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| News: US SECURITIES AND EXCHANGE COMMISSION ADOPTS NEW RULES TO STRENGTHEN RESILIENCE OF MONEY MARKET FUNDS AND PROTECT INVESTORS | ||||||||||
| On 27 January 2010, the US Securities and Exchange Commission (SEC) took the decision to adopt new rules designed to strengthen significantly the regulatory requirements governing money markets funds (MMF) and to protect investors. A full scale review of the regulatory regime of money markets was triggered by the financial crisis as well as the weaknesses revealed by the “breaking of the buck” of the Reserve Primary Fund in September 2008. According to Mary Schapiro, Chairman of the SEC, the new rules will help reduce risks associated with these funds, so that investor assets are better protected and the funds can better withstand market crises. They will also tighten maturity and credit quality standards for money market funds and furthermore, they will impose liquidity requirements. The reforms are split into three main areas: restricting risks by money market funds; enhancing disclosure of portfolio securities; and improving money market operations. Broadly, the new rules entail: Improved liquidity Money market funds will be required to hold a certain percentage of their assets in highly liquid securities. • All taxable MMFs will be required to hold 10% of assets in cash, US Treasury securities or securities that convert into cash within one day. • All MMFs will be required to hold at least 30% of assets in cash, US Treasury securities, certain other government securities with remaining maturities of 60 days or less or securities that convert into cash in one week. The rules also restrict the ability of MMFs to purchase illiquid securities. An MMF is restricted from purchasing illiquid securities where, after purchase, more than 5% of the fund’s portfolio would be illiquid assets and “illiquid” has been redefined to mean any security that cannot be sold or disposed of within seven days at carrying value. Higher Credit Quality The ability of MMFs to acquire lower quality (second tier) securities will be limited. An MMF will be restricted to: • An investment of 3% of its assets in second tier securities. • An investment of 0.5% of its assets in second tier assets issued by any single issuer. MMFs will also be restricted from buying second tier securities that do not mature within 45 days. Shorter maturity limits The average maturity limits will be shortened as follows: • The maximum “weighted average life” maturity of the fund’s portfolio will be restricted to 120 days. • The maximum weighted average maturity of a fund’s portfolio will be restricted to 60 days. “Know You Investor” procedures The new rules impose a requirement to hold sufficiently liquid securities to meet foreseeable redemptions. In order to satisfy this requirement, funds must develop procedures to identify investors whose redemption requests would present risks. Periodic Stress Tests Fund managers would be required to examine the ability of the fund to maintain a stable net asset value per share in the event of shocks. Nationally Recognised Statistical Rating Organisations (NRSRO) On top of existing requirements to limit investments in rated securities to those rated in the top two categories (or unrated securities of a comparable quality) and to require the performance of independent credit analysis of every security purchased, the new rules improve the way in which funds evaluate securities ratings provided by the NRSRO. Funds will be required to designate at least four NRSROs whose ratings the fund’s board consider to be reliable and the current requirement that funds invest only in those asset backed securities that have been rated by the NRSROs has been eliminated. Repurchase Agreements The requirements for allowing an MMF to “look through” the repurchase issuer to the underlying collateral securities for diversification purposes have been strengthened. Monthly Website Posting MMFs will have to post their portfolios on their websites each month. Monthly Reporting Each month, MMFs will have to report to the Commission detailed portfolio schedules in such a format that an interactive database can be created allowing the Commission to oversee the activities of the MMF. The reported information should be publicly available 60 days after the report and will include the MMFs “shadow” NAV, or the mark-to-market value of the fund’s net assets. Processing of Transactions MMFs and their administrators will be able to process purchases and redemptions electronically at a rate other then USD1 per share. Suspension of Redemptions An MMF’s board of directors will be permitted to suspend redemptions if the fund is about to break the buck and decide to liquidate the fund. The MMF will have to notify the Commission prior to relying on this rule. Purchases by Affiliates The rules expand the ability of affiliates of MMFs to purchase distressed assets from funds in order to protect a fund from losses. The Commission must be notified prior to reliance on this rule. The new rules, adopted on 27 January 2010 are effective 60 days after their publication in the Federal Register and mandatory compliance with some of the provisions will be phased in throughout the year. According to Mary Schapiro, Chairman of the SEC, the adoption of the rules is an important step – but just a first step – in the efforts of the SEC to strengthen the money market fund regulatory regime. |
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| News: BVI DEVELOPMENTS: NEW REGULATORY CODE, NEW INSURANCE LEGISLATION AND BVI COMPANIES ACCEPTED TO THE HONG KONG STOCK EXCHANGES | ||||||||||
A raft of important developments have emerged in the British Virgin Islands strengthening the jurisdiction’s position as an international financial centre.
