Table of Contents

Getting the Deal Through – Fund Management 2018

British Virgin Islands

Cayman Islands

Cyprus

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Norway

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South Africa

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Switzerland

United Kingdom

United States

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Fund Management 2018

Getting the Deal Through is delighted to publish the fourth edition of Fund Management, which is available in print, as an e-book and online at www.gettingthedealthrough.com.

Getting the Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers.

Throughout this edition, and following the unique Getting the Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Hong Kong and Luxembourg.

Getting the Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.gettingthedealthrough.com.

Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers.

Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise.

Publisher

Tom Barnes

tom.barnes@lbresearch.com

Subscriptions

James Spearing

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Senior business development managers

Adam Sargent

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Dan White

dan.white@gettingthedealthrough.com

Published by

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© Law Business Research Ltd 2018

No photocopying without a CLA licence.

First published 2015

Fourth edition

ISBN 978-1-78915-026-1

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. The information provided was verified between April and May 2018. Be advised that this is a developing area.

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British Virgin Islands

Ayana S Hull

Harney Westwood & Riegels

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The provision of fund management to funds by way of business is a regulated activity in the British Virgin Islands (BVI), pursuant to the Securities and Investment Business Act 2010 (as amended) (SIBA). SIBA prohibits any person from carrying on, or holding him or herself out as carrying on, investment business of any kind in or from within the BVI unless he or she holds a licence authorising the carrying on of this type of investment business. The management of investments is regarded as investment business, pursuant to the provisions of SIBA. In the BVI, the primary responsibility for regulating funds, fund managers and promoters of funds rests with the BVI Financial Services Commission (the BVI FSC).

2 Is fund administration regulated in your jurisdiction?

The provision of fund administration services to mutual funds by way of business is an investment activity and therefore a regulated activity in the BVI, pursuant to SIBA.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Five types of funds may be given approval to operate as BVI funds under the BVI’s regulatory regime, namely, the private fund, the professional fund, the public fund, the approved fund and the incubator fund. An application is required to be made to the BVI FSC by each particular entity as specified in SIBA.

Key requirements applying to BVI licensees that are managers and operators of investment funds in the BVI include the following:

• there is a general prohibition against the conduct of unauthorised (without a licence) investment business;

• once licensed by the BVI FSC, a licensee is required to maintain its business in a financially sound condition and maintain adequate capital resources (as prescribed by the BVI FSC);

• a fund manager must have two directors appointed at all times (at least one of whom is an individual);

• the appointment of directors and senior officers of a fund manager must obtain the prior approval of the BVI FSC;

• the disposition or acquisition of significant interests in a fund manager must obtain the prior written approval of the BVI FSC;

• authorisation is required where a fund manager desires to open, maintain or carry on business through a branch or a representative office outside the BVI, or to incorporate, form or acquire a subsidiary;

• a BVI licensee must:

• maintain professional indemnity insurance (in the amount prescribed by the BVI FSC) at all times;

• notify the BVI FSC of any changes to the name of a BVI fund manager within 21 days of the change;

• maintain appropriate financial records to show and explain its transactions and to enable its financial position to be determined with reasonable accuracy;

• ensure that client assets are identified, identifiable, appropriately segregated and accounted and properly protected;

• appoint an authorised representative to act as the main intermediary between the licensee and the BVI FSC;

• appoint an auditor for the purposes of auditing its financial statements and must keep an auditor appointed for this purpose at all times;

• file its audited financial statements within six months of the end of each financial year to which they relate (in accordance with an accounting standard prescribed by SIBA); and

• appoint a compliance officer and maintain compliance procedures commensurate with the Anti-Money Laundering Regulations and Terrorist Financing Code of Practice 2008 (as amended); and

• a BVI licensee may not issue any bearer shares.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

At its core, SIBA provides that no person may, by way of business, in or from within the BVI, carry on an investment activity in relation to an investment without a licence from the BVI FSC (unless one of the safe harbours in SIBA apply). The words ‘in or from within the BVI’, therefore, encompass the territorial scope of the BVI regime. An overseas manager (not domiciled in the BVI) would not generally be subject to the scope of SIBA if it conducts its business purely on a cross-border basis outside the BVI.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

The acquisition of a controlling or non-controlling stake in a fund manager in the BVI is subject to the BVI FSC’s prior written approval. See also question 3.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

No.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Marketing of investment funds in the BVI requires authorisation. No person, including a mutual fund itself, whether in or from within the BVI, can promote a mutual fund unless the fund is governed or exempted by SIBA.

8 What marketing activities require authorisation?

Marketing activities that require authorisation include a person communicating, or causing to be communicated, an invitation or inducement to any other person, or advising or procuring any other person, to become an investor, or offering them to become an investor, in a mutual fund.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The words ‘in or from within the BVI’ encompass the territorial scope of the BVI investment business regime. Subject to certain safe harbours contained in SIBA, although operating from outside the BVI, an overseas entity would still be considered as being ‘in’ the BVI where it solicits BVI persons in order to offer them the services that would constitute investment business to those BVI persons.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

Cross-border business activities that include the services and solicitation of BVI persons in relation to the services, are permitted, in general, only if:

• the BVI person is an excluded person, that is:

• the corporate client or prospect itself has only a nominal link or nexus with the BVI (ie, a registered office or registered agent with no activities taking place in the BVI), and the solicitation is conducted outside the BVI; and

• no documents are received or executed on behalf of the corporate client domiciled in the BVI by any person domiciled or physically based in the BVI other than its duly appointed professional services provider (eg, a registered agent or other equivalent intermediary); or

• the BVI persons are not ‘members of the public’. BVI persons that are not members of the public would not need to fall within the nominal link provisions referred to above in order to be legitimately solicited by an overseas entity. In other words, BVI persons that are not members of the public could be subjected to unrestricted solicitation by such overseas entities.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Intermediaries earning commission payments in relation to their marketing activities into the BVI are also subject to the territorial scope of SIBA and are prohibited from soliciting BVI persons in order to offer them services that would constitute investment business. See also question 9.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

The main legal vehicles used to set up retail funds in the BVI are business companies, international limited partnerships and unit trusts.

Companies that are established to structure retail funds are governed by the BVI Business Companies Act 2004 (as amended). International limited partnerships that are formed to structure retail funds are governed by the BVI Limited Partnership Act 2017. Trusts are governed principally by the BVI Trustee Act 1961 and the Virgin Islands Special Purpose Trusts Act 2003.

13 What are the key laws and other sets of rules that govern retail funds?

Pursuant to SIBA, a retail fund must:

• be registered with the BVI FSC as a public fund;

• register its prospectus with the BVI FSC for approval;

• have a minimum of two directors appointed at all times (only an individual can be appointed as a director of a public fund);

• have a fund manager, a fund administrator and a custodian (unless the custodian is exempt by the BVI FSC) at all times;

• have an auditor appointed for the purposes of auditing its financial statements (and in accordance with an accounting standard prescribed by SIBA);

• file its audited statements within six months of the end of the financial year to which they relate (in accordance with the specifications of SIBA);

• appoint an authorised representative to act as the main intermediary between the licensee and the BVI FSC; and

• comply with the Public Funds Code 2010 on matters of:

• corporate governance;

• its governing policies and procedures;

• conflict of interests;

• segregation and safekeeping of fund property;

• valuation and pricing;

• dealing and managing of customers’ accounts;

• record-keeping;

• investors’ rights;

• reporting obligations to the BVI FSC; and

• its general relationship with the BVI FSC.

Additional requirements include the following:

• each functionary of a public fund must be functionally independent from every other functionary of the fund;

• appointments of directors and functionaries of public funds require the prior written approval of the BVI FSC; and

• the termination of directors, functionaries and authorised representatives of public funds must notify the BVI FSC of such terminations within the time limits specified by SIBA.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes; at present, no security may be offered to the public (ie, the receipt of the offer of such securities by any person in the BVI) in the BVI for purchase or subscription unless it confirms with the provisions of SIBA. A retail fund is required to be registered as a public fund with the BVI FSC and to file a copy of its prospectus with the BVI FSC for approval.

15 Who can market retail funds? To whom can they be marketed?

Provided the marketing of retail funds meets the requirements of SIBA, such funds can be marketed by anyone and to any person in the BVI.

16 Are there any special requirements that apply to managers or operators of retail funds?

There are no key requirements set out in SIBA for managers and operators of retail funds over and above the general prohibition to conduct unauthorised investment business. The requirements of a retail fund as they pertain to managers and operators are set out in questions 13 to 15 and 17.

17 What are the investment and borrowing restrictions on retail funds?

SIBA does not contain restrictions on the borrowing ability of retail funds. However, the Public Funds Code 2010 stipulates that material information (which would include borrowing restrictions), which investors and their professional advisers would reasonably require and expect to be found in the fund prospectus, should be stated therein.

18 What is the tax treatment of retail funds? Are exemptions available?

Retail funds, together with other BVI-formed entities, are not required to pay any income tax under the BVI Income Tax Act (Chapter 206). Further, shareholders do not have to pay any BVI income tax or capital gains tax on payments received from the fund. Provided the fund has no employees in the BVI, it will have no liability for BVI payroll taxes. Capital gains realised with respect to any interests are also exempt from income tax in the BVI.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The portfolio of assets of a retail fund must be held by a custodian (separate and distinct from other functionaries). The custodian is a mandatory functionary required by the FSC (unless exempt). SIBA, the Regulatory Code 2009 and the Public Funds Code 2010 all contain provisions to protect fund assets.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

Aside from the standard regulatory obligations of regulated public funds, a company is required to be registered as a BVI business company at the Registry of Corporate Affairs and to pay its annual fees each year in order to remain in good standing. Each company is required to file and maintain an accurate register of directors with the Registry of Corporate Affairs. Each company is also required to keep the following documents and records at its registered office:

• memorandum and articles of association;

• register of members or a copy of the register of members (where a copy is kept, the registered agent should be notified in writing within 15 days of any change);

• register of directors or a copy of the register of directors (where a copy is kept, the registered agent should be notified in writing within 15 days of any change);

• copies of all notices and other documents filed by the company in the previous 10 years;

• minutes of meetings and resolutions of members and directors; and

• records and underlying documentation of transactions of the company (which allows the financial position of the company to be determined with reasonable accuracy) for the previous five-year period.

21 What are the periodic reporting requirements for retail funds?

Retail funds are subject to the specific conditions contained in their certificates of registration with the BVI FSC. Additionally, a fund must file its audited statements within six months of the end of the financial year to which it relates and it must also file a mutual fund annual return electronically with the BVI FSC by 30 June of each calendar year.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

A manager or operator of a retail fund can place restrictions on the issue, transfer and redemption of interests in retail funds. However, such restrictions must be clearly specified in the prospectus of the funds to be issued to investors prior to investment. Further, investors must provide consent to any changes made to these terms that affect existing investors to a material extent prior to such changes being effected. Changes to the prospectus of public funds must also be notified to the BVI FSC and a copy of the amended prospectus filed with the BVI FSC (in accordance with the specifications contained in SIBA) for the BVI FSC’s review and approval.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

The main legal vehicles used to set up non-retail funds in the BVI are BVI business companies and international limited partnerships.

24 What are the key laws and other sets of rules that govern non-retail funds?

Non-retail pooled funds that invest in illiquid assets (such as private equity and real estate) are typically closed-ended funds that fall outside the scope of BVI securities legislation. These funds are governed principally by the respective legislation they are established under.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

There is no requirement for non-retail pooled funds to be authorised or licensed to be established in the BVI. In order to market non-retail pool funds in the BVI, the rules prohibiting solicitation in SIBA (as discussed in questions 9 and 10) will apply.

26 Who can market non-retail funds? To whom can they be marketed?

Provided the marketing of non-retail funds meets the requirements of SIBA, they can be marketed by anyone and to any person in the BVI.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

Investor-protection rules contained in BVI securities legislation do not restrict ownership in non-retail funds to certain classes of investor.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

Part II of SIBA, which deals with the public issues of securities, is not currently in force; therefore, non-retail funds cannot be marketed to members of the public in the BVI. However, provided that the manager or operator of a non-retail fund complies with SIBA as regards the prohibition on conducting unauthorised business and soliciting, non-retail pooled funds can be marketed to persons, specified by SIBA as not being members of the public, for these purposes.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Non-retail pooled funds, together with other BVI-formed entities, are not required to pay any income tax under the BVI Income Tax Act. Furthermore, shareholders do not have to pay any BVI income tax or capital gains tax on payments received from the fund. Provided the fund has no employees in the BVI, it will have no liability for BVI payroll taxes. Capital gains realised with respect to any interests are also exempt from income tax in the BVI.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

From a commercial perspective, a non-retail pooled fund would be expected to have a custodian to custody the assets of the fund.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

Non-retail pooled funds that are closed-ended vehicles are not regulated in the BVI. Non-regulated entities have no reporting requirements in the BVI. An unregulated company is only required to be registered as a BVI business company at the Registry of Corporate Affairs and to pay its annual fees each year in order to remain in good standing. See question 20 for full requirements.

32 What are the periodic reporting requirements for non-retail funds?

Non-retail funds that are not regulated in the BVI have no specific reporting requirements to BVI regulators.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

A managed investment account itself is not usually structured using BVI-domiciled vehicles. However, the provision of services to these types of accounts is typically undertaken by a BVI approved manager (which is an entity regulated by the BVI FSC).

34 What are the key legal issues to be determined when structuring a separately managed account?

If a management investment account is structured through a BVI entity, the same rules applicable to a standard BVI business company, which is not regulated, apply. These rules are discussed in questions 23 to 32 in relation to non-retail pooled funds.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The management and marketing of separately managed accounts are regulated in the BVI under the same regime regulating fund management.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

There are currently no proposals for further regulation of funds, fund managers or marketers of funds in the BVI.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

There are no specific requirements in the BVI for stock-exchange listing of retail and non-retail funds. Such stock-exchange listing requirements are driven by the particular listing requirements in the jurisdiction in which the listing will occur.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are certain special rules relating to the ability of foreign investors to invest in funds established or managed in the BVI. Investors in professional funds must be professional investors. Under SIBA, a professional investor means the following:

• a person who has signed a declaration that he or she, whether individually or jointly with his or her spouse, has net worth in excess of US$1 million or its equivalent in another currency, and that he or she consents to being treated as a professional investor; or

• a person whose ordinary business involves, whether for his or her own account or the account of others, the acquisition or disposal of property of the same kind as the property, or as a substantial part of the property, of the fund.

Subject to the rules on conducting unauthorised business in or from within the BVI and the rules on soliciting, pursuant to SIBA, there are no special rules relating to the ability of domestic investors to invest in funds established or managed abroad.

Update and trends

The BVI has recently seen an explosion of interest in the Fintech market and in establishing funds that invest in digital assets such as cryptocurrencies. We have seen increased attention on the impact that BVI regulatory legislation has on initial coin offerings structured through BVI companies; and on Fintech initiatives in general, including the common anti-money laundering and counter-terrorist financing risks attendant to these structures.

Ayana S Hull

ayana.hull@harneys.com

PO Box 71

Craigmuir Chambers

Road Town

Tortola VG-1110

British Virgin Islands

Tel: +1 284 494 2233

Fax: +1 284 494 5047

www.harneys.com

Cayman Islands

Daniella Skotnicki

Harney Westwood & Riegels

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The Cayman Islands Monetary Authority (CIMA) is the main regulatory body in the Cayman Islands that oversees open-ended investment funds, fund managers and those marketing investment funds. The statutory framework under which CIMA derives its supervisory responsibilities (in respect of investment funds and investment managers) is set out in the Mutual Funds Law and the Securities Investment Business Law (the SIB Law).

2 Is fund administration regulated in your jurisdiction?

Only mutual fund administrators that are established in the Cayman Islands are required to be regulated by CIMA. Mutual fund administration is defined in the Mutual Funds Law as the management or administration of a ‘mutual fund’ (as defined in question 24), the provision of the principal office of the mutual fund in the Cayman Islands or the provision of an operator to the mutual fund.

If a mutual fund administrator is required to be regulated by CIMA, it will need to apply for a licence, the granting of which will be based upon, among other things, the administrator’s abilities and the expertise of its management team and employees.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

In broad terms, the Mutual Funds Law requires mutual funds to be licensed or regulated as such. Closed-ended funds (those that issue equity interests that are not redeemable at the option of the holder) are not required to be regulated as mutual funds by CIMA, although, in practice, CIMA will accept voluntary submission to regulation by closed-ended funds (and this is often attractive where, for marketing purposes, it is helpful for the fund to be subject to regulatory oversight in its jurisdiction of establishment). See question 25 for details on the authorisation and licensing process for funds.

Provided a fund manager of a Cayman Islands investment fund is not established or does not otherwise register itself in the Cayman Islands, it will not be subject to any regulation by CIMA or any other authority in the Cayman Islands.

Operators of mutual funds, such as directors or trustees, are subject to registration or licensing requirements (see question 28).

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

Fund regulation by the authorities in the Cayman Islands does not have extraterritorial effect. An overseas manager can provide services to a Cayman Islands investment fund and there is no requirement for the overseas manager to be authorised unless that manager formally establishes itself in the Cayman Islands.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

If the fund manager is licensed under the SIB Law, no shares or partnership interests (as applicable) in the fund manager may be issued, voluntarily transferred or disposed of without the approval of CIMA. There is no such requirement in respect of fund managers that are not licensed by CIMA.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are no applicable restrictions, save in respect of a general partner of a Cayman Islands-domiciled limited partnership that may fall within scope of registration requirements if it acts as investment manager or adviser of the partnership and is remunerated separately (from the terms of the partnership agreement) for such activity.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

The Companies Law of the Cayman Islands restricts shares of an ‘exempted company’ (the most common corporate form adopted by investment funds in the Cayman Islands) from being offered to the public in the Cayman Islands unless those shares are listed on the Cayman Islands Stock Exchange. This restriction is contained in the Companies Law and is not replicated in the statutory framework governing limited partnerships or unit trusts. For the purposes of the Companies Law, the term ‘public in the Cayman Islands’ should be taken as referring to a non-targeted group of prospective investors in the Cayman Islands and certain entities and residents are excluded from the definition, including other Cayman Islands investment funds that are generally structured as exempted companies or exempted limited partnerships.

A fund that is not established in the Cayman Islands and that wishes to offer its equity interests to the public in the Cayman Islands will need to either register as a mutual fund with CIMA (as above) or market its equity interests through a person who is appropriately licensed by CIMA under the terms of the SIB Law (provided that the equity interests offered to the public in the Cayman Islands are listed on a stock exchange approved by CIMA or the fund is regulated by an overseas regulatory authority approved by CIMA).

8 What marketing activities require authorisation?

If a Cayman entity, a foreign entity registered in the Cayman Islands or an entity with a place of business in the Cayman Islands, is arranging deals in securities with a view to another person dealing in securities, or if it is participating in the arrangements for dealing in securities, then it will fall within the scope of the SIB Law and, as such, may be required to obtain a licence from, or otherwise register with, CIMA, before engaging in such activities.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

An entity that is performing fund marketing activities from within the Cayman Islands (whether that entity is incorporated or registered in, registered as a foreign entity in or otherwise has established a place of business in the Cayman Islands) is required by the terms of the SIB Law to obtain a licence from, or otherwise register with, CIMA, prior to engaging in such activities.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

There is no requirement for a local entity to be involved in the fund marketing process.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

There are no restrictions on intermediaries earning commission payments in relation to their marketing activities in the Cayman Islands.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

The statutory and regulatory framework in the Cayman Islands has typically attracted funds that seek investment from high net worth individuals and other sophisticated and institutional investors, rather than funds aiming to raise money through retail channels. The minimum initial subscription in respect of CIMA-registered funds is US$100,000, although there are regulatory categories that would facilitate the registration with, or licensing by, CIMA, of funds wishing to raise money from sub-institutional investors.

The choice of vehicle and the approaches to their formation are the same for non-retail funds (see question 23).

13 What are the key laws and other sets of rules that govern retail funds?

The key statutory and regulatory provisions that apply in respect of retail funds are the same as those that apply in respect of non-retail funds. The Retail Mutual Funds (Japan) Regulations (as amended) (the Regulations) apply specifically to Cayman Islands retail mutual funds marketed to Japanese investors. The Regulations allow for mutual funds that are licensed under the Mutual Funds Law that have been, or are intended to be, exclusively offered to Japanese retail investors to comply with certain securities laws and regulations of Japan (see question 24).

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

A retail fund is, for the most part, subject to the same regulation and licensing as a non-retail fund; however, the options for the regulatory class that a fund might fall under are more limited for retail funds. A retail fund can be a licensed mutual fund, an administered mutual fund or a registered mutual fund (see question 25).

15 Who can market retail funds? To whom can they be marketed?

See questions 7 to 10.

16 Are there any special requirements that apply to managers or operators of retail funds?

As noted in question 13, the statutory and regulatory framework applying to investment funds in the Cayman Islands does not distinguish between retail funds and non-retail funds. Accordingly, there are no special requirements that apply to managers or operators of retail funds.

17 What are the investment and borrowing restrictions on retail funds?

There are no restrictions.

18 What is the tax treatment of retail funds? Are exemptions available?

The tax treatments and exemptions available to non-retail funds apply equally to retail funds. See question 29.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

There are no requirements for assets of a Cayman fund to be held by a separate custodian located in the Cayman Islands, although the fiduciary duties that the directors of the fund would have to safeguard the assets of the fund should be noted.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

See question 31 regarding the governance requirements for Cayman investment funds. No distinction is made between retail and non-retail funds.

21 What are the periodic reporting requirements for retail funds?

The periodic reporting requirements for non-retail funds apply equally to retail funds. See question 32.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Yes, as with non-retail funds, such restrictions can be contained in the constitutive documents of the fund or otherwise in the terms of issue of the relevant equity interests.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Open-ended funds

Companies

Companies are the most common vehicle for open-ended funds. Specifically, the exempted company limited by shares is the vehicle of choice, accounting for 68 per cent of regulated funds, with exempted segregated portfolio companies making up a further 9 per cent of the market (based on the 2014 Investments Statistical Digest produced by CIMA).

A standard exempted company limited by shares can be set up on a same-day basis with a filing of the company’s memorandum and articles of association with the Registrar of Companies. No prior government consent or approval are required. The memorandum of association must contain certain basic information about the company, including its registered office, its authorised share capital and the objects for which it is incorporated. Shares can be denominated in any currency and denomination. There is no minimum or maximum amount prescribed for authorised, issued or paid-up share capital (although at least one share must be in issue at the time of registration).

An exempted segregated portfolio company is a single legal entity within which various segregated portfolios may be established. The assets and liabilities of each segregated portfolio are legally separate from those of other segregated portfolios. A segregated portfolio company is formed in a similar manner to an exempted company limited by shares.

Unit trusts

The second most common form of regulated fund is the exempted unit trust. Unit trusts are based on English trust law, but are modified by the Trusts Law of the Cayman Islands for suitability as investment fund vehicles. Under a unit trust arrangement, investors contribute funds to a trustee that holds those funds on trust for the investors, and each investor is directly entitled to share pro rata in the trust’s assets. An advantage of the unit trust is that it may be structured as an ‘umbrella’ unit trust so that different investments may be allocated to different ‘sub-trusts’ with investors subscribing for units in a particular sub-trust. Unlike segregated portfolio companies, however, there is no statutory segregation of assets and liabilities of each sub-trust.

A unit trust is formed through a declaration of trust by the trustee alone or by a trust deed executed by both the trustee and the investment manager.

Limited partnerships

Exempted limited partnerships (ELPs) accounted for only 10 per cent of regulated funds in 2014. ELPs are most commonly used for closed-ended funds or private equity funds and are described in more detail below.

Closed-ended funds

The vehicles that can be used for closed-ended funds are the same as for open-ended funds. The most popular vehicle used for closed-ended funds is the ELP. Cayman ELPs are governed by a combination of equitable and common law rules (based on English common law) and also statutory provisions, pursuant to the Exempted Limited Partnership Law 2014. An ELP may be formed for any lawful purpose to be carried out and undertaken either in or from within the Cayman Islands or elsewhere upon the terms, with the rights and powers, and subject to the conditions, limitations, restrictions and liabilities set forth in the Exempted Limited Partnership Law.

An ELP is a creature of contract (and thus does not have separate legal personality) and is constituted by an agreement of limited partnership and registered in the Cayman Islands by filing a registration statement with the Registrar of Exempted Limited Partnerships containing the following details:

• the name of the partnership;

• the general nature of the business and term of the partnership;

• the address of the registered office of the partnership;

• the name and address of the general partner; and

• a declaration that the partnership shall not undertake business with the public in the Cayman Islands other than so far as may be necessary to conduct business outside the Cayman Islands.

24 What are the key laws and other sets of rules that govern non-retail funds?

Open-ended funds

The Mutual Funds Law is the principal legislation relevant to the regulation of investment funds in the Cayman Islands. CIMA is the regulatory body responsible for compliance with these regulations and has broad powers to ensure the protection of investors.

The Mutual Funds Law refers to investment funds as ‘mutual funds’ and as such defines a mutual fund as a company, unit trust or partnership incorporated or otherwise carrying on business in the Cayman Islands, that issues equity interests for the purpose of pooling investor funds, with the aim of spreading investment risk, and enables investors to receive profits or gains from investments. The reference to ‘equity interests’ is important because this excludes debt instruments (including warrants, convertibles and sukuk instruments) and tokenised interests; funds issuing such instruments will not be required to be registered with CIMA. The scope of regulation extends to Cayman incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities.

There are exemptions that allow certain funds to fall outside the scope of the Mutual Funds Law. Funds with only one investor do not ‘pool funds’ and as such fall outside the definition of a mutual fund. Investment funds with 15 investors or fewer, the majority of whom have the power to appoint or remove the operators of the investment fund (ie, the directors, the general partner or the trustee, as the case may be), are exempt from the licensing and registration provisions of the Mutual Funds Law. This latter exemption does not apply to Cayman Islands-regulated master funds.

There are no restrictions imposed by the laws and rules of the Cayman Islands on investment strategies of hedge funds, or their use of leverage, shorting or other techniques. There is no concept of ‘eligible investor’ in a Cayman-registered fund.

Directors of funds regulated by CIMA, that are companies, are required to register with CIMA under the Directors Registration and Licensing Law 2014. This requirement does not extend to CIMA-registered partnerships and trusts and, as such, will not apply to the directors of their general partners or to trustees of a trust. The Directors Registration and Licensing Law is intended to allow CIMA to verify certain basic information in respect of directors of CIMA-registered funds and applies to directors wherever they are located, not just to Cayman Islands-based directors.

Closed-ended funds

Closed-ended funds or private equity funds that do not permit redemption or repurchase of interests fall outside the definition of a mutual fund and as such do not fall within the scope of the Mutual Funds Law. Closed-ended funds are therefore unregulated.

All investment funds must comply with relevant anti-money laundering legislation and regulations. The Cayman Islands government and CIMA actively work with the Organisation for Economic Co-operation and Development, the Financial Action Task Force and regulators in numerous jurisdictions to ensure international standards of good practice are maintained and observed. Further, all funds, whether regulated by CIMA or not, are subject to the Proceeds of Crime Law (PCL), the Terrorism Law and the Misuse of Drugs Law.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The following applies to funds that allow redemption of equity interests at the option of the investor. As noted in question 24, closed-ended funds (ie, those that do not permit redemption of equity interests at the option of the holder) fall outside of the Mutual Funds Law but may elect to become subject to regulation as if they were mutual funds.

Three categories of fund are required by the terms of the Mutual Funds Law to submit to regulation by CIMA: the licensed mutual fund, the administered mutual fund and the registered mutual fund.

The licensed mutual fund is the least common type of regulated mutual fund, as it involves an approval process such that the mutual fund itself is licensed (as opposed to being able to only rely on the licence of the administrator in the case of administered mutual fund or being exempt from obtaining the licence in the case of a regulated mutual fund). In granting a licence, CIMA will consider whether each promoter is of sound reputation, the administration of the fund will be undertaken by sufficiently experienced persons who are fit and proper to be directors, managers or officers (as the case may be) and the business of the fund and the offer of equity interests will be carried out in a proper manner.

Instead of applying for its own licence, a fund may seek to rely on the existing licence of a licensed fund administrator based in the Cayman Islands. This type of mutual fund is favoured by investment managers who wish to have a minimum initial subscription per investor that is lower than US$100,000, but who prefer not to go through the approval process for a licensed mutual fund outlined above. An administered mutual fund is the only type of regulated fund that must appoint an administrator based in the Cayman Islands; licensed and registered mutual funds may appoint an administrator in any jurisdiction.

The most common type of investment fund regulated by CIMA is the registered mutual fund, accounting for approximately 96 per cent of the funds regulated by CIMA (as of December 2016). Registered mutual funds are exempt from the requirement to be licensed or administered on the basis that either each investor must subscribe for equity interests in an amount not less than US$100,000 or the equity interests of the fund are listed on a stock exchange recognised by CIMA.

All mutual funds regulated by CIMA, other than master funds, must have a current offering document, which must describe the equity interests of the mutual fund in all material respects and must contain all material information to enable a prospective investor to make an informed decision as to whether to subscribe. The offering document must be filed with CIMA, together with the prescribed particulars that are set out in forms that summarise key provisions of the offering document.

26 Who can market non-retail funds? To whom can they be marketed?

Restrictions apply to the entity performing a marketing function as well as upon whom they target such marketing. See question 25.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

The hurdle to entry to registered mutual funds is a minimum initial investment (whether by subscription or transfer) of US$100,000; otherwise no other investor-qualification criteria apply.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

There is no requirement for the manager of a Cayman fund to be resident or domiciled in the Cayman Islands and no Cayman Islands laws or regulations will apply to that manager.

Investment managers that wish to establish themselves in the Cayman Islands need to comply with the provisions of the SIB Law. The SIB Law regulates ‘securities investment business’, which broadly encompasses managing securities, arranging deals in securities and advising on deals in securities. ‘Securities’ are widely defined and include shares, partnership interests, trust units, debt investments, warrants, options, futures and contracts for differences.

Broadly, the SIB Law provides that the investment manager will need to be licensed under the SIB Law unless it is regulated in respect of securities investment business by a recognised overseas authority (eg, the Financial Conduct Authority), it is carrying on securities investment business exclusively to companies within the manager’s group or it is managing the assets of only certain categories of high net worth or sophisticated investors, in which case it will be able to take advantage of an annual exemption filing instead. The definition of ‘sophisticated investors’ includes mutual funds regulated by CIMA, so the majority of investment managers are, in practice, able to take advantage of the exemption filing.

Open-ended funds

The requirements that apply to operators of a fund depend on the type of vehicle used for the fund. An exempted company or segregated portfolio company must have at least two directors if it is regulated by CIMA. As noted in question 24, directors of a company that is regulated by CIMA must also be registered with CIMA under the Directors Registration and Licensing Law.

If a unit trust is regulated as a licensed fund, then the trustee will need to be licensed under the Banks and Trust Companies Law as a trust company.

Closed-ended funds

If a closed-ended fund is not regulated by CIMA then there are no requirements for its directors to be registered with CIMA. Investment managers must still adhere to the requirements under the SIB Law, as discussed above.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

The Cayman Islands has no direct taxation of any kind. There are no income, corporation, capital gains or withholding taxes or death duties. It is possible for all types of fund vehicles – the company, the unit trust and the limited partnership – to apply to the government of the Cayman Islands for a written undertaking that they will not be subject to various forms of direct taxation, for a minimum period, which in the case of a company is 20 years, and in the case of a unit trust and a limited partnership is 50 years.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

There are no requirements for assets to be held by a separate custodian located in the Cayman Islands.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

All corporate entities need to be registered with the Registrar of Companies to be legally formed. There is a registration fee, which must be paid annually, and if an entity is late in paying, it may not be in good standing. The government must be informed of any changes to the fund’s directors or officers.

As noted in question 25, some funds will need to register with CIMA and will be regulated as a result. Such funds will need to pay annual fees and file audited accounts and a summary form each year. If the fund is CIMA registered, material updates or amendments to the fund’s offering document must also be submitted to CIMA. This can include changes to offering terms, the fund’s directors and officers, the investment manager’s principals or the fund’s service providers.

While an exempted company is not required to hold annual general meetings of shareholders, CIMA has released a statement of guidance that establishes key principles of good governance that must be observed by each Cayman Islands-regulated mutual fund. Such principles require, inter alia, the board of directors or other governing body to:

• properly oversee the activities of the fund’s service providers;

• suitably identify, disclose and manage all conflicts of interest; and

• meet at least twice a year or otherwise more frequently as determined by the size, nature and complexity of the fund.

The directors are also encouraged to maintain accurate and complete records of meetings and board decisions.

32 What are the periodic reporting requirements for non-retail funds?

All funds regulated by CIMA must, as long as there is a continuing offering, update their offering documents and prescribed particulars within 21 days of any material change, and must refile the updated offering document or the prescribed particulars with CIMA within such 21-day period.

All funds regulated by CIMA must also have their accounts audited annually and such audited financial statements must be filed with CIMA within six months of the year end of the fund, together with an annual return form including prescribed details, signed by a director. Such audited financial statements must be signed off by an approved Cayman Islands-based auditor.

Funds regulated by CIMA must also pay an annual fee in January each year (currently, approximately US$4,270 for funds other than master funds, for which the fee is approximately US$3,050).

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Managed accounts are not typically established in the Cayman Islands. If investors require segregation of assets, the typical structure would be the use of an exempted company registered as a segregated portfolio company.

34 What are the key legal issues to be determined when structuring a separately managed account?

There are no specific Cayman Islands legal requirements, and indemnification provisions would depend on the contractual arrangement.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The manager or entity marketing the separately managed account is regulated in the same manner as fund management. The separately managed account, however, is not regulated by CIMA as it is not classed as a ‘mutual fund’ as there is no pooling of investor funds.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

The statutory and regulatory framework in the Cayman Islands has been built on the back of partnership between government, CIMA and industry, and there is every reason to expect the framework to evolve as demands on, and of, the industry evolve. See ‘Update and trends’, particularly regarding the implementation of the beneficial ownership register and the increased penalties available to CIMA.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The process of listing equity securities on a stock exchange would be driven by the rules of the relevant exchange; popular exchanges for the listing of equity interests of Cayman Islands funds include the Cayman Islands Stock Exchange, the Channel Islands Securities Exchange and the Irish Stock Exchange.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

The process for company redomiciliation is laid out in the Companies Law, and can be achieved for funds that are, or that will need to be, regulated by CIMA.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Provided foreign investors meet the necessary anti-money laundering requirements of the fund, there are no restrictions on their ability to invest in funds established or managed in the Cayman Islands other than those imposed by the fund itself or by securities laws and other restrictions that may be applicable to investors in their jurisdiction of residence or establishment.

Update and trends

The past year has seen a number of legislative developments in the Cayman Islands. In addition, transparency and information exchange remain a top focus for the jurisdiction.

Beneficial ownership register

Following lengthy discussions with the UK authorities, the Cayman Islands government approved legislation to introduce beneficial ownership registers for certain Cayman Islands companies in 2017.

Essentially, Cayman companies that are subject to some form of direct or indirect regulatory oversight are likely to be exempt from the requirements to maintain a beneficial ownership register.

For the investment funds industry, this means that companies structured as Cayman Islands investment funds, whether hedge funds or private equity funds, Cayman Islands investment managers registered as ‘excluded persons’ under the SIB Law, and general partners of private equity funds or other investment funds, will not have to maintain beneficial ownership registers provided they fall within one of several exemptions contained in the legislation.

There are currently no proposals to extend the registers to cover beneficial ownership of limited partners of Cayman Islands exempted limited partnerships or foreign companies and foreign limited liability companies registered in the Cayman Islands.

The UK authorities will be able to request that a search of information held on registers be done by the competent authority in the Cayman Islands. The register will otherwise be private and confidential and not open to public inspection. The UK has introduced legislation requiring the Cayman Islands to make such registers publicly available. The Cayman Islands government has indicated that it will not accept such measures.

Anti-Money Laundering Regulations (the AML Regulations)

Changes have been made to the Cayman Islands AML regime to bring Cayman in line with international best practice. The main change for investment funds is the requirement to appoint natural persons as a money laundering reporting officer (MLRO), deputy money laundering reporting officer (DMLRO) and AML compliance officer (AMLCO). Although performance of these functions can still be delegated to an administrator or another service provider, this change means that most funds will now need to appoint natural persons to these roles and then review their fund administration agreements to ensure that the delegation of the function is dealt with and update their documentation and procedures regarding AML compliance generally.

Unregulated funds: now explicitly subject to AML regulations

Unregulated funds (eg, hedge funds exempt from registration with CIMA or private equity funds) will need to comply with the PCL and the AML Regulations with effect from 31 May 2018.

In practice, unregulated funds will achieve AML compliance in much the same way that funds regulated by the Mutual Funds Law have done to date, namely by delegating these functions to a service provider, such as a regulated administrator or investment manager.

The most straightforward option available is to delegate to an administrator or investment manager that is regulated for AML purposes in a recognised jurisdiction (eg, Cayman Islands, Bermuda or Ireland), with equivalent standards to the AML Regulations. In such cases, compliance by the delegate with its jurisdiction’s regulations would be sufficient to ensure that the Cayman-based fund is compliant with its obligations, provided the fund has appointed natural persons as a MLRO, DMLRO and AMLCO before it delegates these functions, as described below.

All funds: the role of the MLRO, DMLRO and AMLCO

The AML Regulations, Guidance Notes issued in December 2017 and a notice issued by CIMA in April 2018 now require all funds that are subject to the AML Regulations to designate natural persons as their MLRO, DMLRO and AMLCO. Once natural persons have been appointed, performance of these functions can then be delegated to a third party, such as the fund’s administrator.

Funds can continue to delegate the function of reporting suspicious activities to their administrator in accordance with their own regulatory obligations once they have appointed these individuals. New funds registering with CIMA from 1 June 2018 will need to confirm who has been appointed to these roles as part of the registration process. Existing registered funds have until 30 September 2018 to confirm who has been appointed, via a filing on CIMA’s portal.

For those funds that now need to appoint an MLRO, DMLRO and AMLCO, these are management level roles and the responsibilities of the MLRO and DMLRO are substantial and include assessing reports of suspicious activity in relation to money laundering or terrorist financing and determining whether to report such suspicious activity to the Cayman Islands Financial Reporting Authority. Where the fund does not have its own employees (which will be the case for most funds), the Guidance Notes detail the criteria that should be applied in selecting an appropriate person to fill each role and provide guidance on the delegation and outsourcing decision making process.

Revised regulations regarding accepting subscription payments from bank accounts located in regulated jurisdictions

Until the new regime was adopted, for AML purposes, funds and their administrators had not been obliged to obtain full know your customer (KYC) documentation from investors whose accounts are held in their name at a bank regulated in an equivalent AML jurisdiction, on the basis that the appropriate due diligence had been undertaken by the bank.

As part of the overarching risk-based approach that is now key to the AML regime, the AML Regulations require that, before the fund receives subscription monies from an investor’s account held at a regulated bank, the fund (or its delegate) will need to: conduct an assessment of the level of risk relating to the investor (eg, low, medium or high) and have identified the risk as low; and have identified the customer and its beneficial owner and assessed whether or not full KYC documentation or further information is required. CIMA has confirmed that the Guidance Notes are also being amended to clarify these provisions. In reality, very few fund administrators relied on the previous exemption and obtained full KYC documentation from all investors regardless. Where that may not have been the case, the practical consequence of this will be that some investors in Cayman Islands funds will be required to provide full KYC documentation in more situations than previously.

Substantial administrative fines for breaches of the AML Regulations

Amendments to the Monetary Authority Law and associated regulations came into force on 15 December 2017, giving CIMA increased powers to impose administrative fines for breaches of certain regulatory laws. These fines can initially be imposed for breaches of the AML Regulations, with a maximum fine of up to US$1,219,500.

CIMA must classify breaches as minor, serious or very serious, and will apply these criteria when it exercises its discretion to impose fines. The minimum fine for a breach considered to be ‘minor’ is US$6,098.

Once further regulations under the Monetary Authority Law are adopted, we fully expect CIMA to use these new powers to take increased action for breaches of all regulatory laws, including the Mutual Funds Law and the SIB Law (eg, failure to make filings within time limits without applying for exemptions or extensions).

New tax offence in the Cayman Islands related to AML

Changes to the Cayman Islands Penal Code (the law that contains most criminal offences in the Cayman Islands) mean that a new criminal tax offence has been introduced into Cayman Islands law. It is now a criminal offence when a person, with intent to defraud the Cayman Islands government:

• wilfully makes, delivers or causes false or fraudulent information to be made to a person employed in the public service relating to the collection of money for the purposes of general revenue;

• wilfully omits information required to be provided to a person employed in the public service relating to the collection of money for the purposes of general revenue; or

• wilfully obstructs, hinders, intimidates or resists a person employed in the public service in the collection of money for the purposes of general revenue.

Without any specific punishment provided, the offence will be punishable with imprisonment for four years and with a fine.

The main offence of tax evasion is likely to be of limited applicability given the lack of direct taxation in the Cayman Islands. The real impact of the new offence is part of the Cayman Islands AML framework because overseas tax evasion is now ‘criminal conduct’ and the proceeds of such conduct would be the proceeds of crime. The PCL requires ‘dual criminality’ for offences that are not committed in the Cayman Islands in that the conduct must not only be an offence in the place where it is committed (if not the Cayman Islands) but must also be an offence in the Cayman Islands in order for it to be criminal conduct. Failure to make the required disclosure, when a person knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct (eg, tax evasion overseas), in the absence of any defence, is punishable with imprisonment or a fine or both.

Daniella Skotnicki

daniella.skotnicki@harneys.com

Harbour Place

103 South Church Street

George Town

Cayman Islands

Tel: +1 345 949 8599

www.harneys.com

Cyprus

Aki Corsoni-Husain, Elina Mantrali and Irene Panayidou

Harneys Aristodemou Loizides Yiolitis LLC

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Cyprus is a member state of the European Union and therefore is subject to, and obliged to be in compliance with, all EU directives and regulations in respect of fund management. In general, Cyprus implements EU legislation on a ‘copy-out’ basis.

