Anna Pinedo:
I'm going to go ahead and turn it over to Ely to introduce himself, to introduce vestr, and to introduce his colleague, Stefan.
Ely Tolen:
Hi, everyone. Thank you, Anna, for the introduction.
My name is Ely Tolen, Senior Sales Executive at vestr AG. Really quick, vestr is a Swiss firm based in Zug, and we offer a comprehensive product management tool.
This tool handles everything from portfolio management and portfolio rebalancing to investor reporting and audit trails.
I'd also like to introduce my colleague, Stefan, who just joined us. Stefan, if you'd like to introduce yourself.
Stefan Wagner:
Yeah, thank you for being on the call. I'm Stefan Wagner. I'm the Head of Business Development at vestr. I've been with the firm now for nearly five years, and I'm looking forward to this conversation and webinar today.
Ely Tolen:
Fantastic. So, I think we can get started. If we can go over to the first slide there. You can go to the next one. Super.
So, today we'll be going over two asset classes which we have seen significant growth in Europe and also increasing interest among some of our users, namely, Actively Managed Certificates (AMCs) and Separately Managed Accounts (SMAs).
Let's get started with AMCs, or Actively Managed Certificates. Actively Managed Certificates (AMCs) can be defined as Structured Products whose underlying strategy and the components of which are rebalanced or adjusted over their term, and also at the discretion of an Asset Manager or Portfolio Manager.
In short, they allow the Asset Manager to run an entire portfolio as a single instrument while also maintaining the liquidity and transparency of a traditional exchange-traded security. Important to note here that Actively Managed Certificates (AMCs) have many labels, such as Exchange Traded Notes, Exchange Traded Products, Strategic Index Certificates, and that's just to name a few. You can see on the slide here, we've listed some of those for you.
Next slide, please.
Where have we seen some of the interest, or where is this growth coming from, within the Actively Managed Certificate (AMC) space? Well, a lot of that has to do with the adaptability and the cost-effectiveness within dynamic investment strategies. With Actively Managed Certificates (AMCs), you're able to link traditional securities such as bonds and equities, as well as non-bankable assets such as real estate or collectibles, and you can do that all within predefined index rules. You could set those rules based on credit ratings, certain jurisdictions, or what have you, and also on the performance.
A little bit from the regulatory perspective, we mentioned they're classified as Structured Products, but more specifically as debt instruments, and they can be issued both publicly and privately. To launch such a program, typically you need to have an offering document, a final term sheet, a program document, and some fact sheets or some other product supplements need to be included. Hopefully, we'll hear a bit more in a bit about some of the cross-border considerations for Actively Managed Certificates (AMCs) in the US, as these products are mostly currently in Switzerland, Luxembourg, and Ireland, or issued out of those jurisdictions.
But, nevertheless, another key aspect to the growth that we've seen is the time to market. So, Actively Managed Certificates (AMCs) can be typically issued within two to three weeks, as opposed to for ETFs, it would be like two to three months. So, that's a brief overview of Actively Managed Certificates (AMCs) as a whole. I'd like to pass on now to Stefan, who would show you a few numbers as to how this market has been growing and some of the trends.
Stefan Wagner:
Okay, so I mean the markets, the interesting bit about this product is probably because it has such a fast time to market, you also need much smaller AUM to start something. I mean, our clients, to give you an idea, now launch some of these products with only 1 million AUM, and probably three-four years ago, it was still at five, but in comparison to a mutual fund, that's significantly below.
So, you can start building your track records, but we see more and more markets opening up to that one. While this was probably initially mainly only used in Switzerland and surrounding countries, you find it extensively now in Singapore, South Africa, the Middle East, and even Italy, which is historically always a bit slow when it comes to structured products.
These Actively Managed Certificates (AMCs), as I will get into later, but you know, these Actively Managed Certificates (AMCs) can be issued either by, let's say, banks of their own balance sheet with their own issuance, or more and more we're seeing Special Purpose Vehicles (SPVs) being used to do this, particularly to convert non-bankable assets like hotels, even collectible cars. We even have Actively Managed Certificates (AMCs) on the platforms that have jumping horses in it, you know, who get trained and 18 months later get sold, and that's a thing.