It is anticipated that the code will be extended to be applicable to licensees under the new Securities and Investment Business Act once this comes into force (this is expected in early 2010). This includes investment managers, administrators, advisors, custodians etc. |
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| News: RETROSPECTIVE ANTI-AVOIDANCE LEGISLATION NOT CONTRARY TO EUROPEAN CONVENTION ON HUMAN RIGHTS – HIGH COURT RULING PAVES WAY FOR TAX AUTHORIES TO CLAIM BACK UNPAID TAXES | ||||||||||
| On 28 January 2009, UK tax authorities won a significant ruling giving them the green light to claw back millions of pounds in backdated tax from UK residents who put their money in offshore trusts. The case involved a self-employed IT consultant, Robert Huitson from Cheshire. Mr Huitson, for several years, took advantage of a scheme set up by Montpelier Tax Consultants (Isle of Man) in 2001. The scheme allowed him to receive an annual fee of GBP15,000, plus an additional sum, in his capacity as the owner of a life interest in an offshore trust. The UK government introduced anti-avoidance legislation under the Finance Act 2008 and the legislation was introduced with retrospective effect, allowing the taxman to claim back unpaid tax in trusts even where they were set up prior to the enactment of the legislation. David Elvin QC, appearing for Mr Huitson, argued that the retrospective element of the 2008 legislation was incompatible with the “right to free enjoyment of property”, as protected by Article 1 of Protocol 1 of the European Convention on Human Rights. The degree of retrospectivity was unprecedented in the history of tax legislation and it was argued that it was not proportionate as it imposed an excessive burden on taxpayers. According to court documents, 57 scheme users could not meet similar tax demands even if they were to sell all of their assets including the family home and 29 others could only settle by selling or remortgaging their homes. Nevertheless, Mr Justice Kenneth Parker dismissed the application for judicial review ruling that the demands were “in the relevant circumstances proportionate” and did not breach human rights. It is estimated that some 2,500 taxpayers may be exploiting similar arrangements, with about GBP100 million of income tax at stake. Mr Huitson faces a payment of GBP100,000 in backdated taxes. In his judgment, Mr Justice Kenneth Parker did add “I note that, according to the evidence in this claim, HMRC intends to take into account financial hardship to taxpayers before seeking to enforce demands for tax and interest in respect of past periods.” Although the judge refused Mr Huitson permission to appeal, his lawyers indicated that they would ask the Court of Appeal to hear the case because of the significant personal implications of the judgment. |
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| News: SAN MARINO RELAXES BANK SECRECY | ||||||||||
| San Marino has taken an important step towards increased transparency by approving legislation which relaxes strict bank secrecy. The new legislation reflects San Marino’s commitment to the OECD standard of transparency and information exchange, having recently been promoted to the “white list” of nations which have substantially implemented the OECD’s internationally accepted standard. Previously, San Marino has maintained obligatory bank secrecy, allowing the opening of anonymous accounts. Under the new legislation, accusations of illegality, such as fraud or tax evasion will forfeit the anonymity of account holders and details of account holders may be given, on request, to a list of institutions which include magistrates, the central bank and the tax office. |
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| News: EU: SIGNIFICANT REFUNDS EXPECTED FOR WITHOLDING TAX PAID ON DIVIDENDS | ||||||||||
| A recent decision by the Norwegian government to refund withholding taxes to a Luxembourg SICAV could pave the way for refunds of millions of Euros. The decision comes after the European Court Justice (ECJ) issued a significant ruling in the Aberdeen Property Fininvest Alpha Oy (Aberdeen) case in favour of the taxpayer. The ECJ held that the application of withholding taxes to non-resident investment funds, while at the same time exempting resident investment funds was discriminatory and in breach of Articles 43 and 48 and Articles 56 and 58 of the EC Treaty. This decision set the wheels in motion for investment funds spanning the EU to challenge the unlawful application of withholding taxes levied on dividends. Teresa Owusu- Adjei, UK asset management tax leader of PricewaterhouseCoopers LLP revealed that the refund could run into tens of millions of Euros, plus interest, for the Luxembourg SICAV. Furthermore, she anticipates that the decision will have a significant impact on the current withholding tax regimes applied in EU and EEA jurisdictions, ensuring a level playing field for all funds. Currently, a number of European countries such as France, Germany, Italy, Spain and Belgium apply withholding tax on dividends paid to funds. |
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| News: SURVEY FINDS APPETITE FOR EQUITIES IS STRONG | ||||||||||