The legal framework regulating fund management in Cyprus is contained in the following legislation:

• the Alternative Investment Fund Managers Law 2013 (the AIFM Law), which transposes EU Directive 2011/61/EU on alternative investment fund managers (AIFMD) into national law and regulates Cypriot alternative investment fund managers (AIFMs);

• the Alternative Investment Funds Law 2014 (the AIF Law), which regulates ‘full-scope’ alternative investment funds (AIFs) and alternative investment funds with limited number of people (AIF LNPs) in relation to professional and well-informed investors; and

• the Open-Ended Undertakings for Collective Investment Law 2012 (the UCI Law), which transposes EU UCITS legislation into national law.

In addition to the above, those engaging in the marketing of funds will need to consider regulations issued further to the Investment Services and Activities and Regulated Markets Law 2017 (the IS Law), which implements EU Directive 2014/65/EU on markets in financial instruments (MiFID II).

In terms of supervisory authorities, the Cyprus Securities and Exchange Commission (CySEC) is the national competent authority and regulator in respect of regulating funds, fund managers and those marketing funds on the basis of the above legislation.

In certain circumstances, sub-threshold fund managers of overseas funds (ie, managers not within the scope of the AIFM Law as the funds they manage are below certain AIFMD thresholds) based in Cyprus may fall outside of any licensing or regulatory requirements.

2 Is fund administration regulated in your jurisdiction?

Cyprus does not presently regulate fund administration as a distinct and separate category of licensable financial services activity.

However, some regulation of administration as an ‘ancillary matter’ may be provided for under the following:

• as an ‘administrative service’ under the Administrative Services Providers Law 2012; or

• within the ambit of the IS Law, under the non-core or ancillary investment service of ‘safe-keeping and administration’ of financial instruments.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Licensing process

There are currently two broad categories of funds in Cyprus, namely:

• open-ended undertakings for collective investments funds (UCITS), aimed at investors universally (retail and professional); and

• AIFs, aimed at professional or ‘well-informed’ investors.

CySEC is the competent authority for granting licences to both. The establishment of a Cyprus investment fund requires prior authorisation from CySEC. An application form accompanied by certain supplementary documents is required to be submitted for the consideration and approval of CySEC. In the case of UCITS, the management company of the UCITS will be advised of authorisation within two months of the submission of a complete application file and, in the case of AIFs, notice of authorisation will be provided within three months of the submission of a complete application.

The main requirements for operating funds in Cyprus are set out below.

AIFs

An AIF can be established as a company (with fixed or variable capital), a limited partnership or a ‘common fund’ (an undertaking similar to the common law unit trust).

The AIF Law provides the legal framework for the establishment and operation of AIFs as well as AIF LNPs. Under the AIF Law, all Cypriot AIFs must be licensed and regulated by CySEC. The AIFM Law applies extra requirements to the managers of AIFs that meet or exceed the thresholds for assets under management set out in the AIFMD (additionally, indirect requirements are placed on the AIFs themselves).

In Cyprus, determining whether an investment fund is subject to the full scope of regulation of the AIFMD depends on whether its assets under management meet or exceed the thresholds that cause it to fall within the ambit of the AIFMD, these being as follows:

• €100 million leveraged; or

• €500 million unleveraged with a five-year lock-in period for investors.

These thresholds apply to the assets under management of the investment fund as a whole, as opposed to individual investment compartments. An investment fund may not be set up as an AIF LNP if it meets or exceeds the AIFMD thresholds.

Accordingly, depending on the intended value of the assets under management of the investment fund to be set up, the following Cypriot regulated products would be relevant in relation to this matter:

• a full scope AIF;

• a sub-threshold AIF; or

• an AIF LNP.

An investment fund set up in Cyprus typically needs to include the following parties and service providers in its structure in the course of its operations in Cyprus:

• fund manager: depending on the intended structure and assets under management of the investment fund, it may be necessary to appoint an external manager for the investment fund. It is also possible, under certain circumstances, for the investment fund to be self-managed;

• depositary: it is typically required that an investment fund appoints a depositary, although it is possible, under certain circumstances, for this requirement to be disapplied. Depending on the type of investment fund, the depositary may be located and regulated in another EU member state or a third country;

• general partner (where applicable): in the event that the investment fund is established as a limited partnership, the general partner will need to be incorporated and established in Cyprus;

• local directors: in the event that the investment fund is established as an investment company or otherwise in relation to the general partner of a limited partnership, directors resident in Cyprus will need to be appointed to the board of directors;

• auditor: the investment fund will need to appoint an auditor in Cyprus; and

• fund administrator: although there is no strict legal requirement for the fund administrator to be located in Cyprus or appointed, it is standard to appoint an administrator as managers do not typically maintain the infrastructure required to undertake fund administration internally.

UCITS

UCITS can be formed either as a common fund or as a variable capital investment company (VCIC). In the case of a common fund, the initial capital requirement is €200,000, payable within three months of the grant of the licence. On the other hand, the initial capital requirement for a VCIC is either €200,000 fully paid-up in cash upon constitution or €300,000 if it is self-managed. For umbrella funds, the minimum capital applies for each compartment.

Where the UCITS is self-managed, the UCI Law imposes additional requirements; in particular, a self-managed VCIC must comply with the following additional conditions:

• include at least two executive directors of sufficient repute and experience in relation to the type of investment pursued; and

• hold an appropriate business plan (programme of activities) and programme of operation.

Authorisation of a UCITS management company in Cyprus can be granted by CySEC, provided a number of conditions are met:

• an initial capital of €125,000, plus additional own funds of 0.02 per cent of assets under management exceeding €250 million, subject to a maximum of €10 million;

• a minimum of two fit and proper persons must conduct the business of the management company; and

• the application must be accompanied by a document containing:

• the programme of activity;

• the risk management process;

• the organisational structure;

• the human and technical infrastructure;

• the delegation arrangements; and

• details of shareholding and external auditor.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

With regard to the territorial scope of fund regulation, in high-level terms, an AIF or UCITS will be considered to be based in or operating from Cyprus where it is registered or otherwise established in Cyprus.

A Cypriot AIF manager or investment firm could provide its services on a relatively unimpeded basis to funds domiciled within the European Economic Area; equally, an AIF manager or investment firm based in the EU, but outside of Cyprus, could offer its services on an unrestricted basis to AIFs domiciled in Cyprus.

A non-EU AIF manager will, in general terms, require prior authorisation from CySEC in order to manage an AIF established in Cyprus. CySEC Directive DI131/56/02 stipulates detailed requirements for third-country AIF managers to manage or market AIFs in Cyprus.

Similarly, under the provisions of the UCI Law, a management company authorised in another member state according to Directive 2009/65/EC, may pursue the activity for which it has been authorised in Cyprus, either by the establishment of a branch or under the freedom to provide services. This means that the management company authorised in another EU member state shall not be subject to any authorisation requirement and may offer its services to funds domiciled in Cyprus.

However, non-EU management companies wishing to market or manage UCITS in Cyprus must obtain a licence from CySEC.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

AIFs

Under the AIFM Law, an AIF manager that manages an AIF that acquires, disposes of or holds shares of a non-listed company, must notify CySEC of the proportion of voting rights of the non-listed company held by the AIFs any time when that reaches, exceeds or falls below the thresholds of 10, 20, 30, 50 or 75 per cent. The AIFM Law defines qualifying holding as a direct or indirect holding in an AIFM that represents, at least, 10 per cent of the capital or of the voting rights or that makes it possible to exercise a significant influence over the management of the AIFM in which that holding subsists.

UCITS

Section 113 of the UCI Law imposes notification requirements to fund manager companies when a qualifying holding in the fund manager company is acquired or disposed, directly or indirectly, or such a qualifying holding in a fund manager company is further increased or reduced so that the proportion of the voting rights, or of the capital held, would reach, exceed or fall below 20, 30 or 50 per cent. Qualifying holdings, for the purposes of the UCI Law, means any direct or indirect holding in a management company that represents at least 10 per cent of the capital or of the voting rights of the management company. Furthermore, a management company must also inform CySEC, at least once a year, of the names of shareholders and members possessing qualifying holdings and the sizes of such holdings.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

AIFs

Information on the remuneration policy, including, but not limited to, a description of how remuneration and benefits are calculated, must be provided to CySEC in order for CySEC to grant an authorisation to an AIF. Furthermore, the AIFM Law sets out a number of principles on remuneration policies and practices for AIFMs to comply with, and these shall be applied in a way and to the extent that is appropriate to the size, internal organisation and the nature, scope and complexity of the activities of the AIFMs.

UCITS

Similarly, under the UCI Law, the details of the up-to-date remuneration policy, including, but not limited to, a description of how remuneration and benefits are calculated, the identities of persons responsible for awarding the remuneration and benefits, including the composition of the remuneration committee, where such a committee exists (section 56), must be included in the prospectus of the fund. The UCI Law also sets out a number of stringent remuneration policies, which must be adopted and applied by UCITS management companies.

Most importantly, CySEC has recently adopted the guidelines that the European Securities and Markets Authority (ESMA) issued on sound remuneration policies under the AIFMD (ESMA/2016/579) in 2016, which apply as of 1 January 2017. This means that the guidelines on professional fees will also apply to UCITS and AIFMs established in Cyprus.

Further rules governing intermediaries’ dealings with fund managers are provided for under the IS Law and MiFID II.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Yes, in certain circumstances.

8 What marketing activities require authorisation?

UCITS

Any authorised UCITS established in another EU member state that wishes to market to investors in Cyprus must submit a notification to CySEC before embarking on their marketing activities.

AIFs and AIF LNPs

Marketing of an AIF by a full-scope AIFM that has duly exercised its right to passport into Cyprus under the AIFMD does not require a licence in Cyprus. A separate notification regime applies where an above-threshold AIFM wishes to market the AIF to professional investors in Cyprus without a passport.

However, an application needs to be submitted to CySEC in order to obtain approval to market accordingly, where:

• a below-threshold AIFM will be marketing the AIF to professional investors in Cyprus without a passport;

• an AIFM wishes to market the AIF to well-informed investors in Cyprus without a passport; or

• an AIFM wishes to market to retail investors in Cyprus.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

No; however, in certain cases, a notification procedure, instead of an authorisation procedure, may apply (see question 8).

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

A local entity is not required to be involved in the fund marketing process.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

The IS Law introduces a crucial distinction between the provision of independent and non-independent advice. When investment advice is provided, investment firms are required to inform clients in good time prior to providing the investment whether or not the advice is provided on an independent basis, and further whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments and, in particular, whether the range is limited to financial instruments issued or provided by entities having close links with the adviser or any other legal or economic relationships that pose a risk to impartiality of the advice.

Of particular note is the fact that, for investment advice to be considered independent, an adviser cannot accept fees, commission or other benefits. Only minor payments may be accepted in certain very restricted circumstances. CySEC Directive DI87-01 for the Safeguarding of Financial Instruments and Funds belonging to Clients of January 2018 further provides that any remuneration, commission or monetary benefits that a firm receives from third parties in relation to providing investment advice on an independent basis or portfolio management must be passed on in their entirety to the client.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

A UCITS can be set up as a mutual fund or a variable capital investment company. The mutual fund is a pool of assets that belong to the unitholders of the fund and its operation is defined by a regulation. The fund is managed by a mutual fund management company in the interest of the unitholders. The assets of the mutual fund are kept with a depository. The mutual fund has no legal standing and its interests are represented by the management company in any case of dispute.

Variable capital investment companies are limited liability companies with shareholdings, registered with the Registrar of Companies. These companies have the exclusive purpose of investment of their pooled assets in transferable securities and other financial instruments. The assets of the company are kept with a depository.

13 What are the key laws and other sets of rules that govern retail funds?

The key legislation that regulates retail funds is the following:

• the UCI Law;

• the Companies Law; and

• CySEC directives and circulars.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

See question 4 in relation to establishment and question 8 in relation to marketing.

15 Who can market retail funds? To whom can they be marketed?

See questions 3 and 4.

16 Are there any special requirements that apply to managers or operators of retail funds?

See question 3.

17 What are the investment and borrowing restrictions on retail funds?

Under the UCI Law, there are some investment restrictions applicable to UCITS. Specifically, a UCITS fund may invest no more than 10 per cent of its assets in transferable securities or money market instruments issued by the same body. The total value of the transferable securities and the money market instruments held by the UCITS in the issuing bodies in each of which it invests more than 5 per cent of its assets shall not exceed 40 per cent of the value of its assets. Moreover, a UCITS cannot invest in precious metals or certificates representing them.

In principle, neither a UCITS nor a management company or depositary acting on behalf of a UCITS, may borrow. However, the UCI Law provides three exceptions to this restriction:

(i) borrowing is permitted provided that such borrowing is on a temporary basis and does not exceed 10 per cent of the net asset value of the UCITS;

(ii) a management company may borrow on its own behalf provided that such borrowing represents no more than 15 per cent of its own funds, to enable the acquisition of immovable property essential for the direct pursuit of its business; and

(iii) borrowing to acquire foreign currency by means of a ‘back-to-back’ loan, is permitted under certain conditions.

The combined amounts of borrowings under (i) and (ii) shall not exceed 15 per cent of its net asset value in total. It should also be noted that UCITS shall not grant loans or act as a guarantor on behalf of third parties.

18 What is the tax treatment of retail funds? Are exemptions available?

In principle, retail funds in Cyprus are treated the same as any other Cypriot entity, and therefore they are subject to the general 12.5 per cent corporate tax on annual net profits earned worldwide.

The following tax exemptions are available to retail funds:

• exemption from tax on profits generated from the sales of securities, which includes shares, bonds, debentures and other instruments;

• exemption from tax on dividend income;

• there is no withholding tax on income repatriation (dividends paid to unitholders);

• exemption from tax on capital gains arising from the sale of immovable property that is situated outside Cyprus;

• there is no capital gains tax on disposal of shares or units by the holders; and

• there is no subscription tax on the net assets of the fund.

Further, retail funds established in Cyprus benefit from the wide network of double tax treaties in place with more than 50 countries worldwide.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under the UCI Law, the portfolio of assets of a UCITS fund must be held by a local custodian or depositary. The depositary must be an authorised credit institution or another entity licensed by CySEC to provide depositary services. Where the depositary is not a credit institution, it is further subject to (among other things) capital adequacy requirements and to stringent regulation and ongoing supervision. The depositary and management company may belong to the same group of companies. However, they have a duty to act independently from one another and to promote solely the interests of all unitholders. The depositary must provide services such as safekeeping of the assets of the UCITS and monitoring of the assets of the UCITS (monitoring on how the assets are invested and how many assets are available to the fund).

The depositary may delegate the safekeeping of the assets of the UCITS to a third party if so entitled under the UCITS regulations or instruments of incorporation.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

The primary governance requirements for retail funds established in Cyprus are the following:

• the management company of the fund must report and provide the following documents to the investors of the fund on a regular basis:

• a prospectus;

• an annual report for each financial year; and

• a half-yearly report covering the first six months of the financial year;

• there must be at least two executive natural persons of sufficient integrity and experience in relation to the type of investment pursued to manage the managing firm;

• the management companies must put in place risk assessment procedures to ensure the control of risks associated with the fund; and

• the management companies must, at all times, be in compliance with CySEC rules and regulations and code of conduct. This is to promote the effective functioning of the fund as well as to ensure that the fund operates in a lawful and diligent manner.

21 What are the periodic reporting requirements for retail funds?

Under the UCI Law, the manager of a UCITS fund must submit an annual report for each financial year and a half-yearly report covering the first six months of the financial year to CySEC. The reports must be submitted to CySEC no later than four months after year end, in the case of the annual report; and two months after the end of the six-month period, in the case of the half-yearly report.

The annual report shall include a balance sheet or a statement of assets and liabilities, a detailed income and expenditure account for the financial year and a report on the activities of the financial year, as well as any significant information that will enable investors to make an informed judgement on the development of the activities of the UCITS and its results.

The annual report of an UCITS must be prepared in accordance with the International Financial Reporting Standard No. 34 and shall include the interim non-audited financial statements.

It must be noted that CySEC is entitled to impose additional reporting requirements on managers of retail funds.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

According to the UCI Law, the acquisition of UCITS units by the unitholder requires full payment, to the depositary, of the amount due for the acquisition of units, as determined on the basis of the sale price of units, in cash or in transferable securities or other financial instruments.

The redemption of UCITS units shall be obligatory upon request of the unitholder. The value of the UCITS units redeemed shall be paid in cash within four working days of the date of valuation that is used for the calculation of the repurchase price of the units. As per the UCI Law:

In exceptional cases, when circumstances make it necessary, or in cases provided for in the UCITS regulation or its instruments of incorporation, and in any case it is in the unitholders’ interest, it shall be permitted to suspend the redemption of units for a period up to one month, by a decision of the management company or the UCITS itself.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Under the AIF Law, there are two types of non-retail funds: AIFs and AIF LNPs.

AIF

An AIF can be established provided that its constitutional documents specify that the fund is restricted to professional or well-informed investors. ‘Professional clients’ are defined in the IS Law and MiFID II. The concept of a well-informed investor was introduced by the Cypriot legislation and means an investor who is not a professional investor but confirms in writing that he or she is well informed and is aware of the risks associated with investing in the said AIF, and either:

• invests at least €125,000 in the AIF; or

• is assessed as a well-informed investor with the necessary experience and knowledge to evaluate the appropriateness of his or her investment in the AIF in question by a credit institution falling within the scope of the Banking Laws of 1997, or by a UCITS management company or by an investment firm.

An AIF can be established as a mutual fund, as an investment company in the legal form of a limited liability company with shares or as a limited partnership.

AIF LNP

AIF LNPs are subject to considerably less regulatory oversight than full-scope AIFs. This is because they fall outside of the scope of the EU-wide AIFMD. As a consequence, they do not benefit from the passporting mechanism under the AIFMD.

The establishment of an AIF LNP is allowed, provided that it does not fall within the scope of the AIFM Law (ie, it is not caught within the AIFMD) and it is not managed by an AIFM (ie, does not opt in to the AIFMD). In addition, its constitutional documents must specifically define that:

• the relevant fund is only addressed to professional or well-informed investors;

• the number of its unitholders, including the co-holders, is limited to a maximum of 75 persons; and

• it does not allow the issue of bearer shares.

An AIF LNP can be formed either as a company, with the legal form of a limited liability company with shares that is recognised to operate as an investment company of fixed or variable capital, or as a limited liability partnership.

The operation of an AIF LNP is subject to the prior notification of authorisation by CySEC. An AIF LNP must communicate to CySEC, without any delay, any change in the information on the basis of which its authorisation was granted. Further, the acquisition of partnership interests in an AIF LNP should not take place before the notification of its authorisation by CySEC.

24 What are the key laws and other sets of rules that govern non-retail funds?

The key legislation that regulates non-retail funds is the following:

• the AIF Law;

• the AIFM Law;

• the IS Law;

• the Companies Law;

• the General and Limited Partnerships and Trade Names Law, Chapter 116 of the statutes of Cyprus (the Partnerships Law); and

• CySEC directives and circulars.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

See questions 4 and 8.

26 Who can market non-retail funds? To whom can they be marketed?

Under the relevant laws, management companies and other intermediaries may market non-retail funds in Cyprus provided that they are a licensed investment firm, a credit institution or a UCITS management company. EU management companies may market non-retail funds provided they have satisfied the notification requirement to CySEC. It must be noted that where the constitutional documents of a non-retail fund do not permit its marketing to certain classes of investor, the management company or other intermediary must be precluded from marketing the fund to such investors.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

To the extent that ownership refers to unitholders in the fund, the AIF Law provides that AIFs may only be addressed to professional or well-informed investors. An additional licence would need to be obtained to permit such funds to market to retail investors.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

An AIF LNP could be self-managed or externally managed. Where the AIF LNP is externally managed, a set of stringent requirements is applicable. A manager of an AIF LNP can be an authorised UCITS management company, a Cypriot investment company under the IS Law or a company established in another EU member state that is authorised by the competent authority of that member state to provide portfolio services. A full-scope AIF must comply with the AIFM Law.

With regard to other non-retail funds, and more specifically AIFs, see question 3.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Non-retail funds are treated identically to retail funds for tax purposes, thus the tax treatment outlined in question 18 also applies to non-retail funds.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

In principle, the portfolio of assets of an AIF LNP fund must be held by a separate local custodian. A depositary that has a registered office in Cyprus, in the EU or in a third country, with the condition that CySEC has a written agreement of cooperation with that country, must be appointed. The depositary must be an authorised credit institution or another entity licensed by CySEC to provide depositary services.

The above requirement can be waived where the following exemptions apply:

• assets do not exceed €5 million;

• the incorporation documents or partnership agreement restrict the number of shareholders to five people; or

• assets are not held under custody (eg, real estate).

With regard to other non-retail funds, see question 19.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The governance requirements outlined in question 2o also apply to AIF LNPs. However, managers of AIF LNPs must also retain a special electronic registry, known as the unitholder register. The information in the unitholder register must be kept for at least five years. Moreover, according to the AIFM Law, the manager of an AIF LNP must also report to unitholders the number of units they have in their possession as well as the percentage return of the units.

32 What are the periodic reporting requirements for non-retail funds?

Under section 116 of the AIF Law, an AIF LNP must prepare an annual report that includes information on the financial performance of the AIF, total assets and liabilities and the net asset value of its units for the period covered by the report. The annual report must be audited by an independent auditor and it must be submitted to CySEC within one month of the end of the period it refers to.

See question 21 regarding the reporting requirements of all other types of non-retail funds.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts, where an investment manager maintains the funds and assets of a specific investor segregated from other investors, would typically take the form of a sub-fund or investment compartment dedicated to each such separately managed account.

The AIF Law permits funds to be established as umbrella funds that maintain a number of legal segregated sub-funds or investment compartments. Each investment compartment of the AIF may issue units that correspond to the assets of the specific compartment, and the value of the units may vary by investment compartment.

The rights and liabilities of each investment compartment are legally segregated; however, this is a new and untested area of law in Cyprus and the reaction of the courts to such segregation provisions is not currently known.

34 What are the key legal issues to be determined when structuring a separately managed account?

See question 33.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Yes, as described in question 33, each multiple investment compartment operates as separate AIF and thus it must comply with the provisions of the AIF Law.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

Draft legislation, which aims to upgrade the regulatory framework governing investment funds in Cyprus, has been released. More specifically, in relation to an increase in the scope of the regulation of funds, CySEC has recently published draft legislation for the creation of a ‘mini manager’ regulatory regime for sub-threshold ‘registered AIFs’.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Retail funds

UCITS can be admitted without trading on a stock exchange market operating in Cyprus, any member state or a third country provided that CySEC has signed a memorandum of understanding and exchange of information with the relevant competent authorities. Moreover, UCITS can be admitted for trading in a regulated market of tradable UCITS operating in Cyprus or another member state, provided that certain cumulative conditions are met. Trading of UCITS in another EU member state or third country (as mentioned above) requires prior authorisation from CySEC and the appointment of a market maker, as well as updating of the constitutional documents of the fund.

Non-retail funds

The AIF LNP must not be listed or traded on a stock exchange, but it can be registered on a special registry of the Cyprus stock exchange. On the other hand, AIF LNPs can be traded or listed on a regulated market.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes; foreign AIFs (and possibly even UCITS management companies), whether they are established in another EU member state or outside the EU, can redomicile in Cyprus provided it is permitted by the constitutional documents of the company and the local laws of the country in which the fund is currently established.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no special rules in Cyprus that restrict the ability of investors to invest in funds established or managed in Cyprus on the basis of residency or citizenship. However, there are restrictions on marketing to investors situated in Cyprus, as described above.

Update and trends

It is envisaged that Cypriot funds legislation, specifically the AIF Law, will be subject to a comprehensive overhaul that will seek to enhance the Cypriot funds regime. Draft legislation has been released and a consultation has been completed, and it is expected that this revised framework will be passed into law in the coming months. In this respect, key changes include the introduction of a ‘mini-manager’ regime, regulating sub-threshold fund managers; and the introduction of a ‘registered AIF’ product by which individual funds need not undergo a licence procedure with CySEC, provided that they come under the umbrella of a regulated AIFM.

More generally, we note that high-frequency algorithmic trading is now subject to licensing under MiFID II and, further, ESMA announced its intention to impose product intervention measures including a total prohibition on the provision of binary options and restrictions on the provision of contracts for differences for retail investors on 27 March 2018. There are also ongoing discussions at the European level regarding the design of a new prudential framework for investment firms (see European Banking Authority Opinion (EBA/Op/2017/11) of 29 September 2017), as well as the incoming EU Prospectus Regulation, which revises the regime under the Prospectus Directive (relevant to private placement rules) and the EU Securitisation Regulation (seeking to regulate simple, transparent and standardised securitisations).

Aki Corsoni-Husain

aki.corsoni-husain@harneys.com

Elina Mantrali

elina.mantrali@harneys.com

Irene Panayidou

irene.panayidou@harneys.com

Omrania Centre

313, 28th October Avenue

3105 Limassol

Cyprus

Tel: +357 25 820 020

Fax: +357 25 820 021

www.harneys.com

Germany

Tarek Mardini and Sebastian Käpplinger

P+P Pöllath + Partners

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management is regulated in Germany by the German Capital Investment Act (KAGB). The KAGB implements the EU Undertakings for Collective Investments in Transferable Securities (UCITS) Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (AIFMD).

Responsible for regulating funds, fund managers and those marketing funds is the Federal Financial Supervisory Authority (BaFin).

2 Is fund administration regulated in your jurisdiction?

Fund administration is not regulated per se in Germany. The regulation rather depends on whether the specific services fall within a specifically regulated environment.

As a rule, general assistance in fund administration is not regulated, such as the preparation of reports or distribution notices.

Certain administrative services are regulated by professional services laws. Before offering bookkeeping services on the market, a minimum of three years’ professional experience is required. Trade settlement is typically licensable as the financial service of the execution of orders on behalf of clients or the banking activity of trading on behalf of others.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Regulation of funds is primarily exercised through regulation of managers. It requires that the manager is either fully licensed or registered with BaFin under the KAGB. If a fund is internally managed, then the fund itself needs a licence or registration.

Registered managers: registration process

Availability

The registration process is only available to certain small or medium-sized managers. The most important category of these small to medium-sized managers is known as ‘sub-threshold managers’ under the AIFMD and KAGB. In practice, most German fund managers fall within this category.

Sub-threshold managers, under the KAGB, are managers with assets under management of not more than €100 million (in the case of leverage) or not more than €500 million (no leverage) and who only manage special alternative investment funds (special AIFs). Special AIFs are AIFs whose interests or shares may only be acquired according to the fund documents by professional investors or semi-professional investors (ie, non-retail funds).

Professional investors are defined in the AIFMD and in the Markets in Financial Instruments Directive II (MiFID II). A semi-professional investor is a person who:

• commits to invest at least €200,000;

• confirms in writing that he or she is aware of the risks; and

• has the expertise, experience and knowledge to participate in the investment opportunity. This must be assessed and confirmed by the manager.

In addition, senior management, risk-takers and other staff of the manager within the meaning of article 13 of the AIFMD are considered semi-professional. A person with a minimum commitment of €10 million is also considered semi-professional.

Besides the requirements mentioned above, special AIFs managed by sub-threshold managers are in principle not regulated.

Registration procedure

The registration procedure is comparatively simple. It requires the submission of an informal registration request together with certain ‘corporate’ documents on the manager and the managed funds (such as the fund’s limited partnership agreement (LPA) and the manager’s articles of association). In addition to being a special AIF, the fund may not require the investors to pay in additional capital beyond the investor’s original commitment.

Ongoing issues

An advantage of the registration is that only a few provisions of the KAGB apply to a ‘registered-only’ manager, mainly the provisions on the registration requirements, ongoing reporting requirements and the general supervisory powers of BaFin. However, fund-specific requirements do not apply to ‘registered-only’ managers and their funds. In particular, the depositary requirements and marketing requirements, as well as the additional requirements of the KAGB for fully licensed managers, do not apply.

On the downside, the registration restricts the manager to the type of funds and investors for which the registration was obtained (ie, only special AIFs and professional or semi-professional investors). Furthermore, a registered manager does not benefit from the European marketing passport under the AIFMD. A registered manager can, however, opt in to become a fully licensed manager.

Fully licensed manager: licensing process

Availability

Fund managers who do not qualify for a registration or who opt out of a registration must apply for a full fund-management licence with BaFin under the KAGB.

A full fund-management licence opens the door for a manager to market funds to retail investors as well as to the marketing passport under the AIFMD or UCITS Directive. Retail investors are investors who are neither professional nor semi-professional investors.

Licensing procedure

The licensing procedure is a fully-fledged authorisation process with requirements equivalent to the requirements for granting permission under article 8 of the AIFMD or article 6 of the UCITS Directive. The licensing procedure checks requirements, such as sufficient initial capital or own funds, sufficiently good repute of the directors and shareholders, and organisational structure of the manager.

Ongoing issues

The licensing of the manager results in the manager being subject to the entirety of the KAGB. This means, in particular, the following:

• the required appointment of a depositary for the funds;

• access to setting up contractual funds;

• adherence to the corporate governance rules for funds set up as investment corporations or investment limited partnerships (investment KGs);

• adherence to the fund-related requirements of the KAGB;

• adherence to the marketing rules of the KAGB;

• access to the marketing passport under the AIFMD or UCITS Directive;

• access to the managing passport under the AIFMD or UCITS Directive; and

• adherence to the reporting requirements of the KAGB.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

EU fund managers

EU fund managers are allowed to perform fund management services under the passport regime of the AIFMD or UCITS Directive. In addition, EU fund managers may use the EU passport regime to provide other services and ancillary services (such as investment advice or discretionary individual portfolio management).

Non-EU managers

Non-EU managers are currently not allowed to perform fund management services in Germany. This will change with regard to alternative investment fund managers (AIFMs) in those countries for which the passporting regime under the AIFMD for third-country managers will eventually become effective.

Non-EU managers can provide regulated services outside of fund management (such as investment advice or discretionary individual portfolio management) but only if there is an existing relationship with a German client or if the relationship is established at the initiative of the German client.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

The acquisition of a material stake in a UCITS management company requires prior clearance by BaFin. The threshold for a material stake is 10 per cent of the capital or voting rights of the management company. The threshold also applies in the case of an indirect acquisition (eg, through acquiring a controlling stake in a financial holding company).

There is no prior clearance procedure with BaFin for the acquisition of a material stake in an AIFM. However, BaFin can take measures if shareholders with a material stake are not of sufficiently good repute or are otherwise not reliable enough to hold a stake in an AIFM.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

Germany follows the remuneration requirements of the European Securities and Markets Authority (ESMA) Guidelines on Sound Remuneration under the UCITS Directive and under the AIFMD.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Overview

The marketing of investment funds requires an authorisation by BaFin or at least a European marketing passport under the AIFMD or under the UCITS Directive. A private placement regime is no longer available in Germany.

The only exception available applies to German-registered sub-threshold managers (see question 3). German-registered sub-threshold managers can market their funds using the private placement exemption available under the German implementation of the EU Prospectus Directive or, as applicable, the private placement exemption available under the Asset Investment Law.

The German funds marketing regime distinguishes between domestic funds, EU funds and non-EU funds, as well as between domestic fund managers, EU fund managers and non-EU fund managers. It further distinguishes between UCITS and AIFs, as well as – with regard to AIFs – whether the funds are marketed to professional investors, semi-professional investors or retail investors.

Marketing of UCITS

With regard to the marketing, in Germany, of non-German UCITS, Germany follows the passporting regime of the UCITS Directive. In addition to the standard notification procedure, the marketing of UCITS must comply with the German implementation of the UCITS passporting rules (articles 91 to 95 of the Directive). For instance, there must be a financial institution in Germany for making payments to unitholders, repurchasing or redeeming units and for making available the information that UCITS are required to provide under Chapter IX of the Directive.

UCITS can be marketed under the passport to professional, semi-professional and retail investors.

Marketing of EU AIFs by EU AIFMs

With regard to the marketing of non-German EU AIFs by EU AIFMs, the AIFMD marketing passport of article 32 of the AIFMD is available. The AIFMD marketing passport allows for the marketing of EU AIFs to professional and semi-professional investors in Germany.

Marketing of non-EU AIFs or EU AIFs by non-EU AIFMs

With regard to the marketing of non-EU AIFs managed by non-EU AIFMs, Germany allows for marketing under the regime of article 42 of the AIFMD to professional investors. The same regime applies to the marketing of EU AIFs managed by non-EU AIFMs to professional investors. Germany also applies the article 42 regime to non-EU sub-threshold managers.

Germany has implemented the article 42 regime in a rather cumbersome way. Compared with some other EU member states, the process is a bit lengthy and costly. BaFin has at least two months (in some cases even longer) for review once the filed documents are complete and BaFin currently (as of 2018) charges a fee of €1,545 (which is a welcome reduction compared to the previous fee of €6,582). The set of documents to be submitted to BaFin is quite extensive and includes the private placement memorandum (PPM), the fund LPA and certain constitutional documents.

There also some additional requirements (gold-plating) not readily discernible from the reading of article 42. For instance, Germany also applies the article 42 regime to non-EU sub-threshold managers.

To ensure that the article 42 requirement of cooperation agreements between the relevant competent authorities is effective, BaFin requires, as part of the marketing authorisation procedure, an express declaration from the non-EU AIFM that:

• the non-EU AIFM is registered with the competent authority with which BaFin has entered into a cooperation agreement or that the non-EU AIFM is registered in another register to which the competent authority has access; and

• the competent authority has information rights in relation to the non-EU AIFM.

Most importantly, Germany introduced the additional requirement of a ‘depositary-lite’. The AIFM must appoint a depositary who performs the three depositary functions of article 21(7) to 21(9) of the AIFMD, namely, cash monitoring, safekeeping of assets and a general oversight over the AIFM and the AIF. The depositary can be located outside of Germany. The final draft of the depositary agreement, together with a depositary confirmation, must be submitted to BaFin.

The article 42 regime is also available for marketing to semi-professional investors. However, in such case, the non-EU AIFM and the management of the AIF must fully comply with the AIFMD.

EU sub-threshold AIFMs

EU sub-threshold AIFMs may use a simplified marketing notification procedure with BaFin. This notification procedure requires, among other things, a confirmation of the registration status of the AIFM in its home member state and reciprocity. ‘Reciprocity’ means that the home member state must allow the marketing of AIFs managed by a German sub-threshold manager without imposing stricter requirements than Germany. Such reciprocity is currently recognised for instance with regard to the UK and Luxembourg, but not with regard to Austria, Denmark, France or the Netherlands.

Marketing of EU AIFs or non-EU AIFs to retail investors

The AIFMD deals only with the marketing of AIFs to professional investors. With regard to non-professional investors, the member states of the EU are free to impose stricter requirements (article 43, paragraph 2 AIFMD). Germany therefore introduced a strict retail marketing regime for EU and non-EU AIFs. The regime is based on the retail marketing regime of German AIFs. It requires full AIFMD compliance as well as full compliance with the German Products Regulation. Because of these strict requirements, marketing an AIF to retail investors only makes sense if the relevant AIF is already set up with German retail investors in mind. A ‘re-tailoring’ of an existing AIF is cost-prohibitive.

8 What marketing activities require authorisation?

Definition of marketing and pre-marketing

The key trigger of an authorisation is the term ‘marketing’. Marketing means the direct or indirect offering or placement of units or shares in an investment fund.

Marketing must therefore relate to units or shares in an investment fund. BaFin concludes that marketing, in particular, takes place with regard to a fund if:

• the fund has been established (ie, first closing with investors); or

• the terms of the fund are ready to be sent for acceptance to investors.

Consequently, there is no marketing if the fund has not yet had a closing with investors and only incomplete fund terms are distributed. This means that, in practice, marketing might start rather early in the investor relationship process.

However, marketing must also include an offering or placement. The term ‘offering’ includes offers to subscribe, as well as the sending out of invitations to potential investors to make an offer to subscribe. The ‘placement’ alternative is, in practice, already included in the offering mechanism. Therefore, marketing can only occur if the investor has a legal basis for a subscription or for making an offer to subscribe. Accordingly, an activity should still be pre-marketing (even if the investment fund has had a closing with certain investors) if: (i) the investor has no access to the final documents (PPM, LPA and subscription documents); and (ii) it is made clear that the fund manager is not currently seeking subscriptions and that offers to subscribe will only be possible following BaFin marketing approval on the basis of the final documents (eg, in a disclaimer in the documents).

It remains to be seen what effects the current EU Council proposal on pre-marketing activities (COM (2018) 92 final) will have in the future.

Reverse solicitation

Germany recognises a reverse solicitation concept, albeit in a rather strict form. It requires that the offer or placement is genuinely initiated by the investor. In addition, the prospective investor must be a professional or semi-professional investor. The exact scope of the reverse solicitation concept as understood by BaFin is still not clear.

If the investor is a retail investor, the requirements on reverse solicitation are even less clear. In general, reverse solicitation will not work with regard to retail investors and the fund manager would be subject to the more cumbersome retail marketing regime in Germany.

In any case of reverse solicitation, the fund manager should have documentary evidence of how the relationship with the investor started and seek a confirmation from the investor that the contact has been initiated solely by the investor. Generally, the requirements for reverse solicitation will be fulfilled only in limited instances.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The German marketing regime described above applies to any inbound marketing in Germany.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

A local entity must only be involved with regard to UCITS (paying and information agent) and in the case of marketing AIFs to retail investors (paying agent and representative of the AIFM). The position of the local entity is usually performed by a German credit institution.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Germany follows the MiFID inducement rules on commission payments received by intermediaries. In practice, this means that such commission needs to be disclosed to the prospective client. With regard to cross-border services without a German branch, the supervision of the German MiFID rules of good conduct is primarily with the home country regulator.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

The fund-related requirements of the KAGB distinguish between UCITS, special AIFs and public AIFs. UCITS are UCITS funds within the meaning of the UCITS Directive. Retail funds are UCITS funds and public AIFs. Public AIFs are AIFs that can be subscribed by retail investors (as well as professional and semi-professional investors). Retail investors are investors who are neither professional nor semi-professional investors (see question 3).

Arrangements and vehicles for open-ended funds

For open-ended funds, the contractual fund and the investment corporation with variable capital structures are available. They can have different classes of units or shares. They can also establish sub-funds (umbrella structure).

The open investment limited partnership structure is only available to semi-professional or professional investors.

The contractual fund is established by the fund manager on a contractual basis with the investor. The contractual fund is a pool of assets separated by statute and contract from the (other) assets of the fund manager. The investment guidelines for contractual funds set out the details of the contractual relationship between the fund manager and the investors, in particular the applicable investment restrictions. The investment guidelines of retail funds require the approval of BaFin.

Investment corporations and the investment limited partnerships are basically corporations and limited partnerships with some modifications for investment law. They are established in accordance with the applicable procedures for establishing corporations and partnerships (with some modifications because of investment law). In addition to the articles of incorporation or the LPA, separate investment guidelines are necessary.

Vehicles for closed-ended funds

For closed-ended funds, the only available vehicles for retail funds are the investment corporation with fixed capital and the closed-ended investment limited partnership.

Both vehicles can issue different classes of shares or interests, but they cannot establish sub-funds (no umbrella).

In addition to the articles of incorporation and the LPA, separate investment guidelines are necessary.

13 What are the key laws and other sets of rules that govern retail funds?

The main law governing retail funds is the KAGB. The KAGB is supplemented by several ordinances (the Derivative Ordinance, the Organisational and Rules of Conduct Ordinance and the Mediation Ordinance). In addition, the AIFMD Level II Regulation applies to retail AIFs.

This set of laws is supplemented by self-regulatory standards, mainly the Rules of Good Conduct issued by the German Investment Funds Association and the Association’s sample investment guidelines.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The investment guidelines of retail funds, as well as the marketing of retail funds, need BaFin approval. In addition, BaFin has to approve the selection of the depositary for the respective fund. The approvals are usually obtained in parallel with each other.

15 Who can market retail funds? To whom can they be marketed?

Retail funds can be marketed to any investor in Germany (regardless of whether the investor is professional, semi-professional or retail).

Retail funds can be marketed only by the following three categories of ‘marketers’:

• the fund manager itself can always market its ‘own’ funds and, if fully licensed (ie, not only registered as a sub-threshold manager), may also market investment funds of other managers;

• MiFID firms are entitled to market investment funds (provided they have a MiFID licence or passport for investment advice and the transmission or receipt of orders); and

• firms or individuals with a financial intermediary licence under the German Commerce Act (GewO) may also market retail funds. The financial intermediary licence is a non-MiFID licence and is based on the optional exemption from MiFID II in article 3 of MiFID II.

16 Are there any special requirements that apply to managers or operators of retail funds?

The special requirements on retail funds are not applicable to managers. The requirements applicable to managers of retail funds are broadly similar to the requirements on managers of non-retail funds. The main differences between retail and non-retail funds are the stricter statutory investment guidelines (product regulation) and stricter marketing rules.

17 What are the investment and borrowing restrictions on retail funds?

Germany offers different types of retail funds (eg, UCITS, real estate funds, fund-of-funds, hedge funds and closed-ended funds). The fund types are based on the UCITS investment and borrowing restrictions as the default rules. The investment and borrowing restrictions are then modified to fit each fund type. For instance, real estate funds may only invest in real estate, but can also invest up to 49 per cent of the net asset value in money-market instruments or investment funds. The borrowing limits are increased for real estate funds from the UCITS’ short-term borrowing of 10 per cent of the net asset value to a long-term borrowing for investment of 30 per cent of the net asset value.

18 What is the tax treatment of retail funds? Are exemptions available?

The German Investment Tax Act generally applies to UCITS and AIFs (both retail AIFs and special AIFs (see also question 29)).

