Defining and capturing information on the beneficial ownership of investment funds

Policy considerations

This section provides some summary considerations for policymakers and agencies implementing BO disclosure on how investment funds should be treated within BOT regimes. The following measures are recommended in alignment with the Open Ownership Principles for effective implementation of beneficial ownership disclosure. [85] However, further research into this complicated area of BOT reform is still needed. For instance, the relationship between effective BO disclosure for investment funds and PLCs, and the risks and regulations associated with less formalised investment structures such as rotating savings and credit associations, should be better understood.

Definition and thresholds for beneficial ownership of investment funds

The beneficial owners of an investment fund can include any individual (i.e. natural person) who ultimately owns, controls, or benefits from it. A jurisdiction may create a specific definition and disclosure procedure for investment funds, as has been done in Ireland, though it is recommended that this information be accessible via a central BO register. If not, the definition of either the beneficial ownership of legal entities or arrangements can be applied depending upon the legal form of an investment fund, whilst ensuring that all beneficial owners are accurately identified and disclosed to the BO register. In either case, a harmonised definition should exist across legislation to, for example, prevent false-positives when banks use information from a BO register alongside BOI they collect under AML obligations to perform discrepancy reporting. [86]

In the case of investment funds arranged as legal entities, the following key considerations apply:

a) Explicitly including the concept of deriving economic benefit in the legal definition of beneficial ownership of entities to ensure individuals with substantial financial interests in a fund are captured regardless of their level of control.

b) Allowing for the reporting of senior managing officials as beneficial owners of an investment fund to a central register when they exercise control over the fund, and requiring information about fund managers to be captured in most or all cases. However, this should be supplementary to, not reported in place of, complete information on beneficial owners.

c) If a manager is officially licensed and registered with another body, a reference to the location of this information may be adequate in a BO register rather than a full disclosure.

In the case of investment funds that are legal arrangements, all natural persons who are parties to the arrangement can be beneficial owners, e.g. settlors, trustees, protectors, beneficiaries or class of beneficiaries, and natural persons exercising effective control, including the fund manager. Where a legal entity is party to the arrangement, identifying its ultimate beneficial owners should form part of a fund’s BO disclosure.

For both entities and arrangements, any thresholds that are used to determine ownership or benefit in the case of investment funds should be lowered, for example to 5%. Due to their nature and operation, higher thresholds, such as 25% or more, are likely to result in no one being identified and reported as a beneficial owner, including those who may derive substantial economic benefit. Differential or absolute thresholds based on factors such as risk and turnover could also be considered.

Coverage of the beneficial ownership transparency regime and the granting of exemptions to investment funds

Blanket exemptions should not be applied to investment funds, due to the documented risk of their misuse. Moreover, an exemption should not be granted unless reasonable, given an assessment of the sufficiency and effectiveness of existing disclosure and transparency requirements for investment funds, according to a jurisdiction’s policy aims. To ensure the comprehensive coverage of all corporate vehicles that can serve as a legal form for investment funds, and any parties to these funds, countries may implement the following to enhance their BOT regime:

• covering all categories of corporate vehicles, including investment funds, regardless of their legal form, that facilitate the ownership and control of assets within the BO disclosure requirements, unless reasonably exempt;
• if any exemptions are to be granted, justifying them against policy aims, and reassessing them on an ongoing basis; and
• considering relative levels of risk between types of investment funds in creating disclosure requirements, with a particular emphasis on ensuring BO disclosure for private funds. However, the potential displacement of risk from corporate vehicles that are obliged to disclose beneficial ownership to those that are not should also be considered.

When a third party is carrying out oversight of investment funds outside a BO register and publishes relevant information on ownership, control, and benefit, such as a stock exchange, this can serve as a reasonable basis for exemption. Linking to such information should be an essential component of justifying the basis for the exemption. When granting exemption, it is also important to evaluate any challenges that may exist in obtaining the BOI. These challenges could arise from the format or structure of the data or from any limitations on access to the information.

Information to be collected from investment funds

Disclosure requirements for investment funds that are not exempt should align with the purpose of existing requirements for other covered corporate vehicles and be proportionate to policy aims. BOI should be collected from an authorised person or fund manager responsible for making such a disclosure to the BO register.