| A recent survey carried out by Bank of America Merrill Lynch has shown an increased appetite for equities and indicates that investors have rediscovered their appetite for risk The Survey of Fund Managers for January 2010 found that for the first time since January 2006, investors are taking above average risk, relative to their benchmark. The global survey spanned 209 fund managers managing a total of USD539 billion in the period 8 January 2010 to 14 January 2010. A total of 169 managers managing USD404 billion participated in the regional surveys. Gary Baker, Head of European Equities strategy at Bank of America Merrill Lynch Global Research commented that “This survey is one of the more bullish we have seen and suggests that investors buy into the idea that this recovery has legs.” The survey found that a net 2% of investors were taking “higher than normal” risk compared with a net 7% taking “below normal risk” in December 2009. Average cash balances fell to 3.4%, the lowest since mid-2007 and significantly down from 4% a month ago. A net 52% of asset allocators are overweight equities, up dramatically from a net 37% in December 2009. A net 58% of investors have no protection against a fall in the next three months, compared with a net 38% of investors in December. Investors have been moving into cyclical stocks, are positive about profits and are urging management teams to invest in growth. For the first time since mid-2006, capital investment is a high priority according to 40% of investors, ahead of reducing debt and returning cash to shareholders. 55% say that companies are under investing, up from 48% in December. 15% believe that corporate balance sheets are “under leveraged”, up from a net 9% in December. The outlook for corporate earnings is positive with 63% expecting an increase over the next 12 months and 40% of investors predict that operating margins will improve. Portfolio managers have shown signs of returning to sectors and regions that have recently been shunned. The net percentage of respondents underweighing banks has fallen from 37% to 16%. European respondents to the regional survey have become more bullish about banks and automotives and Japan is back in favour. A net 63% of the regional panel expect a stronger Japanese economy in 2010, up a staggering 30% from November 2009. A net 87% expect improved earnings and Japanese equities were identified as the most undervalued in the world over the past two months and they have become more popular than Eurozone equities. Japan is the region that 20% of the panel would most like to overweight in the coming year, compared to 10% opting for Europe. |
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| News: CHINA REINSTATES TAX CHARGES ON TAIWANESE AIRLINES | ||||||||||
| China has retaliated against Taiwan’s failure to reciprocate preferential tax rates for airline and shipping companies by reinstating tax charges. Under a consensus reached at the second and third meetings of P.K. Chiang, Chairman of the Taipei-based Straits Exchange Foundation and Chen Yunlin, Chairman of the Beijing-based Association for Relations Across the Taiwan State, airlines from both sides of the strait can enjoy preferential tax treatments. From December 2008, China waived a 3% business tax and a 1.25% income tax. Taiwan has not been able to reciprocate the preferential tax treatment as the draft amendment to the Cross-Strait Relations Act, which provides the legal basis for the preferential treatment, has not been ratified by the Taiwanese parliament (the Legislative Yuan). Mainland China’s sea and air transportation companies still have to pay 2.5% income tax. China’s disatisfaction at Taiwan’s failure to keep up their side of the deal has led to retaliation whereby Chinese authorities are seeking to backdate the charges to December 2008 and has prevented the airlines from repatriating income from China until the back tax is paid. The retaliation is causing a cash crisis among airlines, which are already suffering due to the financial crisis and they are reportedly urgently appealing to the Taiwan Ministry of Finance to rectify the matter. |
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| News: MALAYSIA AND BAHRAIN TO DEVELOP A PLATFORM FOR ISLAMIC FINANCE | ||||||||||
| Bursa Malaysia, the Malaysian Stock Exchange and Bahrain Financial Exchange have signed a significant memorandum of understanding (MoU) to develop a commercial agreement to provide financial products to Islamic market participants and strengthen bilateral ties between both organisations. The deal will involve a feasibility study to identify products which can be developed to increase the choice in Islamic financial markets and produce greater liquidity for markets. It lays down the foundations for both parties to jointly work on increasing awareness of investment opportunities in the respective Islamic markets and assist each other in further developing the Islamic investment framework across multiple geographies, according to Bursa Malaysia. Bursa Malaysia CEO, Yusli Mohamed Yussoff CEO remarked that this is a “…major step towards consolidation in the Islamic Finance world…”. Furthermore, Mr Yussoff believes that as both exchanges come together on a single platform, the Islamic Finance industry will be strengthened and the initiative will “go a long was in addressing the issues of standardisation, innovation and transparency thus providing a new dimension to the Islamic Finance market.” |
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