Performance A triannual topical digest for investment management professionals, issue 7, January 2012 Market buzz Fund analytics, regulatory requirement or business opportunity? Investing in Château Lafite, Picasso or Patek Philippe — The rise of collectible assets GIPS — A 'necessary' evil Corporate governance in investment funds Duties and responsibilities of directors revisited Brazilian investment funds Wealth management trends Swing pricing and the challenge of fair cost allocation in distressed financial markets Regulatory angle Managing risks under UCITS IV New release or fountain of youth? IASB and FASB issue Exposure Drafts (ED) on investment entities Reform of 'MiFID' Spotlight on the 'inducements' section Tax perspective New tax reporting requirements for foreign investment funds distributed in Italy New tax rules put pressure on offshore jurisdictions Financial transactions tax EMEA 2 14 In this issue 4 Foreword 5 Editorial Market buzz 6 Fund analytics, regulatory requirement or business opportunity? 14 Investing in Château Lafite, Picasso or Patek Philippe The rise of collectible assets 20 GIPS — A 'necessary' evil 26 Corporate governance in investment funds Duties and responsibilities of directors revisited 32 Brazilian investment funds 40 Wealth management trends 46 Swing pricing and the challenge of fair cost allocation in distressed financial markets 6 20 26 32 40 3 Tax perspective 54 New tax reporting requirements for foreign investment funds distributed in Italy 60 New tax rules put pressure on offshore jurisdictions 68 Financial transactions tax Regulatory angle 80 Managing risks under UCITS IV New release or fountain of youth? 86 IASB and FASB Issue Exposure Drafts (ED) on investment entities 92 Reform of 'MiFID' Spotlight on the 'inducements' section 96 Hot off the press 98 Contacts 92 54 60 68 80 8646 4 Foreword Dear investment management practitioners, faithful readers and new-comers of our magazine, we are glad to present you the seventh edition of Performance, Deloitte’s worldwide digest covering the current topics of the Investment Management industry. First of all, we wish you a successful year in 2012 at both personal and professional levels. This edition of Performance actually kicks off the third calendar year of existence for our publication. We continue to believe that offering an international and common platform to the worldwide Investment Management industry professionals is a challenge that turns out to be of great interest for our clients, prospects and Deloitte practitioners. Thank you again for your inspiring support. 2011 has been everything but a quiet year in Investment Management. Worldwide consumer confidence is not at its highest, this is the least one can say. Who is to blame? Did the market expect investors to fully erase 2008 and the Lehman collapse driven crisis from their memory? Is it not a natural reaction to anxiously anticipate the reminiscence of this uncomfortable time for asset management now that even the eurozone, the world leading economy, is as fragile as it ever was? We nevertheless do not paint everything in black. Let us remember that from a statistical perspective, global markets cyclically going down for a straight period, as it has been the case towards the end of 2011, are generally followed by a period of potential appreciation. Macro perspectives tell us that 2012 could well become a difficult year for the EMEA region. A recession scenario will be difficult to avoid for the eurozone, this factor will obviously have LIST OF PROJECTS CALLING FOR INVESTMENT FOR PERIOD OF 2008-2015 (Issued in accordance with the Decision No 3512/QD-UBND dated October 3rd, 2008 by the Chairman of the Provincial People’s Committee) N0 Name of projects locations Some criteria (plan- architecture; land, capital ) Forms of investment A- Industry and Construction sectors Project on construction of infrastructure for industrial Groups in Hai Duong province Project on construction of Cay Bridge and road 394 (from Phu Binh to Hung Yen) Industrial Groups in + Area & capital: base on the each group planned and approved by the Provincial People's Committee, the districts investors can self choose the proper projects + Investment mechanism: - Bidding if there more than two investors interested in project - Bid assignment if there is only one investor interested in project Binh Giang district 100 Foreign capital, Joint-venture Domestic capital or other forms investment + 200 m long; bitumen covered road, 7m wide, km BOT long + Capital: from 200 billion VND + Investment mechanism: - Bidding if there more than two investors interested in project - Bid assignment if there is only one investor interested in project or of Project on construction of TUAN MAY Bridge and lanes to the two bridge ends Kim Thanh District + 600 m long Bridge; Concrete Lanes km long BOT + Capital: 200 billion VND + Investment mechanism: - Bidding if there more than two investors interested in project - Bid assignment if there is only one investor interested in project Project on construction