Revised law (in force since 1 January 2018)

Since 1 January 2018, the new rules under the revised Investment Tax Act have become effective. The scope of application has been slightly reduced as partnerships are no longer covered. Instead, the general rules of German taxation for partnerships are applicable. However, the German tax treatment of such funds effectively remains the same as under the previous law (only the tax treatment of sub-funds in the case of funds in form of a partnership is still subject to clarification; though a draft guidance by the tax authorities indicates a treatment as a separate fund to which the rules on partnerships apply). Thus, only funds in the form of a corporation (eg, a German stock corporation, Luxembourg SA/SCA SICAV or Irish PLC) or of a contractual type (eg, a German Sondervermögen, Luxembourg fonds commun de placement, French FCPI/FCPR or Italian fondo chiuso) are now covered by the new law. Also covered are certain other entities that do not qualify as ‘investment funds’ under the KAGB (in particular ‘single-investor funds’). One major conceptual change is that the principle of ‘restricted transparency’ has been replaced by a newly introduced opaque tax regime where there are two levels of taxation: the fund and the investors. This new tax regime was designed for retail funds, but is applicable to all investment funds (including non-retail funds) that do not satisfy the specific criteria for specialised investment funds under the new law or specialised investment funds that do not use the transparency option (see also question 29).

Under the opaque regime, the fund is now subject to taxation in respect of certain domestic German income (in particular, dividends and real estate income, but not capital gains from the sale of securities unrelated to real estate and unrelated to a permanent establishment in Germany) at fund level (15 per cent tax rate (ie, German corporate tax)). The exemption for dividends (section 8b of the German Corporation Tax Act) is not applicable at fund level even if the relevant threshold (ie, 10 per cent) is exceeded. In addition, German trade tax may be triggered at fund level if it is engaged in trade or business in Germany (subject to a potential exemption if the fund does not engage in ‘active entrepreneurial management’ in relation to its assets).

At the investor level, there is a lump-sum taxation (which is designed for the needs of retail funds with a large number of investors, but applicable to all funds covered). Distributions from the fund, predetermined tax bases and capital gains realised upon sale or redemption of the fund interests, are covered, in particular. The objective of the predetermined tax base is to subject retained income of the investment fund to tax. For individual investors, the actual rate of investor level taxation depends on whether the investor holds the fund interests as part of their ‘non-business’ or ‘business’ assets. For individuals that hold their investment fund interests as part of their non-business assets, such items are subject to flat income tax. For individuals that hold their investment fund interests as part of their business assets, principally, the full amount of such items is subject to income tax at their personal rate.

For corporate investors, the full amount of such items is subject to corporation tax. In addition, German trade tax may be triggered. The partial income taxation and the exemption pursuant to section 8b of the German Corporation Tax Act do not apply. In return, investment fund proceeds (ie, distributions, predetermined tax bases and capital gains from dispositions or redemptions) are now subject to partial exemptions depending on the respective fund type. With respect to ‘equity funds’, the partial exemption is:

• 30 per cent of such proceeds for individuals that hold their investment fund interests as part of their non-business assets;

• 60 per cent for individuals that hold their investment fund interests as part of their business assets; and

• 80 per cent for corporate investors.

With respect to ‘mixed funds’, half of the applicable partial exemption rate applicable to ‘equity funds’ is available. With respect to ‘real estate funds’, the partial exemption is 60 or 80 per cent of the proceeds, depending on whether the fund invests at least 51 per cent of its value in German or non-German real estate and real estate companies. In return, income-related expenses and operating expenses may not be deducted to the extent of the available partial exemption percentage. With regard to trade tax, half of the applicable partial exemption rate applies.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Germany requires a depository or custodian for both UCITS and AIFs. The rules for custodians for AIFs implement the rules of article 21 of the AIFMD. Germany made use of the option in article 21(3) of the AIFMD to provide for a special custodian for private equity funds. The requirements for UCITS custodians are based on the UCITS Directive.

A custodian is not required for funds managed by AIFMs who are only registered with BaFin (in particular, sub-threshold managers; see question 3).

There are rules in place to protect a fund’s assets from liability incurred by the manager or by the activities of managing the fund (in case of an internally managed fund). For instance, a manager can, as a basic rule, not directly act on behalf of a contractual fund. Any arrangement a manager enters into on account of a contractual fund is binding only on the manager. The contractual fund will then indemnify the manager, but only to the extent allowed by law and the rules of the contractual fund. The contractual fund is therefore protected from claims of third parties unrelated to the management of the contractual fund. In the case of an internally managed investment KG, the KG must have two types of assets: administrative assets and investment assets. The investment assets are financed by the capital of the investors and are used for making investments. The administrative assets serve to finance the general operations of the investment KG. The administrative assets may not be financed by the investors’ capital.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

The governance requirements distinguish between the fund vehicle and the fund manager.

With regard to a manager, several governance requirements apply. An external manager can only be set up in a corporate or corporate-like legal form (AG, GmbH and GmbH & Co KG). As a result, the basic governance rules of the respective legal form apply (such as registration requirements and rules for shareholders’ meetings). To adapt these governance rules to a fund management environment, the KAGB supplements these rules with specific requirements. For instance, the manager must have at least two executive directors (officers) of good repute and with sufficient knowledge. In addition, there must be a supervisory board. Further, the KAGB requires a manager to obey several duties of good conduct, such as a duty of care, a duty to act in the best interests of the funds and the investors, a duty to avoid conflicts of interest and a duty to treat investors fairly. These duties are reinforced by organisational requirements on the manager, such as a duty to have adequate risk management or rules for personal transactions of employees in place.

The governance requirements applicable to the fund manager are the main governance protection rules applicable to contractual funds.

For a fund set up as an investment corporation with fixed or variable capital (investment AG) or an investment KG, the fundamental layer of governance is based on the governance of the legal forms these funds are based on (eg, with regard to registration requirements). In addition, the KAGB sets out fund-specific requirements, such as the appointment of at least two executive directors.

21 What are the periodic reporting requirements for retail funds?

A manager must report annually. Semi-annual reports are required for contractual funds and investment AGs with variable capital.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

A manager can restrict the issue, transfer and redemption of interests if there is a basis in the fund’s investment guidelines. For instance, investment guidelines typically empower the manager to suspend redemption in extraordinary circumstances.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

With regard to vehicles used for non-retail funds (ie, professional or semi-professional investors only), Germany distinguishes between funds managed by fully licensed managers and funds managed by registered managers (sub-threshold managers). Non-retail funds are typically called special AIFs (see question 3).

In the case of a fully licensed manager, the following types are available: contractual fund, investment KG and investment AG. In our experience, the contractual fund is the most common vehicle used for non-retail investors by fully licensed managers.

In the case of a registered manager, the vehicle of choice is a simple limited partnership with a company with limited liability (GmbH) as the only general partner (GmbH & Co KG). However, the legal forms of an investment KG or an investment AG are also available.

24 What are the key laws and other sets of rules that govern non-retail funds?

With regard to fully licensed managers managing non-retail funds, the same key rules apply to managers managing retail funds (see question 13).

Managers who are only registered benefit from very light regulation. With the exception of the requirements mentioned in question 3, non-retail funds managed by sub-threshold managers are, in principle, not regulated.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

In contrast to retail funds, the investment guidelines of non-retail funds only need to be submitted to BaFin without BaFin having to approve the guidelines. The investment guidelines of non-retail funds can either mirror the investment guidelines of retail funds or can be freely specified as long as a fair market value of the assets can be determined. The marketing of non-retail funds requires BaFin approval.

In the case of registered managers, no investment guidelines are necessary and they do not need to be submitted to BaFin. BaFin has established in its practice a requirement to submit a commercial register excerpt of the fund once the fund is established. Once the manager is registered, the marketing of a fund does not need BaFin approval (on the assumption that the marketing takes place within the private placement regime of the German prospectus laws; see question 7).

26 Who can market non-retail funds? To whom can they be marketed?

Non-retail funds can, in general, be marketed by the same players as retail funds (see question 15). An exception applies to funds managed by registered managers. Such funds cannot be marketed by firms with a financial intermediary licence under the GewO.

Non-retail funds may only be marketed to professional or semi-professional investors (for the definition of these, see question 3).

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

Only professional or semi-professional investors may invest in non-retail funds.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

The distinction between retail and non-retail lies in stricter investment guidelines and stricter marketing rules, at least with regard to funds managed by fully licensed managers.

With regard to registered managers, only a regulation-lite regime applies (see question 3).

29 What is the tax treatment of non-retail funds? Are any exemptions available?

The tax treatment of retail funds (see question 18) is generally also applicable to non-retail funds. Certain qualifying retail funds, however, have a second option available.

Revised law (in force since 1 January 2018)

As noted in question 18, funds in the form of a partnership are now outside the scope of the Investment Tax Act. In effect, there is no change compared to the previous law for most non-retail AIFs as they are often structured as limited partnerships. Thus, the new law only applies to non-retail funds if they are structured in a corporate or a contractual form. Under the new law, there is an option for certain qualifying specialised investment funds to opt out of the new ‘opaque regime’ and, instead, to apply the ‘restricted transparency regime’ (ie, the tax regime for investment funds under the previous law, which was in force until the end of 2017, but with certain amendments).

Specialised investment funds may only have a maximum of 100 investors (as was the case previously). Unlike the previous law (in force until end of 2017), there is a look-through approach with respect to partnerships as investors (ie, each partner of such partnership is counted as one investor of the fund). However, individuals may now invest directly in a specialised investment fund, provided that they hold such fund interests as part of their business assets (previously, only indirect participations of investors were possible).

To qualify as a specialised investment fund, a fund must satisfy certain criteria with respect to regulation, redemption rights, eligible assets and investment restrictions. These are substantially similar to the criteria under the previous law (although certain changes with respect to the definition of ‘securities’ apply).

If the specialised fund opts to apply the restricted transparency regime, at fund level, there is no taxation for domestic participation income and domestic real estate income. At the investor level, ‘special investment income’ is subject to tax (ie, distributed income, deemed distributed income and capital gains realised upon the dispositions or redemption of investment fund interests). The flat income tax is not applicable, even if an individual holds its investment fund interests as part of its non-business assets. Foreign withholding tax is still creditable.

Fund manager taxation

A 40 per cent exemption from German income tax applies to the carried interest received by managers of a private equity fund structured as a partnership (including limited partnerships) if certain cumulative criteria are fulfilled (in particular, the fund must qualify for asset management status and the carried interest must be paid only after the investors have had all their invested capital paid back). Otherwise, such income is fully taxable at normal German income tax rates. These rules are generally not affected by the revision of the German Investment Tax Act.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

A separate custodian is necessary if the non-retail fund is managed by a fully licensed manager. A custodian is not necessary in the case of a registered manager.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The governance requirements with regard to non-retail funds managed by fully licensed managers are similar to retail funds (see question 20).

There are no special requirements on the governance of non-retail funds managed by registered managers.

32 What are the periodic reporting requirements for non-retail funds?

A manager must report annually.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Managed accounts are often structured as contractual funds provided by a fully licensed manager as the investment platform. The portfolio management is then typically delegated to a specialised portfolio manager.

34 What are the key legal issues to be determined when structuring a separately managed account?

Managing a separate account is usually deemed discretionary portfolio management in Germany. As a result, the MiFID II rules of conduct apply. If a sub-delegation structure is used for the managed account, the sub-delegation must comply with delegation rules of the KAGB. This means that, effectively, the rules of conduct under the KAGB and the other provisions of the KAGB also apply to the delegate manager. Also, the sub-delegate’s staff remuneration needs to be included in the AIFMD remuneration disclosures of the AIFM.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Managing a separate account is usually deemed discretionary portfolio management in Germany and therefore regulated under the German MiFID II implementation. If the account is managed in the form of a contractual fund, the manager must be a fully licensed manager under the KAGB (see question 3).

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

Germany is currently considering tightening the rules applicable to financial intermediaries that are licensed merely under the GewO. As explained in question 15, these financial intermediaries are exempt from the MiFID II. Germany is considering applying the MiFID II rules of conduct also to these financial intermediaries as well as placing them under the federal supervisory authority of BaFin (instead of the current local municipal supervisory authorities).

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The specific requirements for stock-exchange listing of funds depend on each exchange. For instance, there are exchanges that allow for the trading of closed-ended funds, whereas other exchanges permit only open-ended funds.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

This is currently not possible in the context of funds.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are, in general, no special rules applicable. However, some investors, such as German insurance companies, are restricted to a certain extent by regulatory law, when investing in overseas or offshore vehicles, to invest only in certain OECD or EU-based funds.

Update and trends

In December 2017, BaFin published a new investment circular with regard to the German Insurance Ordinance. The Insurance Ordinance is relevant for investments by certain non-Solvency II investors, such as local pension funds and small insurance companies. A prior draft had included severe restrictions for investments in non-EU (managed) private equity and debt funds. However, the final version of the circular, while not perfect, contains some helpful clarifications. In particular, the circular explicitly allows the incurring of debt, at least for purposes of bridging of capital calls in the case of directly investing private equity funds. A time limit for such borrowing is also no longer included. Certain limitations apply, though, for private equity fund of funds. Also, the circular clarifies that direct investments in closed private equity funds by ‘special funds’, which are relevant for institutional investors, remain eligible. Thus, such investors can continue to invest up to 20 per cent of the value of their special funds in private equity funds without hereby burdening the quota for alternative investments. Regarding investments in certain debt funds that invest in non-subordinated debt, certain restrictions, unfortunately, remain in place (geographic limitations, requirement of a fully licensed AIFM and a 7.5 per cent quota for ‘alternative investments’ rather than ‘participation quota).

German lawmakers do not currently intend to extend the MiFID rules for high-frequency trading, commodity position limits or capital adequacy to fund managers. In 2016, Germany expressly regulated the activities of German debt funds and addressed thereby ‘shadow banking’ concerns.

Regarding the issue of VAT on management fees, there is an update on the legislative side. As of 1 January 2018, a new provision under the German VAT Act became effective with the purpose of implementing the European Court of Justice’s (ECJ) jurisprudence (in particular, the Fiscale Eenheid case (No. C-595/13) of December 2015) by ‘selectively extending’ the scope of application of the relevant VAT exemption. According to the revised section 4(8)(h) of the German VAT Act, the management of UCITS and of certain AIFs that are ‘comparable’ to UCITS, is exempt from VAT. The German legislature did not explicitly stipulate which types of AIF are ‘comparable’ to UCITS. The German tax authorities have established the criteria that must be fulfilled in order to benefit from the VAT exemption. In addition, open-ended special AIFs will be exempt from VAT without fulfilling the established criteria. The tax authorities also clarified that the administration of closed-ended AIFs would be exempt from VAT, but only if certain previously established cumulative criteria were met. However, this narrow framework with the requirement of a catalogue of cumulative criteria is unsatisfactory – and in our view not in line with the spirit of the ECJ jurisprudence. However, there is hope that this strict interpretation will not stand as the VAT exemption of special AIFs is on the agenda of the EU VAT Committee and courts may take a different view.

A new German federal government was formed based on a coalition agreement dated 7 February 2018. This agreement lays out the plan of the new government for the next four years. It stipulates that the existing flat income tax on interest income will be abolished (in connection with the establishment of an effective automated exchange of information). This relatively brief statement in the coalition agreement raises many questions that will have to be clarified by the legislature (eg, the term ‘interest income’ is not specified). It also remains unclear whether the currently applicable lump-sum savings allowance will apply to interest income in the future. If this is the case, it must be clarified whether the true income-related expenses can be deducted if the lump sum savings allowance is exceeded. In the case of an investment in an investment fund, it remains to be seen how the taxation of interest income with the personal rate will be ensured. This is unclear as an obligation of investment funds to publish their tax bases no longer exists. Currently, all fund income of a private investor is taxed on the basis of the flat income tax. If the flat income tax on interest income would indeed be abolished, a split between interest income and other income would have to be made. In general, it remains true that the tax landscape is complex and subject to constant change.

Tarek Mardini

tarek.mardini@pplaw.com

Sebastian Käpplinger

sebastian.kaepplinger@pplaw.com

Potsdamer Platz 5

10785 Berlin

Germany

Tel: +49 30 25353 0

Fax: +49 30 25353 999

www.pplaw.com

Greece

Michael Tsibris and Giannis Koumettis

Souriadakis Tsibris

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management is governed by two main sets of rules, depending on the nature of the collective investment undertakings (funds) the fund manager purports to manage: more specifically, the implementing regime of the EU Undertakings for Collective Investments in Transferable Securities Directive 2009/65/EC (UCITS IV) as amended by Directive 2014/91/EU (UCITS V) and the Alternative Investment Fund Managers Directive 2011/61/EC (AIFMD).

The Greek UCITS IV implementing regime consists of Law No. 4099/2012, as amended, and in force and the Hellenic Capital Market Commission (HCMC) Decisions Nos. 15/633/20.12.2012; 16/633/20.12.2012; 17/633/20.12.2012 and 1/756/18.5.2016, as well as Circular No. 55 of the HCMC and regulates the management of funds that qualify as UCITS under the UCITS IV and V Directives and their managers.

UCITS include two basic types of collective investment undertakings: mutual funds and variable capital investment companies. Both fund types are open-ended and they will collectively be referred to below as ‘UCITS’.

The Greek AIFMD implementing regime, consisting of Law No. 4209/2013, as amended, regulates the management of funds that qualify as alternative investment funds (AIFs) under the AIFMD. Certain types of locally regulated collective investment undertakings fall under the definition of an AIF, more specifically the following:

• closed-ended venture capitals regulated under Law No. 2992/2002 (AKESs);

• portfolio investment companies regulated under Law No. 3371/2005 (AEEXs); and

• real property management companies regulated under Law No. 2778/1999 (AEEAPs).

Other, non-regulated types of non-UCITS funds also fall under the definition of an AIF.

The supervisory authority for both types of funds and their managers, as well as those marketing funds, is the HCMC.

To the extent fund marketing includes the provision of investment services (eg, investment advice), persons engaged in this activity are also subject to the local Markets in Financial Instruments Directive 2014/65/EU (MiFID II) implementing regime, namely, Law No. 4514/2018, and HCMC Decision No. 1/808/7.2.2018.

The local UCITS, AIFMD and MiFID regimes do not deviate from the respective EU Directives.

2 Is fund administration regulated in your jurisdiction?

Fund administration is included in the broader scope of the term ‘fund management’ in respect of both UCITS managers and AIFs. The functions consisting of fund administration are subject to the aforementioned laws and regulations, but are not, per se, regulated.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

The authorisation process depends on the type of the fund.

UCITS

For the establishment of a UCITS fund (mutual fund or variable capital investment company), the prior authorisation of the HCMC must be obtained. This requires filing the following documents, in Greek, with the HCMC:

• the fund’s regulation or constitutional documents signed by the management company and the custodian;

• a statement of the credit institution about the acceptance of its appointment as custodian; and

• a detailed list of the fund’s assets, the total of which must be at least €300,000.

The fund is granted a licence provided that the HCMC has approved the above documents after having ascertained that they are compliant with the provisions of Law No. 4099/2012.

AIFs (generally)

There is no obligation for AIFs to be authorised; the authorisation obligation applies to alternative investment fund managers (AIFMs).

AKESs

No licensing or authorisation procedure is provided for AKESs; however, these entities must comply with the provisions of Law No. 2992/2002.

AEEXs

An HCMC licence must be obtained before operating an AEEX. The procedure involves filing a set of documents with the HCMC proving that:

• the AEEX has the necessary technical and financial resources;

• the AEEX’s directors have the necessary professional experience, skills and reliability (the criteria are also stipulated in HCMC Decision No. 4/452/1.11.2007);

• the AEEX’s shareholders are also suitable for holding a shareholding in the AEEX;

• a credit institution authorised in Greece has accepted its appointment as custodian for holding the assets of the AEEX; and

• the AEEX has fully paid the initial share capital.

The HCMC must reply to the application by granting a licence or rejecting the application, within three months of its filing. Within six months of obtaining an authorisation, AEEXs are obliged to have achieved the listing of their shares on a regulated market operating in Greece. Otherwise, authorisation is revoked by the HCMC.

AEEAPs

An HCMC licence must be obtained before establishing an AEEAP. This requires the prior granting of an authorisation to the fund management company and the approval of the appointment of the custodian, as well as the funds’ regulation.

In order to obtain a licence, the AEEAP must file an application to the HCMC, accompanied by documentation proving that:

• the said requirements (authorisation of fund management company, etc) have been fulfilled;

• the managers or directors and the custodian of the fund have the necessary experience in the area of real estate investments; and

• the regulation of the fund includes sufficient provisions for the protection of the interests of its unitholders.

Furthermore, the AEEAP must submit a detailed list of its assets (which must have a minimum value of €10 million) and a detailed analysis of its investment plan. There are also certain requirements for the managers, which depend on whether each manager qualifies as a UCITS manager or an AIFM.

UCITS managers

Entities that intend to provide UCITS management services must obtain a prior authorisation by the HCMC. To this end, they must submit an application to the HCMC that must include, inter alia, a list of the services they intend to provide, details of their shareholders, information about their organisational structure and their technical and financial resources, so as to prove that they have in place appropriate and adequate administrative and accounting procedures and internal audit policies to reduce the risk of investors suffering losses. Simultaneously with such filing, the applicant must pay the HCMC initial fees that amount to €5,000 for the basic authorisation (fund management only) plus €2,000 for each additional service (such as portfolio management and investment advice). The HCMC must reply to this application within six months. UCITS managers authorised by the competent supervisory authority of another member state regarding their intention to market units or shares in Greece are subject to a set filing fee of €1,000 plus 2.4 per cent stamp duty per sub-fund or per UCITS with no sub-fund, and annual (maintenance) fees of €1,000 plus 2.4 per cent stamp duty per sub-fund.

AIFMs

Entities that intend to provide AIF management services in Greece must also obtain a prior authorisation by the HCMC, unless they fall within the exemption provided in article 3 of Law No. 4209/2013 (ie, the assets under their management do not exceed the amount of €100 million when leverage has been used, or €500 million when leverage has not been used). To this end, they must submit an application to the HCMC, which must include detailed information regarding, inter alia, the following:

• the natural persons conducting their operations;

• identities of their shareholders with qualified holdings;

• their programme of activities and information on their remuneration policies and practices; and

• information on arrangements for the delegation and sub-delegation of their functions to third parties.

Moreover, applicants must provide detailed information about the AIFs they intend to manage, including information about their investment strategies, rules of incorporation and place of establishment of their master and feeder AIFs, and information about their depositary. The above-mentioned filing fees apply accordingly to Greek AIFMs (ie, €5,000 for the basic authorisation (fund management only) plus €2,000 for each additional service) as well as the initial and maintenance fees (€1,000 plus 2.4 per cent stamp duty), which also apply to AIFMs authorised by the competent authority of another member state, regarding their intention to market units or shares in Greece.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

The fund regulatory regime is applicable to fund management services provided in Greece. An overseas manager performing fund management activities or providing services in Greece may not do so without the proper local authorisation unless an EU passport is used.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Any acquisition of a shareholding in a UCITS manager that results in a shareholder reaching, exceeding or falling below 20, 33.3 or 50 per cent of its share capital is subject to the prior approval of the HCMC. To this end, the respective shareholder must notify the HCMC in advance of the purported share transfer.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

UCITS funds

There are no regulatory restrictions. However, clear reference must be made in the fund’s regulation as well as the key investor information document about the amount (or method of calculation) of the fund manager’s compensation, and the timing and procedure of distributing profits to unitholders. The UCITS in both subscription and redemption forms must indicate the exact commission rate with which the unitholder is charged when subscribing or redeeming its units or shares. Recently, two new articles, 23A and 23B, were introduced to Law No. 4099/2012, setting out the principles for the establishment and application of remuneration policies and practices in respect of staff and senior management of fund managers.

AIFs

There are no regulatory restrictions. However, the fund manager must disclose to investors a description of all fees, charges and expenses and of the maximum amounts thereof that are directly or indirectly borne by investors. Extended rules have been laid down about remuneration of staff and senior management of fund managers, which are detailed in article 13 of Law No. 4209/2013, implementing Annex II of the AIFMD.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Yes. Marketing of investment funds is permitted on the condition that the fund and the fund management company hold a licence granted by the HCMC. To the extent marketing activities involve the provision of one or more investment services (eg, investment advice), a MiFID II licence is also required. The UCITS funds authorised in another member state intending to market units or shares in Greece must appoint, in writing, at least one paying agent and a distributor that will be responsible for the marketing in Greece.

The paying agent must be a credit institution domiciled either in Greece or in another country with a branch located in Greece. The paying agent is the intermediary responsible for providing the financial services of a UCITS fund, responsible for fulfilling the monetary elements of the subscription and redemption orders and other transactions necessary for the marketing activities. In particular, the paying agent has to provide at least the following financial services:

• receiving the cash equivalent funds for subscriptions and making payments for redemptions;

• making coupon and dividend payments; and

• dealing with any settlement differences arising when switching between compartments.

The distributor may take the form of a credit institution, management company, insurance company or investment firm, either domiciled in Greece or in another country with a branch located in Greece. The distributor is the intermediary responsible for providing at least the following marketing services: processing subscription and redemption forms to the paying agent and supplying a series of requisite information to unitholders. The distributor must also report to the HCMC the statistical data of the UCITS marketed in Greece.

A UCITS fund may appoint more than one paying agent or distributor, or both, and where the latter is a credit institution, it may be appointed with both intermediary roles.

8 What marketing activities require authorisation?

There is no specific list of activities that qualify as ‘marketing’ and thus require authorisation. However, the regulatory position taken by the HCMC is that all active marketing activities (including, for example, sending fund material, making personal communications via telephone, fax, email, personal meetings or roadshows, using local media or websites dedicated to Greek investors to promote funds or making public announcements) must be deemed to constitute licensable marketing activities, as long as they are product-specific. Therefore, generic discussions about the manager or the general financial and investment environment, generic brand advertising (without naming a specific fund), as well as actions such as the distribution of business cards, the distribution of newsletters or other presentations or announcements not naming a specific fund, are not included in the scope of the authorisation requirement. Passive marketing (ie, responding to unsolicited requests submitted by investors or potential investors (reverse solicitation)) is not deemed to constitute marketing in this respect and therefore does not require authorisation. However, to be considered unsolicited, a client request must be product specific and the manager may only provide the requested product. It is advisable that reverse solicitation is evidenced in writing.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

All activities performed towards Greek residents when in Greece are included in the scope of the licensing requirement. Activities towards Greek residents when they are outside Greece are not included in the scope of the said requirement.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

All actual contact towards Greek investors or potential investors must be performed by licensed entities. In the case of AIFs, marketing activities may only be performed by the fund manager of the AIF or locally authorised investment firms and credit institutions.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

There are no specific restrictions regarding commission payments for intermediaries’ marketing activity to the intermediary itself. However, according to fund management requirements, the procurement policy must be clearly defined in the UCITS rules (see question 6). For remuneration payable to intermediaries, in particular, the fund manager must disclose to the UCITS any procurement to third parties, accurately and reasonably, prior to the provision of the service. Such remuneration shall be paid in order to enhance the quality of the relevant service and does not preclude the fund manager to act in the best interests of the UCITS.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

The main legal vehicles for setting up a retail fund are: a UCITS open-ended fund, an AKES, an AEEX and an AEEAP. Since the recent amendment of article 109 of Law No. 4209/2013, implementing the AIFMD, all types of funds can now be marketed and sold to retail investors under the conditions set out therein. Therefore, all existing fund types are retail funds. The main characteristics of the said fund types are the following.

UCITS

This is a fund that is compliant with the UCITS IV Directive. UCITS are structured as open-ended collective investment schemes and can take the form of a mutual fund or a variable capital investment company. The assets of a mutual fund must be managed by a dedicated fund management company, whereas a variable capital investment company may be self-managed.

AKES

This is a closed-ended fund. Its manager must have been authorised as an AIFM. Its establishment requires the execution of an agreement between its unitholders, the fund manager and a custodian. The HCMC supervises the operation of AKESs. Its fund manager must have an initial share capital of at least €100,000 and the total assets of the fund must be at least €3 million.

AEEX

This is a closed-ended fund (in corporate form), whose initial share capital must be at least €500,000. Before establishment, an AEEX must obtain approval from the HCMC. To this end, it must file with the HCMC documentation about its internal policies and procedures and evidence about the appropriateness of its directors, managers and shareholders.

AEEAP

This is a closed-ended fund investing in real property. It is managed by a fund management company with an initial share capital of at least €25 million, which is fully payable upon establishment of the company. The fund management company must be 51 per cent controlled by an authorised credit institution or insurance company.

13 What are the key laws and other sets of rules that govern retail funds?

The principal laws governing retail funds are as follows:

• UCITS: Law No. 4099/2012 (implementing UCITS IV), HCMC Decisions Nos. 15/633/20.12.2012; 16/633/20.12.2012; 17/633/20.12.2012 and 1/756/18.5.2016 and HCMC Circular No. 55 (in English);

• AIFs (generally): Law No. 4209/2013 (implementing the AIFMD);

• AKESs: Law No. 2992/2002;

• AEEXs: Law No. 3371/2005; and

• AEEAPs: Law No. 2778/1999.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes. Retail funds must be authorised by the HCMC in order to be established or marketed in Greece.

15 Who can market retail funds? To whom can they be marketed?

Only authorised entities (fund management companies, investment firms and credit institutions) can market retail funds. UCITS funds can be marketed to both retail and professional investors.

All funds that qualify as AIFs (ie, AKESs, AEEXs and AEEAPs) can be marketed to both professional and retail investors.

Professional investors are defined within the meaning of Annex II of Law No. 4514/2018, implementing MiFID II. These are deemed to include the following:

• credit institutions;

• investment firms;

• other authorised or regulated financial institutions;

• insurance companies;

• collective investment schemes and management companies of such schemes;

• pension funds and management companies of such funds;

• commodity and commodity derivatives dealers;

• local corporations;

• portfolio investment companies and other institutional investors;

• large undertakings meeting at least two of the following requirements: a balance sheet total of at least €20 million, a net turnover of at least €40 million and ownership of at least €2 million in funds;

• national and regional governments, public bodies that manage public debt, central banks, international and supranational institutions such as the World Bank, the International Monetary Fund, the European Central Bank (ECB), the European Investment Bank and other similar international organisations; and

• other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

Retail investors are investors other than those described above as professional investors, provided that the following conditions are met: the investors undertake to invest at least €100,000 per AIF and per investor; and they state in writing, in a document separate from the agreement concluded for the undertaking of the investment, that they are aware of, and fully understand the risks connected with, the relevant investment.

16 Are there any special requirements that apply to managers or operators of retail funds?

Other than those set out in question 3, there are no special requirements applicable to managers or operators of retail funds.

17 What are the investment and borrowing restrictions on retail funds?

Depending on their type, each fund is subject to different investment and borrowing restrictions.

UCITS

The UCITS IV rules on permitted investments and restrictions generally apply (articles 59 to 60 of Law No. 4099/2012, implementing articles 51 to 54 of UCITS IV).

AIFs

There are no specific investment or lending restrictions applicable to all AIFs. However, each particular type of fund (AKES, AEEX and AEEAP) has its own investment restrictions, as described below.

AKES

An AKES may invest in businesses established in Greece or another EU member state. It may also invest in businesses established in third countries provided that such businesses are active in the production or rendering of services in Greece. It may invest in listed or non-listed equity. In the case of investment in listed equity, the AKES may not participate in the share capital of an issuer with a percentage of less than 15 per cent. It may also invest in business bonds, also subject to the 15 per cent condition. Finally, it may deposit its reserves in bank accounts and money market instruments.

An AKES may not invest more than 20 per cent of its assets to transferable securities of the same issuer. It may also not invest to transferable securities of entities related to a unitholder or issuers whose share capital belongs to a unitholder or his or her relatives, to a percentage equal to or greater than 25 per cent. The aforementioned restrictions do not apply if the investment is approved by 100 per cent of the unitholders and on the additional condition that the said investment does not exceed 30 per cent of the total assets of the AKES.

AEEX

The investments of an AEEX shall comprise transferable securities, money market instruments, UCITS, non-UCITS, deposits and derivatives. AEEXs may not invest in precious metals and may not enter into borrowing to an extent greater than 35 per cent of the current value of their assets. AEEXs’ investments are also subject to certain qualitative restrictions for the purpose of avoiding exposure to a single issuer and to the same type of financial instruments (eg, units of other collective investment schemes).

AEEAP

An AEEAP may only invest in the following assets: real estate at a rate of at least 80 per cent of its assets; money market instruments; and cash, deposits or equivalent liquidity credit securities, up to 10 per cent of its assets. An AEEAP is not permitted to invest in precious metals or warrants related thereto.

18 What is the tax treatment of retail funds? Are exemptions available?

The establishment of a UCITS, an AEEX or an AEEAP is generally exempted from any tax, duty and charges. Incomes of UCITS from transferable securities are also exempted from any tax or duty, with the exception of income from dividends distributed by Greek issuers, which is subject to a withholding tax with the respective rate of 10 per cent. In respect of interest rates from bond loans in particular, the exemption applies under the condition that the respective bonds have been acquired at least 30 days before their coupon date.

The UCITS manager is obliged to pay a tax calculated on a daily basis on the six-month average of its assets. The tax rate, depending on the type of investment of the fund, ranges between 10 and 11 per cent of the applicable ‘main refinancing operations rate’ determined by the ECB.

Any income and capital gains obtained by unitholders from their participation in a UCITS fund is free of all taxes, duties and charges.

The AEEAP and its subsidiaries are obliged to pay an annual asset tax that is equal to the 10 per cent tax of the respective ECB current intervention rate (reference rate), incremented by one percentage point and calculated on the average of their investments, plus their reserves, at current market prices as shown in the biannual investment statements. This tax rate cannot be lower than 0.75 per cent on an annual basis. The tax is payable to the competent tax authority within the first 15 days of the month following the period recorded in the biannual investment statement. Upon payment of this tax, the tax liability of the company and its shareholders is exhausted.

There are no similar exemptions for other types of funds and therefore the respective revenues are taxed with the applicable income tax rate. Unitholders of an AKES are taxed as co-owners of the assets that belong to the AKES for any income obtained thereby.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of funds must be held by a separate custodian, which must be a credit institution licensed either in Greece or in another EU member state and subject to the Capital Requirements Directive (CRD). The applicable provisions of Law No. 4261/2014, implementing the CRD, govern the keeping of the assets and cash of the funds.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

The main governance requirements for UCITS funds can be summarised as follows. A UCITS must:

• be authorised by the HCMC;

• have in place adequate regulations or constitutional documents;

• adhere to specific rules regarding the evaluation of its assets;

• be managed by an authorised fund management company;

• appoint an authorised credit institution or investment firm (which fulfils the preconditions specified in article 36, paragraph 1(b) of Law No. 4099/2012) as custodian for holding its assets;

• provide specific information and documents to investors;

• adhere to specific investment rules and restrictions;

• have in place and comply with specific risk management rules and policies;

• adhere to specific transparency requirements (publication of annual and semi-annual reports); and

• adhere to specific promotion and advertising rules.

The main governance requirements for AIFs can be summarised as follows:

• AIFMs must ensure the proper and independent evaluation of all AIFs they manage;

• annual reports must be published for every AIF managed;

• proper procedures and policies must be in place for ensuring that delegation is not affecting compliance with the applicable provisions;

• appropriate information must be provided to investors;

• reports must be submitted to the HCMC; and

• notifications must be made in the case of significant shareholdings in non-listed companies and in the case of acquiring control over such companies.

21 What are the periodic reporting requirements for retail funds?

UCITS are obliged to make available to investors an annual and a semi-annual report with the content described in Law No. 4099/2012 (article 77), their prospectus (article 76) and a key investor information document. The prospectus shall consist of the documents specified in Schedule A of Annex I of Directive 2009/65/EC, whereas the annual and semi-annual report shall consist of all the information included in Schedule B of the said Annex (this is detailed in HCMC Decision No. 17/633/20.12.2012).

AIFMs must make available to investors an annual report for each fund they manage. The annual report must have the content specified in Law No. 4209/2013, implementing the AIFMD (article 23), including at least their balance sheet or statement of assets and liabilities, their income and expenditure account, an activities report and the total remuneration amount – both fixed and variable – of both ordinary staff and senior management.

AIFMs must also report to the HCMC on the principal markets and instruments in which they trade on behalf of the AIFs they manage. The information to be included in the said reporting is also specified in article 24 of Law No. 4209/2013, implementing article 24 of the AIFMD without significant changes.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Restrictions on the issue, transfer and redemption of interests in funds are specified by the respective laws and regulations and the fund manager may not place additional restrictions.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

There are no types of fund under Greek law that are classified as non-retail because all fund types can be (and typically are) offered to both professional and retail investors.

24 What are the key laws and other sets of rules that govern non-retail funds?

See question 23.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

See question 23.

26 Who can market non-retail funds? To whom can they be marketed?

See question 23.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

See question 23.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

See question 23.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

See question 23.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

See question 23.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

See question 23.

32 What are the periodic reporting requirements for non-retail funds?

See question 23.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

This activity is described as ‘portfolio management’ and it is a MiFID II investment activity that can be duly exercised by locally licensed investment firms or entities using their EU passport. This activity may also be exercised by UCITS fund managers and AIFMs on the condition that they hold a ‘top-up’ licence for this activity. This licence can be procured by application to the HCMC, on the condition that the respective fund manager already holds or has applied for a licence for its basic activity, namely, fund management.

34 What are the key legal issues to be determined when structuring a separately managed account?

The MiFID II organisational and conduct of business rules apply when providing portfolio management services to clients. The level of liability of the portfolio manager can be contractually agreed between the parties in accordance with applicable law; note, however, that, pursuant to the Greek Civil Code (article 332), liability owing to gross negligence or wilful misconduct cannot be contractually waived. The provisions of the Consumer Protection Law (No. 2251/1994) are also applicable when services are provided to persons qualifying as ‘consumers’.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The management of separately managed accounts is regulated as a MiFID II investment service (portfolio management) in Greece. The provision of portfolio management to Greek clients must be in line with the provisions of Law No. 4514/2018, implementing MiFID II, as well as HCMC Decision No. 1/808/7.2.2018.

Fund managers providing portfolio management via separately managed accounts are also subject to the aforementioned legal and regulatory provisions while exercising this activity.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

No such proposals have been submitted to the Greek parliament for approval, nor are any currently under discussion. It should be noted that, in January 2018, Law No. 4514/2018, implementing MiFID II, came into force; however, its provisions have not yet radically affected the Greek fund management regime.

Upon issuance of the European Commission’s delegated act referred to in article 67(6) of the AIFMD, certain changes may also occur in the provisions of Law No. 4209/2013. According to the Commission’s letter addressed to the European Securities and Markets Authority (ESMA), the relevant decision is intended to be taken when a sufficient number of countries have been appropriately assessed; the first wave of countries has already been assessed using ESMA’s advice, published in September 2016.

It is also possible that changes in the tax treatment of funds and unitholders will be effected in the near future.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The listing of a UCITS on a regulated market operating in Greece (exchange traded funds) requires the appointment of a market maker and the full deposit of all assets of that UCITS to a custodian, as per the applicable UCITS IV rules. In the case of delisting, the unitholders may request the redemption of their units (sell-out right).

For the listing of an AEEX to a regulated market operating in Greece, the minimum amount of the initial public offering is €10 million. If an AEEX does not reach this subscription amount, the listing is cancelled and any amounts paid by investors for their participation therein are returned to them.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes. For this purpose, the fund must obtain authorisation by the HCMC.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no specific rules on this matter. There are generally no restrictions on the investment of foreign investors in Greek funds.

Michael Tsibris

mtsibris@souriadakistsibris.gr

Giannis Koumettis

gkoumettis@souriadakistsibris.gr

6 Kriezotou Street

10671 Athens

Greece

Tel: +30 210 362 6888

Fax: +30 210 363 1631

www.souriadakistsibris.gr

Hong Kong

Vivien Teu and Christina Suen

Vivien Teu & Co LLP

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management in Hong Kong is primarily regulated under the Securities and Futures Ordinance (SFO). The SFO empowers the Hong Kong Securities and Futures Commission (SFC) to regulate fund management activities, to authorise collective investment schemes (funds) and also regulate offers of securities (including collective investment schemes as widely defined). Specifically, the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) governs the offer of shares in the Hong Kong corporate structure.

The SFC is the main regulator for authorising retail fund products, licensing fund managers and overseeing the conduct of intermediaries in the offer and marketing of fund products. The SFC issues various handbooks, codes, guidelines and frequently asked questions (FAQs) containing requirements and expected standards of conduct that licensed fund managers or other intermediaries or market participants are subject to. The SFC Code on Unit Trusts and Mutual Funds (the UT Code) is the main code governing the authorisation and ongoing requirements applicable to retail funds, while licensed fund managers are further subject to the SFC Fund Managers Code of Conduct (FMCC), as well as the SFC Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct).

2 Is fund administration regulated in your jurisdiction?

Fund administration providers do not require a specific licence and are not directly regulated. However, some of these support services are considered the responsibility of the fund manager, and as such, the fund manager should exercise due care in selecting providers or outsourcing, and would bear the ultimate responsibility.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Retail funds need to be authorised by the SFC before they can be offered to the public in Hong Kong. Non-retail funds do not need to be authorised.

A Hong Kong fund manager would require an SFC licence for conducting the Type 9 regulated activity of asset management, whether as a manager of private funds or retail funds. However, additional requirements apply under the UT Code in order for managers to qualify as managers of retail funds, as outlined in question 16. The UT Code also contains specific requirements on the trustee or custodian of retail funds, as described in question 16.

Marketing and distribution of funds (whether retail or not) would require an SFC licence for conducting the Type 1 regulated activity of dealing in securities.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

The SFO governs fund products offered in Hong Kong, or targeted to the Hong Kong public, or the conduct of businesses relating to regulated activities in securities or futures that is carried out in Hong Kong.

