedures applicable to indirect accounts (other than PFFIs). I. Distribution agreements. The DIV s distribution agreements with each of its intermediary account holders other than PFFIs will bind each distributor to only sell interests in the fund in accordance with the fund prospectus. Where permitted by law in the jurisdictions in which the distributor and the DIV are organized, each distribution agreement will include all of the following additional terms: A. A representation by the distributor that the terms of the prospectus will be enforced; (4)(ii)(E)(3)(I)(A)

48 P. 48 B. The distributor will agree to include in its application forms the terms described in (4)(ii)(E)(3)(II) for all direct investments in the distributor; C. The distributor will agree that it will permit investment by downstream intermediary distributors only if those downstream intermediary distributors enter into distribution agreements containing terms comparable to those specified in this (4)(ii)(E)(3) (except for downstream intermediary distributors that are Qualified FFIs and that are not Local Distributors); D. The distributor will agree that it will comply with verification requirements with respect to its direct account holders as provided in (4)(ii)(E)(3)(I); E. The distributor will agree to report redemptions of United States accounts to the DIV; F. The distributor will agree to reasonable requests from the DIV for information evidencing compliance with the requirements in the distribution agreement; and G. Where a distributor s breach of the distribution agreement could jeopardize the DIV s deemed compliant FFI status, the distributor will agree, to the extent allowed by law, that its investment will be separately tracked until the distributor provides information to the DIV that enables the DIV to determine that the distributor s breach does not involve United States accounts or, alternatively, (4)(ii)(E)(3)(I)(G)

49 P. 49 that United States accounts have been redeemed. For this purpose, the term distribution agreement includes any separate agreement between the DIV and an intermediary account holder, if that agreement is binding on the parties. Thus, a DIV and an intermediary account holder may enter into a separate agreement covering their respective FATCA obligations without having to re-execute the existing distribution agreement. c. Other applicable procedures. I. Fund prospectus. The DIV s fund prospectus must include a prohibition on investment by any person that would cause the DIV to fail to meet the requirements of this (4)(ii)(E). (F) Application for Deemed Compliant FFI Status. A DIV that is an FFI (other than a Local Distributor, as defined in (c)) must apply with the Commissioner to become a Deemed Compliant FFI. An application must include the information specified below. 1. A statement that the DIV is registering its status as a Deemed Compliant FFI and the basis for such status (i.e., publicly traded, widely held, or restricted fund). 2. The applicant's name, address and any employer identification number (EIN). 3. The country in which the applicant was created or organized. 4. A list of the position titles of those persons who will be the responsible parties with regard to certification of the DIV's Deemed Compliant FFI status, and the names, addresses and telephone numbers of those persons as of the date the registration is submitted. 5. In the case of a DIV that is a restricted fund, a copy of a sample distribution agreement, in compliance with paragraph (4)(E)(3)(I) of this section, that is representative of agreements executed with any distributors that distribute the DIV's units (4)(ii)(F)(5)

50 P A completed Form SS-4 (Application for Employer Identification Number) to apply for a Deemed Compliant FFI Employer Identification Number (DCFFI-EIN) to be used solely for Deemed Compliant FFI reporting and compliance purposes. 7. An affidavit signed by a responsible person under penalties of perjury that the DIV will comply with all requirements in order to register as a Deemed Compliant FFI. A DIV will be treated as having complied with this requirement if its Deemed Compliant FFI status is registered in accordance with the provisions of (e) and an affidavit is signed by a responsible person of the Manager or other agent within the meaning of that section. (G) Deemed Compliant FFI continued compliance requirements.. In General. -- Every three years, the DIV (other than a Local Distributor, as defined in (c)) must provide to the Commissioner confirmation of continued compliance. The confirmation shall include a copy of the original registration statement given pursuant to (4)(ii)(F) and an affidavit signed by a responsible person under penalties of perjury that, based on a review of the requirements of (4)(ii) and the procedures and policies utilized by the DIV, it is and has been in compliance with those requirements from the period beginning with the last certification pursuant to this paragraph and ending with the date of the affidavit. (H) Significant Change in Information. If the information provided under section (4)(ii)(F) changes significantly, the DIV must provide the Commissioner, within 180 days of the change, a statement describing each change. (I) Semi-annual publication by Deemed Compliant FFI of net asset information. No less frequently than semi-annually, the DIV must publish, in a widely available permanent medium, as that term is used in (d)(1)(iii), a good faith estimate of the DIV s net asset value and the net asset value of its U.S. securities (as defined in (5)). 18 Simplified Compliance Distributors: 19 (1) In general. A Simplified Compliance Distributor ( SCD ) is a DIV or other FFI that distributes interests in funds and that prohibits investors 18 This is included in order to determine a U.S. asset ratio for any pass-through payments made by a distributor. 19 We have adopted procedures analogous to those for DCFFIs. We have cross-referenced to the DCFFI provisions. Specifically, SCDs must limit investment in the same way as a restricted fund and must comply with the same procedures for account verification, application forms, distribution agreements, and prospectus, if any. It must also comply with the same registration requirements as a DCFFI. It must not publish net asset information (1)