of Quang Thanh Bridge Thanh Binh Commune (Thanh District) + Bridge: 400 m long; 2.5 km road leading to bridge BOT +Time for transfer: after 25 years + Investment mechanism:- Bidding if there more than two investors interested in project - Bid assignment if there is only one investor interested in project Project on construction of lengthening the road No 390B From Ba Hang roadcrossing to Tien Tien Commune (Thanh Ha Distric) + Bitumen or concrete road, km long BOT + Investment mechanism: - Bidding if there more than two investors interested in project - Bid assignment if there is only one investor interested in project Project on electrical & + Industrial Zones + Scale: Investment Capital required: electronic production + Industrial Groups: Cao An (Cam From 50 million USD (equivalent to Giang District); Nguyen Giap (Tu 800 billion VND) upwards Ky Dist); Đoan Thuong, Thach Khoi (Gia Loc dist); Thai Hoc (Binh Giang Dist) Project on production + IZs of new construction + Industrial Group material in districts: Kinh Mon, Thanh Ha, Tu Ky, Ninh Giang, Chi Linh Project on building Industrial Group plant producing high Van An I; Chi Minh quality glass Group (Chi Linh dist) Project on industrial + IZs; material production + Industrial clusters 100 Foreign capital, Joint-venture or Domestic capital or other forms of investment + Scale: Investment Capital required: From 20 million 100 Foreign capital, USD (equivalent to 320 billion VND) upwards Joint-venture or Domestic capital + Scale: Investment Capital required: From 100 million 100 % Foreign USD (equivalent to 1,600 billion VND) upwards capital, Joint-venture or Domestic capital + Scale: Investment Capital required: From 10 million 100 % Foreign USD (equivalent to 160 billion VND) upwards capital, Joint-venture or Domestic capital 10 Project on manufacturing and assembling automobiles, equipments and construction & agriculture machinery + Industrial Zones; + Scale: Investment Capital required: From 30 million 100 % Foreign USD (equivalent to 480 billion VND) upwards capital, Joint-venture + Industrial clusters or 100 % Domestic of Thanh Mien, capital Cam Giang, Ninh Giang, Binh Giang Tu ky districts 11 Project on + IZs + Scale: Investment Capital required: From 10 million 100 Foreign capital, 10 manufacturing electric + Industrial Groups USD (equivalent to 160 billion VND) upwards engines and diesel of An Dong engines (Nam Sach; Nguyen Giap ( Tu Ky) 12 13 14 15 Joint-venture or 100% Domestic capital Project on manufacturing and assembling civil & industrial washing machines Project on production of energy saved lighting equipments + IZs; + Industrial Groups chosen by investors + Scale: Investment Capital required: From 10 million 100 Foreign capital, USD (equivalent to 1,600 billion VND) upwards Joint-venture or 100% Domestic capital + IZs; + Industrial Groups chosen by investors Project on manufacturing and assembling digital audio- visual equipments Project on production of informatic and technilogy equipments + IZs; + Industrial Groups chosen by investors + Scale: Investment Capital required: From 10 million 100 Foreign capital, USD (equivalent to 160 billion VND) upwards Joint-venture or 100% Domestic capital + Scale: Investment Capital required: From 30 million 100 Foreign capital, USD (equivalent to 480 billion VND) upwards Joint-venture or 100% Domestic capital + IZs; + Industrial Groups chosen by investors + Scale: Investment Capital required: ...OUTER Top 10 Challenges for Investment Banks 2011 Top 10 Challenges for Investment Banks 2011 Top 10 Challenges for Investment Banks 2011 Copyright © 2010 Accenture All rights reserved. A ccenture, its logo, and High Performance Delivered are trademarks of Accenture. Accenture is a global management consulting, technology services and outsourcing company, with a pproximately 204,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all i ndustries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them b ecome high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com. Top 10 Challenges for Investment Banks 2011 With leverage no longer an easy option to drive returns on equity, and proprietary trading now seen as risky by both regulators and shareholders alike, investment banks are faced with the difficult task of identifying new ways to propel their returns on equity back to something close to pre-crisis levels. In such an uncertain operating environment, assessing risk, making the most of existing revenues, and capitalising on new opportunities have never been more important. Introduction Navigating Through Uncertainty Focusing on the future: Investment banks are increasingly operating in a volatile, resource constrained and highly regulated environment. Rigorous focus on strategic and operational priorities provides the key to high performance. The world economy is emerging from its most severe recession in over 50 years. And the mid-term prognosis is still far from rosy. Recoveries from credit- induced recessions take time. Often twice as long, in fact, as recoveries from recessions sparked by interest