An overseas manager cannot perform management activities or provide services to clients in Hong Kong without being properly licensed by the SFC for the conduct of relevant regulated activities.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Yes. Fund management constitutes a Type 9 regulatory activity of asset management, and, as such, fund managers need to hold such licence, approved by the SFC, before business can be conducted in Hong Kong. Any changes to a licensed entity’s substantial shareholders would require the prior approval of the SFC.

A person is a ‘substantial shareholder’ in relation to a corporation if he or she:

• either alone, or with any associates, has an interest in shares in the corporation:

• of which, the aggregate number is equal to more than 10 per cent of the total number of the corporation’s issued shares; or

• that entitles the person, either alone, or with any associates, and either directly or indirectly, to exercise or control the exercise of more than 10 per cent of the voting power at general meetings of the corporation; or

• holds shares in any other corporation that entitles him or her, either alone, or with any associates, and either directly or indirectly, to exercise or control the exercise of 35 per cent or more of the voting power at general meetings of the other corporation, or of a further corporation, which is itself entitled, either alone or with any of its associates and either directly or indirectly, to exercise or control the exercise of more than 10 per cent of the voting power at general meetings of the corporation.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

No. However, if the fund manager’s compensation and profit-sharing arrangement is in relation to an SFC-authorised retail fund, then disclosure would need to be made in such retail fund’s offering documents.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Yes. Marketing of investment funds constitutes a Type 1 regulated activity of dealing in securities, and a licence granted by the SFC to conduct such regulated activity is required. A holder of a licence to conduct Type 9 regulated activity in asset management may market the funds under its management as an incidental exemption or unless other exemptions apply subject to applicable conditions.

8 What marketing activities require authorisation?

Advertisements relating to the offer of SFC-authorised retail funds will need the SFC’s approval before being issued, although when such advertisements are issued by intermediaries licensed by the SFC to conduct the Type 1 regulated activity of dealing in securities, the Type 4 regulated activity of advising on securities or the Type 6 regulated activity of advising on corporate finance, they are exempt from prior authorisation by the SFC. However, if the advertisements relate to certain funds, such as mandatory provident fund schemes and their constituent funds, occupational retirement schemes or insurance contracts, then the SFC’s prior vetting is still required.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The SFO applies to securities and futures business activities carried out in Hong Kong, or from a place outside Hong Kong, directed to persons in Hong Kong.

An overseas entity may not actively market, whether in Hong Kong or from a place outside Hong Kong, to the Hong Kong public, any fund products (as it constitutes a regulated activity), unless it is registered or licensed by the SFC.

In determining what activities constitute ‘active marketing’, the SFC will consider the nature of the business activities as a whole with regard to relevant factors, such as language and currency, and other factors that may be considered relevant – potentially internet activities, websites or online content that target Hong Kong investors.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

If the overseas manager has a local affiliate or subsidiary in Hong Kong with the relevant licence, such local subsidiary can act as the sponsor to support the overseas manager’s application for a temporary licence.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

From August 2018, under the revised Code of Conduct, intermediaries earning commission payments in the marketing of fund products will be restricted in using the term ‘independent’ to describe themselves and, while there is no specific maximum amount of commission that can be earned, at the point of sale, intermediaries must make disclosures regarding the monetary benefits as well as the ongoing commission (trailer fees).

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

A Hong Kong domiciled open-ended fund is set up by way of a trust deed governed by Hong Kong law and takes the form of a unit trust. The Securities and Futures (Amendment) Ordinance gazetted in 2016 provides the framework for open-ended investment funds structured in corporate form, and it will soon be possible to establish a Hong Kong domiciled open-ended fund in the form of an open-ended fund company structure with variable capital. This is subject to further detailed rules to be issued by the SFC, which shall be the proposed Open-ended Fund Companies Rules (as subsidiary legislation of the SFO) (the OFC Rules) and the proposed Code on Open-ended Fund Companies (the OFC Code), which are expected later in 2018.

However, the UT Code does not restrict the authorisation of retail funds to Hong Kong domiciled funds. Other than Hong Kong domiciled funds, the SFC accepts applications for authorisation of non-Hong Kong domiciled funds or schemes. In addition, overseas-approved schemes may be authorised in Hong Kong, broadly speaking, under two available schemes: recognised jurisdiction schemes (RJS) and schemes to be authorised under mutual recognition of funds (MRF) arrangements.

The majority of RJS are undertakings for collective investment in transferable securities (UCITS) funds domiciled in Luxembourg, Ireland and the United Kingdom, although the current list of RJS also includes United States-registered investment companies, UCITS from France and Germany, Guernsey Class A schemes, certain funds from the Isle of Man and Jersey, Swiss collective investment schemes, and from the Asia-Pacific region, Malaysian Islamic collective investment schemes, Taiwanese exchange-trade index tracking funds and Australian managed investment schemes.

RJS are considered as already complying in substance with certain provisions of the UT Code by virtue of prior authorisation in a recognised jurisdiction, although schemes would still be subject to certain review by the SFC during the authorisation application process, for compliance with certain requirements under the UT Code, including regarding the management company and trustee or custodian of the RJS.

As for MRF, by virtue of Hong Kong entering into mutual recognition arrangements with specific countries or jurisdictions, publicly offered funds in such countries or jurisdictions may be recognised and authorised for offer to the Hong Kong public, subject to specific requirements and application processes. Likewise, Hong Kong funds authorised by the SFC may be registered for public offer in such other countries or jurisdictions. The ‘Mainland-Hong Kong Mutual Recognition of Funds’ initiative was launched in 2015, under which mainland and Hong Kong funds that meet the relevant eligibility requirements may apply for approval and authorisation for offering to retail investors in each other’s market. Under this initiative, more than 40 mainland funds have been authorised by the SFC for retail offer in the Hong Kong market, while more than 10 Hong Kong funds have been registered for retail distribution in the mainland domestic market.

Hong Kong has also entered into respective MRF arrangements with France and Switzerland.

While the above applies primarily to open-ended funds, other fund types, including exchange-traded funds (ETF), real estate investment trusts and closed-ended funds for retail offer, are also subject to authorisation by the SFC for offer to the public in Hong Kong, or to be listed on the Hong Kong stock exchange.

13 What are the key laws and other sets of rules that govern retail funds?

The key legislation governing retail funds include:

• the SFO;

• the CWUMPO;

• the SFC Handbook on Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Products (including the UT Code); and

• in respect of funds listed on the Hong Kong stock exchange, the Rules governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules).

As noted in question 1, there are regulatory requirements contained in various handbooks, codes, guidelines and FAQs containing requirements and expected standards of conduct that licensed fund managers or other intermediaries or market participants are subject to. The UT Code is the main code governing the authorisation and ongoing requirements applicable to retail funds, while licensed fund managers are further subject to the FMCC, as well as the Code of Conduct.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Retail fund products marketed and offered to the Hong Kong public must be authorised by the SFC in accordance with the UT Code, as described in question 3.

If such fund products seek to be listed on the Hong Kong stock exchange, they will be subject to Chapter 20 of the Listing Rules.

15 Who can market retail funds? To whom can they be marketed?

The marketing of retail funds (both open-ended and closed-ended) constitutes a regulated activity, and therefore only persons licensed with the SFC to conduct the Type 1 regulated activity of dealing in securities can carry out such activities.

Retail funds can be marketed to the public in Hong Kong. However, in the offering of fund products, the licensed person should further satisfy suitability and other know-your-customer requirements as set out in the Code of Conduct. In particular, offering of funds that may be considered derivatives products would require specific assessment of suitability including derivatives knowledge of the investor.

16 Are there any special requirements that apply to managers or operators of retail funds?

Managers of retail funds have to satisfy the requirements as set out in the UT Code, which specifies that they must:

• be engaged primarily in the business of fund management;

• have sufficient financial resources; in particular, a minimum issued and paid-up capital and capital reserves of HK$1 million, or equivalent in foreign currency (note that the capital requirement will likely be increased to HK$10 million as proposed in the revised UT Code, which will take effect in 2018); and

• not lend to a material extent and maintain at all times a positive net asset position.

The managers can be based in Hong Kong or other jurisdictions. If based in Hong Kong, the manager should be licensed for a Type 9 regulated activity of asset management. However, fund managers are not limited to Hong Kong licensed managers, as those regulated in jurisdictions within a list of acceptable inspection regimes (AIR) may be approved by the SFC to act as managers of retail funds, or as delegates to conduct discretionary management of SFC-authorised retail funds. The current AIR list includes, among others, Australia, France, Ireland, Luxembourg, the United Kingdom and the United States. Discretionary investment management functions can be delegated to non-AIR entities only upon the SFC’s prior approval.

The trustee or custodian of a retail fund needs to be acceptable to the SFC and must be one of the following categories of institutions:

• a bank licensed under the Banking Ordinance of Hong Kong;

• a trust company that is a subsidiary of such a bank;

• a trust company registered under Part VIII of the Trustee Ordinance; or

• a banking institution or trust company incorporated outside Hong Kong, which is acceptable to the SFC.

The trustee or custodian must have minimum issued and paid-up capital and non-distributable capital reserves of HK$10 million, or equivalent in foreign currency.

Further, the trustee or custodian should be subject to regulatory supervision on an ongoing basis; or appoint an independent auditor to periodically review its internal controls and systems on terms of reference agreed with the SFC, and should file such report with the SFC.

The manager and the trustee or custodian must be persons independent of each other. If they are within the same group, they will be deemed as being independent of each other if they satisfy certain conditions (eg, neither is the subsidiary of the other, no person is a director of both entities and they must sign an independency undertaking, etc).

17 What are the investment and borrowing restrictions on retail funds?

Certain investment and borrowing restrictions apply under the UT Code, depending on the type of retail fund. Core requirements primarily apply to ‘plain vanilla’ (equity or bond) funds, covering spread of investments and diversification limits, restrictions on certain types of instruments or assets and limits on short selling and borrowing. Other requirements apply to specialised schemes, such as money market or cash management funds, funds investing in other funds, index funds, hedge funds or structured funds.

18 What is the tax treatment of retail funds? Are exemptions available?

SFC-authorised retail funds are exempt from Hong Kong profits tax.

In respect of a fund’s investment, Hong Kong stamp duty is payable on transfers of Hong Kong registered stock.

At the investor level, generally, investors are not subject to Hong Kong tax in respect of distributions or dividends (if the fund is of corporate form) received, or in respect of any capital gains arising from a sale, redemption or disposal of the shares or units of an SFC-authorised retail fund, unless such receipt forms part of a trade, profession or business carried on in Hong Kong and fall to be regarded as profits sourced in Hong Kong.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of a retail fund must be held by a trustee or custodian; however, there is no requirement to appoint a separate local custodian. As noted in question 16, the trustee or custodian may be a banking institution or trust company outside Hong Kong that meets the requirements of, and is acceptable to, the SFC.

Requirements applicable to the trustee or custodian of the assets of retail funds are described in question 16. Under the UT Code, the trustee or custodian of a retail fund must take into its custody or under its control all the property of the retail fund, register cash and registrable assets in the name of or to the order of the trustee or custodian, and be liable for the acts and omissions of its nominees or agents in relation to assets forming part of the property of the fund.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

Once a retail fund is authorised by the SFC, there are ongoing compliance and reporting requirements under the UT Code. There is also an annual fee payable to the SFC to maintain the authorisation status of a retail fund.

The key facts statement of the retail fund (a summary of key fund features and terms, similar to a key investor information document of a UCITS fund) will need to be updated at least once a year, and reflect changes in the retail fund’s ongoing charges.

Certain scheme changes may require prior approval of the SFC, whereas scheme changes that are not subject to SFC prior approval or are not material in nature, may be subject to post-filing requirements.

For example, changes to a retail fund (eg, the addition of share class, change of fund manager or change of benchmark) do not require the SFC’s prior approval. Investors holding interest in such funds should be informed as soon as reasonably practicable of the changes as necessary to enable them to appraise the position of the scheme. The offering document of the fund may be updated and reissued without further authorisation provided the content and format of such document remains fundamentally the same as the version previously authorised, and the revised documents must be filed with the SFC within one week of the date of issuance.

Other changes that would require the SFC’s prior approval, and prior notification to investors before they can take effect, would be changes such as the following, which are of a material nature:

• changes to constitutive documents;

• changes to key operators (including trustee or custodian, management company and its delegates and Hong Kong representative of funds established outside Hong Kong);

• changes in investment objectives, policies and restrictions of the fund (including the purpose or extent of use of derivatives), fee structure and dealing and pricing arrangements;

• any other changes that may materially prejudice holders’ rights or interests; and

• merger or termination of a fund.

21 What are the periodic reporting requirements for retail funds?

Authorised retail funds must publish at least two financial reports each financial year, which are the annual reports and accounts published and distributed to holders within four months of the end of the fund’s financial year, and the interim reports within two months of the period they cover. These reports will need to be filed with the SFC.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

There must be at least one regular dealing day per month.

The maximum interval between the receipt of a properly documented request for redemption of units and payment of the redemption money may not exceed one calendar month, unless a substantial portion of the investments is in a market that is subject to foreign currency control.

Suspended or deferred dealing is allowed only in certain circumstances, such as during massive redemption, and there should be full disclosure in the offering documents on permitted circumstances.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

A non-retail fund in Hong Kong may be formed as a Hong Kong domiciled unit trust constituted under a trust deed governed by Hong Kong law. The Securities and Futures (Amendment) Ordinance gazetted in 2016 provides the framework for open-ended investment funds structured in corporate form, and it will soon be possible to establish Hong Kong domiciled open-ended funds in the form of an open-ended fund company structure with variable capital. This is subject to further detailed rules to be issued by the SFC, being the OFC Rules and the OFC Code, which are expected later in 2018.

However, non-retail funds that may be offered in Hong Kong on a private placement basis, primarily to ‘professional investors’, as defined under the SFO, are not restricted to Hong Kong domiciled funds or specific forms. Hong Kong managers may adopt legal vehicles domiciled in other jurisdictions when establishing non-retail funds and quite commonly do, subject to:

• considering ease and costs of establishment and operation;

• applicable legal and regulatory requirements in the jurisdiction of the fund domicile;

• familiarity to investors and other factors that may be relevant under the manager’s or the group’s management and operational structure; and

• other potential factors, such as tax implications or any proposed registration or listing in any market.

24 What are the key laws and other sets of rules that govern non-retail funds?

Non-retail funds are primarily subject to the SFO regarding offers of securities (including forms of collective investment schemes widely defined) in Hong Kong or to the Hong Kong market, including applicable requirements relating to offers to professional investors. Persons engaged in the business of offering investment funds, including non-retail funds, are required to be licensed by the SFC to conduct the Type 1 regulated activity of dealing in securities, unless any relevant exemption applies.

A Hong Kong manager of non-retail funds is required to be licensed by the SFC to conduct the Type 9 regulated activity of asset management, and is thereby subject to regulation by the SFC in its business of managing the non-retail funds, including applicable requirements under the Code of Conduct and the FMCC.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Non-retail funds are not subject to authorisation or registration requirements in order to be established or marketed in Hong Kong.

26 Who can market non-retail funds? To whom can they be marketed?

As noted in question 24, persons engaged in the business of offering investment funds, including non-retail funds, are required to be licensed by the SFC to conduct the Type 1 regulated activity of dealing in securities, unless any relevant exemption applies.

Non-retail funds should not be offered to the public, and under Hong Kong securities offering laws, an offering is not a public offer where (among other circumstances that may qualify and apply to exclude the offer as a public offer) it can be offered to an unlimited number of professional investors, or to no more than 50 people (not limited to professional investors).

In brief, professional investors refer to institutional investors, such as financial institutions and specific bodies as prescribed in the legislation, or individuals or corporates that meet the relevant minimum net-worth or net assets requirements (broadly speaking, individuals with a portfolio of at least HK$8 million or a corporation or partnership with a portfolio of at least HK$8 million or net assets of HK$40 million).

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

Non-retail funds are typically offered to professional investors only, although, as noted in question 26, it is permitted under Hong Kong law to offer a non-retail fund to no more than 50 people by way of private placement. For non-retail funds of a Hong Kong corporate form, other exemptions apply, such as an offer involving at least HK$500,000 or not exceeding a specific overall size.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

A Hong Kong manager of non-retail funds is required to be licensed by the SFC to conduct Type 9 regulated activity in asset management, and is thereby subject to regulation by the SFC in its business of managing the non-retail funds. Non-retail funds that are not managed in Hong Kong are not subject to specific requirements by the SFC, other than the securities offering restrictions and the requirement for persons engaged in the marketing of the non-retail funds to hold a licence by the SFC to conduct the Type 1 regulated activity of dealing in securities.

However, from November 2018, when the revised FMCC comes into force, Hong Kong-licensed managers of non-retail funds will be subject to additional specific requirements where the Hong Kong manager is responsible for the overall operation of the fund, specifically covering several areas that are considered risk areas and for managing systemic risks, such as in relation to:

• general market conduct;

• securities lending and repurchase agreements;

• custody;

• use and disclosure of leverage;

• liquidity management;

• risk management;

• valuation;

• use of side pockets; and

• managing conflicts of interest.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Non-retail funds with Hong Kong-sourced profits derived from carrying on business in Hong Kong would be subject to Hong Kong profits tax.

However, non-retail funds that are not Hong Kong resident and meet other qualifying conditions may be exempted from tax according to the offshore funds profits tax exemption. Under the Hong Kong Inland Revenue Ordinance (IRO), an offshore fund must satisfy the following conditions in order to qualify for the offshore funds profits tax exemption:

• the fund is a non-resident of Hong Kong;

• the fund’s profits are derived from ‘specified transactions’ or incidental transactions and the fund does not carry out any trade, profession or business in Hong Kong involving transactions other than the specified transactions and incidental transactions; and

• the specified transactions have been carried out through, or arranged by, a ‘specified person’ or the fund is a ‘qualifying fund’.

Specified transactions, as defined in Part 1 of Schedule 16 of the IRO, are transactions:

• in securities;

• in futures contracts;

• in foreign exchange contracts;

• consisting of the making of a deposit other than by way of a money-lending business;

• in foreign currencies; and

• in exchange-traded commodities.

In 2015, the profits tax exemption for offshore funds was extended to offshore private equity funds, with the definition of ‘securities’ amended such that, for the purposes of the profits tax exemption, transactions in shares, stocks, debentures, etc, of a private company that is a special purpose vehicle or an exempted private company are covered as specified transactions.

A specified person means a licensed corporation or an authorised financial institution registered under the SFO, and this includes Hong Kong-licensed managers.

A qualifying fund is defined in the IRO to mean a fund that falls within the following descriptions:

• at all times after the final closing of sale of interests:

• the number of investors exceeds four; and

• the capital commitments made by investors exceed 90 per cent of the aggregate capital commitments; and

• the portion of the net proceeds arising out of the transactions of the fund to be received by the originator and the originator’s associates, after deducting the portion attributable to their capital contributions (which is proportionate to that attributable to the investors’ capital contributions), is agreed under an agreement governing the operation of the fund to be an amount not exceeding 30 per cent of the net proceeds.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Non-retail funds are not subject to specific requirements in Hong Kong regarding custodian or custody of fund assets, as non-retail funds are not under specific regulations in Hong Kong other than as regards offer of securities or through the regulation of Hong Kong managers of non-retail funds.

From November 2018, when the revised FMCC comes into force, Hong Kong-licensed managers of non-retail funds will be subject to additional specific requirements under the revised FMCC where the Hong Kong manager is responsible for the overall operation of the fund. Specifically, the revised FMCC introduces specific requirements on the fund manager to exercise due skill, care and diligence in the selection and appointment of the custodian (or trustee, in the case of a unit trust structure) and ongoing monitoring of the performance of the functions of the custodian or trustee. The revised FMCC also sets out in detail the matters that should be taken into account in considering whether a custodian is properly qualified and the expected eligibility of a custodian, as well as containing requirements on the custody agreement and the disclosure of custody arrangements to fund investors.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

As non-retail funds are not under specific regulations in Hong Kong other than as regards the offer of securities or through the regulation of Hong Kong managers of non-retail funds, non-retail funds are not subject to specific governance requirements, such as registration, record-keeping or filings.

However, further to the Securities and Futures (Amendment) Ordinance gazetted in 2016 that provides the framework for open-ended investment funds structured in corporate form, non-retail funds to be established as Hong Kong open-ended fund companies are subject to prior approval by the SFC under a registration process and to meet certain requirements. This is subject to further detailed rules to be issued by the SFC, being the OFC Rules and the OFC Code, which are expected later in 2018.

32 What are the periodic reporting requirements for non-retail funds?

As non-retail funds are not subject to specific regulations in Hong Kong, other than regarding offer of securities or through the regulation of Hong Kong managers of non-retail funds, they are not subject to specific governance requirements such as registration, record-keeping or filings.

However, from November 2018, when the revised FMCC comes into force, where a Hong Kong-licensed manager is responsible for the overall operation of a non-retail fund, there will be additional specific requirements on fund valuation and calculation of net asset value, and on appropriate policies and procedures for valuation of fund assets. There will also be a requirement to ensure an independent auditor is appointed to perform an audit of the financial statements of the fund in order to provide audited reports at least annually, to be made available to fund investors.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts in Hong Kong are structured by the client contractually appointing a Hong Kong-licensed manager to conduct discretionary investment management services and giving authority to direct and manage investments. The portfolio of investments is usually held within the client’s custodian account with a third-party financial institution. If the Hong Kong manager is permitted under its licence to hold client assets, the fund manager is subject to requirements to ensure client assets are properly safeguarded and to comply with applicable rules under the SFO regarding client money and client assets.

On the other hand, intermediaries, such as securities brokerage, futures or investment firms that hold an SFC licence to conduct the Type 1 regulated activity of dealing in securities or Type 2 regulated activity of dealing in futures contracts, may, if not restricted under any licensing condition, be given specific authority by the client to exercise investment discretion within the terms of the given authority, with the conduct of portfolio management in such situations to be wholly incidental to the activity of providing the services of dealing in securities or dealing in futures contracts, as the case may be.

The appropriate structure or arrangement may depend on the applicable licence held by the manager or relevant intermediary, the custody of client assets and the proposed investment strategy.

34 What are the key legal issues to be determined when structuring a separately managed account?

The duties and obligations of the investment manager with respect to a separately managed account would primarily be contained in an investment management agreement between the manager and the client. A Hong Kong-licensed manager would be subject to the applicable requirements and expected regulatory standards contained in the Code of Conduct and the FMCC.

From November 2018, the revised FMCC will introduce additional requirements on licensed or registered persons that are involved in the management of discretionary accounts. A Hong Kong manager of discretionary accounts should ensure there is a written agreement entered into with the client containing the minimum content before any services are provided, except where exemptions apply (these minimum requirements do not apply to clients falling within the categories of ‘institutional professional investors’, defined under the SFO).

Further, except otherwise agreed in writing with the client, the manager should review the performance of each account against any previously agreed benchmark, at least twice a year, and provide valuation reports to the client on a monthly basis or such shorter intervals containing minimum information.

The minimum content of an investment management agreement should contain at least the following provisions:

• the appointment of the licensed or registered person as the discretionary account manager;

• a statement of the client’s investment policy and objectives, including asset classes, geographical spread, risk profile of the target portfolio, any limitations or prohibitions on asset classes, markets or instruments (eg, use of derivatives) and performance benchmark (if any). In the case where the client has selected a predefined model portfolio, the agreement should also specify the proportion of the asset classes, markets and corresponding risk profile of the selected predefined model portfolios;

• the amount of all fees to be paid by the client, whether to the discretionary account manager or to a connected person with respect to the account, and a description of fees to be paid by the client to third parties, where applicable;

• any consent from the client where the discretionary account manager intends to receive soft commission or retain cash rebates;

• details of custody arrangements if the discretionary account manager provides custody arrangement by itself or through its associated entity; and

• details of periodic reporting to be made to the client.

Such minimum content is in addition to the other requirements as applicable and risk disclosures as expected under the Code of Conduct.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The conduct of business involving the management of asset management, including securities and futures contract management, is a Type 9 regulated activity under the SFO, which requires a licence issued by the SFC. Active marketing to the public in Hong Kong of any services that would constitute regulated activity if provided in Hong Kong would also require a licence. Hong Kong-licensed fund managers of separately managed accounts are also subject to applicable requirements under the Code of Conduct and the FMCC.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

The SFC has issued consultation drafts of proposed amendments to the UT Code. Key proposals include:

• strengthening requirements for the key operators (management companies, trustees and custodians);

• providing greater flexibility and enhanced safeguards for funds’ investment activities (particularly in relation to derivatives, securities lending and repo and reverse repo transactions); and

• introducing new fund types (including active ETFs).

The public consultation phase ended in March 2018.

The FMCC will be modified and enhanced, with key areas covering:

• additional requirements in respect of securities lending and repurchase agreements;

• custody of fund assets;

• liquidity risk management; and

• disclosure of leverage by fund managers.

The revised FMCC will take effect in mid-November 2018.

There are also enhancements to the Code of Conduct aimed to address conflicts of interest in the sale of investment products and enhance disclosure at the point of sale by:

• restricting an intermediary from representing itself as ‘independent’ or using any terms with a similar inference when distributing an investment product if the intermediary receives commission or other monetary benefits in relation to distributing such investment product, or it receives any non-monetary benefits from any party or has close links or other legal or economic relationships with product issuers that are likely to impair its independence; and

• requiring an intermediary to disclose the maximum percentage of any monetary benefits received or receivable that are not quantifiable prior to or at the point of sale.

The enhancements to the Code of Conduct will take effect in mid-August 2018.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The listing requirements are set out under the Listing Rules. Chapter 20 of the Listing Rules is applicable to SFC-authorised collective investment schemes (including ETFs), while Chapter 21 is applicable to investment companies (ie, closed-ended funds not subject to authorisation by the SFC).

A listing agent will need to be appointed, and a listing agreement must be signed by the relevant parties to undertake that there will be ongoing compliance with the applicable regulatory requirements.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

While there is no specific regulation pertaining to the redomiciliation of an overseas vehicle into Hong Kong, an overseas vehicle may be redomiciled in Hong Kong as a legal matter, and the SFC requires the redomiciliation of an SFC-authorised fund to apply for its prior approval. There have been a number of cases of redomiciliation of overseas vehicles to Hong Kong, particularly, in recent years, the redomiciliation of Cayman Islands unit trusts to Hong Kong, pursuant to the provisions in the trust deeds. Where the fund is an SFC-authorised retail fund, the redomiciliation requires the SFC’s prior approval, as well as prior notification to the unitholders (or approval, depending on the provisions of the trust deed). A new Hong Kong trustee is appointed in place of the existing Cayman trustee, and necessary amendments are made to the trust deed to reflect Hong Kong law and regulations, including mandatory provisions required under the UT Code, such as (but not limited to) clauses relating to liability of the trustee or other differences in trust law or specific Hong Kong or SFC requirements.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no special rules regarding foreign investors investing in funds established or managed in Hong Kong or domestic investors investing in funds established or managed abroad, as Hong Kong is an open market without foreign exchange restriction or foreign ownership restrictions. As described above, foreign funds established or managed abroad may be offered in Hong Kong subject to the applicable securities offering restrictions and relevant conduct and licensing requirements for offer of securities, whereas foreign funds that meet applicable requirements under the UT Code may seek authorisation by the SFC to be offered to the public in Hong Kong.

Update and trends

The availability of the new Hong Kong open-ended fund company structure, details of which are anticipated in 2018, will be an important development in the Hong Kong funds market. The additional aforementioned requirements under the revised FMCC that will take effect in November 2018, as well as the updates to the Code of Conduct that will take effect in August 2018, will also be changes with significant implications for the industry. Many of the changes have been introduced by the SFC in view of the financial policy reforms published by the International Organization of Securities Commissions, the Financial Stability Board and other international regulatory bodies, to address issues and areas such as systemic risk, shadow banking, liquidity and risk management, enhanced custody requirements, securities lending and repos, and to reduce conflicts of interest. Proposals to amend the UT Code include increasing the minimum capital requirement for managers of retail funds.

In March 2018, the SFC further released its conclusions on earlier consultation with respect to the proposed ‘Guidelines on Online Distribution and Advisory Platforms’, and issued tailored guidance to the asset management industry on the design and operation of online platforms, including specific guidance on the provision of automated or robo-advice.

Vivien Teu

vivien.teu@vteu.co

Christina Suen

christina.suen@vteu.co

27/F Henley Building

5 Queen’s Road Central

Central

Hong Kong

Tel: +852 2969 5316 / 5362

Fax: +852 2997 3385

www.vteu.co

Ireland

Sarah Cassidy and Shane Geraghty

Dillon Eustace

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The Central Bank of Ireland (the Central Bank) is responsible for the regulation of fund management and marketing in Ireland, pursuant to EU and domestic legislation and guidance issued and conditions imposed by the Central Bank itself. The Central Bank has responsibility for the authorisation and ongoing supervision of all types of funds domiciled in Ireland (ie, both undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs)) and for Irish-domiciled UCITS management companies, investment managers and alternative investment fund managers (AIFMs).

2 Is fund administration regulated in your jurisdiction?

Yes, the Central Bank is responsible for the authorisation, regulation and supervision of administrators in Ireland under the domestic Investment Intermediaries Act 1995 regime. Fund administration activities include the calculation of the net asset value (NAV), preparation of periodic reports, calculation and payment of distributions, payment of expenses and maintenance of a fund’s financial books and records. It is possible for the administrator to delegate certain elements of the administration process outside of the jurisdiction.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

As noted in question 2, the Central Bank is responsible for authorisation of both UCITS and AIFs. The documentation, process and timelines for approval differ depending on the fund structure and regulatory status. However, the following documentation would be required, at a minimum, in support of an application for approval for all types of funds:

• prospectus or offering document;

• constitutional document;

• depositary agreement;

• administration agreement;

• management agreement; and

• investment management agreement or AIFM agreement (as appropriate).

For UCITS and retail investor alternative investor funds (RIAIFs), the documents are required to be submitted to the Central Bank for prior review and comment. However, qualifying investor alternative investment funds (QIAIFs) can avail of a fast-track procedure under which the fund documents are simply filed the day before approval is required.

Irish-domiciled UCITS management companies, investment managers and AIFMs are also required to be authorised by, and are supervised by, the Central Bank. Such entities are subject to organisational, conduct of business, capital adequacy and corporate governance requirements, as well as having other obligations in areas such as risk and liquidity management, record-keeping, financial control and conflicts of interest. As part of the authorisation process, a business plan or programme of activity satisfying these requirements must be submitted to the Central Bank for consideration.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

UCITS management companies, EU AIFMs and investment managers authorised under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) may passport their services into Ireland and will not be subject to an additional regulatory review process by the Central Bank.

Non-EU discretionary investment managers that are not one of the entities listed above may only be appointed where a memorandum of understanding is in place between the Central Bank and the competent authority in the home jurisdiction of the investment manager, and where the Central Bank has approved the investment manager following receipt of a completed investment manager application, which is submitted electronically.

Where the firm is regulated in a jurisdiction not previously considered by the Central Bank, it should be demonstrated, by way of a formal submission, that the regulatory regime for asset management in the relevant jurisdiction is comparable to the model of prudential regulation applicable to firms included in the above categories. The Central Bank has accepted the following jurisdictions as having a comparable regulatory regime: Australia, the Bahamas, Bermuda, Brazil, Canada, Dubai, Guernsey, Hong Kong, India, Japan, Jersey, Singapore, South Africa, Switzerland and the United States.

The Central Bank does not apply an approval process to non-discretionary investment advisers to Irish funds, provided that the manager or directors of the fund confirm to the Central Bank that the adviser in question will act in an advisory capacity only and will have no discretionary powers over any of the assets of the fund.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Changes to qualifying holdings in Irish UCITS management companies, MiFID firms and AIFMs are subject to the approval of the Central Bank. Approval is sought by completing and submitting an Acquiring Transaction Notification Form, which is used to provide prior notification to the Central Bank of a proposed acquisition or disposal of, or increase or decrease in, a direct or indirect qualifying holding (within certain thresholds). The Central Bank review process must be carried out within prescribed timelines. It is important in this regard to note that acquiring transactions and increases in qualifying shareholdings, if completed without prior notification to, or assessment by, the Central Bank, will not have legal validity in Ireland. Irish UCITS and AIFMs are also obliged to advise the Central Bank of their ownership structure on an annual basis.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

Yes, the key regulatory guidance in respect of remuneration is contained in the European Securities and Markets Authority (ESMA) final report on Guidelines on Sound Remuneration Policies under Directive 2009/65/EC, as amended (the UCITS Directive) and the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) (the Guidelines). The Guidelines are intended to provide clarity on the requirements for managers when establishing and applying a remuneration policy for its key staff and applies to managers of UCITS and AIFs. At a minimum, managers must put in place remuneration policies and practices as follows:

• that are consistent with, and promote, sound and effective risk management;

• that do not encourage risk-taking that is inconsistent with the risk profile or fund rules governing the relevant fund; and

• that do not impair compliance with the manager’s duty to act in the best interest of the fund.

In addition to these general principles, there are specific requirements that deal with the following:

• governance of remuneration;

• pay structure and risk alignment;

• the establishment of a remuneration committee in the case of ‘significant’ management companies; and

• disclosure of remuneration-related information to investors.

The remuneration rules were introduced as a reaction to the global financial crises and in an attempt to temper inappropriate risk-taking on the part of those who may materially impact the risk profile of a management company or the fund under management. MiFID firms in Ireland are also subject to detailed and extensive remuneration rules under the recently introduced Irish MiFID II Regulations.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Yes, the marketing of investment funds in Ireland (UCITS and AIFs) requires certain authorisations and approvals to be granted by relevant regulatory authorities before such investment funds can be marketed. See question 8.

8 What marketing activities require authorisation?

UCITS

Under the framework described in question 7, UCITS established and authorised in one EU member state can be sold across the border into other EU member states without the requirement for additional authorisation. The ‘European passport’ is central to the UCITS product as it enables fund promoters to create a single product for the entire EU rather than having to establish an investment fund product on a jurisdiction-specific basis. Therefore, on the completion of the appropriate notification procedure, a UCITS established in one member state can be sold in any other member state. If the notification is complete, the home state regulator must transmit the file to the host regulator within 10 working days, after which time the UCITS may commence marketing.

RIAIFs and QIAIFs

Regulation 44 of the EU (Alternative Investment Fund Managers) Regulations 2013 (the Irish AIFMD Regulations) permits the marketing of AIFs to retail investors in Ireland. An Irish RIAIF authorised and regulated by the Central Bank may be marketed to Irish retail investors by the relevant AIFM of the RIAIF. An AIF situated in another jurisdiction that proposes to market its shares or units to retail investors in Ireland must make application to the Central Bank in writing and such an application is required to include certain prescribed documentation and disclosures. The relevant AIF that proposes to market its shares or units to retail investors in Ireland must be authorised by a supervisory authority set up in order to ensure the protection of investors and that, in the opinion of the Central Bank, provides an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing RIAIFs.

The following AIFs will receive approval to market their units to retail investors in Ireland on completion of the information and documentation requirements of the Central Bank:

• those established in Guernsey and authorised as Class A schemes;

• those established in Jersey and authorised as recognised funds; and

• those established in the Isle of Man as authorised schemes.

Other AIFs must demonstrate that the AIF arrangements are such that they provide an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing RIAIFs. Marketing of shares or units or other interests to retail investors in Ireland may not take place until the relevant AIF has received a letter of approval from the Central Bank and the AIF marketing its units in Ireland must comply with the law, regulations and administrative provisions in force in Ireland.

The marketing of EU AIFs (including Irish QIAIFs) by an Irish AIFM to professional investors in Ireland is required to be notified to the Central Bank in accordance with Regulation 32 of the Irish AIFMD Regulations. Where the AIF is regulated by the competent authorities of another EU member state, the Central Bank is required to inform those competent authorities that the Irish AIFM may start marketing units or shares of the EU AIF in Ireland.

When an AIFM from another EU member state proposes to market shares or units of an EU AIF to professional investors in Ireland, it must comply with the requirements set out by the respective national competent authority.

Irish AIFMs, or AIFMs from other EU member states proposing to market non-EU AIFs to professional investors in Ireland, must apply to the Central Bank for approval in accordance with the requirements of Regulation 37 of the Irish AIFMD Regulations.

A Non-EU AIFM proposing to market an AIF to professional investors in Ireland must apply to the Central Bank for approval in accordance with Regulation 43 of the Irish AIFMD Regulations and the marketing can only commence once the Central Bank has informed the relevant non-EU AIFM that it can start marketing. The relevant AIFM is required to comply with basic depositary and custody requirements under the AIFMD (such as the safekeeping of assets and the supervision of administrative functions). In addition, there must be a cooperation arrangement for the purpose of systemic risk oversight in place between the authorities of each EU member state where the non-EU AIF is marketed and those in the third countries where the AIFM and the AIF are established and finally, the non-EU country where the AIF is established must not be listed as a non-cooperative country and territory by the Financial Action Task Force on anti-money laundering and terrorist financing.

The marketing of units in collective investment schemes (CIS) in Ireland, other than in accordance with the requirements of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, SI No. 352/2011 (the UCITS Regulations) and the Irish AIFMD Regulations, must only be undertaken by entities authorised to provide such marketing services. The regulation of the receipt and transmission of orders in relation to, and the placing of financial instruments (including shares and units in CIS) by, Irish entities is regulated by the MiFID II Regulations, as amended, the Investment Intermediaries Act 1995 and consumer protection legislation.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

See question 8.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

Although a UCITS manager from another EU member state could market the shares of, for example, a Luxembourg UCITS in Ireland on a freedom of shares basis, or an EU AIFM could market an EU AIF to professional investors in Ireland likewise, most non-institutional investors domiciled in Ireland will buy through an intermediary (ie, a wealth manager, stockbroker or via a wrapper).

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

The form of remuneration paid to intermediaries, whether commission or fixed fees, is driven by the authorisation of the entity making the payment and its duty to ensure investors are aware of the forms of remuneration it is paying to others to distribute or market the fund product.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

There are several different legal vehicles that can be used to set up retail funds (ie, UCITS and RIAIFs). QIAIFs (which are dealt with separately in question 27) can also be formed using these legal vehicles.

The principal legal structures of UCITS, RIAIFs and QIAIFs are as follows.

Unit trusts

Unit trusts (formed under the UCITS Regulations or under the Unit Trusts Act 1990, or both) are contractual arrangements created under a trust deed made between a management company and a depositary. Unit trusts do not have their own legal personality and contracts are entered into by the management company and, in certain cases, by the trustee. A unit represents an undivided beneficial interest in the assets of the unit trust.

Investment companies

Investment companies (formed under Part 24 of the Companies Act 2014) are public limited liability companies incorporated with variable capital (ie, the actual value of the paid-up share capital is equal at all times to the value of the NAV of the company). Shares issued do not represent a legal or beneficial interest in the company’s assets.

Investment limited partnerships (ILPs)

ILPs (formed under the Investment Limited Partnerships Act 1994) are partnerships between one or more general partners and one or more limited partners, constituted by written agreements between the parties known as partnership agreements. A general partner is personally liable for the debts and obligations of the partnership and a limited partner contributes or undertakes to contribute a stated amount to the capital of the partnership.

Common contractual funds (CCFs)

CCFs (formed under the UCITS Regulations or the Investment Funds, Companies and Miscellaneous Provisions Act 2005) are funds constituted under contract law by means of a deed of constitution executed under seal by a management company. The CCF is an unincorporated body and does not have a legal personality, and therefore may act only through the management company. Participants in the CCF hold their participation as co-owners and each participant holds an undivided co-ownership interest as a ‘tenant in common’ with other participants.

Irish collective asset-management vehicles (ICAVs)

ICAVs (formed) under the Irish Collective Asset-management Vehicles Act 2015 are corporate bodies with limited liability where the actual value of the paid-up share capital is at all times equal to the NAV of the ICAV and the share capital is divided into a specified number of shares without assigning any nominal value to them. The assets of the ICAV belong exclusively to the ICAV and no shareholder has any interest in these assets.

Each of these fund vehicles (with the exception of ILPs) may be established as either standalone entities or as an umbrella fund with separate sub-funds. ILPs are not currently capable of being established as umbrella funds.

It is also possible to have unauthorised AIFs (ie, AIFs that are not authorised by the Central Bank under Irish funds legislation), the principal legal structures of which include real estate investment trusts, exempt unit trusts and limited partnerships established under the Limited Partnerships Act 1907.

13 What are the key laws and other sets of rules that govern retail funds?

In addition to the legislation outlined in question 12, there is a significant amount of legislation at both European and domestic level applicable to retail funds that will vary depending on the fund structure and status. ESMA and the Central Bank have also issued guidance applicable to retail funds.

In summary, for UCITS, the key laws and regulations include the following:

• the UCITS Directive;

• the UCITS Regulations; and

• the Central Bank (Supervision and Enforcement) Act 2013 (section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015, SI No. 420/2015 as amended (the Central Bank UCITS Regulations).

For RIAIFs, the key laws and regulations include the following:

• the AIFMD;

• the Irish AIFMD Regulations;

• Commission Delegated Regulation (EU) No. 231/2013 supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision;

• the Prospectus (Directive 2003/71/EC) Regulations 2005 (for certain categories of closed-ended funds) (the Prospectus Directive);

• the Central Bank AIF Rulebook; and

• the European Union (Key Information Document for Packaged Retail and Insurance-Based Investment Products) Regulations 2017 (Regulation (EU) No. 1286/2014).

In addition, Commission-delegated and implementing regulations have been adopted by the European Commission in specific areas in order to ensure that the UCITS Directive and the AIFMD are implemented consistently across the EU.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes, retail funds domiciled in Ireland must be authorised by the Central Bank. Once authorised, these retail funds may market to Irish investors by virtue of their authorisation.