51 P. 51 other than those described in (4)(ii)(E)(1), and that complies with the following additional requirements. (i) The SCD adopts procedures as described in (4)(ii)(E)(3) and ; and (ii) The SCD registers for SCD status with the Commissioner under the procedures described in (4)(ii)(F) and (G). (c) Local Distributors. (1) A distributor FFI that qualifies as a local distributor pursuant to (c)(2) will be treated as a Deemed Compliant FFI for the purposes of section (2) Subject to (c)(3), a distributor FFI will qualify as a local distributor if it meets all of the following criteria: (i) It has no branches outside of the country in which it is organized; (ii) It is not a member of an affiliated group of companies that includes FFIs operating outside the country in which it is organized; (iii) It operates solely in the country in which it is organized; (iv) Its account holders are predominantly residents of the country in which it is organized; (v) It does not actively market its services outside the country in which it is organized; (vi) It is open to the general public and at all times except its first year of operation has more than 15 unrelated account holders; and (vii) It provides a certification to the DIV or the distributor with which it has the direct account relationship that it meets the above criteria, subject to reasonable verification by the DIV or the distributor to which it provides the certification. (3) Notwithstanding (c)(2), a distributor organized in a member country of the European Economic Area will not fail to qualify as a local distributor solely because, pursuant to European Economic Area legal requirements, its account holders are not predominantly residents of the country in which it is organized, provided that its account holders are predominantly residents of the European Economic Area. (4) A Local Distributor is not obligated to enter into an FFI agreement or register for deemed compliant status. However, a distributor FFI may elect to provide a certification directly to the Commissioner that it meets the criteria (c)(4)

52 P. 52 (d) Definitions. 2(c)(2)(i)-(vi) and may use evidence of such certification to a DIV or distributor with which it has a direct account relationship in order to meet its obligation under (c)(2)(vii). (1) Diversified Investment Vehicle (DIV). [...] (2) Indirect account. An indirect account for purposes of this section is an account held by an FFI not for its own account but for further distribution to the FFI s investors or further indirect account holders or deposit where the fund units are kept on behalf of the investors. (3) Direct account. A direct account is an account held for the direct benefit and in the name of the beneficial owner of the account FATCA Definitions. In general. [Reserved 20 ] (6) Qualified FFI. An FFI that meets the definition of a Participating FFI [crossreference to regulatory definition], a Deemed Compliant FFI as defined in , or an Exempt FFI as defined in Only definitions relevant to the funds industry have been included (6)

53 P. 53 APPENDIX 2 QUESTION 14: FUND DISTRIBUTION/SETTLEMENT MODELS 1. INTRODUCTION 1.1 There are two basic models for distribution of funds across Europe, namely: the fund distribution model used in the UK; and the fund distribution model used in Germany. There are, however, a number of variants on these models. 1.2 Further details of the UK and German models, and the many variants thereon, are set out at paragraphs 2 to 3 below. 2. THE UK MODEL Facts 2.1 The distribution chain generally corresponds with legal ownership of the fund units/shares. Distribution chain Fund units/shares may be purchased directly from: (i) the fund management company; or (ii) where the management company has delegated maintenance of the register of unitholders/shareholders to a fund registrar, the fund registrar acting on behalf of the management company. Fund units/shares are also distributed via: (i) advisers such as IFAs, stockbrokers and wealth managers; and (ii) execution-only brokers such as platforms. Legal ownership of fund units/shares cannot be transferred without formal prerequisites. In other words, even where settlement of cash and notional units/shares takes place in the CREST system, there will be no change in legal ownership of the fund units/shares until such settlement has been registered with the management company or, where applicable, the fund registrar. Legal ownership of fund units Record of legal ownership Legal ownership of fund units will be recorded differently in the case of direct and indirect investments. In the case of a direct investment by an individual or institutional investor, the fund register will show details of such investor. Different platforms have distinct business models. The major UK players are currently either exclusively or predominantly B2B, i.e. they conduct sales through advisers. Others have a hybrid model (i.e. a mixture of B2B and B2C ) while some have an exclusively B2C model.