And what these securitization vehicles now do also, which used to be historically purely private placement out of Ireland in particular, Luxembourg is that they start listing them so they also become available for public distribution. So the JSE has listed such products, Milan, with market making, so it's not an MTF, it's proper market making.
The other thing that we're seeing more and more, historically, that was just let's call it a synthetic basket or a basket of underlyings you got access to, but more and more converting these strategies into indices. And I think that is partly because these indices are more and more allowed to be complex regarding the rules of calculations. Partly also is that because many of these indices now allow artificial intelligence in their index calculation, in the reasoning that happens why a certain underlying gets picked or reduced out of the index.
Basically, everybody often asks us how big is actually that market, and it's probably approximately 1.5 trillion in AUM outstanding, but it's booked mainly in Asia and Europe. That doesn't mean the clients are all in there because often, you know, the issue might be in London, or he might be in Luxembourg, he might be in Ireland, but the client might be in Latin America, but the booking of the trade actually might happen in, for example, Switzerland. So, it's always three, often three jurisdictions often involved in it, and we sort of find there's two different types of styles, what I would call the fund style, that is basically behaving like a fund where you invest in the basket. If a new cash flow inflow comes in, it will be, you know, it's up to the investment manager to determine how they want to deploy that cash versus a certificate style, which is basically an index. If a new inflow comes in, it gets equally, you know, the same way distributed as the current weights.
What we see used to be more and more popular but is less popular at this point in time is to have leverage inside the product. Excluding the riches, often you find a lot of derivatives, and the reason why you probably haven't seen much of it is because the majority of all these products are privately placed, at least 95%, if not more. But the trend is going that way, and the other one is that what is interesting is that probably one-third of all products that at least we have on our platform include structured products in it, again in the sense like a bonus certificate or some other form of securitized derivative. So, everybody asked, so what are the typical underlying asset classes in these products? And probably nearly 50% as you can see is purely stocks only in a sense, and even if you then add that would add just stocks and ETFs, you go way more than 50%. And if you do normal mutual funds as well, you probably, that's 70%. And then anything else after this is probably, you know, little add-ons like options and futures, but nearly, you can nearly with all these four, if you would only provide that, you can cover pretty much 70, nearly two-thirds of the market.
Thank you. So, the two main players in this, as I, you probably heard me talking about a little bit, is one is the typical on-balance-sheet issuers, either investment banks or private banks, and often they already have a structured node program that issues structured products, and you find them obviously because they either have a quantitative investment strategy or an existing delta one or prime brokerage business. For them, then leveraging into an Actively Managed Certificate (AMC) business is very easy. It mainly comes then down to how do they handle all the data points that happen and the in and out flows, rebalancing, and everything else. That's sort of where vestr comes into it. But that's the typical things, a lot of the Swiss banks obviously do it, but you find them also in the international big global banks sitting in London and New York.
And then the other one, clients, sort of how we distinguish, is the off-balance-sheet issuers, and that's sort of the Special Purpose Vehicles (SPVs), the securitization vehicles, and in jurisdictions where you sort of the concept of bankruptcy remote structure. So, either Luxembourg and Ireland or Guernsey or Jersey, where you have these cell companies, and there you often find more products that are either non-bankable assets or trying to give access to crypto or very high-frequency trading strategy that they call the on-balance-sheet issues, the investment bank, and private banks are not willing to give them access. So, they then use like brokers like Interactive Brokers who have a API to trade via with, and that's how those we distinguish between the two types of participants in that market.
Thank you.
Ely Tolen:
Super, thanks so much for that, Stefan.
So, moving on to the second asset class, as we mentioned earlier, we have Separately Managed Accounts (SMAs). These products, in many ways, have some overlap with how they're structured with Actively Managed Certificates (AMCs), but with a few key differences.
So, a Separately Managed Account is a personalized investment portfolio that is usually bespoke to the investor's needs and it's also managed by a professional portfolio manager or Asset Manager who can adhere to the requirements and parameters set by the investor, and then try to create the best portfolio for them as possible.