15 Who can market retail funds? To whom can they be marketed?

The marketing and distribution of retail funds can be carried out by the fund or the management company (UCITS or AIFM) or delegated to the investment manager, distributor or any other entity authorised to carry out such function, such as regulated intermediaries. There are no minimum subscription or investor qualification requirements, imposed by regulations, for retail funds and they may be marketed to any investors who fulfil the criteria set out in the offering document.

16 Are there any special requirements that apply to managers or operators of retail funds?

Managers of retail funds are subject to the regulatory requirements that derive from European legislation as transposed in Ireland (the UCITS Directive and the AIFMD). In addition, managers are subject to the applicable Central Bank rules and regulations. See question 3.

17 What are the investment and borrowing restrictions on retail funds?

UCITS

In order to seek to ensure investor protection, UCITS are subject to specific investment restrictions, relating both to the type of investment that may be made and the extent of such investment.

Permitted asset classes

In summary, UCITS are permitted to invest in the following:

• transferable securities and money market instruments that are either admitted to official listing on a stock exchange in an EU member state or non-EU member state or that are dealt on a market that is regulated, operating regularly, recognised and open to the public;

• recently issued transferable securities that will be admitted to official listing on a stock exchange or other market (as described above) within a year;

• money market instruments, other than those dealt in on a regulated market, provided that the issue or the issuer is itself regulated for the purpose of protecting investors and savings;

• units of UCITS;

• units of non-UCITS CIS (in certain cases);

• deposits with credit institutions;

• financial derivative instruments that meet certain criteria; and

• transferable securities and money market instruments other than those referred to above (subject to a maximum aggregate limit of the NAV).

Investment and borrowing restrictions

The UCITS investment and borrowing restrictions are set out in the UCITS Directive, UCITS Regulations and Central Bank UCITS Regulations. However, in summary, the following should be noted:

• UCITS are required to provide high levels of portfolio diversification and liquidity;

• no more than 10 per cent of UCITS’ net assets may be invested in transferable securities or money market instruments issued by the same body, with a further aggregate limitation of 40 per cent of net assets on exposures of greater than 5 per cent to single issuers (otherwise known as the ‘5/10/40’ rule);

• there are exceptions to the above for investments issued or guaranteed by governments, local authorities or certain public international or supranational bodies;

• certain index replicators can take exposures of up to 20 per cent of net assets to single issuers, with up to 35 per cent to a single issuer in exceptional market conditions;

• up to 100 per cent of net assets can be invested in other CIS, provided no more than 20 per cent is invested in any one CIS, with an aggregate restriction of 30 per cent of net assets applying to investment in non-UCITS CIS as well as strict rules applying to the nature of the CIS in which a UCITS can invest, as well as limiting investment to a maximum of 25 per cent of the units of the underlying CIS;

• master-feeder structures are permitted under which a UCITS may invest, by way of derogation from the above limits, at least 85 per cent of its assets in the units of another UCITS;

• no more than 20 per cent of net assets can be invested in cash deposits with any one credit institution as permitted by the Central Bank and up to 10 per cent of net assets may be held for ancillary liquidity purposes with other credit institutions (which 10 per cent limit is raised to 20 per cent in the case of deposits made with the custodian or trustee);

• investments in or through derivatives may be made or taken to assets into which a UCITS can invest directly including financial instruments having one or several characteristics of those assets, and to financial indices, interest rates, foreign exchange rates and currencies (the maximum exposure to a single over-the-counter derivative counterparty is 5 per cent, increasing to 10 per cent for certain credit institutions) – various aggregations of the above restrictions apply;

• the maximum aggregate exposure to securities and instruments (other than CIS, derivatives and cash) not listed or traded on a recognised market is 10 per cent of net assets;

• additional general provisions apply, including concentration limits, prohibitions on taking legal or management control of issuers or prohibitions on uncovered sales; and

• borrowings are limited to 10 per cent of net assets and can only be used for temporary purposes (for liquidity).

Efficient portfolio management (EPM) techniques and instruments

UCITS are also permitted to use techniques and instruments relating to transferable securities and money market instruments for EPM purposes, which is taken to mean that they are economically appropriate and are entered into with the aim of reducing risk, reducing cost or generating additional capital or income (with a level of risk consistent with the UCITS risk profile).

Derivatives used for EPM purposes must comply with normal rules for investment in financial derivative instruments.

Repos or reverse repos and stock lending are expressly permitted with strict rules regarding collateral including acceptable forms of collateral, levels provided, diversification of collateral, valuation of collateral and how and where it is held and maintained.

RIAIFs

RIAIFs are subject to investment and eligible asset restrictions that are less restrictive than for UCITS funds but are far more restrictive than under the QIAIF regulatory regime. In particular, RIAIFs are subject to the following key investment and borrowing restrictions:

• investment in unlisted securities may be up to 20 per cent of the NAV of the RIAIF;

• investment in securities issued by the same institution may be up to 20 per cent of the NAV;

• index-tracking RIAIFs are subject to a limit of 35 per cent of the NAV of investments in securities by the same institution;

• no more than 20 per cent of the NAV may be invested in any class of security issued by a single issuer (does not apply to investment in other open-ended funds);

• investment of more than 20 per cent and up to 100 per cent of the NAV of the relevant RIAIF in government-backed securities requires the prior approval of the Central Bank;

• no more than 10 per cent of the NAV may be held in deposits with any one institution (this limit may be raised to 30 per cent for European Economic Area institutions or certain other credit institutions or the depositary of the RIAIF);

• up to 30 per cent of the NAV may be invested in any one open-ended regulated fund (this rule may be disapplied for certain categories of regulated funds under the AIF Rulebook);

• RIAIFs investing over 30 per cent of their NAV in other investment funds must ensure that the investment funds in which they invest are prohibited from investing more than 30 per cent of their NAV in other investment funds; and

• no more than 20 per cent of the NAV may be invested in unregulated, open-ended funds (this limit may be disapplied subject to further conditions in accordance with the requirements of the AIF Rulebook).

In addition, a RIAIF may borrow up to 25 per cent of its NAV but it is not permitted to offset credit balances against borrowings when determining the percentage of borrowings that remains outstanding. Repurchase or reverse repurchase contracts, securities borrowing or securities lending do not constitute borrowing for the purposes of the 25 per cent limit.

Unlike UCITS funds, RIAIFs are permitted to invest in certain types of alternative assets, such as real estate and hedge funds.

18 What is the tax treatment of retail funds? Are exemptions available?

Irish retail funds are not subject to any Irish taxes on the income (profits) or gains arising on their underlying investments.

While dividends, interest and capital gains that the fund receives with respect to its investments may be subject to taxes, including withholding taxes, in the countries in which the issuers of investments are located, these foreign withholding taxes may, nevertheless, be reduced or eliminated under Ireland’s network of tax treaties to the extent applicable.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Yes, a retail fund must appoint a depositary located in Ireland. The depositary is responsible for the safekeeping of assets, cash monitoring and oversight duties. A depositary must be one of the following:

• a credit institution;

• an investment firm subject to EU capital adequacy requirements and authorised under MiFID; or

• another category of institution subject to prudential regulation and ongoing supervision.

Under the AIFMD and the UCITS Directive, the depositary has restitution liability throughout the custody network for financial instruments lost while in custody and has or will have more prescriptive duties relating to daily monitoring of all cash flows, reconciliations and verifications, due diligence and risk assessments, segregation arrangements and sub-custody oversight.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

Retail funds are – whether UCITS or RIAIF – broadly subject to the same governance requirements. The formalities of registration and incorporation are discussed in question 12. Each of the legal structures available in Ireland is required to have detailed and accurate records kept in order to be able meet their relevant statutory and regulatory obligations. Irish UCITS funds must comply with the record-keeping requirements set out in the UCITS Regulations and Irish AIFs and Irish AIFMs must comply with the provisions of the AIF Rulebook.

Irish retail funds are required to have independent fund administrators appointed who are authorised and supervised by the Central Bank. In addition, UCITS funds and RIAIFs are required to have depositaries appointed for the purposes of holding the assets of the UCITS or RIAIF in custody in accordance with the requirements of the UCITS Regulations and the Irish AIFMD Regulations. A depositary of a RIAIF or QIAIF must enquire into the conduct of Irish corporate UCITS and RIAIFs or the management companies or general partners of non-corporate UCITS and RIAIFs in each annual accounting period and report thereon to the investors via a depositary report included in the annual report of the UCITS or the RIAIF.

Throughout the life of the relevant retail fund, there will be ongoing filing obligations to be made with the Central Bank and other relevant statutory authorities (ie, Companies Registration Office and the Irish Revenue Commissioners (tax authority)).

In addition to complying with regulatory obligations imposed by the UCITS Regulations or the Irish AIFMD Regulations, or both, management companies to UCITS funds, AIFs, self-managed UCITS funds and internally managed AIFs in Ireland are also required to comply with and adhere to the requirements of the Central Bank’s ‘Fund Management Company – Guidance’ published in December 2016 (the Guidance). The Guidance details the Central Bank’s requirements with respect to the following matters:

• delegate oversight;

• organisational effectiveness;

• directors’ time commitments;

• managerial functions;

• operational issues; and

• procedural matters.

All Irish UCITS and RIAIFs that are structured as corporate entities (ie, ICAVs and PLCs) are required to have a minimum of two Irish-resident directors and an Irish company secretary. The directors of an Irish corporate UCITS or RIAIF or the management companies or general partners of non-corporate UCITS and RIAIFs are required to comply with the Central Bank’s Fitness and Probity Standards issued under section 50 of the Central Bank Reform Act 2010 and must be pre-approved by the Central Bank.

Applications to become a director of a UCITS or RIAIF or a management company or general partner of non-corporate UCITS and RIAIFs must be made to the Central Bank via an online individual questionnaire (IQ). The IQ application requires applicant directors to provide detailed information on their educational and professional experience and expertise together with, inter alia, details of the proposed time commitment (in days) that they will provide per year in respect of that directorship. In addition, the appointing entity, in validating the IQ, is required to confirm its expectation regarding the proposed director’s time commitment per year.

Finally, corporate UCITS and RIAIFs or the management companies or general partners of non-corporate UCITS and RIAIFs are recommended to adhere to a voluntary corporate governance code for funds put in place by the Irish Funds Industry Association at the request of the Central Bank.

21 What are the periodic reporting requirements for retail funds?

Retail funds are required to publish an annual audited report for each financial year and an unaudited semi-annual or half-yearly report. The annual report must be published within four months of the year end, the semi-annual report must be published within two months of the period end and both must be sent to the Central Bank. Both must also be offered free of charge to investors before the conclusion of a contract and supplied free of charge to investors upon request.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

For retail funds, there is a general entitlement to refuse an application for shares or units at the discretion of the board of directors or the fund or the relevant management company. In addition, shares or units may not be issued to the following persons:

• those located in jurisdictions where the fund cannot be sold or marketed;

• those who do not provide anti-money laundering or counterterrorist financing documentation; or

• those that would cause negative legal, tax or regulatory consequences for the fund or other investors.

For UCITS funds, there are no redemption restrictions other than gating the fund in certain prescribed circumstances or suspending it in more extreme cases.

A closed-ended RIAIF does not facilitate redemption requests during the life of the RIAIF. Fund documentation may also provide for temporary suspension in specified circumstances. The Central Bank must be notified immediately of any such suspension.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

See question 12.

24 What are the key laws and other sets of rules that govern non-retail funds?

See ‘RIAIFs’ in question 13.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

See question 14.

26 Who can market non-retail funds? To whom can they be marketed?

The marketing and distribution of non-retail funds can be carried out by the fund or the AIFM or delegated to the investment manager, distributor or any other entity authorised to carry out that function.

There are regulatory minimum subscription and investor qualification requirements for non-retail funds and they may be marketed to any investors who fulfil the regulatory criteria. Non-retail AIFs may only be marketed to professional investors in Ireland. QIAIFs may only be marketed to qualifying investors (as defined in the AIF Rulebook).

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

A QIAIF may only be sold in Ireland to qualifying investors and a minimum subscription of €100,000 applies.

A qualifying investor is as follows:

• an investor who is a professional client within the meaning of MiFID;

• an investor who receives an appraisal from an EU credit institution, a MiFID firm or a UCITS management company to the effect that the investor has the appropriate expertise, experience and knowledge to adequately understand the investment in the QIAIF; or

• an investor who certifies that they are an informed investor by providing the following:

• confirmation (in writing) that the investor has such knowledge of, and experience in, financial and business matters as would enable the investor to properly evaluate the merits and risks of the prospective investment; or

• confirmation (in writing) that the investor’s business involves, whether for its own account or the account of others, the management, acquisition or disposal of property of the same kind as the property of the QIAIF.

Qualifying investors must self-certify in writing to the QIAIF that they meet the minimum initial investment per investor and appropriate expertise and understanding tests and are aware of the risk involved in the proposed investment and of the fact that inherent in such investments is the potential to lose all of the sum invested. When marketing a QIAIF in another EU member state under the AIFMD marketing passport, the AIFM may only market units or shares in the relevant QIAIF to professional investors (as defined in MiFID).

28 Are there any special requirements that apply to managers or operators of non-retail funds?

See question 16.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Irish non-retail funds are not subject to any Irish taxes on the income (profits) or gains arising on their underlying investments.

While dividends, interest and capital gains that a fund receives with respect to its investments may be subject to taxes, including withholding taxes, in the countries in which the issuers of investments are located, these foreign withholding taxes may, nevertheless, be reduced or eliminated under Ireland’s network of tax treaties to the extent applicable.

An amended tax regime to that above applies to non-retail funds that invest significantly in Irish real estate assets.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

See question 19.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

See question 20.

32 What are the periodic reporting requirements for non-retail funds?

QIAIFs are required to publish an independently audited annual report for each financial year. The deadline for the publication of the annual report of an AIF is within six months of the year end. In addition, QIAIFs that are structured as unit trusts must also prepare an unaudited half-yearly report, which must be published within two months of the relevant half-yearly reporting date. In addition, QIAIFs are required to report their NAV, units in issue, subscription or redemption, profit or loss, fee and expenses data to the Central Bank on a monthly basis and also submit quarterly statistical returns.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Typically, a client who requires a separately managed account will enter into a discretionary investment management agreement with a MiFID-authorised investment firm who has the authority to engage in portfolio management and who will buy or sell financial instruments on the client’s behalf. Where the MiFID-authorised investment firm is authorised to hold client assets, it will hold these assets on the client’s behalf with an eligible custodian in accordance with the Client Asset Regulations 2015, SI No. 104/2015, that are designed to protect and safeguard client assets. Where the MiFID-authorised investment firm is not authorised to hold client assets, the client will appoint a third-party custodian and grant the MiFID-authorised investment firm a mandate to issue instructions to the custodian on the client’s behalf.

34 What are the key legal issues to be determined when structuring a separately managed account?

The terms for a separately managed account will be set out in the discretionary investment management agreement between the client and the MiFID-authorised investment firm. The level of protection afforded to the client is driven by the client’s categorisation by the MiFID-authorised investment firm with a retail client receiving the highest level of protection under MiFID II in terms of how the product is sold to the client, the level of information provided to the client and the duty of care owed to the client. If, on the other end of the spectrum, a client is categorised as an eligible counterparty, it will be afforded very little protection under the MiFID II conduct of business rules and the agreement will be based on negotiation between the parties. Where a MiFID-authorised investment firm has the authority to hold the client’s assets it must do so in accordance with the Client Asset Regulations and this will be referenced in the discretionary investment management agreement.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

For an entity to be in a position to offer a client the service of separately managed accounts, it must be regulated either as a MiFID investment firm authorised to engage in portfolio management or an AIFM authorised to provide the additional service of individual portfolio management in accordance with mandates given by investors on a discretionary client-by-client basis.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

Updates to the previous MiFID regime came into force in January 2018. The amendments introduced by MiFID II have created significant new rules that, inter alia:

• impact EU entities manufacturing and distributing funds in terms of product design;

• set requirements relating to how such funds are sold to customers (eg, retail investors will need to seek advice in order to access ‘structured UCITS’ (deemed a complex product under the new MiFID II rules));

• impose an effective ban on inducements; and

• provide for greater transparency on fees.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

While there is no requirement for retail or non-retail funds authorised by the Central Bank to be listed, the Irish Stock Exchange (ISE) operates a streamlined listing regime for retail and non-retail funds authorised and regulated in an EU member state. The ISE also lists funds from many non-EU jurisdictions. In order to list an investment fund on the ISE, a listing sponsor must be formally appointed and listing particulars must be drafted and published in compliance with the ISE listing regime. In order to list a closed-ended fund on the Main Securities Market of the ISE, application must also be made to the Central Bank (as competent authority under the Prospectus Directive).

An ISE listing increases distribution capacity and meets the needs of institutional investors and pension funds that have limited capacity to invest in unlisted securities. Investors take comfort that an ISE-listed fund has met the suitability, diversification and ongoing compliance and reporting requirements of an internationally recognised listing authority with specific expertise in investment funds. Another benefit of listing to investors is the transparency that comes with complying with the ongoing reporting requirements: the NAV of the listed fund must be published on the ISE upon calculation, market announcements must be made in relation to material changes and the audited financial statements of the fund must be filed with the ISE.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes. Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man and Jersey are approved as jurisdictions from which corporate funds can redomicile to Ireland pursuant to this legislation. The Central Bank has issued guidance on the practical steps involved in the redomiciliation process for both corporate funds and unit trusts. Redomiciliation can be a more efficient alternative to a cross-border merger as it does not involve setting up a new fund or selling or transferring assets, shares or investors. The legal framework seeks to avoid unnecessary administrative burdens and expressly recognises that a migrating fund will not be treated as a new entity in Ireland, so that its existing identity and track record may be preserved. Further, there is no other taxable event as a consequence of the redomiciliation.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Other than those outlined above, there are no specific rules.

Sarah Cassidy

sarah.cassidy@dilloneustace.ie

Shane Geraghty

shane.geraghty@dilloneustace.ie

33 Sir John Rogerson’s Quay

Dublin 2

Ireland

Tel: +353 1 667 0022

Fax: +353 1 667 0042

www.dilloneustace.com

Japan

Kiyomi Kikuchi and Kazuyuki Wakasa

TMI Associates

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

In Japan, fund management activities including investment of fund assets and offering and marketing of fund interests are regulated principally by the Financial Instruments and Exchange Act (Law No. 25 of 1948, as amended (FIEA)). The Financial Services Agency of Japan (FSA) has the primary responsibility for the oversight, supervision and inspection of funds and fund managers and those marketing the funds.

Under the FIEA, the scope of ‘investment management business’ is considered to include provision of investment management services:

• to counterparties (customers) to a discretionary investment management contract, pursuant to which an investment management business operator manages the assets of such parties on a discretionary basis;

• for the benefit of investors of an investment trust established under the Laws on Investment Trust and Investment Corporation (Law No. 198 of 1951, as amended (LITIC)) as the operator of the trust;

• to an investment corporation incorporated under the LITIC under an asset management contract between an investment management business operator and the investment corporation; and

• for the benefit of investors of a collective investment scheme (CIS), such as an investment limited partnership formed under the Investment Limited Partnership Act of Japan.

In addition, there is also a category of business aimed at managing the assets of specific professional investors (qualified investor businesses), which was introduced in Japan in 2012. Under this category of business, an investment manager can provide services solely to ‘qualified investors’, including qualified institutional investors (QIIs) and certain other qualified pension fund, corporate or individual investors who satisfy certain criteria, with a ¥20 billion limitation on the total amount of assets to be managed.

Pursuant to the FIEA, to engage in one of the investment management businesses above, fund managers are required to register with the FSA. There is, however, an exception to the registration requirement under article 63 of the FIEA in relation to investment management services provided to CISs (the article 63 exemption). Owing to the recent amendment to the FIEA, which became effective on 1 March 2016 (the 2016 amendment), the requirements for the article 63 exemption have been tightened as outlined in question 36.

It should also be noted that, in Japan, non-discretionary investment advisory business is a separate business from the investment management business, and accordingly, those intending to provide non-discretionary investment advisory service must be registered separately under the FIEA.

2 Is fund administration regulated in your jurisdiction?

Under the FIEA, a registered investment manager is responsible for preparing and maintaining the books and records in relation to its business, including investment management contracts entered into with the customer, statutory documents to be delivered to the customer before and upon entering into investment management contracts, investment management reports regarding the fund assets, detailed statements regarding investments and trade orders, etc. As a general rule, investment management reports must be delivered periodically to customers at least every six months. Investment managers are also required to prepare a business report annually and submit it to the FSA within three months of the end of each business year.

There are no explicit restrictions on the outsourcing by the investment manager of the foregoing fund administration business to a third-party business provider. Other than the outsourcing of application or IT businesses, however, it is not yet common in Japan to outsource the administration business. Trade settlements are, in principle, conducted through financial institutions, namely the securities company or the trust bank, with which the customer has opened an account.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

As set out in question 1, to engage in the investment management business in Japan, in principle, it is necessary to be registered with the FSA. The applicant for registration, if it is a Japanese entity, must be a joint-stock corporation incorporated under the Companies Act of Japan, with a board of directors and a corporate auditor or a committee system and a minimum capital of ¥50 million. In addition, an adequate compliance system, with sufficient staff to properly perform the business of an investment manager, must be in place. (A foreign company that has similar organisation in place is also eligible for registration, provided that it has a business office in Japan.)

The registration requirements in relation to qualified investor businesses are more relaxed. The applicant is required only to be a joint-stock corporation with a corporate auditor or a committee system and a minimum capital of ¥10 million. In addition, the compliance function can be outsourced to an affiliated company, among others.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

As a general rule, anyone who intends to perform investment management activities in Japan or provide services towards customers in Japan must register as an investment management business operator with the FSA. As an exception, however, a foreign entity licensed to conduct investment management business in its own jurisdiction may provide discretionary investment management services solely to a Japanese-registered investment manager without such registration. Similarly, a foreign entity with a licence to conduct non-discretionary investment advisory business in its own jurisdiction may provide investment advisory services solely to Japanese-registered investment management business operators. It is not permitted, however, for a foreign-licensed investment manager to provide investment management services to those who have only registered as non-discretionary investment advisers in Japan.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

A shareholder who acquires 20 per cent or more of the voting shares of an investment management business operator is required to file a notification with the FSA as a ‘major shareholder’. If the shareholding ratio becomes more than 50 per cent, the major shareholder must file a further notification as a ‘specified major shareholder’.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are no regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements except that fee-related information such as the amount, calculation method and payment timing must be specified in the disclosure documents and investment management contracts. With regard to the disclosure of the compensation of a fund manager as operator of investment trusts, more detailed information must be set forth in the investment management reports delivered to customers, such as the specific services provided as consideration for the fees and costs.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Under the FIEA, marketing of securities including fund interests is generally permitted to the following registered financial instruments firms:

• a Type I financial instruments firm that is eligible to handle marketing, solicitation, undertaking and offering of liquid securities, such as units of investment trusts or shares of investment corporations (Category I securities); and

• a Type II financial instruments firm that is eligible to handle the marketing and solicitation of illiquid securities such as the interests of CISs (Category II securities).

There is, however, an article 63 exemption to the above requirement in relation to the marketing of fund interests as well. Those who only intend to solicit investments in CISs with at least one QII and fewer than 50 non-QIIs are not required to register as financial instruments firms, but only need to file a notification to the local finance bureau. It should be noted, however, that, because of the 2016 amendment, the scope of QIIs and non-QIIs eligible for the article 63 exemption has been narrowed (see question 36).

8 What marketing activities require authorisation?

Activities related to the solicitation of offers to acquire investment in securities (whether liquid or illiquid) require registration either as Type I or Type II financial instruments firms. Although no definition is provided under the law, ‘solicitation’ is generally defined as inducing the acquisition or purchase of specific securities by enhancing the interest of an investor.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

As a general rule, any marketing activities conducted onshore or towards customers in Japan are regulated under the FIEA. Accordingly, any overseas entity that wishes to perform fund-marketing activities in Japan is required to register and obtain the same type of financial instruments business status as domestic firms. However, as an exception, if an overseas entity is licensed to conduct securities-related business in its own jurisdiction, it is permitted to make solicitation of securities to certain types of financial institutions (solely) from offshore.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

Foreign firms are eligible to apply for registration as Type I or Type II financial instruments firms. However, considering the time and effort it takes to complete the registration process, many foreign funds prefer to retain a locally registered Type I or Type II financial instruments firm to handle the offering and marketing of applicable fund interests.

Not all foreign funds can be marketed in Japan. The Japan Securities Dealers Association provides for the selection criteria for foreign funds that qualify for marketing in Japan under the Association’s self-regulatory rule. Member firms (registered financial instruments firms) are prohibited from offering foreign funds in Japan that do not satisfy such selection criteria.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

There are no regulatory restrictions on the structuring of intermediaries’ compensation except that fee-related information such as the amount, calculation method and payment timing must be specified in the disclosure documents delivered to customers. In practice, there are several investment trust products in which intermediaries (ie, security companies) do not charge brokerage fees. Such investment trust products are typically called ‘no load investment funds’.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

The legal vehicles most commonly used to set up a retail fund are open-ended investment trusts. For such an investment trust to be formed, the operator of the trust fund will prepare a trust deed and file its content with the Japanese regulator, and prepare and enter into a trust agreement with a trustee (normally a trust bank) to set up a trust. The fund interest will be issued to the beneficiaries of the trust. Typically, these funds are publicly offered to wide-ranging retail investors through securities companies, in which case a securities registration statement must be filed with the FSA.

A closed-ended investment corporation investing in real estate-related assets and foreign-domiciled unit trusts is also a popular investment structure for retail investors in Japan. However, for the purpose of this chapter, unless specifically stated otherwise, the explanation will be focused on publicly offered investment trusts, which are the most common type of retail funds offered in Japan.

13 What are the key laws and other sets of rules that govern retail funds?

The FIEA primarily governs the authorisation of investment management business and regulates the activities of investment managers, acting as fund operators, who are registered under the FIEA. It also regulates the offering, placement and marketing of Category I securities, which include interests in investment trusts. The LITIC regulates domestic and foreign investment trusts as well as investment corporations formed or offered in Japan, and governs the following:

• the structure, organisation and operation of such funds;

• information to be included in the trust deed;

• rights of the beneficiaries; and

• disclosures to investors including investment management reports.

Self-regulatory organisations such as the Investment Trusts Association of Japan (ITA) also provide detailed rules in relation to the above matters.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

As set out in question 12, the fund operator must file a trust deed with the regulator before entering into a trust agreement with the trustee. Under the LITIC, a trust agreement must be entered into between an operator who must be an investment manager registered under the FIEA and a trustee who must be a trust company authorised under the Act on Concurrent Operation, etc, of Trust Business by Financial Institutions. (In the case of a foreign investment trust established under a foreign law, a notification must be filed with the FSA before beginning solicitation of the fund interest.)

15 Who can market retail funds? To whom can they be marketed?

If a registered investment manager acting as an operator of the fund intends to market the interest of such fund directly to investors, registration as a Type II financial instruments firm will also be required. However, in the case of publicly offered investment trusts, an operator will normally retain a third-party securities firm (or other registered financial institution) to handle the marketing of such fund interests. To market such Category I security, a Type I financial instruments firm registration is required (see question 7). There is no restriction on the people to whom such fund interests can be marketed.

16 Are there any special requirements that apply to managers or operators of retail funds?

As provided under question 14, an operator of an investment trust must be a registered investment manager (see question 3 for the eligibility requirement to register as an investment manager with the FSA). By law, an investment manager owes a duty of loyalty and the duty of care required of a prudent manager in managing the assets of the investment trust. In addition, investment managers and their officers and employees are required to perform their duties towards their customers with sincerity and fairness. They are also subject to certain rules of conduct such as that of avoiding conflicts of interest.

17 What are the investment and borrowing restrictions on retail funds?

There are certain investment and borrowing restrictions placed on a publicly offered investment trust under the FIEA, the LITIC and the self-regulatory rules of the ITA in Japan.

An investment trust may acquire no more than 50 per cent of the shares in a single issuer. Assets of the investment trust may be invested in other fund interests (but with a limitation of no more than 5 per cent of the net assets) but may not be invested in a ‘fund of funds’ (an investment trust that makes investments in other investment trusts or investment corporations). An investment trust may invest in derivative instruments; however, such transaction may not be conducted when a risk equivalent amount calculated by a reasonable method (ie, any of the three methods proposed by the ITA) is expected to exceed the net assets of the investment trust. From the perspective of diversification of credit risks, no more than 20 per cent in total of the assets of the investment trust may be invested in securities of a single issuer (and no more than 10 per cent each in the stocks, bonds and derivative products of such issuer).

Borrowing of money by the investment trust is limited for the purpose of the payment of redemption amounts and, in the case of investment trust where distributed amounts can be reinvested, the distribution of dividends, to the extent of the amount necessary to make such payments.

18 What is the tax treatment of retail funds? Are exemptions available?

Under the tax laws of Japan, a publicly offered investment trust is not subject to taxation with respect to the profits or income gained through the investment of trust assets. Distributions made by the investment trust to investors are subject to a withholding tax at the rate of 20.315 per cent (as of January 2018), except that distributions that are, in substance, a return of the principle, are non-taxable. Profits gained upon redemption or liquidation of interests are also generally taxable at the rate of 20.315 per cent (as of January 2018). (Tax treatment of a publicly offered foreign investment trust is generally the same as that of a domestic investment trust.)

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

In the case of an investment trust formed under the LITIC, an investment manager and a trustee company will enter into a trust agreement, and accordingly, it is structurally expected that the portfolio of assets be held by a trustee company. Further, to protect the assets of the trust, a trustee is obliged to segregate its own assets and those of the fund under the Trust Law of Japan.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

A trust deed of an investment trust must be submitted to the FSA by the investment manager before the execution of the trust agreement with the trustee. When a public offering is to be made, a securities registration statement (or a short-form statement, together with a securities report, under certain conditions) must be filed with the local finance bureau before the solicitation of fund interests, and a prospectus must be prepared and delivered to the investor. If an investor intends to acquire the fund interest, a document setting forth, inter alia, the contents of the trust deed must be delivered to the investor (unless the same information is covered in the prospectus).

With respect to the governance exercised by the holders of the fund interest, the consent of two-thirds of the voting interests is required to approve a material change to the provisions of the trust deed or a merger between investment trusts (except for mergers with a minimal impact on the interest of investors).

See question 2 for the general record-keeping requirements and question 21 for the reporting requirements of retail funds.

21 What are the periodic reporting requirements for retail funds?

A publicly offered investment trust is subject to ongoing disclosure requirements after its formation. The operator of the fund must file an annual securities report to the regulator containing such information as the details of the fund, status and performance of investments, financial statements and information on the operator, as well as prepare and submit a business report for each business year to the FSA. It must also prepare the investment management reports at the end of the calculation period of the fund assets and deliver a physical short-form version and an electronic comprehensive version to the investors.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Retail funds in Japan are typically structured as open-ended investment trusts and, accordingly, redemption can be requested in principle at any time to ensure liquidity of fund interests. The operator of the fund may, however, place restrictions on the redemption or purchase of interests in such retail funds, provided that such restrictions are clearly set forth in the fund prospectus. In practice, there are often funds that, inter alia, have a limited window period, restrictions on the volume of redemptions or that are subject to suspensions or cancellations of redemptions owing to the suspension of trading on the exchange.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Among the various types of non-retail funds, an investment limited partnership (Japanese LPS) formed under the Investment Limited Partnership Act of Japan (Law No. 90 of 1998, as amended) (the LPS Act) is a legal vehicle frequently used for private equity funds. The Japanese LPS is formed upon the execution of a limited partnership agreement by and among the general partner and the limited partner in accordance with the LPS Act.

24 What are the key laws and other sets of rules that govern non-retail funds?

The LPS Act sets out rules for a Japanese LPS, covering such matters as the role and responsibility of the general partner and the limited partner, and the investment restrictions of a Japanese LPS.

Under the LPS Act, a Japanese LPS must have at least one general partner and at least one limited partner. The general partner manages the operation of the Japanese LPS and has unlimited liability for the obligations of the Japanese LPS. The general partner shall execute the business of the Japanese LPS in accordance with due care of prudent managers. By contrast, the limited partner does not have the authority to execute the business of the Japanese LPS and is liable for the obligations of the Japanese LPS only to the extent of its capital contribution.

With respect to investment restrictions, the LPS Act provides for a wide range of asset classes in which a Japanese LPS can invest; however, the acquisition of shares, warrants, equity interests and debt securities issued by foreign corporations must be less than 50 per cent of the total amount of capital contribution.

Solicitation for the acquisition of partnership interest and the management of the fund assets are regulated by the FIEA.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The solicitation of investors for acquisition of partnership interests in a Japanese LPS is regulated under the FIEA as a Category II security. If more than half of the assets of the Japanese LPS are to be invested in securities and partnership interests are to be publicly offered (ie, the number of investors who acquire the partnership interest as a result of solicitation is expected to be 500 or more), the issuer of such interests must file a securities registration statement before solicitation of investors and must prepare a prospectus to be delivered to the investors, which can be quite time-consuming and cumbersome. Accordingly, in practice, limited partnership interests are often solicited by way of private placement.

In addition, if the general partner of the LPS wishes to solicit investors on its own initiative, it must register as a Type II financial instruments firm before such solicitation with the following two exceptions: the first applies if the general partner delegates all of the solicitation activities to an outside firm that is registered as an operator of a Type II financial instruments business; and the second is the article 63 exemption, where the general partner can solicit investors by means of private placement after filing a certain notification with a local finance bureau in accordance with article 63 of the FIEA. (As described in question 36, the 2016 amendment applies to the article 63 exemption.)

26 Who can market non-retail funds? To whom can they be marketed?

The solicitation of investors for the acquisition of a partnership interest must be made by one of the following:

(i) the general partner that has registered itself as a Type II financial instruments firm;

(ii) a third party registered as a Type II financial instruments firm and that is given the entire authority to solicit investors from the general partner; or

(iii) the general partner that has submitted a notification to the local finance bureau in reliance upon the article 63 exemption.

As long as a registered Type II financial instruments firm solicits investors by means of (i) or (ii), there is no express restriction on the qualification of investors. By contrast, if the general partner solicits investors using the article 63 exemption, there must be at least one QII. Among the investors being solicited, the number of non-QIIs must be no more than 49. The general partner shall not solicit investors who are included in the list of disqualified investors under the FIEA, unless otherwise exempted thereunder. (See question 36 for the narrowing of the scope of QII and non-QII eligible for the article 63 exemption arising from the 2016 amendment.)

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

As long as a registered Type II financial instruments firm solicits investors for the acquisition of a partnership interest, there are no express restrictions on the qualification of investors. On the other hand, if the general partner solicits investors by means of private placement in reliance on the article 63 exemption, there is a restriction on the qualification of investors as described in question 26. (See question 36.)

28 Are there any special requirements that apply to managers or operators of non-retail funds?

The general partner must, in principle, be registered as an operator of an investment management business if more than 50 per cent of the assets of the Japanese LPS are invested in securities or derivatives. The general partner, however, often employs one of the following exemptions to the registration requirement:

• delegation of the entire authority to handle investment management business to an outside registered investment management firm, by entering into a discretionary investment management contract with such outside firm; or

• relying on the article 63 exemption, where the general partner can handle investment management activities after filing a notification with a local finance bureau in accordance with article 63 of the FIEA.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Under Japanese tax law, a limited partnership is treated as a non-taxable (pass-through) entity and is not subject to corporate tax. Accordingly, income and loss arising from the investment by the partnership can be allocated to each investor without taxation at the partnership level.

Foreign investors are subject to corporate tax and income tax on their income generated in Japan. The scope of the income subject to Japanese taxation depends on whether foreign investors have a permanent establishment in Japan and the type of such establishment. A prevailing view is that if a foreign investor conducts investment in Japan through a limited partnership that has a place of business in Japan, such foreign investor is deemed to have a permanent establishment because its investments in Japan are jointly carried out with other partners through such place of business in Japan. If a foreign investor has a permanent establishment in Japan, the distribution of profit from the partnership will be subject to Japanese taxation. The tax reform of 2009, however, has created an exemption in which foreign investors in a Japanese LPS will not be deemed to have a permanent establishment in Japan under certain conditions.

In addition to the foregoing, the tax reform of 2014 has established a new tax benefit to promote venture capital investment through the Japanese LPS. This new tax incentive allows corporate investors (limited partners) in a Japanese LPS to treat up to 80 per cent of their investment amount as deductible expenses if they satisfy certain requirements under Japanese tax law. Owing to a recent tax reform, this tax benefit has now become applicable only if the LPS has been accredited by the Ministry of Trade, Economy and Industry on or prior to 31 March 2019, and the applicable percentage has been reduced from 80 per cent to 50 per cent if the LPS is accredited by the Ministry of Trade, Economy and Industry after 31 March 2017.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under the FIEA, a Type II financial instruments firm shall not solicit investors for acquisition of partnership interest, unless the governing document of the Japanese LPS ensures the segregation of the funds contributed from the limited partners and the assets of the general partner. Financial institutions such as commercial banks and trust banks can serve as a custodian of the funds contributed from the limited partners. In addition to the foregoing, if the general partner is a registered investment manager, it must segregate the assets of the Japanese LPS from the assets of other clients and its own assets.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

With respect to the registration of a Japanese LPS, once the limited partnership agreement becomes effective, certain information (including the type of business and name of the Japanese LPS) must be registered with the local legal affairs bureau with jurisdiction over the location of the Japanese LPS within two weeks. If there are any subsequent changes to the registered information, the general partner must register those changes with the local legal affairs bureau within two weeks.

With respect to record-keeping, the general partners must prepare the balance sheet, profit and loss statement and business report, along with their detailed attachments for the business year concerned, within three months of the end of each business year. These documents are maintained at the principal office of the Japanese LPS for five years for inspection by limited partners and creditors. In addition, if a registered investment manager handles the management of the assets contributed by the limited partners, it must provide a periodical management report to the client at least once every six months.

Unless solicitation of investors constitutes a public offering of securities, the general partner is not required to file the securities registration statement referred to in question 25. If the general partner wishes to make use of the article 63 exemption for either the private placement of a partnership interest or investment management activities, it must file a notification with the local finance bureau. In addition, by virtue of the 2016 amendment, the general partner who has made use of the article 63 exemption is now subject to ongoing bookkeeping and annual business reporting obligations (see question 36).

As previously mentioned, a Japanese LPS is composed of the general partner and the limited partner. The general partner manages the operation of the Japanese LPS and has unlimited liability for the obligations of the Japanese LPS.

32 What are the periodic reporting requirements for non-retail funds?

See question 31.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts (SMAs) are typically structured as a discretionary investment management product whereby a wrap account or an individually customised managed account is created pursuant to a discretionary investment management contract between a customer and a registered investment manager (typically a securities company or a trust bank). In recent years, SMAs, especially fund wrap accounts, have become increasingly popular among the retail market owing to the lowering of the minimum purchase amount. Management fees for SMAs are typically based on the value of the asset under management.

34 What are the key legal issues to be determined when structuring a separately managed account?

To conduct a discretionary investment management service for SMAs, the fund manager must be a registered investment management business operator. When a registered investment manager solicits customers to open a managed account that is expected to invest in fund interests, it must provide an explanation of the details of the fund to fulfil its accountability obligation. Accordingly, in practice, a securities company with a registration as a Type I financial instruments business operator in addition to the registration as an investment management business operator would normally market, as well as manage, the SMA, to avoid any violation of the solicitation rules for fund interests.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

As set out in question 34, although SMAs are structured as a discretionary investment management product and only an investment manager registration is technically necessary to market a discretionary investment management contract for an SMA, normally, a business operator with both a Type I financial instruments business and an investment management registration will market the SMA.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

In response to the scandals in which unsophisticated individuals suffered loss as a result of their investment in funds making use of the article 63 exemption, the FIEA was amended in 2015 in order to strengthen the governmental supervision over general partners making use of this exemption. The key elements of the amendment are as follows:

• limiting the scope of non-QII investors eligible for the article 63 exemption only to those certain sophisticated investors enumerated in the enforcement order of the FIEA;

• clarification of the situation where the article 63 exemption is not available even if there is a QII investor in the fund (eg, in the event that there are no QII investors except for a Japanese LPS with net assets of less than ¥5 million);

• requirement of additional information at the time of filing notifications to the regulator (such as the location of the office or the place where the general partners will conduct their business in reliance upon the article 63 exemption);

• imposing record-keeping and annual business reporting obligations on the fund operators;

• providing eligibility requirements for the article 63 exemption and disqualifying applicants that satisfy certain conditions under the FIEA;

• the introduction of a code of conduct equivalent to those applicable to registered financial instrument business operators; and

• public disclosure of certain information (such as part of the notification and the annual business report).

This amendment became effective in March 2016.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Exchange-traded funds (ETFs) have been fully available in Japan since 2001. Domestic and foreign ETFs can be listed on the stock exchange but the types of fund that are eligible for listing are limited to those passively managed funds that attempt to track and replicate the performance of a specific index (such as a stock, bond or commodity index). It is also a requirement that there be at least two authorised participants for the listing of an ETF. Only authorised participants (typically, large broker–dealer firms) may subscribe to the primary offering of ETFs, and retail investors will only participate in the secondary market. Disclosure and reporting requirements of ETFs are similar to the unlisted publicly offered retail funds, except that the delivery of investment management reports to the investors is not required.

With respect to non-retail funds, it is not currently expected that partnership interests will be listed on securities exchanges in Japan and therefore no rules are in place.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

There is no system to redomicile an overseas fund to Japan.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no specific rules from the fund management regulatory perspective.

Update and trends

Japan is preparing for the launch of the Asia Region Funds Passport (ARFP). The ARFP is an initiative by the Asia-Pacific economies to allow funds registered in ARFP-participant countries to be sold in other participant countries by establishing common fund registration standards among participating countries (similar to UCITS in the EU). It aims to facilitate and expedite cross-border offerings of ARFP-compliant funds within the bloc of ARFP-participant countries. In order to participate in the scheme, the countries are required to obtain the consent of the other participating countries and become a signatory to the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information. Japan, together with Australia, Korea, New Zealand and Thailand, are the current signatories. The participating economies are finalising legal and regulatory requirements in their respective jurisdictions. It is expected that this preparatory work will be completed in due course and that the passport will commence later in 2018 (when at least two participating economies have formally confirmed that implementation has been completed).