54 P. 54 In the case of an indirect investment by an individual via a platform but without the involvement of an IFA or other adviser, i.e. through a hybrid or B2C platform, the fund register will record the platform as the legal owner and it will be the platform which will hold details of the investor who is the beneficial owner. Where the platform operates in a B2B context, the question as to whether or not the platform will know the identity of the beneficial owner will depend on how the particular IFA or other adviser operates their business. Some IFAs and other advisers will act in an agency capacity (i.e., they are the legal, registered holders of the shares/units but not the beneficial owners). As such, where an individual invests via an IFA, there may be two tiers of nominees, such that the fund register will record the platform as the legal owner, the platform will record the IFA as the legal owner and it will be the IFA which will hold details of the investor who is the beneficial owner. Some IFAs and other advisers operate in an advice only model and do not act in an agency capacity. In this situation, the platform will know the identity of the beneficial owner and the position will be identical to the B2C scenario. Where the IFA and other adviser act in an advice only capacity, they will not be FFIs. Information available to the management company, fund registrar and distributors The management company or, where applicable, the fund registrar will have information in relation to the first entity in the distribution chain (e.g., the platform), but will not have any information in relation to either subsequent entities in the distribution chain or, save in the case of a direct investment, the ultimate investors. The last tier of nominees in the distribution chain will be the only entities which have any information in relation to such investors. Neither the management company nor the fund registrar will be able to obtain such information on the basis that there are no specific UK regulatory requirements that oblige platforms, IFAs or other advisers to provide distribution data, even in aggregated form, let alone to divulge the names of the beneficial owners. Where the distributors acquire nominee interests in the shares/units, they will have information on what happens in the future with the next person in the distribution chain. The management company may have a direct or indirect contractual relationship with the last tier of nominees in the distribution chain and, depending on the terms of the distribution agreements, may be able to enforce selling restrictions (e.g., by blocking US investors from further subscription, or forcing redemption when the distributor notifies it of a breach of selling restrictions under the terms of a distribution agreement).

55 P. 55 Diagram 2.2 A diagram showing the distribution chain and the chain of legal ownership in the UK is set out below: Management Company Management Agreement Investment fund Registrar Agreement (maintain register of share/unitholders) Distribution Agreement s Fund Registrar (ManCo or another entity acting on ManCo s behalf) Sale and registration of fund units/shares Platform IFA (direct nominee) Direct retail investor maybe Distribution Agreement IFA (indirect nominee) Sale and record of fund units/shares Sale and record of fund units/shares Retail investor Sale and record of fund units/shares Retail investor Retail investor 3. THE GERMAN MUTUAL FUND DISTRIBUTION MODEL Facts 3.1 The distribution chain does not correspond with the chain of entities safekeeping the fund units and through which the settlement process is effected: Chain of banks safekeeping the fund units Fund units are securitised through the issue of a global certificate which is kept in safe custody with a Central Securities Depositor ( CSD ). Where investors acquire fund units, they are required to keep such units in safe custody with qualifying banks or regulated firms safekeeping the fund units (the Account Holder Banks ). The CSD will assign a pro rata share of the global certificate to each Account Holder Bank (i.e. the Account Holder Banks have accounts with the CSD), which will hold such share for the account of the investors. In some cases, between the CSD and the Account Holder Bank there may be interim custodians, i.e. the Account Holder Bank may have an account with the interim custodian and the interim custodian with the CSD. Note that in any case this will usually only be a safekeeping role and legal ownership will usually, therefore, remain with the investors.