Again, similar to Actively Managed Certificates (AMCs), but also with ETFs and mutual funds, within an Separately Managed Accounts (SMAs) you have a diversified basket of stocks, bonds, and other financial instruments. However, here the key difference comes in that within an Separately Managed Accounts (SMAs) you are the owner of those underlyings. As opposed to with a fund, or even with an Actively Managed Certificate (AMC) as we mentioned, which is classified as a debt instrument, you know you are receiving exposure to the fluctuations in the market of those underlyings but you don't own any of them, whereas with an Separately Managed Account (SMA), you absolutely do. This also differs from other pooled vehicles in that everything goes into a single unique account. You're not sharing that account with anyone else, as the name suggests – Separately Managed Accounts.
This comes with a few advantages. First of all, the investor has quite a bit of control as to what goes into the underlying, so they could align with whatever ESG requirements they have. For example, they could set restrictions saying they don't want exposure to any underlyings that have poor ecological ratings, and they could also do it by industry or by credit rating, or even the maturity of the underlying.
They could manage that together with their portfolio manager, and then again still take advantage of the work of professional portfolio managers and advisors to optimize that portfolio as best as possible. In addition, you have all of the transparency that you would expect with mutual funds, ETFs, and other exchange-traded products. You have access to all the real-time account balances because you own them, you get regular performance, transaction reports, and also clearly defined fees and costs.
Another big element here, and why we've seen quite a few investors interested in such an asset, is because of the tax gain and loss harvesting. Again, as you are the owner of all the underlyings, that becomes quite a bit easier to manage in comparison to if you were with a debt instrument or something like that. So, that's just a very broad overview of Separately Managed Accounts (SMAs). Stefan, do you have anything else you'd like to add to that?
Stefan Wagner:
Yeah, I mean, some people often see the Actively Managed Certificate (AMC) as just a way of securitizing a Segregated Managed Account or a Separately Managed Account. That's often the case, and because you can do them in quite a Separately Managed Account (SMA)ll size, you can even, you know, if you have a million, you can set up even an Actively Managed Certificate (AMC) dedicated just for one client.
Ely Tolen:
And I think from a market perspective, Separately Managed Accounts (SMAs) are targeted to investors of, I wouldn't say ultra-high net worth, but more kind of somewhere in the middle, just high net worth individuals, that have a little bit more risk appetite but maybe also are looking for more diversified portfolios. So that certainly works for them.
Fantastic. So perhaps from here, we can hand over to our friends at the Mayor Brown and understand some of the regulatory aspects of these two asset classes in the United States and some other interesting insights as well.
Anna Pinedo:
Well, actually, we're going to talk a little bit about Europe before we wander over to the US.
Patrick Scholl:
Super, yes. Hello, I'm Patrick, a partner at Mayor Brown located in Frankfurt, Germany. I will accompany the introduction by our colleagues from vestr from a legal perspective, or from a European Union perspective in particular.
First of all, let me introduce, from our perspective, anActively Managed Certificate (AMC). When I talk about Actively Managed Certificates (AMCs), it's a structured product, a structured product with an investment strategy. So, it's a security. How this finally will be established and implemented in practice, there are many legal ways. You either can have an on-balance-sheet issuance, so you have a bank, for example, that is a frequent structured products issuer, and they, in addition to their normal structured product program, issue certificates that are linked to a strategy.
On the other hand, as already explained, there can be issuance vehicles in jurisdictions where we have issuance vehicles. This means finally you have to build and set up a Special Purpose Vehicle in line with the laws there, and then create the instruments and maybe segregated pools in order to ensure that they are bankruptcy remote, which is a big topic finally when you issue the Actively Managed Certificates (AMCs) out of Special Purpose Vehicles.
Many jurisdictions in Europe, for example, offer this kind of segregation mechanism. The final issuance structure, not so popular in all European countries, is a kind of issuer fiduciary structure. In the fiduciary structure, we have a national insolvency law that enables as part of the issue to create segregated pools so that these pools are on balance sheet but they're segregated from the insolvency estate once the issuer goes bankrupt.
So, these are the legal structures we see.
The on-balance-sheet structures are more straightforward. You have a security, it is likely cleared at the clearing system, it can be traded, it can even be listed. With a Special Purpose Vehicle, you can also have cleared and listed securities, but you will always have to have all the infrastructure and surrounding that Special Purpose Vehicle (SPV) so that it can work. So you need agreements in place and everything like that, so there's an administrator or manager managing finally the SPV.