rates hiked to contain inflation. Signs of real structural strength are in short supply. In the US, although recovery is underway, underlying fundamentals remain relatively weak. The government’s stimulus package has not delivered as significant a boost as had been hoped. Meanwhile, in Europe, the likelihood of any sustained recovery from the worst downturn in 30 years remains at best uncertain. For the moment, bank lending continues to be constrained by new regulation such as Basel III, as much as by now cautious bankers – just when it is needed most. While banks managed to dramatically improve productivity over the past two years, a new wave of banking innovation and revenue generation has yet to arrive. The most encouraging signs of growth are in the emerging markets – highlighted by the IMF for their exciting catch-up growth potential. In many of these markets, escalating levels of wealth point to accelerating demand for financial services and products – an exciting opportunity for investment banks, provided they can tailor their offerings to suit local requirements. Introduction: Navigating Through uncertainty 1 0 Source: IMF, World Economic Outlook Database, April 2010 8 6 4 2 0 -2 -4 -6 2 0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 US Emerging & Developing economies EU Figure 1: Real GDP Growth (% growth year-on-year) Introduction: Navigating Through Uncertainty No surprise that investment banks are still scrambling to adjust to the realities of this ‘new normal’. In a straitened operating environment where the only certainty is increased regulation, pre-crisis returns on equity (RoE) of, on average, 20 percent look extremely optimistic. As banks seek to identify (and exploit) every revenue opportunity, they need to ensure a rigorous focus on strategic and operational priorities. If they do not, Accountin g Standard ( AS ) 13 133 Accounting for Investment s Contents INTRODUCTION Para g raphs 1-3 Definitions 3 EXPLANATION 4-25 Forms of Investments 4-6 Classification of Investments 7-8 Cost of Investments 9-13 Carrying Amount of Investments 14-19 Current Investments 14-16 Long-term Investments 17-19 Investment Properties 20 Disposal of Investments 21-22 Reclassification of Investments 23-24 Disclosure 25 MAIN PRINCIPLES 26-35 Classification of Investments 26-27 Cost of Investments 28-29 Investment Properties 30 Continued. . /. . 134 Carr y in g Amount of Investments 31-32 Changes in Carrying Amounts of Investments 33 Disposal of Investments 34 Disclosure 35 Accounting for Investments 169 Accounting Standard (AS) 13 Accounting for Investments (Thi s A ccountin g S tanda r d include s p aragraph s s et in bold i t alic type and plain type, which have equal authority. Paragraphs in bold italic typ e indicate the main principles. This Accounting Standard should be read in the context of the General Instructions contained in part A of the A nnexure to the Notification.) Introduction 1. This Standar d deals with accounting fo r investments in the financia l statements of enterprises and related disclosure requirements. 1 2. This Standar d does not deal with: (a) the b ases fo r recognition of interest, dividends an d rentals earne d on investments which are covered by Accounting Standard 9 o n Revenue Recognition; ( b ) o p eratin g o r finance leases; (c) investments of retirement b enefit plans an d life insurance ente r - prises; and (d) mutual funds and venture capital funds and/or the related asse t management companies, banks and public financial institution s formed under a Central or State Government Act or so declare d under the Companies Act, 1956. 1 Shares, debentures and other securities held as stock-in-trade (i.e., fo r sale in the ordinary course of business) are not ‘investments’ as defined in this Standard. However, the manner in which they are accounted for and disclosed in the financial statements is quite similar to that applicable in respect of current investments. Accordingly, the provisions of this Standard, to the extent that they relate to curren t investments, are also applicable to shares, debentures and other securities held a s stock-in-trade, with suitable modifications as specified in this Standard. 136 AS 1 3 Definitions 3. The following terms are used in this Standard with the meanings assigned: 3.1 Investments are assets held by an enterprise for earning incom e by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held a s stock-in-trade are not ‘investments’. 3.2 A current investment is an investment that is by its nature readil y realisable and is intended to be held for not more than one y ea r from the date on which such investment is made. 3.3 A long term investment is an investment other than a current investment. 3.4 An investment property is an investment in land or buildings tha t are not intended to be occupied substantially for use by, or in th e operations of, the investing enterprise. 3.5 Fair value is the amount for which an asset could be exchan g e d between a knowledgeable, willing buyer and a knowled g eable, willing seller in an arm’s length transaction. Under appropriat e circumstances, market value or net realisable value provides a n evidence of fair value. 