56 P. 56 Distribution chain Distribution and subsequent circulation Fund units are usually distributed via: banks (some of which may also act as platforms); such Management Companies as have a custodial function; and (c) IFAs. Even where the distributors would qualify as Account Holder Banks (e.g. in the case of banks, platforms and certain Management Companies), the investor is free to choose another entity to act as Account Holder Bank. Once issued, fund units may, like ordinary shares, circulate freely in the market and may be transferred without formal prerequisites (e.g. there is no requirement to register fund units with the fund or its Management Company). Information available to the management company, fund registrar and distributors The Account Holder Banks may be the only entities which have any information in relation to the investors. The fund will not be able to obtain such information from the Account Holder Banks on the basis that: the fund will not be aware of the identity of the Account Holder Banks unless they also act as distributors; and in any event, the Account Holder Banks would be prohibited by banking secrecy and data protection rules from sharing such information with the fund. Distributors may not, unless they also act as Account Holder Banks, have any information on what happens in the future with fund units or investors. We understand that some IFAs will, however, retain a nominee interest and may therefore have information regarding what happens in the future with fund units or investors. Diagram The fund will not always have a direct or an indirect contractual relationship with the Account Holder Banks and any nominees in the chain and will, as such, have very limited powers of audit or enforcement. 3.2 A diagram showing the distribution chain and the chain of Account Holder Banks (assuming that there are no interim custodians) in Germany is set out below:

57 P. 57 Management Company Instructions to issue global certificate Fund Custodian Issue global certificate CSD Management Agreement Investment fund Distribution agreement s Account Holder Bank (distributor) Pro rata share of global certificate Account Holder Bank (not distributor) Retail investor Retail investor Recommendation to acquire units Distributor/IFA 4. VARIATIONS OF THE GERMAN AND UK MODELS 4.1 A list of other jurisdictions which have a similar model to either Germany or the UK is set out below, together with details of the variations from such models: Austrian and German institutional funds such funds have a limited number of investors (usually one) that are known to the management company as well as the custodian bank. There is a distinction from the UK model, however, in terms of payment flows in that it is the fund custodian, not the management company, which makes the relevant payments and is, therefore, the entity best placed to deal with FATCA; Austrian retail funds the Austrian distribution model is very similar to the German fund model, i.e., there is often a disjunction between the distribution chain and the chain of entities safekeeping the fund units and through which the settlement process is effected. There is, however, one key difference, which is that the fund custodian bank will also be an Account Holder Bank, which means that: (i) (ii) the fund custodian bank will be able to identify which entities are acting as Account Holder Banks, although it will still not be able to obtain information from the Account Holder Banks on the grounds of banking secrecy and data protection rules; and the fund custodian bank will be the most appropriate entity to comply with the FATCA requirements as it is the fund custodian which has the direct payment relationship with such investors. The management company can only fulfil its own direct distributing obligations in relation to FATCA, but not any distributing obligations which have been agreed upon by the custodian or other Account Holder Banks; (c) Belgium although the custody arrangements and settlement process for the Belgian model are very similar to the Austrian model (which is itself similar to the German model), there are two key differences, namely that:

58 P. 58 (i) (ii) the Account Holder Bank (as defined at paragraph 3.1 above) will usually be in the same group as the management company; and there will usually be a distribution agreement between the management company and the Account Holder Bank; (d) (e) (f) (g) Bulgaria the Bulgarian model is really a hybrid between the UK and German models in that although fund units are issued in dematerialised form through a central depository of securities as under the German model, units are sold directly to investors as under the UK model (i.e. not via Account Holder Banks). In this respect, under current Bulgarian practice, the central depository acts as the fund registrar. As such, it is the depositary which will be the most appropriate entity to comply with the FATCA requirements as, although the management company will be aware of the identity of the first tier of investors (having access to information on individual accounts in their capacity as members of the depositary), it is the depositary which will have the direct payment relationship with such investors. Note that it is also possible under Bulgarian law for the management company to elect to keep the register (although no management company has at present opted to do so), in which case it would be the management company which would be best placed to comply with the FATCA requirements. Distributors are not party to sales/redemptions of units/shares and do not participate in the settlement procedure; Czech Republic there are three main fund distribution models in the Czech Republic, namely: (1) direct distribution by the management company; (2) distribution via a separate depositary operated by a bank (usually a member of the same group as the management company; and (3) distribution via a central securities depositary. Distribution model (2) is the principal fund distribution model and the three largest banking groups (Erste, KBC and Société Générale) account for 80 percent of distributed volume. Distribution model (3) is much closer to the German model, although the notion of global certificates is not widely used. As a general rule, IFAs act solely in an agency capacity; Denmark the Danish model closely resembles the German model, save that it is usually a market maker and not the fund custodian which instructs the management to issue or redeem fund shares; Finland there are two fund distribution models in Finland. The first is really a hybrid between the UK and German models in that either the Management Company or the Fund Registrar will keep the register of units in which will appear the names of either: (i) (ii) the investors; or in the case of non-finnish investors, sometimes their nominees, i.e. other entities (typically, Account Holder Banks) which appear in the register on behalf of their clients. The possibility of using a nominee structure may be extended to Finnish investors following the current review of the Finnish securities market legislation.