Domestically, there is a continuing emphasis by the FSA to create a customer-oriented financial services culture in Japan, especially within the asset management community. The move is based on the understanding by the FSA that customer-oriented business conduct is essential for steady accumulation of household financial assets in Japan, which will also contribute to the sustainable growth of the national economy and the development of the financial market. On 30 March 2017, the FSA published its ‘Principles for Customer-Oriented Business Operations’ (the Principles) applicable to financial business operators (FBOs) in Japan, including registered investment managers. The Principles set out the following seven overarching principles for FBOs, to:

(i) establish and announce the policy concerning fiduciary duty;

(ii) pursue the clients’ best interest;

(iii) appropriately manage conflicts of interest;

(iv) clarify fees and commission to the clients;

(v) provide important information that is easily understandable to the clients;

(vi) provide services suitable for clients in the creation, sale and recommendation of financial products; and

(vii) establish the framework for appropriately motivating FBO’s personnel to comply with fiduciary duties.

Among these Principles, Principle (v) may be challenging to the investment manager, as the notes to this Principle state that it should be indicated to customers whether unbundling of packaged products (ie, products such as fund of funds or fund wraps) is available, and that explanations made to customers should be proportional to the complexity of the product or services offered (including presenting information in a way that allows customers to compare similar financial products and services).

Kiyomi Kikuchi

kkikuchi@tmi.gr.jp

Kazuyuki Wakasa

kwakasa@tmi.gr.jp

23rd Floor, Roppongi Hills Mori Tower

6-10-1 Roppongi

Minato-ku

Tokyo 106-6123

Japan

Tel: +81 3 6438 5511

Fax: +81 3 6438 5522

www.tmi.gr.jp

Luxembourg

Marc Meyers and Veronica Aroutiunian

Loyens & Loeff Luxembourg Sàrl

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

There are two types of funds in Luxembourg: regulated funds (ie, authorised and supervised by the Financial Sector Supervisory Commission (CSSF)) and unregulated funds. Regulated funds are governed by one of the following (product) laws:

• the Law of 19 December 2010 on undertakings for collective investment (the UCI Law);

• the Law of 15 June 2004 on the investment company in risk capital (the SICAR Law); and

• the Law of 13 February 2007 on specialised investment funds (the SIF Law).

Unregulated funds are governed by either the Law of 23 July 2016 on reserved alternative investment funds (the RAIF Law), or, to the extent that they qualify as alternative investment funds (AIFs) within the meaning of the Law of 12 July 2013 on alternative investment fund managers (the AIFM Law), and are not organised under any of the product laws or the RAIF Law, the Law of 10 August 1915 on commercial companies (the Companies Law).

Fund managers are subject to the UCI Law or the AIFM Law, or both.

2 Is fund administration regulated in your jurisdiction?

Fund administration is a regulated activity in Luxembourg and either performed by an authorised Luxembourg management company (ManCo) or an alternative investment fund manager (AIFM), or delegated to an administrative agent authorised by the CSSF under the Law of 5 April 1993 on the financial sector (the Financial Sector Law).

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

When setting up a regulated fund, a prior written application for authorisation has to be filed with the CSSF. Following the review of the application file, the CSSF usually asks additional questions or makes comments (or both) and, to the extent the review phase is successfully completed, informs the applicant that the fund may be established.

Once the regulated fund is established (before a Luxembourg notary or, depending on the legal form of the fund, under private deed) and all agreements with the service providers have been executed, copies of the fund’s constitutive document and fully executed agreements have to be filed with the CSSF, together with the final version of the offering document, which shall be submitted to the CSSF for visa. Subject to the satisfactory receipt of all required documents, the CSSF will register the fund on the relevant official list of supervised entities and issue the visa-stamped offering document.

The CSSF supervises regulated funds on a continuous basis. Regulated funds have to apply for prior approval with respect to each change in their fund documentation (ie, constitutive document and offering document) or governance (eg, appointment of a new board member or replacement of administrative agent, depositary or portfolio manager).

Unregulated funds do not require prior CSSF authorisation. Once the unregulated fund is established, the Luxembourg manager has to inform the CSSF about its appointment as manager of the relevant fund.

A Luxembourg manager has to obtain prior authorisation from the CSSF and comply with certain minimum requirements, including in respect of: own funds; appropriate infrastructure and internal governance; authorised shareholding and management; and external audit.

The central administration of a Luxembourg manager has to be located in Luxembourg. Managers who wish to provide discretionary management services, besides collective portfolio management, must participate in an investor compensation scheme.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

Luxembourg law applies when the fund or the manager, or both, are established in Luxembourg, and when investors to whom a fund is marketed are domiciled in Luxembourg.

When management of a regulated fund is delegated to a non-Luxembourg EU manager, prior CSSF approval is required. The same will apply to unregulated funds once the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFMD) third-country passport under article 38 of the AIFM Law is made available to non-EU AIFMs. A prior notification to the CSSF is required (pursuant to the procedure under article 45 of the AIFM Law) prior to any marketing of a foreign or Luxembourg fund by a non-EU manager to Luxembourg investors.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Yes. The identity of the shareholders holding directly or indirectly a qualifying holding (ie, any direct or indirect holding that represents at least 10 per cent of the capital or of the voting rights or that makes it possible to exercise a significant influence over the management of the company in which that holding subsists) in the manager, as well as the amount of such holding, must be communicated to the CSSF.

When assessing the application, the CSSF takes into consideration the following criteria:

• professional standing and financial soundness of the applicant shareholder;

• professional standing and experience of each person responsible for managing the activities of the manager as a result of the acquisition transaction;

• compliance with prudential and supervisory requirements at group level; and

• risk of money laundering and financing of terrorism.

Both natural and legal persons are eligible to become shareholders of a Luxembourg manager.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

Yes. Managers have to comply with the European Securities and Markets Authority (ESMA) Guidelines on sound remuneration policies under the Undertakings for Collective Investment in Transferable Securities Directive (Directive 2009/65/EC) (the UCITS Directive) and the ESMA Guidelines on sound remuneration policies under the AIFMD, as applicable. In addition, each manager has to comply with CSSF Circular 10/437, which applies to all entities subject to CSSF prudential supervision.

The key principles are that the remuneration policy must:

• promote sound and effective risk management and must not induce excessive risk taking;

• be drawn up in such a way as to create an appropriate balance between fixed and variable remuneration components; and

• when the variable component represents a significant part of remuneration, the payment of a considerable portion of this variable component must be deferred for a minimum period.

Remuneration rules apply to members of the board and staff whose professional activities have a material impact on the risk profile of the firm. Certain information has to be made public.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Active marketing of funds to investors in Luxembourg is subject to a prior notification to the CSSF.

8 What marketing activities require authorisation?

Any direct or indirect offering or placement at the initiative of a manager or on behalf of such manager of units, shares or interests of a fund it manages for or with investors domiciled in Luxembourg requires a prior notification to the CSSF.

Managers authorised under the UCI Law or the AIFM Law, or both, may perform marketing activities without requiring an additional authorisation from the CSSF.

A Luxembourg investment firm (which is not a manager under the UCI Law or the AIFM Law) that intends to distribute units, shares or interests of funds, must request prior CSSF authorisation under the Financial Sector Law.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

If investors are located in Luxembourg, the non-EU manager has to file a prior notification with the CSSF before marketing its fund in Luxembourg.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

In principle, no local entity must be involved in the fund marketing process, except in relation to retail funds. See question 20.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Luxembourg investment firms are subject to inducement rules of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFID II), as transposed under Luxembourg law. In a nutshell, a distributor placing a fund with its clients may receive a commission from the manager or the fund only if:

• the relevant payment is designed to enhance the quality of the service to the clients;

• the relevant payment does not impair compliance with the distributor’s duty to act honestly, fairly and professionally in accordance with the best interests of its clients; and

• the commission is clearly disclosed to the clients.

A distributor that also provides independent investment advice to its clients is, in principle, prohibited from receiving a commission from the fund or its manager.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

There are two types of regulated funds that can be sold to retail investors in Luxembourg: undertakings for collective investment in transferable securities governed by Part I of the UCI Law (UCITS) and undertakings for collective investment governed by Part II of the UCI Law (Part II UCI).

Unregulated funds qualifying as AIFs may also be marketed to retail investors, subject to certain conditions set out in the AIFM Law.

Both UCITS and Part II UCI may be structured as:

• an investment company with variable capital (SICAV);

• an investment company with fixed capital (SICAF); or

• a common fund (FCP).

The share capital of a SICAV is always equal to its net assets and hence no formalities are required to increase or decrease the share capital. The decrease and increase of share capital of a SICAF is subject to formalities laid down in the Companies Law. A UCITS SICAV must take the form of a public limited company (SA) and be formed before a Luxembourg notary.

An FCP is a co-ownership whose joint owners are only liable up to the amount they have contributed and whose ownership rights are represented by units. An FCP has no legal personality and shall be managed by a ManCo, which will draw up and execute the fund’s management regulations.

A retail fund can be set up as a single fund or as an umbrella fund consisting of multiple compartments, each with a different investment policy. The fund and compartments may have an unlimited number of share classes, depending on the needs of the investors. Under certain conditions, cross-investments between compartments are allowed.

13 What are the key laws and other sets of rules that govern retail funds?

The key laws and regulations applicable to retail funds are:

• the UCI Law;

• the Companies Law;

• the AIFM Law;

• the Financial Sector Law;

• the Luxembourg Civil Code;

• Luxembourg laws, regulations and CSSF circulars regarding anti-money laundering (AML) and counter-terrorist financing (CTF);

• the EU Packaged Retail and Insurance-based Investment Products Regulation (Regulation (EU) No. 1286/2014) (the PRIIPs Regulation);

• the European General Data Protection Regulation (Regulation (EU) No. 2016/679) (GDPR);

• CSSF Regulation No. 16-07 regarding out-of-court complaint resolution (if the fund is regulated); and

• various ESMA guidelines and CSSF regulations and circulars.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Regulated retail funds must be authorised and supervised by the CSSF.

Unregulated retail funds qualifying as AIFs do not require the approval of the CSSF, although their AIFM is subject to the supervision of the CSSF or the supervisory authority of its home member state.

15 Who can market retail funds? To whom can they be marketed?

A retail fund may be marketed in Luxembourg to retail investors by its manager or by an authorised distributor (see question 8).

While UCITS avail of the EU marketing passport and can be marketed to retail investors throughout the EU, Part II UCI can be marketed to retail investors in the EU only in compliance with article 43 of the AIFMD.

16 Are there any special requirements that apply to managers or operators of retail funds?

Managers of Luxembourg UCITS and Part II UCI have to be authorised by the CSSF (or any other EU regulator) before commencing their activity in Luxembourg. EU managers benefit from the EU management passport under the UCITS and AIFMD regimes.

Where a manager envisages to market units, shares or interests of AIFs it manages to retail investors in the territory of Luxembourg, the following restrictions or additional conditions apply:

• compliance with article 46 of the AIFM Law;

• compliance with articles 59, 100 and 129 of the UCI Law, if the fund is an open-ended non-Luxembourg EU AIF;

• compliance with CSSF Regulation No. 15-03 and certain risk-spreading obligations set forth therein; and

• issuance of a key information document in accordance with the PRIIPs Regulation.

17 What are the investment and borrowing restrictions on retail funds?

UCITS are subject to strict rules on:

• eligible assets;

• diversification requirements;

• borrowing, granting loans and short selling; and

• techniques and instruments relating to transferable securities and money market instruments (MMI), laid down in the UCI Law and specified in the various CSSF and ESMA guidelines.

The UCI Law contains no provisions regarding investment and borrowing rules in respect of Part II UCI. Such rules are specified in CSSF Circulars 91/75 and 02/80. There are no restrictions on eligible assets for Part II UCI.

UCITS

Part II UCI

Eligible assets

Restricted to transferable securities admitted or dealt in on a regulated market, certain investment funds, deposits with a credit institution, financial derivative instruments, cash and MMI, subject to compliance with article 41 of the UCI Law.

Prohibited from investing in real estate, commodities and loans. UCITS may not acquire control over an issuing body. Eligibility of the asset must be assessed on a case-by-case basis.

Unrestricted by law.

Certain limitations are applied by the CSSF.

Risk diversification

Strict risk diversification rules are laid down in the UCI Law, such as (non-exhaustive list):

• maximum 10% in transferable securities issued by the same body;

• maximum 20% in deposits made with the same body;

• total value of transferable securities held in the issuing bodies in each of which the UCITS invests more than 5% shall not exceed 40% of the value of its assets;

• maximum 20% in one other fund and maximum 30% in funds other than UCITS; and

• global exposure relating to derivative instruments may not exceed the total net value of the UCITS portfolio.

The CSSF imposes the following (less stringent) risk diversification requirements (unless a derogation is granted by the CSSF during the approval process) (non-exhaustive list):

• maximum 20% in securities issued by one issuer; and

• maximum 20% in one real estate property.

Borrowing

Not permitted (unless on a temporary basis and subject to restrictions laid down in the UCI Law).

Permitted. Certain restrictions apply (non-exhaustive list):

• maximum 300% of the value of net assets; and

• in relation to real estate, maximum of 50% of the value of the property.

18 What is the tax treatment of retail funds? Are exemptions available?

Retail funds are subject to an annual subscription tax of 0.05 per cent (or, to the extent money market funds are concerned, 0.01 per cent) of their net asset value, subject to certain exemptions. Retail funds are exempt from income tax, net wealth tax and withholding tax.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Yes. The assets of a retail fund have to be entrusted to a local depositary and the fund’s assets have to be segregated from the depositary’s assets. The depositary shall be liable to the fund and its investors for the loss by the depositary or by a delegate of financial instruments held in custody. In case of loss of a financial instrument held in custody, the depositary must return a financial instrument of an identical type or the corresponding amount to the fund without undue delay. There is no possibility for the depositary to discharge its liability.

The Law of 27 February 2018 on interchange fees and amending several laws relating to the financial sector provides for the following depositary regime with respect to Part II UCI:

• Part II UCI marketed to retail investors on Luxembourg territory must appoint a UCITS compliant depositary, regardless of whether they are managed by a Luxembourg or EU-authorised or registered AIFM or a non-EU manager;

• Part II UCI managed by a Luxembourg-authorised AIFM whose offering documents expressly forbid the marketing to retail investors on Luxembourg territory may appoint a depositary compliant with the AIFM Law; and

• Part II UCI managed by a Luxembourg or EU-registered AIFM or by a non-EU manager and whose offering documents explicitly forbid the marketing to retail investors on Luxembourg territory should appoint a depositary bank compliant with the SIF Law.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

Regulated retail funds, following the successful completion of the CSSF examination phase (see question 3), have to be registered on the relevant official list of supervised entities held by the CSSF.

Regulated retail funds have to apply for prior CSSF approval with respect to any change in their fund documentation (ie, constitutive document and offering document) or governance (eg, appointment of a new board member or replacement of depositary or auditor).

For a retail fund structured as a company, as well as for a management company or an AIFM, there must be a board of directors composed of at least three members, half of which are recommended to be Luxembourg residents.

For externally managed funds, administrative tasks such as accounting, record-keeping, net asset value calculation and the keeping of a register of shareholders or limited partners are in general entrusted with an administrative agent (established in Luxembourg and subject to supervision by the CSSF). When marketing funds to retail investors in Luxembourg, a paying agent has to be appointed to ensure that facilities are available in Luxembourg for making payments to shareholders and repurchasing or redeeming shares.

Retail funds must produce key information documents (key investor information document for UCITS and key information document for AIFs) to be provided to retail investors before they invest in the fund. Essential elements of the key information document must be kept up to date.

21 What are the periodic reporting requirements for retail funds?

UCITS and Part II UCI must produce annual and semi-annual reports, in addition to ongoing reporting to the CSSF.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

The rules governing the redemption of interests vary depending on the type of fund and its regulatory status. UCITS are obliged to redeem their shares or units at the investor’s request. Part II UCI can, on the other hand, be established as closed-ended vehicles or otherwise restrict the terms on which interests can be redeemed.

Transfer restrictions (including, but not limited to, in respect of the transferee meeting certain eligibility criteria for a certain class of shares) may also be provided for in the fund’s constitutive document. The circumstances for any suspension of share or units issuances or redemptions (or both) shall be provided for in the fund’s constitutive document.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Non-retail funds can be organised as:

• specialised investment funds (SIFs) governed by the SIF Law;

• reserved alternative investment funds (RAIFs) governed by the RAIF Law;

• investment companies in risk capital (SICARs) governed by the SICAR Law; or

• unregulated AIFs governed by the Companies Law and the AIFM Law.

24 What are the key laws and other sets of rules that govern non-retail funds?

See question 23. In addition, key laws and regulations applicable to non-retail funds are:

• the AIFM Law if the fund qualifies as an AIF;

• the Companies Law;

• the Financial Sector Law;

• the Luxembourg Civil Code;

• the Luxembourg laws, regulations and CSSF circulars regarding AML and CTF;

• the GDPR;

• CSSF Regulation No. 16-07 regarding out-of-court complaint resolution (if the fund is regulated); and

• various ESMA guidelines and CSSF regulations and circulars.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

SIFs and SICARs require prior CSSF approval. RAIFs and unregulated AIFs may be established and marketed without prior CSSF approval. If marketing is intended to be performed based on the AIFMD passport, notification requirements have to be met prior to commencing any marketing activity.

26 Who can market non-retail funds? To whom can they be marketed?

Non-retail funds may be marketed by authorised AIFMs on the basis of the AIFMD passport or by authorised distributors on the basis of the MiFID passport. Investors in SIFs, SICARs and RAIFs have to qualify as well-informed investors (see question 27). In the European Economic Area (EEA), non-retail funds may be marketed to professional investors within the meaning of the AIFM Law (see question 27).

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

SIFs, SICARs and RAIFs are reserved to well-informed investors only. Unregulated AIFs may only be marketed under the AIFMD passport in the EEA to professional investors. Well-informed investors are institutional investors, professional investors or any other investor that:

• has confirmed in writing that it adheres to the status of well-informed investor; and

• either invests a minimum of €125,000 in the fund, or obtains an assessment certifying its expertise, experience and knowledge in adequately appraising an investment in the fund, made by:

• a credit institution within the meaning of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms;

• an investment firm within the meaning of MiFID;

• a management company within the meaning of the UCITS Directive; or

• in respect of a RAIF, an AIFM.

Directors and other persons who are involved in the management of the fund do not need to qualify as ‘well-informed’ in order to invest in the fund.

Professional investors within the meaning of the AIFMD are investors considered to be professional clients (or eligible, upon request, to be treated as such) within the meaning of Annex II of MiFID.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

Managers of non-retail funds qualifying as AIFs must be either authorised or registered as AIFMs in the EEA or meet the requirements of a third-country AIFM.

It is of importance to note that, while registered AIFMs are not subject to authorisation under the AIFM Law, they are not entirely exempt from the AIFM Law requirements. They are required to be registered with the CSSF, disclose the AIFs they manage (including their investment strategies) and regularly report to the CSSF the principal instruments in which they trade and relating investment exposures. Registered AIFMs may nonetheless elect to subject themselves to the AIFM Law (especially if they want to benefit from the AIFMD passport).

29 What is the tax treatment of non-retail funds? Are any exemptions available?

SIFs and RAIFs (save for RAIFs investing exclusively in risk capital) are subject to an annual subscription tax of 0.01 per cent, subject to certain exemptions. The taxable basis of the subscription tax is the fund’s aggregate net assets as valued on the last day of each quarter. Generally speaking, SIFs and RAIFs are characterised by their tax neutrality, as they are exempt from tax on income or capital gains, as well as from net wealth tax. Any distributions (including dividends and liquidation surpluses) made by a SIF or RAIF to investors are not subject to withholding tax in Luxembourg.

A SICAR can, generally speaking, be described as a tax-neutral vehicle for private equity investments.

The SICAR regime for fiscally opaque entities (such as an SA, a private limited liability company or a corporate partnership limited by shares) follows the ordinary income tax regime. Accordingly, it is subject to corporate income taxes and to specific domestic or treaty exemptions, and should qualify as a resident company for domestic and Luxembourg tax-treaty purposes. However, income from securities, as well as income derived from the transfer, contribution or liquidation thereof (namely, bonds, shares and other transferable securities, as well as negotiable instruments giving the right to acquire the aforementioned securities), is exempt. All other income is fully subject to ordinary Luxembourg direct taxation rules. Fiscally opaque SICARs are subject to a minimum net wealth tax. A SICAR formed as a fiscally transparent common limited partnership (SCS) or a special limited partnership (SCSp) is itself not liable for direct taxation or net wealth tax in Luxembourg. Neither dividends nor liquidation proceeds distributed by a SICAR to investors are subject to withholding tax.

RAIFs investing exclusively in risk capital assets are taxed according to the same tax rules as those applicable to SICARs.

The tax treatment of unregulated AIFs depends on the legal form of the fund. While an SCS or SCSp is fully tax transparent, funds set up under other corporate forms are subject to the general tax regime.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The appointment of a depositary is required for SIFs, SICARs, RAIFs and unregulated AIFs that are managed by authorised AIFMs, and the fund’s assets must be segregated from the depositary’s assets. Unregulated AIFs that are managed by a registered AIFM are not required to appoint a depositary.

The depositary shall be liable to the fund and its investors for the loss of financial instruments held in custody either by him or herself or any third party to whom custody was delegated. In the case of such a loss of a financial instrument held in custody, the depositary shall return a financial instrument of identical type or the corresponding amount to the fund without undue delay. The depositary may contractually discharge itself of its liability under certain circumstances.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

Regulated funds, such as SIFs or SICARs, following the successful completion of the CSSF examination phase (see question 3), have to be registered on the relevant official list of supervised entities held by the CSSF.

For unregulated funds, such as RAIFs and unregulated AIFs, no prior authorisation from the CSSF is required before their set-up and there is no direct ongoing supervision by the CSSF.

A fund organised as an FCP must be managed by a ManCo or AIFM, which is in charge of the governance of the FCP, under the oversight of the depositary in respect of certain aspects.

If organised as a SICAV or SICAR, the fund is managed by its governing body (ie, board of directors or general partner). In such a case, the fund may either appoint a ManCo or AIFM (ie, be externally managed) or manage itself (ie, internally managed AIF).

Luxembourg funds must have their central administration in Luxembourg.

32 What are the periodic reporting requirements for non-retail funds?

Both SICARs and SIFs must comply with certain disclosure requirements. They must, inter alia, produce an offering document and an annual report that they also need to communicate to the CSSF and to investors. These documents must include the information necessary for investors to be able to make an informed judgement on the proposed investment and the related risks. The annual report must be finalised within six months of the end of the financial period to which it pertains. Although the annual reporting obligations are in line with the common reporting obligations of commercial companies, neither the SICAR nor the SIF are subject to consolidated reporting.

The annual accounts must be audited, furthermore, by a certified Luxembourg independent auditor, which must inform the CSSF of serious violations of the applicable legal provisions or of any facts or decisions that could potentially threaten the continuity of the SICAR or SIF. A SICAR must submit half-yearly financial information to the CSSF. A SIF must submit yearly and monthly financial information to the CSSF.

Although a RAIF is neither subject to any prior regulatory approval nor to any ongoing direct supervision, it must qualify as an AIF and be managed by an authorised AIFM. It also has to produce an offering document and an audited annual report.

In terms of reporting requirements, the AIFM Law contains obligations applicable to the manager of any AIF in scope. For SIFs and SICARs, those requirements will apply alongside the specific reporting rules of the SIF Law or SICAR Law that, to a large extent, are in line with the reporting rules of the AIFM Law. The AIFMD reporting framework mainly consists of annual reporting, disclosure to investors and regulators’ requirements. Annual reports must be prepared at least once a year and within six months following the end of the financial year for each Luxembourg AIF managed or marketed in the EU. The annual reports will be audited and provided to investors upon request and to the CSSF. Disclosure requirements entails communication of certain information to be provided to investors before they invest in the fund (generally contained in an offering document). Such information relates, inter alia, to the AIF’s investment strategy and objectives, techniques it may employ and associated risks, the use of leverage and collateral and the procedures for issue and sale of shares, units or interests. Further aspects that need to be disclosed are as follows:

• the AIF’s valuation procedure and pricing methodology;

• a description of liquidity risk management and redemption arrangements;

• a description of all fees, charges and expenses and maximum amounts thereof, which are directly or indirectly borne by the investors;

• the policy on ensuring fair treatment of investors; and

• a description of any preferential treatment of investors.

In respect of reporting to the CSSF, a Luxembourg AIFM should regularly report on the principal markets and instruments in which its AIFs trade and is required to disclose certain additional information encompassing, inter alia, the following:

• the percentage of the AIF’s assets that are subject to special arrangements arising from their illiquid nature;

• any new liquidity management arrangements;

• the AIF’s risk management systems;

• information on the AIF’s main categories of assets; and

• the results of any stress tests.

Frequency of reporting depends on the amount of assets under management.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts may be structured as funds of one, or via discretionary investment management agreements with an investment firm.

In practice, funds of one would, in the context of separately managed accounts, be structured either as a single-investor unregulated SCSp or as a dedicated compartment of a SIF or a RAIF.

34 What are the key legal issues to be determined when structuring a separately managed account?

The terms for an SCSp, including the duties and indemnification obligations of the manager, will be set out in a partnership agreement, and for a separately managed account, in an investment management agreement, which may both be negotiated by the investor.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

A regulated fund with a dedicated compartment for each investor will usually fall under the scope of the AIFMD (see questions 1 to 6 for fund management). A single-investor SCSp will, in principle and save if the vehicle is formed as a fully AIFMD-compliant AIF, not qualify as an AIF, subject to a condition that the vehicle has been formed at the express request of the investor (ie, reverse solicitation) and its constitutive document precludes the admission of other investors.

The marketing of funds of one will depend on the AIF status of the relevant fund, the licence and the country of origin of the manager (see questions 7 to 11 for fund marketing).

The management of separately managed accounts is usually deemed discretionary portfolio management, which (save in respect of funds qualifying as AIFs and in respect of which the portfolio management will be done by the relevant fund’s AIFM) is a regulated activity falling within the scope of the Financial Sector Law, implementing MiFID rules.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

On 13 July 2017, ESMA issued an opinion to support supervisory convergence in the area of investment management in the context of the UK withdrawing from the EU, which sets out principles based on the objectives and provisions of the UCITS Directive and the AIFMD, which are applied to the specific case of relocation of entities, activities and functions following the UK’s withdrawal from the EU, under the assumption that the UK will become a third country after this time. It seeks to supplement the principles set out in the cross-sectoral opinion by addressing regulatory and supervisory risks in the area of investment management.

The EU Commission published two legislative proposals on 12 March 2018 regarding:

• a directive amending both the UCITS Directive and the AIFMD with regard to the cross-border distribution of collective investment funds; and

• a new regulation on facilitating cross-border distribution of collective investment funds and amending the regulation on European venture capital funds and the regulation on European social entrepreneurship funds.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The Luxembourg Stock Exchange (LuxSE) operates via the two following markets: an EU-regulated market within the meaning of MiFID (regulated market) and an exchange-regulated market, designated as the ‘Euro multilateral trading facility market’ (Euro MTF market).

Issuers of securities on the regulated market are subject to the obligations of various European directives that have been implemented under Luxembourg law in terms of prospectus approval and ongoing disclosure obligations. The CSSF is, as a rule, in charge of approving prospectuses for admission to trading on the regulated market. It should, however, be noted that prospectuses of open-ended funds admitted for distribution in Luxembourg are exempted from approval under the Law of 10 July 2005 on prospectuses for securities (the Prospectus Law), whereas prospectuses for closed-ended investment funds will need to be approved by the CSSF in accordance with the provisions of the Prospectus Law. Issuers, whose prospectus has been approved in accordance with the Prospectus Law, may benefit from the European passport for the admission to trading in more than one EU member state.

The Euro MTF market was launched in order to offer an alternative market to issuers that do not need to comply with EU regulations, in particular when they are not interested in passporting their securities to other EU-regulated markets. Prospectuses for an admission to trading on the Euro MTF market must be drawn up in accordance with the internal rules and regulations of the LuxSE (the Rules and Regulations). In the case of a listing on the Euro MTF market, the LuxSE is in charge of approving the prospectus. However, open-ended funds that are accepted by the CSSF for distribution in Luxembourg, are exempted from additional requirements on prospectuses (ie, a listing can be obtained on the basis of the offering document of the fund as approved by the CSSF).

The ongoing and periodic disclosure requirements applicable to issuers of securities depend on the market where the securities are admitted to trading.

For issuers whose securities are admitted to trading on the regulated market, these obligations mainly arise from the Law of 11 January 2008 on transparency requirements for issuers of securities, as amended (the Transparency Law), the Rules and Regulations and Regulation (EU) No. 596/2014 on market abuse (MAR).

Issuers whose securities are admitted to trading on the Euro MTF market do not fall within the scope of the Transparency Law. However, they will need to comply with the ongoing and periodic obligations detailed in the Rules and Regulations and MAR. Such ongoing and periodic disclosure obligations include, for instance, the provision of annual reports and interim financial statements and the disclosure of all other important information affecting the securities or the issuer. More stringent ongoing obligations apply to companies admitted to trading on the regulated market only.

It is worth noting that the LuxSE now also offers the possibility for issuers to have their securities listed on a specific section of the LuxSE’s official list without being admitted to trading on either the regulated market or the Euro MTF market. The securities official list (SOL) has been designed for issuers looking for visibility and for whom admission to trading is not a prerequisite and who do not intend to be subject to the regulations related to admission to trading (notably MAR). Ongoing disclosure obligations will in this case be limited to certain communication requirements with regard to the LuxSE only as set out in the applicable SOL rulebook.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

It is possible to redomicile an overseas vehicle into Luxembourg if it is allowed under the law of the country where the overseas vehicle is domiciled.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Other than the marketing restrictions referred to in question 7, and international financial sanctions, prohibitions and restrictive measures with respect to the fight against terrorist financing, there are no special rules in this regard.

Update and trends

Luxembourg continues to strengthen its ranking as the world’s second-largest fund domicile after the US, as assets under management of Luxembourg funds crossed the bar of €4 trillion for the first time in 2017, and stood at €4.187 trillion as at 28 February 2018. Such increase is not only based on the growth of traditional Luxembourg UCITS, but is also down to the continued strong growth in respect of AIFs.

Ahead of Brexit, London-based fund managers face increased scrutiny by ESMA of their potential relocation plans to other EU jurisdictions. The sector at large is also currently dealing with a wave of regulatory developments, including MiFID, the PRIIPs Regulation and the GDPR, as well as regarding AML and CTF. In addition to increasing their compliance costs (ultimately borne by investors), these regulations may materially impact the business models of fund managers.

Marc Meyers

marc.meyers@loyensloeff.com

Veronica Aroutiunian

veronica.aroutiunian@loyensloeff.com

18–20 rue Edward Steichen

L-2540 Luxembourg

Luxembourg

Tel: +352 46 6230

Fax: +352 46 6234

www.loyensloeff.lu

Norway

Karl Rosén and Elin Haugen

Advokatfirmaet Grette AS

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management is primarily regulated by the Investment Fund Act 2011 (IFA) (implementing Directive 2009/65/EC (the UCITS IV Directive) and Directive 2014/91/EU (the UCITS V Directive)), the Alternative Investment Fund Management Act 2014 (AIFMA) (implementing Directive 2011/61/EU (AIFMD)) and the regulations and executive orders made under these acts. In addition, some elements in the Securities Trading Act (STA) (implementing Directive 2004/39/EC (MiFID)) and the Norwegian MiFID II regulation of 4 December 2017 thereunder (implementing Directive 2014/65/EU (MiFID II)), such as investment advice and fund management under licence to conduct asset management, serves to supplement the regulatory environment.

The Norwegian Financial Supervisory Authority (NFSA) is the regulator responsible for the ongoing supervision of funds, fund managers and for the issuance of supplementary regulations and formal guidance to the aforementioned acts. The NFSA is responsible for ensuring that the business of fund managers is carried out in accordance with applicable laws and regulations, pursuant to the NFSA Act 1956 (NFSAA).

From a regulatory perspective, there are two broad categories of investment funds in Norway: UCITS funds and non-UCITS funds, which are defined as alternative investment funds (AIFs). The IFA applies to all collective fund structures (independent pools of assets that have arisen through capital contributions from an undefined range of persons against the issuance of units in the fund and that consist essentially of financial instruments or deposits in a credit institution). Specific regulations regarding UCITS are set out in Chapter 6 of the IFA, implementing the UCITS requirements, such as investment restrictions, borrowing restrictions and redemption rights. Specific regulations regarding AIFs in the form of mutual funds are set out in Chapter 7 of the IFA and specific regulations regarding AIF management are set out in the AIFMA. AIFs include domestic funds, special funds (such as hedge funds) and other AIFs (such as private equity funds). Domestic funds are funds established in Norway that do not qualify as UCITS and are regulated specifically in Chapter 7 of the IFA, with authorisation from the NFSA to derogate from some of the UCITS requirements regarding investment strategy and redemption rights. Special funds are a subcategory of domestic funds that derogate from an even wider spectrum of regulations, including borrowing restrictions.

2 Is fund administration regulated in your jurisdiction?

Yes, fund administration falls within the scope of the Norwegian definition of fund management and is thus regulated in the IFA, the AIFMA and the NFSAA.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

The establishment of investment funds in Norway requires authorisation by the NFSA. Authorisation to establish UCITS in Norway may be given to UCITS managers authorised by the NFSA or by managers authorised within the European Economic Area (EEA), under the ‘passporting’ process (see question 4). AIFs may be established by AIF managers authorised by the NFSA or with authorisation for management of similar funds within the EEA, pursuant to the passporting process.

Each fund shall be authorised separately and the application for fund authorisation shall include the following:

• the fund’s articles of association as set by the board in the fund’s management company;

• the depositary agreement; and

• information about outsourcing, if applicable.

The NFSA shall determine the application within two months of receiving a complete application and authorisation shall be granted if the NFSA approves the management of the particular fund and if the statutory requirements of the fund’s articles of association, depositary and outsourcing are met.

Key requirements for fund managers providing services in Norway are as follows:

• organisation restricted to limited liability companies or public limited liability companies;

• authorisation by the NFSA or within the EEA (notified according to the passporting procedure where applicable); and

• compliance with organisational and business requirements, including a fit and proper assessment, adequate policies and procedures for risk management, conflict of interest management, compliance, remuneration, transparency, valuation, financial reporting, due diligence and other business functions, as set out in the IFA.

A Norwegian alternative investment fund manager (AIFM) applying for authorisation to manage an AIF other than a Norwegian special fund would essentially need to comply with the requirements stipulated above and must be a limited liability company. The formation of the AIF (apart from AIFs formed as Norwegian domestic or special funds) is, however, not contingent upon the NFSA’s approval of the fund rules (or similar documentation).

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

Norwegian fund regulation applies to funds, management and other regulated fund activities carried out in Norway or marketed to investors in Norway. Initially a division has to be made between managers established inside and outside of the EEA. In the former case, the manager would need an authorisation in its home country and activities may subsequently be performed in Norway, either from the overseas manager’s home country or from inside Norway, subject to the establishment of a Norwegian branch office. If the manager has already been granted authorisation in its home country within the EEA pursuant to either the UCITS V Directive or the AIFMD, the overseas manager may ‘passport’ its licence into Norway via the competent supervisory authority in its home country, and a separate authorisation from the NFSA is thus not necessary. Following such ‘passporting’ it is also possible for the overseas manager to manage Norwegian funds, provided that the manager’s authorisation in its home country includes management of fund types comparable to the type of Norwegian fund the manager wishes to manage. However, in relation to management of a Norwegian UCITS or a Norwegian domestic or special fund, a separate authorisation must be obtained from the NFSA, which includes approval of the (revised) fund rules. The manager must also ensure that it can make disbursements to unitholders, redeem units, provide investors with required information and handle complaints in Norway. If an overseas manager wishes to manage a Norwegian AIF that is not a domestic or special fund, no separate authorisation from the NFSA is required.

A fund manager established outside the EEA may only perform management activities or provide services to Norwegian investors provided that the manager has been granted an authorisation from the NFSA in accordance with the Norwegian regulatory requirements.

Management of all investment funds in Norway thus requires that the manager is authorised either in Norway or by the authorities in the EEA home state where the passporting procedure applies. There is, however, one exception to the authorisation requirement: in accordance with article 3(2) of the AIFMD, management of AIFs below the relevant thresholds may be carried out without authorisation provided that the AIFMs are registered in an NFSA register. Note that unauthorised, registered AIF managers may only carry out marketing activities to professional investors (see question 7). The exception applies to managers that manage AIFs whose assets under management in total do not exceed either:

(i) €500 million when the portfolios consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of the initial investment in each AIF; or

(ii) €100 million for types of AIFs other than those mentioned in (i).

These managers are only subject to Chapter 9 of the AIFMA regarding supervision by the NFSA and the registration and reporting requirements pursuant to the AIFMD.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Acquisition of a qualifying holding in a management company may only take place after the acquirer has notified the NFSA thereof. ‘Qualifying holding’ is defined as a direct or indirect holding in an investment fund management company that represents at least 10 per cent of the capital or the voting rights, or a holding that makes it possible to exercise a significant influence over the management of the manager in which that holding subsists.

Additional authorisation is required when a holding in an investment fund management company exceeds thresholds of 20, 30 and 50 per cent of the capital. The NFSA may refuse such acquisitions within three months of receiving the notification if the acquirer cannot be considered fit to ensure sound and prudent management of the company.

Changes in the qualified holding of authorised managers of funds that fall outside the scope of the IFA (see definition of ‘investment fund’ in question 1) require notification to the NFSA, as such changes are considered changes to the basis for authorisation.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

The IFA sets out remuneration rules that govern managers’ compensation and profit-sharing agreements, and implements the UCITS V Directive regarding fund managers. Key requirements are that management companies shall establish and practise remuneration policies and practices that promote sound and effective risk management, consistent with the investment strategy of the funds managed by the management company. The remuneration policies shall apply to employees with material impact on the risk profiles of the management company or funds subject to its management, including senior managers, employees with control tasks and employees receiving similar remuneration as senior managers. The remuneration policies shall be proportionate to the nature, extent and complexity of the business.

The AIFMA sets out similar remuneration rules for AIF mangers, in line with the objective in the UCITS V Directive of harmonising remuneration rules within the capital market and especially in UCITS and AIFs.

UCITS management companies are further subject to restrictions on remuneration from or to anyone other than the investment fund, which is only allowed in the following circumstances:

• if the unitholders are informed about the type and value of the remuneration, or the calculation method if the value cannot be determined; or

• if the remuneration is suitable to improve the quality of the business and will not impair the manager’s compliance with the fund’s interests.

These restrictions do not, however, apply to actual costs that ensure or are necessary in order for the company to continue its business, including costs for the depositary, the market place, the securities register and legal advisers unless the cost may raise conflicts with the management company’s obligation to act in an honest and professional manner in accordance with the fund’s interests.

Note that fund managers who offer investment advice or active funds management are subject to the restrictions regarding remuneration from anyone other than the customer (inducements), as set out in MiFID II (implemented in the Norwegian MiFID II regulation). In short, this entails that such fund managers shall not receive any remuneration, discounts or non-monetary benefit from anyone other than the customer, except for minor non-monetary benefits.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

UCITS

Norwegian UCITS may be marketed in Norway by foreign managers, provided notification of the marketing is sent to the NFSA, pursuant to the passporting procedure. The same applies to UCITS established in another EEA state, which may be marketed in Norway by Norwegian or foreign managers after the competent authority in the fund’s home state has transmitted notification of marketing to the NFSA, pursuant to the passporting procedure.

AIFs to non-professional investors

AIFs that are not domestic funds may be marketed to non-professional investors by a manager authorised by the NFSA. Managers authorised in another EEA country may apply for such authorisation by providing the following information:

• a business plan that identifies the fund and the fund’s home country;

• information about the fund, which is available for investors;

• a key investor information document (KIID), which fulfils the EU packaged retail and insurance-based investment products requirements (Regulation (EU) No. 1286/2014);

• confirmation from the home state that the fund can be marketed to non-professionals; and

• a description of the planned marketing and sale, and the measurements to ensure marketing to non-professionals in accordance with good business practice.

If the AIF is established outside the EEA, the following additional criteria must be met: the manager complies with the AIFMA (except for rules regarding depositaries) and the manager’s home state is not listed as a Financial Action Task Force country.

Foreign investment funds that are not considered UCITS (not covered by the EEA rules corresponding to the UCITS V Directive), may be marketed to non-professional investors in Norway subject to Norwegian authorisation from the NFSA. Such authorisation may be granted on the following conditions:

• the manager of the investment fund has transmitted such information and documentation to the supervisory authority as required by the NFSA;

• satisfactory supervisory cooperation has been established between the supervisory authority in the management company’s home state and Norway;

• the investment fund and its management are subject to adequate supervision in the home state;

• the investment fund and its management meet the requirements imposed for carrying on business in the home state, and these requirements provide investors in Norway with protection at least in line with the protection provided to them when investing in domestic funds;

• the manager of the investment fund makes the arrangements necessary to make payments to the participants, redeem units and provide the information that the undertaking is required to prepare pursuant to the rules in the home state; and

• the sale in Norway of units in the investment fund takes place through one of the following:

• an authorised management company (with a Norwegian authorisation, an EEA authorisation pursuant to the passporting process or with Norwegian permission for foreign managers authorised outside the EEA);

• a credit institution entitled to carry out financing activities in Norway;

• an insurance company entitled to carry out insurance activities in Norway; or

• an investment firm entitled to provide investment services in Norway.