I just want to frame what is then relevant from a European law when it comes to regulation because what I can already say now, there's no clear-cut solution, given that Actively Managed Certificates (AMCs) have different structures. Even though we have in Europe harmonized overall legal framework in capital markets, we still have national legislators, and in particular, if structured products are focused, there are different views of legislators and supervising authorities on whether they're comfortable or not with the product. Definitely, oversight that market and look if there are anything that could be problematic from an MIFID perspective or from a securities trading perspective could be problematic from their perspective in order to protect investors.
So I'm now just guiding you through the relevant regulations that you have to think about when doing Actively Managed Certificates (AMCs) and what we as lawyers then finally test in order to ensure that we are within or outside of regulation and what this means as a consequence thereof.
First of all, as we have a security, it can be a requirement to publish a prospectus, particularly if this is also focused on if you want to issue these Actively Managed Certificates (AMCs) to potential retail investors. You could, in that case, trigger prospectus requirement and under the prospectus regulation, you have to comply with minimum content requirements.
For products that compile a strategy, it's quite complex because you need to ensure that all the relevant aspects of the strategy are set out in the prospectus. That's quite a difficult task sometimes because sometimes there's also a lot of discretion involved and if a lot of discretion is involved, then the question is how you transport a discretion and make investors comfortable with the underlying strategy. If the retail investor is involved, even though it's not a public offer, you can become subject to the PRIIPs regulation and have to prepare a PRIIPs document for that retail investor, even if it's a very rich one.
So, this is also a regulation to keep in mind when distributing products. We have in Europe the product governance rules under MiFID, so for example, there is the test whether the suitability of the target market is given, particularly if retail investors are targeted or high net worth individuals.
The other perspective of the product governance rules are the product intervention measures. So, if a product would be seen by a regulator as being maybe too dangerous for investors or maybe there are other topics that they see that the strategy could be too risky or could maybe not be fair, there could be some investor protection measures on the side of the regulator, and they could even ban a product. That's always to keep in mind when doing structured products based on a strategy.
Next slide. Given that I talked about strategy, there are two possibilities for how to build in the strategy into a structured product. Either you create an external index, and this is then the reference of the product, or you can even include the strategy directly into the terms of the product. In both cases, the Benchmark Regulation can come into play, because the strategy and the rules of it can be used in a financial instrument by a supervisory authority, in which case it could be created as an index. If it is an index, then you have to comply with the Benchmark Regulation, particularly ensuring that the index or the administrator must be registered in the ESMA register.
The benchmark regulation applies to the European Union administrators so for third-country benchmark administrators, like if the administrator is in Switzerland. At a certain point in time, this Benchmark Regulation could kick in for third-party index providers.There’s still not that clean cut solution whether instruments of the security that implement the strategy directly can be considered as an index or not. We've had discussions with regulators, and I can tell you it might be easily also within the definition of an index. Then, the security as such implementing the strategy in its terms could be regarded as an index for the purposes of the benchmark regulation.
This needs to be very carefully analyzed if the strategy is directly implemented in the product. Then, given all the management aspects, we have to differentiate Actively Managed Certificates (AMCs) from funds and from the regulations on funds. Structured products as such are not subject to the funds regulation, but there are material definitions of what creates a fund under the European Union regulations, also with regard to the distribution of the products or the prospectus requirements, etc. So there's a separate legal regime in the European Union on funds, and then if an issuing structure for example, like a Special Purpose Vehicle, is used, given that there's a strategy involved, we have to differentiate from a fund and do a careful analysis of the qualification things that create a fund compared to a structured product. It's very decisive because you want to either fall into the regulation of funds or fall into the regulation of securities.
And finally, the last thing I want to say is liabilities, they're always involved in the issuance of structured products. Once there's a prospectus involved, you could be subject to prospectus liabilities, particularly dominating factor with regard to strategies if they create a lot of discretion because investors then look at what has been disclosed in the prospectus and whether that created a suitable basis for the investment decision or whether there was not enough information for them to understand what the product is about.