59 P. 59 Unlike both the German and UK models, where shares are held via a third party, that third party has an obligation to provide the management company with information about the beneficial owners upon request. While there would not necessarily be a distribution agreement between such third party and the management company (as in the German model), the direct relationship also means that it may be easier for the management company to audit and enforce sales restrictions than under the German model. The second distribution model (which is currently only used by one exchange-traded fund) is very similar to the German model save that the management company should be able to identify the investors. (h) (i) (j) (k) France the shareholder register is always held by a teneur de comptecentralisateur (the Transfer Agent ), which is the equivalent of the fund registrar and will be a service-provider appointed by the management company. Distribution may be carried out either directly or indirectly via another member of the management company s group (an internal distributor) or an unrelated third party. In the case of funds distributed via internal distributors, it would be easier for the management company to obtain information in respect of the next step in the distribution chain, although there may be a number of layers of distributors in between the fund and the ultimate investor. Note that there is a service offered by Euroclear which enables funds to identify the ultimate investors, but it is expensive and offers no cast-iron guarantee of results; Greece although, as in the UK model, fund units may be distributed directly by management companies or indirectly via a network of banks, insurance companies or investment funds, or, in the case of ETFs, brokerage firms (as in the UK model), the fund register will always show details of the end-investor (with the exception of ETFs, which may be purchased by a broker). This is because distributors never acquire nominee interests in the units and will, therefore, in the case of an indirect investment, simply relay the identity, status, etc. of the end investor to the management company (having received the consent of the investor to do so as a prerequisite for subscription); Ireland the distribution model is broadly similar to the UK model, although the shareholder register is always held by a transfer agent; Italy the custody arrangements and settlement process for Italian funds are broadly similar to the German model in that all units are securitized through the issuance of a global certificate, which is kept in safe custody by the fund custodian. There are, however, two key differences. The first is that, since fund units are not issued in a dematerialized form and are held by the fund custodian, the shareholders cannot maintain a custody account with another financial institution (as a consequence, distributors may not be FFIs for FATCA purposes). The second difference is that although fund units are usually distributed indirectly via local banks and other third party intermediaries (which record investors holdings in their accounts), such distributors do not under current law act as nominees for such investors, although this position is expected to change following implementation of the UCITS IV Directive. There is, furthermore, a requirement for the management company to

60 P. 60 record the identity of the ultimate shareholders in the shareholders register. There is an exception to this general rule in the case of shares held by portfolio managers. In this respect, whether the management company will know the identity of the beneficial owners will depend on the way in which the portfolio manager in question operates. If the portfolio manager acts in an agency capacity, it will be registered as the shareholder even though it will not be the beneficial owner of such shares. By contrast, if the portfolio manager operates on behalf of and in the name of the customer, the management company will know the identity of the investor who is the beneficial owner. Transfer of fund shares in the market is free, although it will require an update to the shareholder register for the fund. Since there is no secondary market for trading in fund shares in Italy, however, such shares will in practice rarely be transferred between investors; (l) (m) (n) Luxembourg the distribution model is again broadly similar to the UK model, save that the shareholder register is always held by a Transfer Agent; Lichtenstein the position for Lichtenstein is broadly similar to the position in Germany. It would, however, be more onerous for Lichtenstein to comply with the requirement to report a pass through percentage under national law requirements; Netherlands there are three fund distribution models in the Netherlands, namely: (1) distribution via the stock exchange (which is the most important distribution model in the Netherlands); (2) distribution for non-listed funds; and (3) the investors giro distribution model. Distribution model (1) is similar to the German model. There is, however, one key difference which is that the fund agent listed on the stock exchange which acts as the fund registrar has a direct relationship with the Account Holder Banks, which means that: (i) (ii) the management company will be able to identify which entities are acting as Account Holder Banks, although it will still not be able to: (x) obtain information from the Account Holder Banks on the grounds of banking secrecy and data protection rules; or (y) enforce the sales restrictions as there will not necessarily be any distribution agreements between the management company and Account Holder Banks; and the fund agent will be the most appropriate entity to comply with the FATCA requirements as, although the management company will be aware of the identity of the Account Holder Banks, it is the fund agent which has the direct payment relationship with such investors; Distribution model (2) is very similar to the UK model, in that: (i) investors may acquire their participations both directly from the management Company and indirectly via banks and platforms; and

