IEIM403230 - Due Diligence: Entity Accounts: Investment Entity with Regularly Traded Securities

Due Diligence: Entity Accounts: Investment Entity with Regularly Traded Securities

A difference between the CRS and FATCA regimes is that for FATCA the definition of Financial Account excludes equity and debt interests in an Investment Entity where those interests are regularly traded on an established securities market.

In this context only, ‘regularly traded’ means:

  1. Trades in each such class of debt or equity interest are effected, other than in de minimis quantities, on an established securities market or markets on at least 60 days during the prior calendar year, and
  2. The aggregate number of debt or equity interests in each such class, that are traded on such market or markets during the prior year, are at least 10 percent of the average number of debt or equity interests outstanding in that class during the prior calendar year.

Under the CRS however equity and debt interests in certain listed Investment Entities, for example Investment Trust Companies (ITC) and Venture Capital Trust (VTC), are in scope.

Where such interests are held in uncertified form through CREST, the CREST members and sponsors will be Reporting Financial Institutions and will be carrying out due diligence and reporting for CRS purposes. In those circumstances an ITC, for example, would not need to report in respect of its uncertified shareholders as that would otherwise lead to duplicated reporting.

Where new accounts arise as a result of interests acquired on the secondary market, a periodic check for new shareholders will be required. The frequency of such checks will depend on the systems and processes that are in place. An annual check may be considered adequate if performed at the year-end if the systems in place are sufficiently robust. However, for operational reasons the registrar may perform the checks at six monthly or more frequent intervals.

For new primary market issues the share application form can be amended to include the self-certification required on new account opening. Any incomplete applications would need to be returned to the applicant. In accordance with existing AML practice, incomplete applications could be accepted and the missing information be requested but if the missing information was not received the shares could be re-allotted or sold to a third party and/or the register of members rectified, provided that the terms and conditions of the Offer allowed this.