Whether or not full BOI is available, it is important to accurately capture relationships between investment funds and other entities, as well as between corporate vehicles within an investment fund structure, to gain a picture of the full network of ownership. For example, the Global Legal Entity Identifier System (GLEIS) allows for the capturing of the following fund-entity relationships: [87] umbrella structures, master-feeder, and fund management entities. Applying such data standards globally helps ensure that data is easily interpretable and interoperable across jurisdictions.

Investment funds that are not exempt

For investment funds that are not exempt from the BOT regime, information should be collected in line with existing standards for other legal entities and arrangements, such as name, business address, date of incorporation or formation, and any relevant organisational identifiers. Full information on beneficial owners should be also collected in a structured and machine-readable format, including:

• sufficient details about beneficial owners and corporate vehicles to be able to identify them unambiguously, e.g. full name, date of birth, and reliable identifiers;
• the nature of ownership, control, or economic interest; their extent, including whether the interest is held directly or indirectly; and in the case of trusts or similar legal arrangements, their roles in the trust or arrangement; and
• in the case of indirect interest, the means through which ownership or control is held or benefit is derived.

Exempt investment funds

Although full disclosure might not be required, exempt investment funds should be subject to minimum reporting requirements to ensure that they are identifiable on a BO register. The disclosure by exempt investment funds should include sufficient details to be able to unambiguously identify the investment vehicle. Moreover, exempt funds should be required to confirm their exemption status on a regular basis, for instance annually, and confirm the following information:

• detailed identifying information on an approved person, investment advisor, or a fund manager who is managing, arranging, administering, operating, or promoting an investment fund, including any relevant details under local regulations, such as a registration number;
• the basis on which the investment fund is eligible for exemption from BO disclosure requirements; and
• if an investment fund is exempt on the grounds that it is registered on a recognised stock exchange or other alternative mechanism, details of and an access link to the recognised exchange listing or other source of BOI. [88]

To ensure the adequacy and accuracy of information reported by exempt investment funds, it is also important to ensure the agency responsible for maintaining the BO register has the capacity to:

• record the fact that an exemption has been granted on the basis that the declaring entity is an investment fund with the adequate ownership disclosure requirements; and
• check and, if necessary, reject claims for exemptions based on the grounds provided.

Taking a comprehensive policy approach

Beyond these considerations, BOT should be viewed as one of multiple policy solutions to address the complex question of how to effectively regulate the investment industry. Given its mammoth size and high level of complexity, a comprehensive policy approach is needed to ensure transparency and accountability. Factors such as the involvement of large and growing quantities of cross-border capital flows; interests across a wide variety of actors; divergence in other relevant regulatory frameworks, such as those in place for AML and securities trading; and ever-changing systems of financial secrecy make it essential but challenging to holistically regulate the investment sector.

Examples of other important complementary measures to BOT include requiring that all investment professionals carry out AML practices in line with other financial institutions, such as CDD/KYC checks; ongoing risk assessments of national investment industries; and training for law enforcement on the complexities of private investment funds and the manner in which they can be used to hide illicit assets. [89] BO registers form an integral part of this approach because they enable BO data to be used to achieve a jurisdiction’s policy aims by centralising the information and ensuring it is readily accessible. For example, data can be used by obliged entities as part of their CDD processes, and law enforcement as part of investigations. Effective implementation of BO reforms to account for the specific considerations of investment funds is an essential step towards effective data use for policy impact.

Footnotes

[85] Open Ownership, Open Ownership Principles, 2-4.

[86] For example, see: Markle, Coverage of corporate vehicles in beneficial ownership disclosure regimes, 12.

[87] See: “New LEI data formats: Fund relationships in the Global LEI System”, Global Legal Entity Identifier Foundation, 4 October 2023, https://www.gleif.org/en/newsroom/gleif-podcasts/gleif-explains-new-lei-data-formats-fund-relationships-in-the-global-lei-system; and Legal Entity Identifier Regulatory Oversight Committee (LEI ROC), Policy on Fund Relationships and Guidelines for the registration of Investment Funds in the Global LEI System (s.l.: LEI ROC, 2019), https://www.leiroc.org/publications/gls/roc_20190520-1.pdf.

[88] For more information on the details required about the stock exchange, please see: Chhina and Kiepe, Defining and capturing information on the beneficial ownership of listed companies.

[89] Kumar, Private Investment Funds in Latin America, 26.