61 P. 61 (ii) where registration is made indirectly via a bank or a platform, such registration will usually constitute a nominee registration. Distribution model (3) is also very similar to the UK model in that there will still be nominee registrations in the books of the management company/fund registrar with the only difference being that the bank will itself be involved in making the changes in the number of giro-based securities held in the bank account of the fund;

62 P. 62 (o) Norway there are three main fund distribution models in Norway, namely: (1) direct distribution by the management company; (2) distribution via a fund registrar; and (3) distribution via a central securities depositary. Distribution models (1) and (2) are most like the UK model, in that the distribution chain corresponds with ownership of the fund units. Distributors usually act in a nominee capacity, as registration of the distributor as a nominee is the set-up envisaged in the Norwegian legislation. In particular, the Regulations on Nominee Registration in Securities Funds Unitholder Registers broadly provides that: (i) (ii) regulated nominees may be entered into the unitholder register in lieu of the beneficial owner of the units; and such nominees must maintain a list of the unitholders for which they act as custodians, ascertain the identity of the beneficial owners of the units, and record and report certain information to the Norwegian tax authorities (there is no requirement for them to be reported. (p) (q) Distribution model (3) is more like the German model in that shares are issued via a central securities depositary, although the management company may have distribution agreements with distributors further down the chain; Portugal the model of fund distribution in Portugal is more similar to the German than the UK model. Funds are, however, usually distributed indirectly: (i) (ii) by the fund custodian; or local banks which belong to the same group as the management company; (r) (s) (t) Romania Romanian funds are typically distributed indirectly through a network of banks, other asset management companies and stock brokerage companies and that in such circumstance, a distribution agreement will be executed between the management company and the relevant local distributor; Slovenia Slovenian funds are typically distributed directly to investors, although the management company will use third party distributors to market the fund; Sweden in terms of legal ownership, the Swedish distribution model resembles the UK model. Although the majority of distribution is carried out via bank branches, such branches will either be selling: (i) (ii) funds for the management company owned by the bank, in which case, such sales will usually be recorded as direct sales; or third party funds, in which case the bank will be recorded as owner in the records held by the third party management company. Fund supermarkets/platforms take up an increasing share of the platform. Where funds are distributed via such platforms, it is the fund supermarket/platform which will be recorded as owner in the records held by the management company; and

63 P. 63 (u) Switzerland the position for Switzerland is broadly similar to the position in Germany.

64 P. 64 APPENDIX 3 QUESTION 17: TREATMENT OF UK UNIT TRUSTS 1. TRUSTS 1.1 In common law legal systems, a trust is a relationship between three parties whereby property (real or personal, tangible or intangible) is transferred by one party to be held by another party for the benefit of a third party. Common law legal systems are in widespread use, particularly in England where it originated in the Middle Ages, and in nations or regions that trace their legal heritage to England as former colonies of the British Empire. A trust is created by a settlor, who transfers some or all of his property to a trustee, who holds that trust property for the benefit of the beneficiaries. A settler of a trust can also be a beneficiary of that trust. 1.2 The trustee has legal title to the trust property, but the beneficiaries have equitable title, i.e. the right to enjoy and use the property; there is thus in a trust a separation of control and legal ownership. The trustee owes a fiduciary duty to the beneficiaries, who are the beneficial owners of the trust property. A trust is governed by the terms under which it was created. The terms of the trust are most usually written down in a trust instrument. The terms of the trust must specify what property is to be transferred into the trust, and who the beneficiaries will be of that trust. The trust is also governed by local (in this case, English) law. The trustee is obliged to administer the trust in accordance with both the terms of the trust and the governing law. 1.3 A trust can be created in a number of ways, one of which is by the creation of a written trust instrument. 1.4 Generally, a trust requires three certainties, as determined in Knight v Knight: a landmark English case decided in 1840, namely: (c) Intention. There must be a clear intention to create a trust; Subject Matter. The property subject to the trust must be clearly identified; and Objects. The beneficiaries of the trust must be clearly identified. 2. UNIT TRUSTS 2.1 A unit trust is a form of collective investment vehicle 21 with an unspecified capital established by trust deed and which operates under general trust law. Unit trusts exist in the UK, Ireland, UK Crown Dependencies such as the Isle of Man and Channel Islands as well as in Australia, New Zealand, South Africa, Singapore and Malaysia. 2.2 UK trust law requires the trust to account separately for trust income and trust capital. In trust terms, the beneficiaries and settlers of a unit trust are the unitholders, who share in 21 There are two main types of UK based collective investment vehicles, which are unit trusts and open-ended investment companies ( OEICs ). An OEIC is a body corporate, albeit one constituted under the Financial Services and Markets Act 2000 (FSMA) rather than the UK Companies Act, and is not discussed further in this Appendix.