And finally selling rules are also subject to national laws, but it's also the question of whether the product is sold to a suitable investor or not.
Anna Pinedo:
So, Patrick, before we go on to talk about the US, what about novel assets or asset classes or novel strategies, like crypto or artificial intelligence-related indices? Are there special rules or concerns?
Patrick Scholl:
We see the development of new asset classes, and the rules are, from the regulatory perspective, the same, whether it's from the ones I just outlined. The only difference is the suitability perspective, for example, or whether there are certain national legislators that don't like crypto assets as an underlying. Some are more accommodating of crypto assets, for example.
And then, where other strategies like artificial intelligence come into play, it's also a question of whether regulators like this from an investor protection perspective.
It really depends on the investors that are targeted and whether it is a product that is finally no longer controllable by an investor, and then could be seen as something that is so risky that it maybe could prompt a regulator to not like it. There's always the possibility to ban products if they are distributed into the European Union, which is why it needs to be carefully analyzed how artificial intelligence is implemented for the benefit of the investors, and it's finally a question of risks versus chances.
Anna Pinedo:
Okay, so the same interest that we are discussing... Oh, okay, I'm sorry, there's a question. We'll answer this for Europe, and then the answer may be a little different for the U.S. The question is: Where does the liability lie for investor suitability? Is it on the distributor or the investor's bank, who's supposed to check its client eligibility and the category?
Patrick Scholl:
Yeah, it's mainly and likely on the distributor's side. They are the ones required by law to conduct the suitability analysis. We do a lot of sustainability analysis, so it's their decision. They have direct contact with the investors. It must not be with the issuer, but the issuer could nevertheless be liable for any kind of documentation, etc., that has been prepared in connection with this.
And what we also cannot exclude is some kind of back-to-back liability between distributor and issuer. This depends on who takes risk and whether, for example, the distributor has been providing sufficient information to present the product correctly to the investor. So, it doesn't mean that if the distributor is liable initially, there couldn't be any kind of back-to-back liabilities.
Anna Pinedo:
Okay, so as I was saying, the same level of interest that Ely was talking about at the outset of the presentation, interest in actively managed strategies, that the interest that is present in the United States and in Latin America, and that leads to the last bit of our discussion, which is how some of these products can be sold to investors outside of Europe, whether in the United States or in other jurisdictions.
Marla is going to get us started on that.
Marla Matusic:
For Separately Managed Accounts, legally speaking, a slightly different footing than the European view. The accounts are doing a lot of work for us here; it's not a security, meaning you don't have to worry about finding a securities exemption, it's an account. Importantly, it's also not, for 40 Act purposes, a fund.
What you do need to worry about in connection with the Separately Managed Account (SMA), however, is advisor act concerns, which Anna will speak to a little bit more down the road.
Actively Managed Certificates (AMCs), on the other hand, while similarly not a fund, are securities, debt securities either issued by a financial institution or an SPV, depending on how the particular issuance is structured.. As securities, you do need to worry about exemptions under both the 33 Act and the 34 Act. So under the 33 Act, as we're all very familiar with, you need to either register securities or find an exemption.
Actively Managed Certificates (AMCs) because of the nature of the market and the nature of product, are typically sold pursuant to an exemption, we have our usual suspects: either Reg D, 144A, or Reg S. If you're looking to sell pursuant to Regulation D, typically we're talking about setting up 506, setting up a transaction pursuant to 506(b), including the restrictions on general solicitation and general advertising. In connection with that, you also have to worry about accredited investors. If your transaction is limited to accredited investors, which is customary for the Actively Managed Certificates (AMCs), you don't have the limited investors. Both of these requirements - their advertising and the restriction to accredited investors - are usually set forth in the distribution agreement for compliance. In connection with whoever is distributing, you would also typically have deemed reps or some sort of representation from them as to their accredited investor status.
The other thing to consider with setting up an issuance pursuant to Reg D is that these will be restricted securities. Typically, in the transactions we've seen, there's some sort of issuer or distributor approval of any resales, where you would monitor this, but Reg D securities are restricted for resale unless pursuant to Rule 144. Finally, the other thing to consider is that you will need to file a Form D following the completion of any Reg D offering, and you also need to consider any potential Blue Sky considerations.