3.6 Market value is the amount obtainable from the This document and trademark(s) contained herein are protected by law as indicated in a notice appearing later in this work. 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RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. R ® is a registered trademark. © Copyright 2008 RAND Corporation All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2008 by the RAND Corporation 1776 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 4570 Fifth Avenue, Suite 600, Pittsburgh, PA 15213-2665 RAND URL: http://www.rand.org To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: order@rand.org Library of Congress Cataloging-in-Publication Data is available for this publication. ISBN 978-0-8330-4219-4 The research described in this report was prepared for the Office of the Secretary of Defense (OSD) and draws also on research for the Missile Defense Agency (MDA). The research was accomplished in the Acquisition and Technology Policy Center (ATPC) of RAND’s National Defense Research Institute (NDRI), a federally funded research and development center sponsored by the OSD, the Joint Staff, the Unified Combatant Commands, the Department of the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Cayman Islands Assurance and Advisory Services Technical Brief for Investment Funds Accounting, Financial Reporting and Regulatory: Volume 4 –December 2011 © 2011 Deloitte & Touche Page 1 of 26 Technical Brief for Investment Funds Accounting, Financial Reporting & Regulatory Volume 4 – December 2011 In this issue: Introduction Recent Accounting and Financial Reporting Updates – US Generally Accepted Accounting Principles Recent Accounting and Financial Reporting Updates – International Financial Reporting Standards Regulatory Update – US – SEC – private fund registration and other requirements – summary and update Regulatory Update – US – SEC and CFTC – private fund reporting rule (Form PF) Regulatory Update – US – SEC – ‘Volcker Rule’ – banking entities involvement with investment funds Regulatory Update – US – Foreign Account Tax Compliance Act (FATCA) – an update Regulatory Update – Cayman- CIMA - Rule on Regulatory Reporting Standards Regulatory Update – Cayman - CIMA – registration of “master funds” Legal Update – “Weavering“ judgment – directors responsibilities Fund Liquidations – Cayman considerations Links to archive editions of the Tech Brief newsletter Introduction Welcome to Volume 4 of the Technical Brief for Investment Funds (“Tech Brief”), a periodic newsletter developed by the Deloitte Cayman Investment Funds Technical Team. The major accounting standard setting bodies have put out a number of new and proposed amendments in 2011, some of which represent the culmination of projects that have been ongoing for a year or more. In this Tech Brief, we summarize some of the more significant new accounting and financial reporting requirements that investment funds and their managers will have to contend with. A few of these are effective for 2011 year ends, while others will be effective in future years. Lawyers and others involved in the structuring of funds should have some level of awareness of certain of the new and proposed changes to US GAAP and International Financial Reporting Standards, particularly those that introduce or amend criteria for determining whether an entity is deemed to be an investment fund for financial reporting purposes, as well as separate amendments that may result in some investment managers having to consolidate certain of the funds they manage into the financial statements of the investment manager. Managers of some funds may seek changes to fund structures, agreements or governance processes in order to avoid undesirable reporting outcomes in certain circumstances. On the regulatory front, there continues to be developments that significantly affect the investment management industry. Some of these were proposed in prior years and are now, or soon to be, effective, while some were newly proposed in 2011. This Tech Brief summarizes the more significant developments. Cayman Islands Assurance and Advisory Services Technical Brief for Investment Funds Accounting, Financial Reporting and Regulatory: Volume 4 –December 2011 © 2011 Deloitte & Touche Page 2 of 26 Finally, we summarize some considerations in ... + Industrial clusters 100 Foreign capital, Joint-venture or Domestic capital or other forms of investment + Scale: Investment Capital required: From 20 million 100 Foreign capital, USD (equivalent... 100 Foreign capital, Jointventure or Domestic capital investment + Scale: Investment Capital required: From 25 million USD (equivalent to 400 billion VND) upwards + Investment mechanism: + Investment. .. Foreign capital, Joint-venture or Domestic capital investment - Note: The projects mentioned above are just for orientation Other projects in conformity with the plan of socio-economic development