Norwegian special funds may be marketed to non-professionals provided the fund and the manager comply with Chapter 7 of the IFA, and the market communication makes it clear that the fund is a special fund. The NFSA may, however, restrict the fund manager of a special fund from marketing and selling the fund to non-professionals.

AIFs to professional investors

The marketing of Norwegian AIFs to professional investors may be carried out by Norwegian-authorised fund managers, but also by registered fund managers without authorisation, provided that such managers are covered by the small manager exemptions set out in the AIFMD, as described in question 4.

AIFs established in another EEA state can be marketed to Norwegian professional investors by authorised EU fund managers by notification to the NFSA via the EU marketing passporting procedure, giving the NFSA 20 days to assess whether to deny the marketing in case of non-compliance with relevant regulations.

8 What marketing activities require authorisation?

The definition of marketing varies depending on the type of investment fund. Marketing of UCITS is defined in the IFA regulation as an invitation or inducements to participate in a fund, which is targeted at or is particularly suitable to have effect in Norway. Marketing of AIFs is, however, defined in the AIFMA as to directly or indirectly offer units or shares of an AIF to, or place such units or shares with, investors, on the initiative, or on behalf of, the manager.

Notwithstanding that the above definitions are different, the analysis of what constitutes marketing and thus requires an authorisation would, in practice, be the same for a UCITS and an AIF, and marketing is considered to be all types of advertising or promotion of funds such as advertising in the mass media, cold calling, emails, oral information provided at the offices of the fund or its promoter (if the offices are located in Norway) and websites using the Norwegian language or otherwise containing information specific to the Norwegian market or Norwegian investors. All activities aimed at a potential investor, such as information given prior to an investment, are considered to constitute marketing. This means that the scope of marketing activities requiring authorisation is wide.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The territorial scope of the fund marketing regulation is ‘marketing in Norway or marketing activities from outside of Norway which is targeted towards Norway or is in any way tailored to have an effect in Norway’.

See question 7 regarding authorisation requirements for marketing.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

An overseas manager conducting marketing of a UCITS or an AIF must ensure that payments (eg, dividends), redemptions and disclosure of information relating to the fund can be made in relation to investors. These requirements may be satisfied through the appointment of a local paying agent to be responsible for the aforementioned activities (see question 7).

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

The general requirements regarding good business conduct in the IFA, AIFMA and STA will apply to such activities. See also question 6.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

‘Retail funds’ are commonly referred to as being funds available and generally eligible for non-professional investors. ‘Non-professional investors’ are defined as investors other than professional investors. ‘Professional investors’ are defined in accordance with the definition set out in MiFID II, implemented in Norway in the STA and the Norwegian MiFID II regulation thereunder. The following apply to funds available to non-professional investors.

Open-ended retail funds

Investment funds are categorised as UCITS or AIF, and the latter includes domestic funds, special funds and other AIFs (see question 1). Open-ended retail funds may be structured as UCITS or domestic funds.

Norwegian ‘investment funds’ are classified as a special type of legal vehicle or entity. All such funds established in Norway have their own business register number and are registered in the Norwegian register of business entities as mutual funds. A Norwegian fund is, however, of a semi-contractual nature, and does not have its own board of directors, managing director or employees. Investment funds may only be established by an authorised fund manager (authorised in Norway or within the EEA where the passporting process is applicable) and funds are formed by adoption of the fund’s articles of association and the NFSA’s approval of the articles and the application for authorisation. The fund manager is appointed in the fund’s articles of association and the manager acts on behalf of the fund. Unitholders in the fund exercise influence in the fund’s management through representation in the management company’s board of directors and not in the fund itself.

Collective investment structures established as legal vehicles other than the above-mentioned ‘funds’, such as a limited liability company (AS) or as a partnership (ANS, DA or KS) or similar foreign entities, may also fall within the scope of Norwegian fund regulation, based on individual assessments. Open-ended funds will usually fall within the scope of the IFA. The AIFMA regulates managers and not funds as such, and is therefore not restricted to certain kinds of legal vehicle. If Norwegian fund regulation applies to such other legal vehicles, the requirements regarding authorisation and establishment by a manager described above apply.

Closed-ended retail funds

Investment funds subject to the IFA shall, in general, be open for subscription and redemption twice a month (open-ended). The NFSA may, however, grant permission for domestic funds, to some extent, and for special funds, to derogate from these requirements and thus be closed-ended funds, which may be available to non-professional investors, subject to the general investor protection rules in MiFID II and the STA. Funds subject to further restrictions than these permitted restrictions fall outside the definition of investment funds and are thus not subject to the IFA and the retail protection therein. Such closed funds are generally not considered retail funds. There are no restrictions regarding the legal vehicle used to establish closed-ended funds in Norway.

13 What are the key laws and other sets of rules that govern retail funds?

The establishment and operation of all investment funds, including open-ended retail funds, are governed by the IFA regulations and effective orders made by the NFSA. In addition, the rules of the specific fund, as well as regulations, guidelines and recommendations by the Norwegian Fund and Asset Management Association, apply. AIFs are also governed by the AIFMA, the AIFM regulations and executive orders made thereunder.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The establishment and marketing of funds available to non-professionals require authorisation, either from the NFSA or by the regulator in an EEA state where the passporting procedure applies (see questions 3, 4 and 7).

15 Who can market retail funds? To whom can they be marketed?

There are no formal restrictions governing who may market retail funds or the intended recipient of such marketing. Instead, retail funds can be marketed to any type of investor. Furthermore, the marketing entity does not need to be licensed or authorised provided that the marketing does not include the offering of funds or would otherwise require a licence pursuant to MiFID II or under the STA. See, however, questions 7 and 8.

16 Are there any special requirements that apply to managers or operators of retail funds?

The IFA generally applies to retail funds, as the Act is aimed at protecting non-professionals. Non-retail funds are, however, subject to specific regulations and exceptions in Chapter 7 of the IFA. The AIFMA provides specific regulation of AIFs marketed to non-professionals, such as the requirement for authorisation (compared with unauthorised registered managers of AIFs to professionals) and the additional requirement for Norwegian marketing authorisation for each fund.

Retail funds are characterised by extensive consumer protection rules whereby a manager of a retail fund must comply with a variety of special requirements that are not applicable in relation to other types of investment fund.

The most prominent requirement is the obligation to act exclusively in the common interest of the unitholders. Furthermore, the manager is required to, inter alia, maintain or cause to be maintained a register of all holders of units in the fund, immediately redeem a unit upon request from a holder and to maintain a suitable diversification of investments in accordance with the principle of ‘risk spreading’ (see question 17).

17 What are the investment and borrowing restrictions on retail funds?

Investment restrictions

The investment of retail funds shall follow the risk-spreading principle and be made in financial assets associated with high liquidity, including transferable securities, money market instruments, derivative instruments, units in other UCITS and deposits with credit institutions. As a general rule, however, subject to exemptions, the value of the instruments issued by any single issuer may not exceed 5 per cent of the fund’s value.

Borrowing restrictions

A management company may not raise loans on behalf of an investment fund, impose on the fund surety or guarantee obligations or post the investment fund’s assets as security. A management company may not sell financial instruments not owned by the fund, unless specifically approved by the NFSA. This borrowing restriction does not, however, restrict the management company from, on behalf of the fund, raising short-term loans of up to 10 per cent of the fund’s assets and posting the fund’s assets as security for fulfilment of derivative contracts.

18 What is the tax treatment of retail funds? Are exemptions available?

Norwegian retail funds that are organised as investment funds, as described in question 12, will be covered under the Norwegian participation exemption method and be tax-exempt for gains on shares in, and distributions from, companies resident in the EEA. An investment fund will also be tax-exempt for gains on shares in companies outside the EEA. Three per cent of dividends that are exempt under the exemption method will be subject to a taxation of 23 per cent.

Regarding taxation of interest income, a retail fund organised as an investment fund will, as a starting point, be taxable with 23 per cent on interest income received. Securities funds may claim income deductions in respect of the amounts distributed to their unitholders. Deductions can, however, only be claimed to the extent that the distributions shall be taxed as interest on the part of the unitholders.

On rare occasions, funds organised as limited liability companies, limited partnerships and other legal vehicles may be considered retail funds. If so, they are subject to taxation regulation applicable to the specific legal vehicle; see question 29 regarding tax treatments of legal entities other than investment funds.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of all Norwegian investment funds shall be administered by and entrusted to a depositary for safekeeping. The fund manager must appoint a single independent depositary for each fund that it manages.

Only EEA credit institutions (with licences granted in an EEA home country and established in Norway through a branch) may act as depositaries. The engagement of a custodian may not be permitted for an entity whose interests may come into conflict with the management company or the unitholders.

The IFA and regulations thereunder set out certain commitments and obligations on depositaries and funds, which mirror the obligations regarding depositaries in the UCITS V Directive.

The organisational and governance requirements for UCITS also contribute to the protection of the fund’s assets.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

A fund established in Norway as an investment fund is semi-contractual, based on the articles of association, and does not have its own board of directors, managing director or employees. These functions are fulfilled by the manager of the fund. Unitholders in the fund exercise influence in the fund’s management through representation in the management company’s board of directors and not in the fund itself. The fund itself only has a unitholders’ meeting, which decides on changes to the fund’s articles of association and mergers. Such decisions require consent from a qualified majority of 75 per cent. Fund managers are, however, subject to detailed regulation regarding governance requirements, etc, implementing the UCITS V Directive governance requirements, primarily including risk management, handling of potential conflicts of interest and acting in a manner that maintains the public’s confidence in the fund market. More detailed guidance is provided by the NFSA.

In connection with the authorisation process (and upon revision thereof), the management company is required to submit to the NFSA a number of documents including, for example, the prospectuses, key investor information documents, an annual report and a semi-annual report. Upon authorisation being granted, the fund manager and the retail fund will be registered in the NFSA’s public register. The management company must have a board of directors that consists of at least five members and a managing director, and is obliged to maintain, or cause to be maintained, a register of all holders of units in the fund.

In addition, a management company must document and preserve each portfolio transaction for all UCITS it manages. The documentation must be retained for at least five years and must contain sufficient information in order to reconstruct each transaction performed.

21 What are the periodic reporting requirements for retail funds?

A management company must submit a semi-annual report containing a profit and loss account and a balance sheet for the management company itself to the NFSA. Quarterly reports must also be submitted for each retail fund managed, including information on, for example, the type of fund managed, net asset value of the fund assets, fees charged for the subscription and redemption of units in the fund and the assets and liabilities of the fund.

For each fund, the manager shall publish an annual report with annual financial statements and a management report, as well as a semi-annual report.

The semi-annual report shall contain information, inter alia, on the following:

• the fund’s financial instruments;

• bank deposits;

• liabilities resting on the fund;

• number of units issued;

• the value of a unit less redemption fee;

• all obligations resulting from the fund’s transactions undertaken in the reporting period;

• returns in the reporting period and returns in the last five years;

• other matters that are assumed to be of interest to the unitholders and that are necessary in order to assess the fund’s development and position; and

• the management fee.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

A Norwegian UCITS is by statute an open-ended investment fund available to the public. As such, the fund must accept investments. In general, no restrictions may be placed on the issue, transfer and redemption of units in the funds. However, it is possible to impose rules stipulating, for example, a minimum subscription amount. Upon the request of a unitholder, a unit must be redeemed immediately and may only be postponed under extraordinary circumstances.

A Norwegian domestic or special fund may, however, subject to the NFSA’s consent, incorporate restrictions on the issue of units in the fund. In addition, a special fund may limit the possibility for investors to redeem their units to once per year. Restrictions must be incorporated in the fund rules that must be approved by the NFSA in connection with the formation of the fund.

Investment funds shall be open for subscription and redemption of units in cash at least twice a month. A unitholder may request redemption of his or her units unless:

• otherwise prescribed by agreement on defined contribution pension pursuant to the Defined Contribution Pension Act or an individual pension scheme pursuant to the Individual Pension Schemes Act;

• under special agreement with major unitholders the management company limits the number of units whose redemption may be requested by the latter during specified periods;

• if called for in the interest of the unitholders or the public, the NFSA orders the management company to wholly or partially suspend the right of redemption; or

• the management company adopts a decision to liquidate the fund or the management company’s authorisation has lapsed or been withdrawn, after which units of a fund must not be issued or redeemed after.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Non-retail funds are commonly referred to as being funds solely available and eligible for professional investors.

Different types of legal vehicle may be used for the establishment of a non-retail fund and in general the fund type will govern the choice of vehicle. In this context, and from a Norwegian perspective, non-retail funds comprise AIFs.

The main legal vehicles used to set up non-retail funds in Norway are investment funds, limited liability companies and limited partnerships considered AIFs. Limited liability companies are formed through the signing of a memorandum of association, while limited partnerships are formed through the acceptance of the partnership agreement.

Norwegian private equity funds and real estate funds are primarily formed as limited partnerships but may also be formed as limited liability companies. An essential difference between a retail fund and a non-retail fund is that the latter does not have to be separate from the fund manager and merely consist of the fund assets. Consequently, a non-retail fund can be a legal person with the ability to assume rights and obligations. Furthermore, a non-retail fund could be internally or externally managed. In the former case, the fund is the manager and the entity is required to possess all functions necessary to be able to comply with applicable laws and regulations.

24 What are the key laws and other sets of rules that govern non-retail funds?

Funds that are solely marketed and sold to professional investors are regulated by the fund’s rules, the IFA and the AIFMA, but are exempted from the particular statutory requirements protecting non-professional investors such as investment restrictions and redemption and subscription rights. Specific regulations regarding the marketing and sale to professional investors are set out in Chapter 6 of the AIFMA.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

With the exception of non-retail funds in the form of domestic funds or special funds, subject to the IFA, there is no requirement to obtain authorisation for the establishment of a non-retail fund (AIF). The activities requiring authorisation are, instead, the management of a non-retail fund (see the AIFMA regarding implementing the AIFMD). Marketing is subject to notification (see the AIFMD and AIFMA) and licence for managers established outside the EEA.

26 Who can market non-retail funds? To whom can they be marketed?

Anyone can market a non-retail fund, provided that the marketing does not go beyond the concept of ‘promotion’. The marketing entity would not need to be licensed or authorised unless the marketing activities include the offering of the funds or would otherwise require a MiFID II licence or authorisation pursuant to the AIFMA.

As a main rule, non-retail funds may only be marketed to professional investors as defined in the STA and the Norwegian MiFID II regulation (implementing MiFID and MiFID II). Marketing of non-retail funds to non-professional investors is subject to a licence requirement for each fund. In addition, special requirements for sound business conduct will apply, effectively limiting the ability to market non-retail funds to non-professional investors to an extent that only leaves a small window for compliant marketing.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

No. Even though a non-retail fund may only be marketed to retail investors subject to certain prerequisites, there is no prohibition on an investment being made by a retail investor on a reverse-solicitation basis.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

Fund managers of AIFs directed at professional investors are required to establish arrangements to avoid the funds being marketed to retail investors. In general, however, there are fewer requirements imposed on managers of non-retail funds as opposed to managers of retail funds. Special regulations for domestic funds and special funds, which may be considered non-retail, are set out in Chapter 7 of the IFA, and special regulations for the marketing of AIFs that are not domestic funds are set out in Chapter 6 of the AIFMA.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Non-retail funds organised as investment funds are subject to the same tax regulation as described in question 18.

Non-retail funds organised as a limited liability company will be covered under the participation exemption method and be tax-exempt for gains on shares in, and distributions from, companies resident in the EEA. Such funds will also be tax-exempt for gains on shares in, and distributions from, companies outside the EEA provided that the fund holds at least 10 per cent of the share capital for a period of at least two years and that the company is not resident in a low-tax jurisdiction. However, 3 per cent of dividends, which is exempt under the exemption method, will be subject to a taxation of 23 per cent. Interest income of non-retail funds that are organised as limited liability companies will be taxed at 23 per cent.

Non-retail funds that are organised as partnerships will be treated as transparent entities for tax purposes and taxed in the hands of the partners. Any partner of the partnership that is organised as a limited liability company will thus be covered under the participation exemption method to the same extent as if the investment was done directly by the partner.

Interest income of non-retail funds that are organised as partnerships will be taxed at 23 per cent in the hands of the partners.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Managers of AIFs shall ensure that a single depositary is appointed for each AIF it manages. The AIFMA implements the AIFMD regulations on depositaries and funds’ assets protection, including depositary qualifications and regulations regarding, inter alia, liability, control, cash management, conflict of interest, outsourcing and reporting to the NFSA. See question 19.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The manager of non-retail funds shall comply with the governance requirements set out in the AIFMA, implementing the AIFMD. These include conducting operations in a professional manner so that the public’s confidence in the fund market is maintained, as well as adequate risk and liquidity management, handling of potential conflicts of interest and establishing a remuneration policy compatible with such requirements, designation of a depositary and filings to the NFSA. Members of the board, the general manager and other executive officers in the management company must satisfy the fit and proper requirements at all times.

32 What are the periodic reporting requirements for non-retail funds?

AIFMs shall provide a report to the NFSA on a semi-annual basis.

The reporting requirements regarding non-retail funds vary depending on the fund type and the value of assets under management. In general, the manager or the fund (as the case may be) must report more frequently and in greater detail in relation to funds that are marketed to retail investors and whose asset value exceeds certain thresholds. For funds applying gearing, reporting requirements are found in the Commission Delegated Regulation (EU) No. 231/2013.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Management of separate accounts (discretionary portfolio management) is typically structured through an agreement between the investor and the manager whereby an investment strategy (portfolio allocation, etc) is determined based on the investor’s investment horizon and risk profile. The manager then makes investments relating to the portfolio on a discretionary basis without having to obtain prior approval for each transaction from the investor.

34 What are the key legal issues to be determined when structuring a separately managed account?

The key legal issues to be determined include standard of care, indemnification, the parties’ obligations to cooperate, fee structure, reinvestments, distributions, transparency and reporting requirements towards investors. Initially, the manager has to categorise the investor as either professional or non-professional and such categorisation thereafter governs the obligations of the manager.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The management of separate accounts is a regulated activity falling within the scope of the STA and the MiFID II regulation, implementing MiFID and MiFID II. The regime differs from fund management. Management of separate accounts may be provided by investment firms authorised by the NFSA, investment firms authorised within the EEA who have fulfilled the notification requirement pursuant to the MiFID passporting procedure, and by authorised managers of UCITS and AIFs with additional authorisation to provide individual portfolio management.

Marketing in the sense of ‘promoting’ separately managed accounts is not a regulated activity and does not require authorisation. All marketing material is, however, subject to the Norwegian Marketing Practices Act and requires the marketing to be consistent with generally accepted marketing practices.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

No.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Exchange traded funds (ETFs) can be authorised as investment funds under the IFA. The European Securities and Markets Authority Guidelines on ETFs and other UCITS issues are implemented in Norway and the NFSA supervises the ETF’s compliance with the requirements set out therein, including specific requirements regarding the prospectus, the KIID and other marketing material. Non-retail exchange traded funds are subject to the general requirements for stock exchange listing set out in the STA and the Norwegian Stock Exchange Act.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

No, it is not possible to redomicile a foreign UCITS or equivalent to a Norwegian special fund in Norway. Especially in cases where the overseas vehicle has variable capital (eg, a SICAV), Norwegian legislation would not permit the maintenance of such funds. However, Norwegian legislation would allow for the merger between a Norwegian UCITS and a foreign UCITS where the Norwegian fund is the receiving fund. A merger between a foreign AIF and a Norwegian AIF is not regulated by Norwegian investment fund legislation.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

No.

Karl Rosén

karo@grette.no

Elin Haugen

enha@grette.no

Filipstad Brygge 2

PO Box 1397 Vika

0114 Oslo

Norway

Tel: +47 22 34 0000

www.grette.no

Portugal

Pedro Simões Coelho, Ricardo Seabra Moura and Carlos Filipe Couto

Vieira de Almeida

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Activity involving the management, investment and marketing of funds is mainly regulated by the following:

• the Undertakings for Collective Investment Law, enacted by Law No. 16/2015 of 24 February 2015 (the UCI Law), which partially implemented in Portugal Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS) (the UCITS Directive), as amended on a regular basis;

• Directive 2011/61/EU on alternative investment fund managers (AIFMD), which sets out most of the rules relating to investment funds;

• Portuguese Securities Exchange Commission (CMVM) Regulation No. 2/2015 on Undertakings for Collective Investment, which sets forth more specific rules regarding certain aspects of the UCI Law; and

• the Portuguese Securities Code, enacted by Decree-Law No. 486/99 of 13 November 1999, as amended when necessary, which entered into force on 1 March 2000.

The CMVM is the main regulatory body in relation to investment funds.

Further, fund managers, as financial institutions, are also subject to prudential supervision under the Bank of Portugal (BoP), along with the applicable provisions of the Portuguese Banking Law, enacted by Decree-Law No. 298/92 of 31 December 1992, as amended when necessary, and all complementary legal documents in connection therewith.

2 Is fund administration regulated in your jurisdiction?

Fund administration activities, when not directly carried out by the fund managers, are generally undertaken by a depositary and are subject to specific legal provisions, including the duty of care, outsourcing and liability of the parties involved, etc.

Further, some support services, depending on their specific scope, may be deemed investment services or activities, or ancillary services, thus being subject to specific authorisation by the BoP or the CMVM, as applicable.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

The CMVM authorises the setting up of funds. When requesting such authorisation, the relevant fund manager must provide the CMVM with the fund’s documentation, notably, the key investor information document and the full prospectus of the fund, which must also include the fund regulations.

In addition, the CMVM must also be given copies of the agreements to be executed between the management company and the depositary; the distributors or entities that will market the fund; and any other entities that will render services to the fund or to the fund manager.

Documents corroborating the acceptance of the services rendered by all entities involved in the fund’s activities must also be delivered to the CMVM.

Authorisation is issued within 20 days (or 30 days in the case of self-managed collective investment companies) of the receipt of either the request or of any supplementary information or amendments to the documents required by the CMVM. If, at the end of this period, the applicants have not yet been notified of the success of their application, authorisation is considered to have been tacitly granted, with the exception of alternative investment funds (AIFs) where, conversely, authorisation is deemed as tacitly refused.

The CMVM may refuse to grant authorisation if the applicant does not submit the required documentation or if the fund manager in question engages in irregular management of other investment funds.

Once authorisation is granted, a fund will be fully set up from the moment the first subscription is settled.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

No. Considering that fund managers are financial institutions carrying out intermediation activities, in order to provide their services in Portugal, they will need to be incorporated in Portugal or resort to the passport regime, notably, the freedom of services or the freedom of establishment under the UCITS Directive, the AIFMD or Directive 2013/36/EU (the Capital Requirements Directive IV).

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Yes. The Portuguese Banking Law establishes that any entity or legal person wishing to acquire or to raise a qualifying shareholding in a fund manager, to the extent that it surpasses the 10, 20, 33.33 or 50 per cent share capital threshold, or if the fund manager becomes a subsidiary of the acquirer, will have to file an authorisation application with the BoP.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

Yes. Article 139 et seq of the UCI Law establishes that the fund manager is remunerated through a management fee, which may comprise a variable component. The fixed or variable components of the management fee and its calculation methods must be clearly foreseen in the fund’s constitutional documents.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Yes. The marketing or distribution of funds is defined as an activity directed towards investors with a view to promoting or proposing the subscription of units or shares, regardless of the means of communication used.

The entities that are legally permitted to market funds are as follows:

• fund managers;

• depositaries;

• financial intermediaries registered or authorised by the CMVM to perform the relevant activities, namely those of placement and the reception and transmission of orders on behalf of third parties; and

• other entities, as foreseen in CMVM Regulation No. 2/2015 and subject to its authorisation.

As regards fund marketing, such entities must observe the same rules and are subject to the same supervision as that exercised over financial intermediaries.

8 What marketing activities require authorisation?

As described in question 7, the UCI Law encompasses a very broad concept of marketing and, as such, any activity falling within this scope will require that the relevant marketing entities secure authorisation for such purpose.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

No. As best described in question 7, entities permitted to perform fund marketing activities in Portugal must be incorporated in Portugal or resort to the passport regime, notably, the freedom of services or the freedom of establishment under the UCITS Directive, the AIFMD, the Markets in Financial Instruments Directive 2004/39/EC or the Capital Requirements Directive IV.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

There is no need to have a local entity involved provided that the foreign marketing entity has a proper licence (eg, under the passport regime).

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

The conditions according to which fund marketing is rewarded should be defined in the marketing contract. It is admissible for the marketing agent to be paid through the total or partial amount of the subscription, redemption or transfer commission, provided that this option is foreseen in the constitutional documents of the funds. Under the UCI Law, and contrary to the previous regime, the fund manager cannot receive the entirety or part of the marketing fee.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

Despite the fact that the concept of a retail fund is not entirely applicable under Portuguese law, for the purposes of this chapter, the term ‘retail fund’ shall refer to the Portuguese legal concept of UCITS, which are aimed at investing capital obtained from the public and are subject to a risk-sharing principle and the pursuit of the relevant participants’ interest.

AIFs, if publicly distributed real estate investment funds, could to a certain degree be assimilated to the retail fund concept. Nonetheless, considering that such AIFs are subject to a stricter framework and that their regulation is not harmonised throughout the EU, such grounds hamper their qualification as retail funds.

A retail fund may take one of the following two forms or structures, both subject to the licensing procedures described in question 3:

• a contractual structure with no legal personality. This is the classic structure and requires that the fund be managed by a separate fund manager. The investors’ or participants’ interests in these funds are called units; or

• a collective investment company endowed with legal personality (SIM). The incorporation of such entities is subject to the CMVM’s authorisation. SIMs can be self-managed, in which case a minimum initial capital of €300,000 will be required, or managed by an appointed third party, which must be a duly authorised investment fund manager. Participants in these SIMs will hold shares.

13 What are the key laws and other sets of rules that govern retail funds?

See the laws set out in question 1 and the fund’s documentation specified in question 3, which govern retail funds.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes.

15 Who can market retail funds? To whom can they be marketed?

See question 7. There are no limitations as to whom retail funds may be marketed. Both natural and legal persons can invest in the units or shares of a retail fund.

16 Are there any special requirements that apply to managers or operators of retail funds?

No.

17 What are the investment and borrowing restrictions on retail funds?

The following investment limits apply to retail funds in relation to issuing entities:

(i) no more than 10 per cent of a fund’s global net value may be invested in securities and money market instruments of the same issuer;

(ii) no more than 20 per cent of a fund’s global net value may be invested in deposits with the same entity;

(iii) exposure to a single counterparty in transactions involving derivatives outside a regulated market cannot exceed 5 per cent of the fund’s global net value, or 10 per cent if the counterparty is a bank; and

(iv) the sum of the investments made in securities and money market instruments from the same issuer exceeding 5 per cent cannot exceed 40 per cent of a fund’s global net value. This limit does not apply to deposits or transactions on derivatives performed outside a regulated market and multilateral trading facility where the fund’s counterparty is an entity subject to prudential supervision.

There are a number of exceptions to these limits. For example, limit (i) rises to 35 per cent where:

• the issuer is an EU member state or one of its local or regional authorities;

• the issuer is a non-EU member state or an international organisation with at least one EU member state as a member; or

• one of these entities guarantees the securities or money market instruments.

Limits (i) and (iv) rise to 25 and 80 per cent, respectively, if the investment is in covered bonds issued by a credit institution from an EU member state. However, such covered bond issuances must be backed by underlying assets that fully secure the amount due and any interest payment in the event that the issuer defaults.

No more than 20 per cent of a fund’s global net value can be invested with a single entity.

A fund can invest up to 100 per cent of its global net value in securities or money market instruments issued or guaranteed by an EU member state or its local or regional authorities, or by public international entities related to a member state or a third state, provided that the investment is made across six separate issues and the value invested in each issue never exceeds 30 per cent of the global net value of the fund.

No more than 20 per cent of a fund’s global net value can be invested in securities and money market instruments of issuers belonging to the same corporate group.

In addition, a retail fund cannot acquire more than:

• 10 per cent of shares without voting rights from the same issuer;

• 10 per cent of an issuer’s debt titles;

• 25 per cent of the units of a UCITS or AIF; and

• 10 per cent of an issuer’s monetary market instruments.

The following borrowing restrictions apply:

• management companies may obtain loans on behalf of the funds they manage. Within a one-year period, the sum of all loan periods cannot exceed 120 days, irrespective of whether they are back-to-back. Additionally, there is a borrowing limit of 10 per cent of the fund’s global net value, without prejudice of the right to resort to securities loans and repo agreements;

• collective investment companies may enter into loan facilities to acquire immovable assets indispensable to the direct exercise of their activities, in up to 20 per cent of the global net value of the fund; and

• if the incorporation documents of a collective investment company provide for the possibility of entering into loan facilities, the amounts specified cannot exceed 15 per cent of the fund’s global net value.

18 What is the tax treatment of retail funds? Are exemptions available?

Retail funds are subject to corporate income tax (CIT) at the general corporate tax rate (currently set at 21 per cent). No municipal tax or state surtax will apply.

The taxable income of retail funds corresponds to the net profit assessed in accordance with their respective accounting standards. However, investment income, rents and capital gains (except when sourced in a tax haven) are disregarded for profit assessment purposes; on the other hand, expenses related to this type of income (including funding costs), as well as non-deductible expenses under the CIT code, and income and expenses relative to management fees and other commission earned by retail funds, are also disregarded for profit assessment purposes.

The tax losses of these funds shall become entitled to be carried forward for a period of 12 years. The income of retail funds is not subject to withholding tax.

Retail funds exclusively investing in money market instruments and bank deposits shall become subject to stamp duty calculated over their global net assets at the rate of 0.0025 per cent (per quarter), with the remaining retail funds being subject to a 0.0125 per cent rate (per quarter).

However, at the investor level, income tax exemptions may be applicable to non-resident investors.

In this respect, income derived from retail funds, including capital gains resulting from the redemption of unit participations or their liquidation, shall be exempt from income tax provided that:

• a maximum of 25 per cent of the share capital is not held, directly or indirectly, by Portuguese residents or by individuals resident in Portugal, except when the latter is resident in an EU member state or in a European Economic Area (EEA) member state that is bound to cooperate with Portugal under an administrative cooperation arrangement in tax matters similar to the exchange of information schemes in relation to tax matters existing within the EU member states or in any country with which Portugal has a double tax treaty in force;

• proof of non-residence in Portugal is provided in due time; and

• investors are not domiciled in tax haven jurisdictions listed in Ministerial Order No. 150/2004 of 13 February 2004, as amended.

Non-residents that have failed to prove their non-residence on time may request a total or partial refund of the tax withheld during a two-year period (counted from the end of the year in which the event that generated the tax liability took place).

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of a retail fund must be entrusted to a single depositary, which must be a certain type of financial institution.

A depositary must have at least €7.5 million in own funds and its registered office must be located in Portugal or in another EU member state, although in the latter case it must also have a branch in Portugal. A fund must have different entities as fund manager and as depositary. A depositary can also be an investment company authorised to provide registration and deposit of financial instruments services, subject to compliance with the own funds requirements set out in article 92 of Regulation 575/2013/EU.

The depositary, like the management company, must act independently and exclusively in the interest of the fund’s investors. It has three main responsibilities, as follows:

• the safekeeping of the fund’s assets;

• carrying out acts related to the transfer or exercise of the rights over the assets, as instructed by the fund manager, as well as the payment to the investors of the proceeds of the redemption or liquidation of the assets; and

• monitoring and guaranteeing to investors that the investment policy, the use of proceeds and the calculation of the value of the units of the fund comply with the law, regulations and constitutive documents of the fund.

The depositary is responsible, under the general rules of civil liability, towards the fund manager and the investors for compliance with the legal duties, regulations and constitutive documents of the fund, and for the loss of the financial instruments under its safekeeping. In this respect, the UCI Law closely follows the measures and provisions established in the AIFMD.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

The retail fund must be managed by a licensed fund manager and, considering the recent changes enacted by the UCI Law, will have a board of directors comprising at least three members, of which, one must be an independent director (or non-executive director).

Moreover, pursuant to the recently enacted Law No. 148/2015 of 9 September 2015 (the Auditing Supervision Framework), the fund manager shall also have an audit board comprising at least three members (the majority of whom must be considered independent) and a sole auditor.

The members of the fund manager’s board of directors and audit board must be previously authorised by the BoP to take office, being subject to a thorough suitability assessment during this procedure.

Further, the fund manager must have several internal policies in place aimed at addressing the following:

• the risk of its activity;

• remuneration issues;

• outsourcing;

• internal control;

• evaluation of the assets pertaining to the funds under management;

• anti-money laundering;

• record-keeping; and

• selection of the members of the board of directors and audit board.

All of these are subject to the control of the CMVM and, to a certain extent, of the depository.

21 What are the periodic reporting requirements for retail funds?

The fund manager must prepare and publish annual and biannual accounts. These must be made available free of charge on request by investors.

The marketing entity must send or make available to investors a statement informing them of the number of units held by the investor in question and their value and the aggregate value of the investment. In addition to this information, the marketing entity may provide further information regarding the investor’s financial situation. For example, if the marketing entity is a bank and the investor is a client of that bank, it might provide the above information together with the investor’s bank statement.

Any information published pursuant to the requirements set out below is available to investors, usually through the CMVM’s information diffusion system (website). Moreover, the fund manager must publish and send the following to the CMVM:

• the annual accounts within three months of the end of the financial year;

• the biannual accounts within two months of the end of the relevant semester; and

• an inventory of the fund’s asset portfolio, its global net value, any responsibilities not found in the balance sheet, and the number of units currently in circulation, on a monthly basis.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

There are generally no restrictions placed on the issue, transfer or redemption of interests in retail funds. However, considering that the UCI Law does not expressly forbid the establishment of such restrictions in the fund’s prospectus, it is possible to set certain specific conditions in respect of the issue, transfer and redemption of the aforementioned interests.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

The vehicles available are those described in question 12.

However, in cases where collective investment companies invest in real estate, they are qualified as real estate investment companies.

In addition, it should be noted that, in Portugal, the AIFMD has been partially implemented by Law No. 18/2015 of 4 March 2015, relating to venture capital, social entrepreneurship and specialised investment (the Venture Capital Law).

The Venture Capital Law contains a specific regime applicable to funds investing in equity instruments for a limited period of time, as well as in other structures, which, despite having similar features to the undertakings for collective investment’s (UCI) framework, is perceived under Portuguese law as being an autonomous subject in relation to UCIs. That being said, the Venture Capital Law falls outside the relevant scope of this chapter.

24 What are the key laws and other sets of rules that govern non-retail funds?

See questions 1 and 3.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes.

26 Who can market non-retail funds? To whom can they be marketed?

The entities listed in question 7 can market non-retail funds. There are no limitations as to whom retail funds may be marketed. Both natural and legal persons may invest in the units or shares of a retail fund.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

No. However, the constitutional documents of the non-retail fund may establish that the fund will only be placed with qualified, professional investors, or those of a certain class. In such cases, the distribution of the fund’s units or shares must comply with this restriction.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

The UCI Law, which partially implemented the AIFMD in Portugal, opted out of establishing a framework similar to fund managers of retail and non-retail funds.

Therefore, the requirements applicable to the licensing and development of fund management are identical for the most part, save for a few provisions only applicable to fund managers managing certain types of funds, owing to their specific nature (eg, retail funds, non-financial assets funds or real estate funds).

29 What is the tax treatment of non-retail funds? Are any exemptions available?

The tax treatment of non-retail funds is the same as that applied to retail funds (see question 18), except as regards the following aspects.

At the investor level, income tax exemptions may be applicable to non-resident investors regarding non-retail funds that mainly invest in movable assets, or a reduced withholding tax rate of 10 per cent may be applicable to non-resident investors regarding non-retail funds that mainly invest in real estate assets.

In this respect, income derived from non-retail funds, including capital gains resulting from redemption of units or their liquidation, will benefit from income tax exemption or a reduced withholding tax rate, as the case may be, under the same provisions for retail funds as discussed in question 18.

For the purposes of this regime, income derived from non-retail funds that mainly acquire real estate assets, including capital gains from the sale or redemption of such units or from the liquidation of such funds, shall be classified as income derived from immovable property (as a rule, under a double tax treaty, the right to tax immovable property income is attributed to the source state).

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

See question 19.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

See question 20.

32 What are the periodic reporting requirements for non-retail funds?

See question 21.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts are not provided for under Portuguese law within the scope of the UCI’s framework, but correspond to portfolio management activity.

The structure of separately managed accounts is set up in Portugal through a discretionary mandate agreement between the client and the portfolio manager (usually a portfolio management company, asset management company or another financial intermediary duly licensed to develop such activity), pursuant to which the portfolio manager is obliged, in respect of the client, to carry out all actions necessary to value the portfolio and to exercise all rights inherent to the financial instruments comprised in the portfolio.

34 What are the key legal issues to be determined when structuring a separately managed account?

Besides the general obligations arising from the Portuguese Security Code, which portfolio managers must adhere to in their capacity as financial intermediaries, Decree-Law No. 163/94 of 4 June 1994, as amended, establishes specific provisions in this respect.

The portfolio manager is subject to a strict duty of diligence when acting on behalf of the client; the former is required to act in the sole interest of the latter.

More specifically, the portfolio manager:

• must record and segregate the client’s assets in different accounts or sub-accounts;

• shall refrain from practising certain transactions on its own, such as granting credit under any circumstance, providing collateral, accepting deposits, etc; and

• may not acquire, on behalf of its client, securities issued by entities pertaining to its governance bodies or any company holding more than 10 per cent of the share capital of the portfolio manager, as well as other related entities.

The portfolio management agreement must be entered into between the relevant parties and must determine the level of discretion exercised by the portfolio manager. Nonetheless, the client always has the right to issue binding orders to the portfolio manager regarding the transaction to be carried out, unless the portfolio management agreement contains a guaranteed minimum return undertaking by the portfolio manager.

Finally, this type of agreement always leaves room for the parties to regulate their contractual relationship as they see fit, provided that the principles and obligations of the financial intermediaries are not breached.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Yes. See question 34 for more details on the operation structure.

The legal framework applicable to separately managed accounts, as described in question 33, is different from the UCI’s framework because separately managed accounts are subject to the provisions of article 1 of Decree-Law No. 163/94 (ie, the fund is a mere pool of assets without legal personality per se) and are tailored and managed in accordance with an agreement (which abides by the UCI Law) entered into between the client and the portfolio manager. A UCI will be subject to the legal framework outlined in question 1 et seq.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

The UCI Law and the Portuguese Securities Code are expected to undergo changes in the near future as a result of the implementation of the Markets in Financial Instruments Directive 2014/65/EU legal package. Further one-off amendments to the UCI Law, directly attributable to changes in EU legislation in this respect, cannot be set aside, particularly concerning the implementation of additional amendments to the AIFMD and the UCITS Directive.

Moreover, the new UCI tax regime, which entered into force on 1 July 2015, aligning the taxation of investment funds in Portugal with European standards, may be subject to future amendments, depending on the political decisions taken by the Portuguese government.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The listing of retail funds on a regulated market depends on the daily tradability of these funds being guaranteed in said market, and on the execution of a market-maker contract between the fund manager and the market maker.

The market-maker contract shall guarantee that the market price of the units and shares does not significantly diverge from the value of the units and shares or, when applicable, from their indicative value.

The fund’s constitutional documents may establish that the units and shares acquired in the regulated market cannot be redeemed, but in such cases a warning must be inserted in the fund’s prospectus and in all advertising material. Notwithstanding this, if the market value of the units and shares significantly diverges from the calculated and disclosed value of the units and shares, the investors have the right to redeem their units and shares acquired in the regulated market. The procedure for this redemption is set out in the fund’s prospectus.

Moreover, the fund manager shall disclose to the market manager any change to the following:

• the value of the units and shares calculated in accordance with the fund’s updated portfolio;

• the number of units and shares issued; and

• the assets contained in the fund’s portfolio.

Regarding non-retail funds, no specific requirements are established in the Portuguese legal framework.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

There is no specific provision on this matter in the UCI Law and, to date, the redomiciling of an overseas vehicle in Portugal has not been considered by the CMVM. However, it is possible that the CMVM may come to consider this possibility in the future.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

No.

Pedro Simões Coelho

psc@vda.pt

Ricardo Seabra Moura

rsm@vda.pt

Carlos Filipe Couto

cfc@vda.pt

Rua Dom Luís I, 28

1200-151 Lisbon

Portugal

Tel: +351 21 311 3400

Fax: +351 21 311 3406

www.vda.pt

South Africa

Johan Loubser and Jessica Blumenthal

ENSafrica

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The Financial Services Conduct Authority (FSCA) and the Prudential Authority (located within the South African Reserve Bank (SARB)) have recently replaced the Financial Services Board. This marks the formal implementation of the twin peaks model of financial sector regulation that has been under discussion in South Africa for some time. The Prudential Authority regulates the financial soundness of financial institutions and the FSCA regulates the market conduct of financial institutions. Other regulators include the Financial Intelligence Centre (responsible for administering the anti-money laundering and related requirements of the Financial Intelligence Centre Act) and the SARB (responsible for setting monetary policy and administering exchange control rules).

The Conduct of Financial Institutions Act (COFI), which is expected to be published for comment later in 2018, will move away from the current sectoral licensing model followed in South Africa to a centralised, activity-based licensing model. The new licensing regime that will be outlined in COFI will focus on the activities that a prospective licensee wishes to perform, rather than on particular sectors of the market. COFI will replace existing sector-specific legislation.

Currently, the following legislation applies:

• the Collective Investment Schemes Control Act (CISCA) regulates collective investment schemes in, respectively, securities, property and participatory bonds, and collective investment schemes that are hedge funds;

• the Financial Advisory and Intermediary Services Act (the FAIS Act) regulates the provision of financial services by, for example, investment advisers, asset managers and persons who provide financial product platforms; and

• the Financial Markets Act regulates the Johannesburg Stock Exchange (JSE) and related service providers, such as stockbrokers, depositories and clearing houses.