Finally, any bad actor. So, Reg D offerings require that the issuer or any placement agent conduct due diligence to ensure none of the parties involved in the offering are bad actors who violated certain U.S. securities laws. This requires a factual inquiry, typically handled via reference letters or some sort of public database check, or a combination thereof.
Moving on to other alternatives.
If you want to move to the slide on Rule 144A, the other option is Rule 144A to quibs. This is a resale exemption, so you would still need to consider 42 for the initial placement, the initial sale. The main thing to consider here, that could be problematic depending on how you've structured your issuance for the Actively Managed Certificates (AMCs), is that Rule 144A does require certain financial information of the issuer to be available, including financial statements.
And then finally, we have Regulation S. So, this is, as many of us know, an exemption for offshore sales that are made with no efforts in the United States. Where we're seeing this in connection with Actively Managed Certificates (AMCs) would be if you're using some U.S. touchpoints to sell into Latin America or other areas. Just a note, similar to Reg D and 144A, these subjects could be restricted after issuance - just something to keep in mind.
And now that we've covered the Securities Act, time to move on to the Exchange Act. So, U.S. broker-dealers, you're already registered, you're used to these requirements. But importantly, under the 34 Act, any foreign broker-dealer who is engaging in any conduct in the U.S. would need to either register as a broker-dealer or act solely pursuant to an exemption from registration. Typically here, we're thinking you would be acting pursuant to one of the 15a-6 exemptions. So, those exemptions include unsolicited transaction actions, transactions to certain institutional parties, chaperoning arrangements, people transacting in the U.S., etc.
So, I think the first one to discuss would be the unsolicited transactions. Foreign persons are allowed to conduct very limited broker activities without registering if there's been no solicitation. The term "solicitation" is not specifically defined but has been variously regulatory guidance over the years. Importantly, solicitation is a very broad definition; it can include efforts to induce a single transaction or an ongoing business relationship, or even just general activities to publicize your broker-dealer business in the United States. And importantly, frequent transactions are also considered indicative of solicitation.
Given how broad solicitation can be interpreted, this is a bit of the exemption of last resort. Typically, if at all possible, you would rely on one of the other 15a-6 exemptions. Those are either the status of the purchaser exemptions or the chaperoning exemptions. So, under 15a-6(a)(4), you have the exemption for certain institutional purchasers or certain foreign persons. Foreign persons being non-U.S. citizens, nonpermanent residents that you have an existing bona fide relationship with, who are just transiently in the U.S., or you know, you also have certain limited activities for U.S. persons who are, for all substantive purposes, outside of the United States. You're not targeting them; they're just existing in a foreign country, and you have a relationship with them that way.
Then, the final option would be the chaperoning arrangements, meaning the dealers selling to an institutional client who is chaperoned by a U.S. broker-dealer. Typically, the way in which you'd see this in this context would be for sales to Registered Advisors (RAs) that are placing in Individually Discretionary (IND) accounts. Now that we've done 33 and 34, I think it's time for the 40 Act and the Advisor Act, and I will turn over to Anna.
Anna Pinedo:
Okay, folks seem to have woken up, so we've got lots of good questions. I'm going to answer the questions first because they're fun. If an SPV structure is used and a single investor buys the Actively Managed Certificate (AMC), who is considered to be the distributor? Assume no bank is involved, just an investment manager and an investor.
Okay, so this is like hypos in law school, which I love. In this case, you could have a situation where you have an issuer-dealer in the United States. The issuer itself would be potentially considered the dealer and would be considered itself to be making the offer and soliciting, so that would be your answer. An issuer-dealer would generally need to limit its activities in terms of soliciting, but if you have a single investor, then you should be able to fit within the issuer-dealer exemption from broker-dealer requirements, so that's what we would say to that one.