65 P. 65 both income and capital on the basis of units held. A trustee is appointed and is typically a large bank or insurance company. The trustee is responsible for safeguarding the trust s assets and generally looks after the interests of unitholders. A manager is also appointed to carry out the day to day management of the unit trust and will usually be responsible for investment decisions (although his may be delegated to an independent investment manager). 2.3 The trust deed of a unit trust will include the following provisions: (c) (d) investment objectives; managers permitted periodic and preliminary charges; other charges; and extent of investment and borrowing powers. 2.4 A unit trust is open ended i.e. it has an unspecified capital; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Its units in issue can typically increase or decrease each working day. The open ended nature of a unit trust leads to complex liquidity management and pricing issues, which are outside the scope of this paper. In broad terms, these issues are common to all open ended investment vehicles, not just unit trusts. 2.5 The fund manager runs the trust for profit. The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets. The unitholders have the rights to the trust assets. The distributors allow the unitholders to transact in the fund manager's unit trusts. The registrars are usually engaged by the fund manager and generally act as a middleman between the fund manager and various other stakeholders. 2.6 The first unit trust was launched in the UK in 1931 by M&G. This was the 'First British Fixed Trust' which held the shares of 24 leading UK companies in a fixed portfolio that was not changed for the fixed lifespan of 20 years. The rationale behind its launch was to emulate the comparative robustness of US mutual funds through the 1929 Wall Street crash. The legal structure chosen based on UK trust law was utilised because the UK did not, at the time, have an appropriate alternative legal structure (such as an OEIC). 3. AUTHORIZED AND UNAUTHORIZED UNIT TRUSTS 3.1 A UK unit trust may be either a scheme formally authorized by the UK regulator, the FSA, and is known as an authorized unit trust or AUT. Any UK unit trust which has not been formally authorized by the FSA is by definition unauthorized and is usually referred to as an unauthorized unit trust or UUT. Distinct UK tax regimes apply to AUTs and UUTs, which will be discussed briefly later in this paper. 3.2 FSMA section 237 defines a unit trust scheme as a collective investment scheme under which the property is held on trust for the participants. And an authorized unit trust scheme as a unit trust scheme which is authorized for the purposes of this Act by an authorisation order in force under section 243.

66 P To be sold to UK retail investors, a unit trust must be an AUT. UUTs are typically used as pooling vehicles for UK tax exempt institutions and a recent HMRC paper has estimated that there are around 550 UUTs in the UK, of which approximately 90 percent have exempt status. Some of these UUTs will be very large in terms of AUM. 3.4 The legal structure of an AUT is as follows: 3.5 The trustee of the assets of a unit trust is the legal owner of the assets but is under an obligation to hold the assets for the benefit of other persons (i.e., the unit holders). Under UK regulatory law (FSMA) it is a requirement that the trustee of an AUT is a body corporate, incorporated in the United Kingdom or elsewhere in the European Economic Area. Such a corporate trustee will invariably act as trustee for a wide range of unit trusts. UK regulatory law provides that day-to-day management of a unit trust cannot be carried out by the trustee but by the fund manager (a term used in UK law to define the fund controller, who has the power to act as investment manager and fund administrator, but who will invariably delegate these functions to a specialist investment manager, often but not always within the same group, or third party administrator). However, there are certain responsibilities of the trustee, which must remain with the trustee, such as the safekeeping of assets and the monitoring of the activities of the fund manager. The trustee is at liberty to delegate the custody to others; typically the trustee will delegate this activity to members of its affiliated group. 3.6 Many larger UUTs will have a similar structure since, although the obligations imposed upon the trustees of an AUT are highly prescriptive and are written into the UK regulatory rules, the fiduciary obligations placed upon a trustee by English common law will require a similar level of oversight.