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FundForum 2012: Volker Rule and Fatca pose headaches for global businesses

It’s not only the European Union that is piling a plethora of new regulation and compliance requirements on asset management firms. Across the Atlantic, the Volcker Rule, which aims largely to ban proprietary trading by US institutions, is forcing a rethink of business models.

“The Volcker Rule is a huge, 500-page document put together by five separate agencies,” commented Anne Doherty, market manager for EMEA-based complex global accounts at J.P. Morgan Worldwide Securities Services.
Speaking at a panel session dealing with US regulation, Doherty said: “Anything regulated outside the US will be deemed to be proprietary trading. There will be severe limitations for our asset management arm and custodian bank.”
The rule’s extraterritorial application will bar covered entities, including non-US banks with a US presence, from investing in or sponsoring many types of fund.
“The only exemption is mutual funds,” said Florence Fontan, head of public affairs at BNP Paribas Security Services. “Financial institutions will therefore be restricted from holding more than 3 per cent of their assets in Ucits.”
Fatca, the Foreign Account Tax Compliance Act, will be another major hurdle for foreign financial institutions that invest in the US, according to KPMG partner Rachel Hanger. Institutions must sign up to FATCA – which aims to stop US taxpayers avoiding tax by investing offshore – by June 2013, even though detailed rules have yet to be finalised.
“Firms need to map changes in the rules to the business distribution model,” Hanger said. “There’s also a cost issue because of their sheer complexity. Will that drive different distribution models?”
Federated Investors, which has USD370bn under management, is moving quickly to achieve compliance. “We’re working with service providers, legal partners and compliance to ensure we know our clients,” said corporate counsel Greg Dulski.
Even if a fund and its manager are Fatca-compliant, the custodian needs to be too. “The entire chain has to be compliant,” Fontan said.
Non-compliant foreign institutions face a 30 per cent withholding on the US-source income, for instance revenue from US equities and bonds. “We have to help our clients,” Doherty said. “This isn’t just about service providers being compliant, but fund managers and distributors as well.”
According to Martin Dobbins, a senior vice-president at State Street in Luxembourg, the various inter-governmental agreements the US is negotiating will complicate matters further. “There are 28 different categories, and overlaying them onto IGAs make things very challenging,” he said.
Even an Irish fund investing solely in Japanese assets with Japanese investors, with no exposure to the US, would be considered an affiliated group and have to register. “Nobody wants the job of responsible officer,” said Dobbins half-jokingly, when a typical bank might have 200 separate structures, “one-third of which might be compliant”.

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