The next one: Can U.S. brokers make available non-registered, so exempt, European Actively Managed Certificates (AMCs) to any type of U.S. investors? So, I think Marla kind of answered that. If you have an Actively Managed Certificate (AMC) that is being actively offered in Europe and it complies with the regulatory scheme that Patrick talked about, it hasn't been registered in any fashion with the Securities and Exchange Commission, and there's currently really no way to register Actively Managed Certificates (AMCs) in the U.S., how would you sell it in the United States? So, you would rely on one of the exemptions that Marla talked about, sell to Qualified Institutional Buyers (QIBs), and probably to Qualified Institutional Buyers (QIBs) who are qualified purchasers if it's not an on-balance-sheet vehicle, so if it's not being sold directly by a bank, if it's being sold through a Special Purpose Vehicle (SPV). It's easier if it's being sold directly on-balance-sheet.
Then we have the next one, which is how does this fit in, generally, it's a long question, but how does this fit in with Volcker, and is this sponsoring a fund as per the Volcker rules, and so on? So, a couple of questions here, two parts. Right, so if this is a separate account, it's an account, a bank account, so not a fund or a covered fund under Volcker. If we have an Actively Managed Certificate (AMC) that's on-balance-sheet, then it's directly offered by the issuer, namely a financial institution or a bank, so no special purpose entity, so it wouldn't be a fund, and you wouldn't indirectly consider it a covered fund.
If it's offered by a special purpose entity, sure, you have to look at whether it would be a covered fund, but generally, you wouldn't think of it as a Volcker covered fund. If the bank or bank holding company or banking entity for Volcker purposes doesn't have an ownership interest, and in most cases the way that these are structured, they would not have an ownership interest, but obviously, a great question. So, feel free to keep these coming in our last few minutes.
So, on the 40 Act side, this comes up in the case of Actively Managed Certificates (AMCs), not in the separate account context, because we don't have to get there with the separate account. So, in the Actively Managed Certificate (AMC) context, this comes up, and it may seem curious to non-U.S. folks not accustomed to dealing with the 40 Act. We would have to think about this in both cases. So, we have to think about this when we have an on-balance-sheet Actively Managed Certificate (AMC), and we have to think about it more seriously when we have an Actively Managed Certificate (AMC) that's issued through a Special Purpose Vehicle (SPV).
So, the 40 Act is intended to regulate passive investment vehicles, and we always want to avoid being regulated, or having an entity that's regulated as an investment company, because it's a fairly rigorous regulatory framework. While Actively Managed Certificates (AMCs) in many respects and Separately Managed Accounts (SMAs) in many respects mimic many of the advantages of fund-like products, they are quite intentionally not funds and not subject to fund regulation.
Next page, if you have an Actively Managed Certificate (AMC) that's issued through a special purpose entity, you would want to consider what the 40 Act exemption is. By and large, you would, as I mentioned, limit your sales to Qualified Institutional Buyers (QIBs) who are also qualified purchasers. By limiting your sales to Qualified Institutional Buyers (QIBs) who are qualified purchasers, you could rely on the 40 Act exemption available for sales only to qualified purchasers and then, impose a super Reg S prohibition, so no sales, even past the usual seasoning period, to persons who are not qualified purchasers. That would be one approach to it.
Also, consider instances where you have an on-balance sheet product where you are providing a Delta One type of return. This may seem counterintuitive because you don't have a separate passive investment vehicle or separate legal entity. However, the analysis is similar to when you have a Delta One structured note. Here the theory is that from time to time the Securities and Exchange Commission (SEC) has sometimes viewed Delta One products, particularly the underlying when it's a basket of stocks or a narrow-based index, and this is where the underlying aren’t Securities. You don't have to worry if the assets are something other than securities, although securities for the '40 Act are very broadly defined. You have to consider whether by providing Delta One exposure, you've created a de facto investment company. So that requires its own very detailed analysis with counsel, whether you have, or the Securities and Exchange Commission would think of, an on-balance sheet product with Delta One exposure as a de facto investment company. There are a number of cases on this, as well as no-action letters that provide some guideposts regarding the factors that one would take into account in coming to a reasoned conclusion on this point.
So, if we go to the Advisers Act, the next slide. The Advisers Act comes up in both contexts: the Separately Managed Account (SMA) context and the Actively Managed Certificate (AMC) context. The Separately Managed Account (SMA) product is an account, as we said, so not a security, a bank account, or a managed account, depending on how it's structured. So, it does require in the U.S. the participation of a U.S. registered investment adviser. That's a given in the context of an Actively Managed Certificate (AMC) product in the United States you do have to think about whether you're tripping Advisers Act issues. Does the mere offering of an Actively Managed Certificate (AMC) to persons in the United States trigger any kind of registration requirement, or does it mean that the sponsor of the Actively Managed Certificate (AMC), the person involved in distributing the Actively Managed Certificate (AMC), the index provider, or the person doing the selection of the securities or the stocks in the portfolio, are they holding themselves out as engaged in the business of providing advice such that they would be required in the United States to register under the Advisers Act? So that's something to consider and would maybe prompt whether you would want to sell an Actively Managed Certificate (AMC) into the United States, even to QIBs, or whether you would want to entirely avoid the United States and perhaps limit Actively Managed Certificate (AMC) sales, for example, to only dealers in the United States in reliance on Reg S.
So, to dealers in the United States who are going to rely on Reg S and then sell in reliance on Reg S, let's say, to Latin America, where there's significant interest in managed products like Actively Managed Certificates (AMCs) with active portfolios.
So, if we go to the next slide on the Advisers Act. As we point out, if you do only Reg S transactions, it's possible that you could come to a conclusion, depending on the facts and circumstances, that no advice is being given to U.S. persons. It's also possible to find other alternative approaches, again, very fact dependent. So, we point out a number of other alternatives. Each would be subject to interpretation and would be subject to how these products are being offered and sold, and the participants that are involved. So, for example, whether their principal activities are those of a broker-dealer and there are really no advisory services, and any advisory service is solely incidental to the distribution services. So, the principal services that are being conducted in the United States, are merely broker-dealer or distribution services, and there's no special compensation that's being paid for the advisory function. Maybe there's no fee that's allocated or allocable to the advice component. There are other exemptions that are available under the Advisers Act, so for private funds and for foreign private advisers, those might be available. Again, they're very fact specific, but all of these would require a discussion, and maybe we'll leave it at that for now.
I think we have some information at the end about vestr, and we will let our friends Ely and Stefan maybe have a last word.
Ely Tolen:
Thank you so much for that, Anna.
I'm not sure, Melissa, do we still have those last two slides, or can we bring them up? Just give her a second. But while we're waiting on Melissa here, just a quick thank you to Anna, Patrick, and Marla for the fantastic overview, very insightful. And I'm sure we have quite a few of our users here today that are very thankful for the information.
A quick, slightly more detailed overview of vestr. As I mentioned in the very beginning, we offer an easy-to-integrate platform that digitizes the life cycle management of your actively managed investment products. Some of these products could be, or often are, Actively Managed Certificates (AMCs) and Separately Managed Accounts (SMAs), but that also includes dynamic or actively managed ETFs, and other exchange-traded products, etc. And the platform can handle everything from portfolio rebalancing, investment reporting, audit trails, fee setting, etc.
Next slide, please. So, some of the key benefits that the vestr platform provides. You can manage your investment products from pretty much anywhere. You have instant feedback between your issuer and the external asset manager, customizable reports. We really help and focus on helping our clients scale their businesses. So, you can have an unlimited number of products on our platform. You can manage quite an extensive degree of complexity within the product itself. There are no fixed costs, and we also align our fee structure with your business model. From a regulatory perspective, we again assist with audit trails, tax reporting, transparency. We have a white-label reporting system so you could essentially create your own template and have the reporting on a daily basis per product, to distribute for audit purposes or also to your investors.
And we also optimize operations for the users, where you can correct any product adjustments, moving away hopefully from some erroneous macros in Excel. But we also help execute trades in a timely fashion and correct any fee calculations. vestr has more than 20 clients over many jurisdictions in Europe, Switzerland, Luxembourg, but also in South Africa, the United States, and in the UK.
Stefan, would you like to add anything to that?
Stefan Wagner:
I think you did a great job. The only thing probably to say too is that across these 20 clients that you mentioned, there probably are behind it 500 asset managers that are using the platform. So, pretty sure there are hundreds of users behind it.
Anna Pinedo:
Well, we thank you both very much, and we thank our listeners. So, we hope everyone has a good day, and we will be sending materials shortly.
Thank you very much.
Bye.
Thank you, everyone.
Bye-bye.
Thank you.
Goodbye.
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