Exchange-traded funds and real estate investment trusts (REITs) listed on the JSE are regulated by the FSCA if they are also collective investment schemes.

Special purpose acquisition vehicles listed on the JSE are regulated by the JSE.

Private equity funds are, generally speaking, not regulated by the FSCA, although service providers to such structures may fall to be regulated under the FAIS Act.

As of 1 April 2015, hedge funds that invite or permit ‘members of the public’ (as defined in CISCA – see question 26) to invest money or other assets have been regulated as collective investment schemes in hedge funds in South Africa. Private arrangements and segregated portfolios using hedge fund strategies remain unregulated.

Two types of hedge funds may be registered: qualified investor funds and retail funds. Qualified investor funds are hedge funds that only permit investment by investors who have ‘demonstrable knowledge and experience’ in financial and business matters that would enable them to ‘assess the merits and risks of a hedge fund investment’ (or are advised by a financial services provider having such knowledge) and who initially invest at least 1 million rand. A retail fund does not have such restrictions. Generally speaking, retail funds must comply with more detailed regulatory requirements, including detailed prudential investment requirements.

2 Is fund administration regulated in your jurisdiction?

Yes; as a consequence of the wide definition of ‘intermediary services’ in the FAIS Act, fund administrators are generally required to obtain authorisation from the FSCA under the FAIS Act to provide non-discretionary intermediary services (a Category I licence or, where the administrators make use of aggregated or bulked investment and disinvestment orders, a Category III licence). As per the above, COFI will amend the licensing regime once promulgated.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Five categories of collective investment schemes are currently permitted by CISCA, namely the following:

• collective investment schemes in securities;

• collective investment schemes in property;

• collective investment schemes in participation bonds;

• retail hedge funds; and

• qualified investor hedge funds.

In this section, only the position relating to obtaining authorisation under CISCA for a collective investment scheme in securities, which is the most common scheme, will be discussed.

CISCA and the relevant notices made thereunder have requirements in relation to the authorisation of both the manager (who administers the scheme) and the trustee or custodian (who holds the assets and oversees compliance with applicable requirements), the formation of the collective investment scheme (being the legal structure created to house the investments) and the creation of particular portfolios (each portfolio constituting a fund in which investors can invest). Prior approval from the FSCA is required to establish a collective investment scheme or to form a new portfolio.

With respect to the manager, the following should be noted:

• only companies registered under the South African Companies Act as ring-fenced companies qualify for authorisation;

• the manager’s board must consist of at least four directors approved by the FSCA of whom all executive directors must be resident in South Africa and must include independent directors;

• the manager is required to maintain prescribed minimum capital (in practice, consisting of seed investments in portfolios while they have low value and the maintenance of capital equal to at least 13 weeks of fixed costs of the manager); and

• the manager must satisfy the FSCA of the adequacy of its operational capacity, management systems, risk management and complaint resolution system.

A draft notice was published in 2015 that seeks to amend the conditions for registration of managers of collective investment schemes and the determination of fit and proper requirements for directors and management of such managers. This, however, remains in draft form.

With respect to the trustee, public companies registered under the South African Companies Act, branches of foreign banks and South African insurers qualify to play this role, provided that they have capital of more than 10 million rand and have been registered by the FSCA as a trustee or custodian. The trustee may not be a holding company or subsidiary of a manager. The FSCA may only register a trustee if it is satisfied that the general financial and commercial standing and independence of the relevant applicant is such that it is fit for performing the functions of trustee or custodian and that the company or institution is, by reason of the nature of its business, sufficiently experienced and equipped to perform such functions. In practice, this last requirement sets the bar quite high and only a handful of trustees (which are all affiliated with large financial institutions) have been registered.

With respect to the deed of the collective investment scheme, it should be noted that although CISCA potentially permits a variety of legal structures, in practice, collective investment schemes in securities are housed in unit trust-type schemes whose trust deeds follow model wording approved and published by the FSCA. The consideration and approval of a trust deed forms part of the approval process of the manager.

It is also possible to establish a co-named portfolio, which in effect is a joint venture between a company licensed as a manager of a collective investment scheme, which will administer the co-named portfolio and an asset manager, which will provide the asset management services to the portfolio. The portfolio will bear the name of both the manager and the asset manager.

Portfolios are created in the trust deed of the collective investment scheme or by an amendment thereto approved by the FSCA.

There are no registration requirements for private equity funds housed in partnership structures or segregated portfolios, although asset managers must be appropriately licensed under the FAIS Act to provide services to such funds.

REITs, exchange-traded funds, exchange-traded notes and special purpose acquisition vehicles seeking a listing on the JSE must comply with the JSE Listings Requirements.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

CISCA applies to the administration of a collective investment scheme within South Africa.

Administration has a broad definition in CISCA as:

[A]ny function performed in connection with a collective investment scheme, including the management or control of a collective investment scheme; the receipt, payment or investment of money or other assets including income accruals in respect of a collective investment scheme; the sale, repurchase, issue or cancellation of a participatory interest in a collective investment scheme and the giving of advice or disclosure of information on any of those matters to investors or potential investors; and the buying and selling of assets or the handing over thereof to a trustee or custodian for safe custody.

Only persons registered as managers under CISCA or persons who are authorised agents of the manager may perform such administration services (section 5(1) of CISCA). Generally speaking, before a manager may delegate any function listed in the definition of ‘administration’ to any person, it must obtain the approval of the FSCA (section 4(5) of CISCA). Accordingly, an overseas manager may not perform management activities for South African collective investment schemes without prior authorisation (and would need to hold an appropriate licence in South Africa to authorise it to carry out any outsourced services in South Africa). It should be noted that the outsourcing of functions of administration is currently under review by the FSCA.

The FAIS Act prohibits any person from providing as a regular feature of business, in relation to financial products, intermediary services for product suppliers or intermediary services or advice to clients without authorisation under the FAIS Act. In accordance with ordinary principles of statutory interpretation, the FAIS Act applies to such services rendered in South Africa. In addition, regulation 3 of the regulations made under the FAIS Act prohibits any person from canvassing for, marketing or advertising any business related to the rendering of financial services by any person who is not an authorised financial services provider or a representative of such a provider. Accordingly, foreign service providers may not render financial services in or into South Africa without a FAIS licence and no person may canvass for, market or advertise any South African or foreign financial services business in South Africa unless such business is licensed under the FAIS Act.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

In terms of the FAIS Act, a licensed financial services provider (an asset manager in South Africa will have a Category II licence) is required to notify the FSCA within 15 business days of a change in its shareholders or its board of directors. Section 8(10)(b) of the FAIS Act provides that if the FSCA is satisfied that the new director, member, trustee or partner does not comply with personal character qualities of honesty and integrity the FSCA may suspend or withdraw the licence of the financial services provider. A change in the name of a financial services provider effectively requires prior consent as a financial services provider may not carry on financial services business under its new name until the FSCA has issued it with a new licence in its new name. It should also be noted that a licence in terms of the FAIS Act is non-transferable.

Pursuant to CISCA and the regulations thereunder, the prior consent of the FSCA is required for any change in shareholding of a collective investment scheme, a change of directors or a change of name. In practice, the FSCA usually also requires that this limitation be included in the constitutional documents of the manager of a collective investment scheme, as a restriction on such company’s corporate powers.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

The fee arrangements of the manager of a collective investment scheme are subject to approval by the FSCA as part of the general oversight exercised over collective investment schemes. Furthermore, care should be taken when setting out the agreed fee arrangement, as only the agreed and disclosed fee of the manager may be deducted from the portfolio.

In addition, consideration should be given to the tax implications of any structuring. Generally speaking, managers’ compensation is often structured as a fixed percentage of the value of assets under management plus a performance fee.

A person (whether a juristic person or an individual) authorised to provide advice under the FAIS Act may not receive a sign-on bonus, save if such person is a new entrant to the market (Board Notice 146 of 2014).

There are detailed restrictions and disclosure requirements relating to fees and remuneration in the conflict of interest and other provisions of the General Code of Conduct for Authorised Financial Services Providers under the FAIS Act. These provisions impact the design of compensation and profit-sharing arrangements relating to financial services providers and must accordingly be considered when structuring the fund manager’s compensation and profit-sharing arrangements.

It should also be noted that the FSCA is currently engaged with a Retail Distribution Review, as part of which it is considering far-reaching reforms to the regulatory framework for distributing financial products to customers. The outcome of this review will affect the remuneration of certain financial services providers, most notably financial advisers (Category I financial services providers).

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Yes. See question 8.

8 What marketing activities require authorisation?

A participatory interest in a collective investment scheme constitutes a ‘financial product’ as contemplated in the FAIS Act. The marketing of financial products may only be performed as a regular feature of business by persons having an appropriate licence under the FAIS Act (ordinarily a Category I licence is required).

In addition, section 65 of CISCA prohibits any person from ‘soliciting’ (defined as any act to promote investment by members of the public in a collective investment scheme) investments in a foreign collective investment scheme that is not approved by the FSCA. Accordingly, a foreign collective investment scheme may only be marketed to members of the public in South Africa if it has been approved for such purpose by the FSCA.

Board Notice 92 of 2014, effective from 1 May 2015, introduced comprehensive new requirements relating to the documentation used to market collective investment schemes. In terms of this notice, a manager of a South African collective investment scheme (or of a foreign collective investment scheme approved in terms of section 65 of CISCA) must lodge with the FSCA copies of all advertisements and marketing material, fund fact sheets (with prescribed information) and relevant investor application forms before publication or use of the material. Furthermore, in terms of these requirements, South African collective schemes as well as foreign collective investment schemes that are approved in terms of section 65 of CISCA, are required to prepare (and update on a quarterly basis) minimum disclosure documents (similar, in principal, to the key investor information document required in terms of undertakings for collective investment in transferable securities legislation). In 2017, the FSCA published proposed amended marketing disclosure requirements for collective investment schemes for public comment.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The regulatory provisions set out in question 8 apply to marketing activities in South Africa.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

Foreign financial services providers qualify for licences under the FAIS Act and a substantial number of foreign entities hold Category I FAIS licences. However, it should be noted that, in order for a foreign financial services provider to qualify for a Category I FAIS licence, its key individuals and representatives will be required to demonstrate their ability to comply with the South African fit and proper requirements published under the FAIS Act, which include, if they render financial advice, the completion of regulatory exams in respect of the relevant South African legislation. Examination sittings are held from time to time in South Africa and in London. The fit and proper requirements under FAIS have recently been amended, albeit not all of the provisions of the new fit and proper requirements are yet effective (the regulation provides for a phased implementation and transitional periods). As at the date of writing, the FSCA is considering whether or not to require that foreign financial services providers must keep an office in South Africa and register as external companies under the Companies Act.

One of the requirements relating to approval of a foreign collective investment scheme under section 65 of CISCA is that the manager or operator of the foreign scheme must, for purposes of interacting with the regulator, either open or appoint a South African office (capitalised with at least 2 million rand) or appoint a South African manager authorised under CISCA to act, for a fee, as its representative in relation to regulatory affairs.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Intermediaries subject to the FAIS Act may earn fees expressed as a percentage of the net value of a financial product (such as an investment in a collective investment scheme) upon condition that if such fees are deducted from the investment, then the client must specifically agree thereto in writing and must have the power to stop the payment of fees. In practice, many managers of collective investment schemes or financial product platform providers stipulate maximum fee levels that they would be willing to administer by way of deduction from the client’s investment. The type and level of commission that may be earned in relation to insurance products (such as linked policies referencing investments in a collective investment scheme as the underlying asset) are subject to regulated upper limits. The ongoing Retail Distribution Review may impact such fee arrangements going forward.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

Retail funds are housed in collective investment schemes registered under CISCA. Such schemes are formed by a trust agreement entered into between an authorised manager and a registered trustee, the trust deed of which is approved by the FSCA. Schemes then create portfolios, subject to approval from the FSCA, in which investors purchase participatory interests. CISCA permits other legal structures, but in practice only these unit trusts are used. See also question 3.

13 What are the key laws and other sets of rules that govern retail funds?

The key laws are currently CISCA and the FAIS Act. From a self-regulatory standpoint, the industry body, the Association for Savings and Investments South Africa, has published various standards that are influential, such as a standard on the calculation of the net asset value of portfolios, a standard on the calculation of total expense ratio and transaction costs, a standard on the classification of funds and a standard on performance fees.

The key laws and requirements in relation to exchange-traded funds, special purpose acquisition vehicles and REITs are the relevant listings requirements of the JSE, the Companies Act and the Income Tax Act.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes, a South African collective investment scheme may only be marketed to members of the public if registered under CISCA. A foreign collective investment scheme may only be marketed to members of the public if approved under section 65 of CISCA.

15 Who can market retail funds? To whom can they be marketed?

South African collective investment schemes approved under CISCA may be marketed by the manager thereof and by any person having an appropriate licence under the FAIS Act. Other than in relation to qualified investor hedge funds, there are no restrictions regarding to whom the collective investment scheme may be marketed.

A qualified investor hedge fund may only permit investment by investors who have ‘demonstrable knowledge and experience’ in financial and business matters that would enable them to ‘assess the merits and risks of a hedge fund investment’ (or are advised by a financial services provider having such knowledge) and who initially invest at least 1 million rand.

A foreign collective investment scheme approved under section 65 of CISCA may be marketed by any person having an appropriate FAIS licence. The scheme may only be marketed in South Africa to the same type of investors under the same or substantially similar requirements and conditions relating to the type of investors as in its domicile of registration (Board Notice 257 of 2013).

16 Are there any special requirements that apply to managers or operators of retail funds?

The managers of hedge funds classified as retail funds will be subject to greater disclosure requirements and prudential investment limits than hedge funds classified as qualified investor funds (see question 1).

17 What are the investment and borrowing restrictions on retail funds?

Collective investment schemes in securities may not borrow any funds, save where the manager must repurchase participatory interests but insufficient liquidity exists in a portfolio or assets cannot be realised. In such circumstances, the manager may borrow the necessary funds for such repurchase (and grant security over the assets of the portfolio in question), from registered financial institutions at the best commercial terms available, provided that the maximum amount borrowed does not exceed 10 per cent of the market value of such portfolio at the time of borrowing. In addition, collective investment schemes may enter into eight-day loans for purposes of bridge funding in order to acquire assets.

Collective investment schemes in securities are subject to detailed prudential investment restrictions contained in Board Notice 90 of 2014. The restrictions distinguish between standard portfolios, money market portfolios, fund of funds portfolios and feeder fund portfolios. Notable restrictions relating to standard portfolios include the following:

• limitations on the maximum exposure of a portfolio to equity securities issued by any one entity, calculated with reference to the value of the portfolio and the weighting of the applicable security in applicable indexes;

• limitations on the maximum exposure to listed or unlisted non-equity or debt securities, based on who the issuer or guarantor is (eg, maximum exposure to the debt of an unlisted issuer is 5 per cent of the value of the portfolio);

• a requirement that at least 90 per cent of the market value of a portfolio must consist of the following:

• securities listed on an exchange that is a full member of the World Federation of Exchanges;

• securities acquired by the manager pursuant to the exercise of rights attaching to securities listed on an exchange; and

• permissible unlisted non-equity securities and derivatives; and

• derivatives, such as listed futures, option contracts, warrants or index tracking certificates and unlisted swaps (relating to exchange rates, interest rates of indexes) may not be used to leverage or gear the portfolio and exposures must be covered at all times (Chapter V of Board Notice 90 of 2014).

Applicable restrictions apply to other types of retail funds.

18 What is the tax treatment of retail funds? Are exemptions available?

In general, collective investment schemes in securities are treated as conduit vehicles in relation to income amounts, and accordingly, if the income amounts are distributed within 12 months of their accrual, such amounts are taxed in the hands of the investors in accordance with their tax profile. Amounts so distributed retain their nature for tax purposes and any exemptions available in relation to particular income amounts (eg, the local dividend exemption or the individual interest exemption) are accordingly generally available to the investors in respect of such amounts. Capital gains are exempt in the hands of a collective investment scheme in securities. A disposal of participatory interests in a collective investment scheme is taxable in the hands of the investor disposing of the participatory interest as either revenue or capital depending on whether the participatory interests are acquired as part of a scheme of profit making or as capital assets. Where participatory interests were held for at least three years before their disposal, they will be deemed to be capital in nature for tax purposes.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Yes. The portfolio of a collective investment scheme must be held by an approved trustee or custodian. In addition, the assets of the collective investment scheme are protected by the following regulatory provisions:

• section 2 of CISCA provides that the assets of a portfolio must at all times be properly protected by application of the principle of segregation and identification (eg, section 105 of CISCA requires that the manager must, within one business day of receiving cash from investors, deposit such amounts in a trust account controlled by the trustee);

• section 71 of CISCA provides that any money or other assets received from an investor and assets of a portfolio are regarded as being trust property for the purposes of the Financial Institutions (Protection of Funds) Act (with the effect, for example, that the manager may not derive improper advantage from the investment activities of the portfolio and must declare relevant conflicts of interest) and a manager, its authorised agent, a trustee or custodian must deal with such money or other assets in terms of CISCA and the applicable deed and in the best interests of investors;

• section 93 of CISCA provides for a closed list of permissible deductions against the portfolio for fees, charges and so forth; and

• section 104 of CISCA provides that the assets of a portfolio are not available to satisfy third-party claims against the manager or trustee.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

See questions 3 and 21. In addition, the trustee or custodian of the collective investment scheme is required to:

• ensure that the selling or repurchase price of participatory interests is calculated in accordance with CISCA and the applicable deed;

• enquire into and prepare a report on the administration of the collective investment scheme by the manager during each annual accounting period and send the report for submission by the manager to the FSCA together with the manager’s annual compliance report;

• ensure that appropriate internal control systems are maintained and that records clearly identify the nature and value of all assets under custody, the ownership of each asset and the place where documents of title pertaining to each asset are kept; and

• report any irregularity or undesirable practice concerning the collective investment scheme of which it becomes aware to the FSCA.

21 What are the periodic reporting requirements for retail funds?

Managers of all collective investment schemes must report to investors on a quarterly basis, at a minimum.

Managers are required to make quarterly reports relating to all assets in the portfolios administered by them to the FSCA (regulation 3 of the regulations under CISCA) and must annually submit to the FSCA their audited financial statements together with audited financial statements for each portfolio, a compliance report and prescribed information (such as the manager’s income derived from all sources in the operation of the collective investment scheme and a list of all securities lent by the portfolio and the value of the collateral thereof) (regulation 2 and paragraph 10 of Government Notice 910 of 2010). Managers of retail and qualified investor hedge funds must also submit quarterly and annual reports to the FSCA (Board Notice 52 of 2015).

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

The terms of issue and repurchase contained in the deeds of South African domiciled collective investment schemes tend to be uniform, with collective investment schemes in securities permitting daily dealing. Retail hedge funds must offer at least monthly dealing and qualified investor hedge funds at least quarterly dealing. From time to time, managers enter into contracts with large institutional investors relating to the redemption of participatory interests, providing, for example, for longer periods of notice than provided for in the deed. Where a manager receives redemption notices of more than 5 per cent of the market value of the portfolio with prior notice of less than 10 business days, the manager may, with the consent of the trustee, suspend the repurchase of participatory interests for up to 20 business days. After the 20 days, it must tender redemption through the transfer of assets in kind (unless the investor agrees to a further extension) (Government Notice 573 of 2003).

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Many South African private equity funds are housed in en commandite partnerships. En commandite partnerships are regulated by common law and are formed by agreement between the partners. The main advantage of this type of partnership is that a commanditarian (or limited) partner is not liable for the debts of the partnership in an amount greater than its investment commitment to the partnership (provided applicable common law requirements are met). The managing partner (also known as the general partner) has unlimited liability for the debts of the partnership.

Another type of structure sometimes used in the private equity context is a bewind trust. A bewind trust is a type of trust vehicle registered under the Trust Property Control Act, in terms whereof the applicable assets that are subject to the trust arrangements are owned by the beneficiaries of the trust, but the trustee of the trust holds and manages such assets. In the context of a private equity vehicle structured as a bewind trust, the cash contributions of the investors to the trust form the initial assets of the trust. Each investor is a beneficiary of the trust, and the investors own the assets of the trust jointly in undivided shares in proportion to their respective contributions. A bewind trust is formed by agreement between the investors as beneficiaries and the trustee.

Lastly, long-term insurance companies may market investment exposure to portfolios owned by them to investors through the issue of linked investment policies. This type of investment policy is widely used by pension funds to obtain exposure to both listed and unlisted investments. The investment return on the policy is determined by the investment return of assets held by the insurance company and specified in the policy.

In certain instances, notably if investors are willing to receive returns on an after-tax basis, closed-ended portfolios can also be housed in companies established under the Companies Act.

24 What are the key laws and other sets of rules that govern non-retail funds?

Fund managers and other financial service providers to non-retail funds are currently governed by the FAIS Act. Private equity funds set up as limited or en commandite partnerships are governed by the common law and those set up as bewind trusts are governed by the common law and the Trust Property Control Act. Long-term insurance companies are currently governed by the Long-Term Insurance Act (which will be replaced when the Insurance Act 2017 comes into effect (see question 36).

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

No authorisation or licensing is required to form private equity funds housed in limited or en commandite partnerships or bewind trusts. Bewind trusts must be registered with the Master of the High Court and the appointment of trustees is subject to approval by the Master of the High Court before they may act as such, but these are administrative requirements that apply to the formation of all trusts. Registered insurance companies are free to write linked investment policies without prior approval.

26 Who can market non-retail funds? To whom can they be marketed?

Non-retail funds may be marketed by any person having an appropriate licence under the FAIS Act.

However, save if sold through a linked investment policy by a long-term insurer, such funds are prohibited under CISCA if marketed to members of the public. ‘Members of the public’ is defined in section 1 of CISCA to include:

[M]embers of any section of the public, whether selected as clients, members, shareholders, employees or ex-employees of the person issuing an invitation to acquire a participatory interest in a portfolio, and a financial institution regulated by any law [such as a pension fund, insurance company, stockbroker, financial services provider, or a bank], but excludes persons confined to a restricted circle of individuals with a common interest who receive the invitation in circumstances which can properly be regarded as a domestic or private business venture between those persons and the person issuing the invitation.

In our view, ‘members of the public’ must be given the meaning it has in ordinary usage, save that the statutory definition serves to broaden the concept to include ‘any section of the public’ and (only where the circumstances of the applicable offer is such that it can properly be described as a public offer) financial institutions.

Media advertising, press releases, presentations to third parties, providing sale and promotional materials and advertising through electronic media such as television, email, the internet or a website is not permitted.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

There are no investor-protection rules other than for the requirement that the funds may not be marketed to members of the public, as defined in question 26. A qualified investor hedge fund may only permit investment by investors who have ‘demonstrable knowledge and experience’ in financial and business matters that would enable them to ‘assess the merits and risks of a hedge fund investment’ (or are advised by a financial services provider having such knowledge) and who initially invest at least 1 million rand.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

No.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

In general, partnerships and bewind trusts are essentially disregarded for tax purposes (with the exception of value added tax, in which case a partnership or bewind trust may constitute a separate value added tax vendor), with the tax implications of the underlying investments arising in the hands of the partners or beneficiaries, respectively, as if they held the underlying investments directly. The entry or exit of partners or beneficiaries generally has tax implications.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

There are no specific custody requirements in relation to partnerships and trusts and the general partner or trustee, as the case may be, normally holds the relevant assets. Trust property does not form part of the estate of the trustee except insofar as the trustee is a beneficiary (section 12 of the Trust Property Control Act).

Where a pension fund is invested in a private equity fund, conditions relating to the pension fund require it to procure that a script count is performed by the private equity fund’s auditors every six months (see question 31).

With respect to insurance companies, the Long-Term Insurance Act regulates custody arrangements.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

There are no fund-specific governance requirements prescribed by law. It is usual for non-retail funds to be audited on an annual basis and to be managed by a fund manager licensed under the FAIS Act.

The FSCA published conditions for investment in private equity funds (the Conditions) in March 2012 that stipulate requirements in order for a private equity fund to qualify for investment by a pension fund. Although the applicable requirements do not bind private equity funds, pension funds are significant investors and private equity funds therefore have a strong incentive to comply. The most significant requirements contained in the Conditions are the following:

• fund managers must be members of the South African Venture Capital Association and are required to be authorised as discretionary financial services providers under the FAIS Act;

• the auditors of the private equity fund must verify the assets of the fund on a biannual basis and the fund must produce audited financial statements complying with international financial reporting standards within 120 days of the end of its financial year; and

• the private equity fund must have clear policies and procedures for determining the fair value of the assets of the fund in compliance with the International Private Equity Valuation Guidelines, and any valuations must be verified at least annually by a third party.

The FSCA published a draft notice, ‘Conditions for Pension Fund Investment in Hedge Funds’, in February 2017 for comment. If such notice is adopted in its current form it will permit South African pension funds to invest in foreign hedge funds (as defined) only if the foreign hedge fund is approved for marketing to members of the public in South Africa under section 65 of CISCA (see question 8).

In March 2018, the FSCA published draft legislation that will, once promulgated, require pension funds to consider environmental, social and governance factors when considering an investment.

32 What are the periodic reporting requirements for non-retail funds?

The reporting periods are agreed contractually. Such funds typically report on a monthly or quarterly basis.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

These are commonly referred to as segregated mandates and are typically structured as investment management agreements concluded between the investor and the asset manager. The asset manager will either hold a Category II licence under the FAIS Act or, in cases where the underlying assets are listed, could be a stockbroker authorised to act as such by the JSE. The investor is the owner of the assets managed by the asset manager.

34 What are the key legal issues to be determined when structuring a separately managed account?

Paragraph 5 of the Code of Conduct for Discretionary Financial Services Providers made under the FAIS Act sets out a checklist of matters to be dealt with in a discretionary investment mandate concluded by an asset manager with a Category II licence under the FAIS Act. In addition, the Code requires asset managers to submit their standard form investment management agreements for prior approval by the FSCA.

From a commercial perspective, the key issues to be agreed upon are typically the following:

• duration of the appointment;

• fees;

• investment objectives and restrictions;

• termination arrangements;

• warranties;

• reporting arrangements;

• custody arrangements;

• remedial steps in the event of a mandate breach; and

• exclusion or limitation of liability of the asset manager in certain circumstances.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Only asset managers licensed under the FAIS Act or, in the case of listed assets, stockbrokers authorised by the JSE, may market and perform fund management services on the basis of a segregated mandate.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

Yes. The introduction of COFI, and the ongoing Retail Distribution Review, may have a fundamental impact on the above matters. The insurance industry is also undergoing legislative change and existing governing legislation is anticipated to be repealed and replaced. The Insurance Act 2017 was assented to on 17 January 2018, but no commencement date has been set as yet.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

With respect to retail funds, collective investment schemes in property are required to be listed on the JSE, as are REITs generally. To achieve REIT status under the listings requirements of the JSE, the issuer must, among other things, be primarily engaged in activities in respect of immovable freehold or leasehold property for retention as investments and distribute at least 75 per cent of its total distributable profits to holders of its listed securities on an annual basis.

In 2013, the JSE introduced new listing requirements permitting the listing of special purpose acquisition companies. Such a company may not carry on any commercial or business operations at the time of its application for a listing, but must, within 24 months of the date of its listing, acquire assets meeting the qualifying criteria of the main board or the alternative exchange (AltX) of the JSE. The JSE Listing Requirements were amended in 2017 to the effect that a special purpose acquisition company that does not acquire these assets within 24 months will have its listing suspended and subsequently will be removed. In order to list on the main board of the JSE, an applicant must raise at least 500 million rand through the issue of shares. A minimum of 50 million rand must be raised for a listing on the AltX. All capital raised must be held in escrow with an escrow agent until acquisitions of qualifying assets are made. It is anticipated that this type of vehicle may, in future, be used as an alternative to the more traditional private equity fund structures discussed in question 25.

The JSE listing requirements permit exchange-traded funds investing in securities to list, subject to the overarching requirements that the persons responsible for managing the investments must have appropriate experience, there must be an adequate spread of portfolio risk and the fund must not, to a significant extent, speculate in securities. Exchange-traded funds are required to be registered as collective investment schemes in securities under CISCA.

The listings requirements also permit the listing, on the debt market, of exchange-traded notes backed by assets such as gold, platinum or silver.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

Generally speaking, this would not be possible for collective investment schemes and non-retail fund structures. There are provisions in the Companies Act that permit a foreign company to redomicile in South Africa.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Foreign investors are, in general, required to acquire any South African investments at market value. Where shares are acquired by foreign investors, the share certificates must be endorsed as ‘non-resident’, or an entry to this effect must be made in the records of the central securities depository participant or broker in the case of listed shares. Foreign investors may not introduce loan funding into South Africa without obtaining exchange control approval. Individual South African investors may make foreign investments utilising the following:

• their 10 million rand annual foreign investment allowance;

• their 1 million rand annual single discretionary allowance (to the extent that the same has not already been used for travel purposes); or

• authorised foreign assets.

South African companies may only make foreign investments subject to obtaining exchange control approval for such investment. South African institutional investors (including retirement funds, long-term insurers, collective investment scheme management companies and investment managers) may make foreign investments up to certain limits.

Johan Loubser

jloubser@ensafrica.com

Jessica Blumenthal

jblumenthal@ensafrica.com

1 North Wharf Square

Loop Street

Foreshore

Cape Town 8001

South Africa

Tel: +27 21 410 2500

Fax: +27 21 410 2555

www.ensafrica.com

Sweden

Fredrik Wilkens, Emma Stuart-Beck and Lave Nilsson

Advokatfirman Vinge

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management is primarily regulated through Swedish legislation. There are currently, in very broad terms, two types of Swedish funds that are recognised as such under Swedish law: undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs). AIFs include all funds that are not UCITS funds (such as private equity funds) and Swedish special funds (such as hedge funds). Swedish UCITS are regulated by the Securities Funds Act (SFA) implementing Directive 2014/91/EU (the UCITS V Directive) and AIFs are regulated by the Alternative Investment Fund Managers Act (AIFMA) implementing Directive 2011/61/EU (AIFMD) although it is mainly the managers of AIFs that are regulated. The Swedish Financial Supervisory Authority (SFSA) acts as the competent regulator responsible for ongoing supervision of funds, fund managers and for the issuance of supplementary regulations and formal guidance to the aforementioned acts. The SFSA is responsible for ensuring that the business of fund managers is carried out in accordance with applicable laws and regulations. The Securities Markets Act (SMA) implementing Directive 2014/65/EU (MiFID II) and the SFSA’s supplementing regulations further regulate the use of intermediaries and services ancillary to fund management.

All marketing activities that have the purpose of furthering the sale of any product in Sweden, including funds, are subject to the Marketing Practices Act, which requires, for example, that marketing is carried out in accordance with generally accepted marketing practices. In relation to marketing of funds, the Swedish Investment Fund Association (SIFA) has issued guidance as regards, inter alia, the marketing of funds, which is considered codifying generally accepted marketing practices. The Swedish Consumer Agency, which includes the Consumer Ombudsman, is the primary authority responsible for ensuring that marketing material is in compliance with the Marketing Practices Act.

2 Is fund administration regulated in your jurisdiction?

Fund administration services are generally unregulated but there are certain administrative services, for example custodial services, which are only possible to provide under the prerequisite of a regulatory licence to conduct such business. If a Swedish custodian is delegated custody functions or where the fund administration services include trade settlement, the relevant entity must be authorised in accordance with the SMA.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

A Swedish fund is not, per se, subject to an authorisation or licensing process; instead, it is incumbent upon the manager of the fund to obtain authorisation from the SFSA to act as a fund manager. However, where a fund manager intends to manage a UCITS or an AIF formed as a special fund (a subcategory of domestic funds that derogate from a wider spectrum of regulation, which may not be freely marketed abroad), the authorisation process includes a requirement that the fund rules must be approved by the SFSA.

To obtain authorisation to act as a fund manager, an application would have to be submitted to the SFSA accompanied by, inter alia, a programme of operations of the fund manager and the fund rules of the funds to be managed. Depending on the type of investment fund, slightly different rules will apply in relation to the authorisation process.

In relation to the management of UCITS and special funds, the following requirements and process apply. A Swedish investment management company must be a limited liability company and have a board of directors consisting of at least three members and a managing director. Any natural or legal person who holds or may be expected to hold a qualifying holding (as defined in question 5) in the management company has to undergo an ownership assessment by the SFSA for the purposes of determining whether the natural or legal person is suitable for ownership of an investment management company. Further, a person who will serve as a member of the management body of the management company, or of the management body of an entity holding a qualifying holding in the management company, must undergo a management assessment by the SFSA.

The key requirement applicable to fund management companies primarily entails acting in the common interest of the unitholders. In general, a fund management company must conduct its operations in an honest, fair and professional manner so as to maintain the confidence of the public in the fund market. Further, the fund management company is obliged to have and maintain a minimum capital of own funds during its operations and ensure that it has adequate risk management systems together with sound routines for the operation, accounting, internal control and management of its information systems.

A Swedish AIF manager (AIFM) applying for authorisation to manage an AIF other than a special fund would essentially need to comply with the requirements stipulated above and must be a legal person, but not restricted to the form of a limited liability company. The formation of the AIF (save for AIFs formed as special funds) is, however, not contingent upon the SFSA’s approval of the fund rules (or similar documentation).

The management of an AIF below the relevant threshold may be carried out without authorisation provided that the AIFM is registered in the SFSA’s register. An unauthorised, registered AIFM may only carry out marketing activities to professional investors (as defined in the SMA). The exemption applies to AIFMs that manage AIFs whose assets under management in total do not exceed either:

• €100 million if leveraged; or

• €500 million when the portfolios consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of the initial investment in each AIF.

These managers are subject to supervision by the SFSA, as well as the registration and reporting requirements under the AIFMD.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

Initially, a division has to be made between managers established inside the European Economic Area (EEA) and outside the EEA. In the former case, the manager would need an authorisation in its home country and activities may subsequently be performed in Sweden either from the overseas manager’s home country or from inside Sweden, subject to the establishment of a Swedish branch office. If the manager has already been granted an authorisation in its home country within the EEA, pursuant to either the UCITS V Directive or the AIFMD, the overseas manager may ‘passport’ its licence into Sweden via the competent supervisory authority in its home country, and separate authorisation from the SFSA is thus not necessary. Following such passporting, it is also possible for the overseas manager to manage Swedish funds provided the manager’s authorisation in its home country includes management of fund types comparable to the type of Swedish fund the manager wishes to manage. In relation to management of a UCITS or a special fund, a separate authorisation must, however, be obtained from the SFSA that includes approval of the (revised) fund rules. The manager must also ensure that, in Sweden, it can make disbursements to unitholders, redeem units, provide investors with required information and handle complaints, which may be satisfied through the appointment of a local paying agent responsible for the aforementioned services. If an EEA-based manager wishes to manage a Swedish AIF that is not a special fund, no separate authorisation from the SFSA is required.

A fund manager established outside the EEA may only perform management activities or provide services to Swedish investors provided the manager has been granted an authorisation from the SFSA in accordance with the Swedish national regime.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

The acquisition of a controlling stake (ie, a qualified holding) in a fund manager is subject to prior authorisation from the SFSA. The application has to be submitted to the SFSA in writing. A qualified holding is defined as a direct or indirect ownership where the holding represents 10 per cent or more of the share capital or the voting rights or otherwise makes a significant influence of the fund manager possible. The latter is the case when, for example, a shareholders’ agreement allows for the appointment or dismissal of more than half of the members of the fund manager’s board of directors. Authorisation is also required prior to the increase of a holding through an acquisition where the holding would exceed 20, 30 or 50 per cent of the share capital or voting rights in a manager of UCITS funds. Should the acquisition of such manager occur through the division of joint marital property, testamentary disposition, corporate distribution or another similar measure, an application for retaining the shares has to be submitted to the SFSA within six months of the date of the acquisition. The AIFMA does not contain rules on thresholds for when an approval from the SFSA is necessary other than when a holding is qualified. Thus, the SFSA’s approval is required for all acquisitions or increases in holdings of shares or voting rights above 10 per cent.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

In general, the fund manager’s compensation (ie, fees deducted from the fund assets) must be clearly disclosed to investors. Compensation may generally only be deducted in the form of fees that relate to management of the fund assets (including, for example, custody and transaction costs), subscription and redemption. Pursuant to the rules stipulated by the AIFMA and the SFA, a fund manager’s compensation must follow an established remuneration policy that is consistent with, and promotes, sound and effective risk management. A fund manager that provides advice to non-professional investors shall comply with the restriction of third-party provisions set out in the SMA, which establishes that the fund manager or an investment firm may only accept or give remunerations if such remunerations improves the quality of the service and does not affect the company’s ability to act honestly, fairly and in a professional manner and provided that the client is provided with a full, correct and understandable description of such remunerations. This rule does not apply to remunerations that are necessary in order to provide the fund management or the service and as long as they are of such nature that they do not conflict with the company’s obligation to act honestly, fairly and professionally.

An investment firm that provides investment advice or discretionary portfolio management may not accept and retain remunerations of various kinds received from anyone other than the clients. The SIFA has issued guidance stipulating that, in the event income is derived from securities loans, the income must accrue to the fund. Any profit-sharing arrangement would have to be in compliance with the fund manager’s obligation to act in the interests of the unitholders. Internally, a Swedish fund manager shall have a remuneration system, as well as a remuneration policy, in place. Broadly, this policy shall be based on sound and effective risk management, taking into account the risk profile of the fund and the interest of the unitholders.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Marketing of UCITS or AIFs (including special funds) requires prior registration or passporting of the relevant fund in Sweden. However, once the relevant fund has been registered or passported in Sweden, it can be marketed without any additional licence for the marketing entity provided that the marketing does not include offering (ie, promotion of registered or passported funds can be carried out without further authorisation) (see questions 15 and 26). It should, however, be noted that different types of authorisation are required in cases where AIFs are to be marketed to Swedish non-professional investors.

8 What marketing activities require authorisation?

The definition of marketing varies depending on the type of investment fund. As regards UCITS, marketing is considered as any direct or indirect offering or placement of units or shares of a UCITS at the initiative of the UCITS, or on behalf of the UCITS, or to investors domiciled, or with a registered office, in Sweden. As regards AIFs, marketing is considered to include all types of advertising or promotion such as advertising in the mass media, cold-calling, emails, oral information provided at the offices of the fund or its promoter (if the offices are located in Sweden) and websites using the Swedish language or otherwise containing information specific to the Swedish market or Swedish investors. This means that the scope of marketing activities requiring authorisation is wide.

Notwithstanding that the above definitions are different, the analysis of what constitutes marketing and thus requires an authorisation would, in practice, be the same for a UCITS and an AIF.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The applicable Swedish legislation should be interpreted to include any marketing or promotional activities carried out in Sweden or directed towards Swedish investors. In determining whether an activity is directed to Swedish investors, a number of factors need to be taken into account including, for example, whether the communication is in Swedish, whether a Swedish contact address is provided and whether payment can be made in Swedish kronor.

In the absence of authorisation in respect of the relevant fund, an overseas entity may not direct marketing activities towards Sweden. A fund may, however, be marketed under the concept of ‘pre-marketing’, which is, in principle (however, not categorically), before the fund has been established. The scope of this exemption is, however, unclear and cannot be used to circumvent the obligation to obtain authorisation. A fund may also be marketed on a reverse-solicitation basis, meaning that the investor initiates the contact with the manager. Such marketing can only be carried out on a product-by-product basis and only allows the entity to provide the investor with information specifically requested.

Once the relevant fund has been authorised in Sweden for marketing purposes, the overseas entity may carry out marketing on a cross-border basis into Sweden. It should be noted that cross-border marketing is not intended to include regular activities being carried out in Sweden, but rather being conducted from outside Sweden.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

There is no requirement to involve a local entity in the fund marketing process. An overseas manager that is conducting marketing of a UCITS, or an AIF that is a special fund, to Swedish investors must ensure that payments (eg, dividends), redemptions and disclosure of information relating to the fund can be made in relation to investors. These requirements may be satisfied through the appointment of a local paying agent to be responsible for the aforementioned activities.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Fund managers must take all reasonable steps to identify potential conflicts of interest that may arise between the intermediary and the client as a result of commission payments. Commission payments to intermediaries are only allowed if such are made for purposes of enhancing the quality of the relevant service and provided that the manager is not impeded from acting in the interest of the unit or shareholders. Commission payments are considered to enhance the quality of a service when the commission is proportional to the higher level of service provided to the client and if it provides the client with a tangible advantage. Intermediaries (being entities authorised by the SFSA) distributing or selling funds separately must be able to demonstrate that the commission received is devised so as to enhance the quality of the relevant service to the client. Further, the intermediary must document how the commission benefits the client and keep an internal record of all payments and benefits accepted from a fund manager.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

Swedish ‘retail funds’ are commonly referred to as being funds available and generally eligible for non-professional investors. ‘Professional investors’ are defined in accordance with the definition set out in the SMA and ‘non-professional investors’ are defined as investors other than professional investors.

Swedish retail funds include UCITS and AIFs in the form of special funds. These funds are construed as pools of assets without any legal capacity and thus cannot acquire rights or assume liabilities. In addition, such funds may not be sued in, or brought before, courts of law or any other public authority. Consequently, these funds merely consist of the fund assets. The fund manager represents the unitholders in respect of all issues concerning such a fund and it is also required by law that the assets of the fund are kept with a custodian that is independent of the fund management company. The fund is formed via capital contributions from investors and through the SFSA’s approval of the fund rules. Accordingly, the establishment of a Swedish retail fund requires a three-party relationship that is governed by contractual and statutory obligations. Collective investment structures established as legal vehicles other than UCITS, AIFs and special funds, such as a limited liability company or similar foreign entities, may come to fall within the scope of Swedish fund regulation, but it is currently not possible to set up the above-mentioned funds on the basis of company law as a regulated form of investment fund.

13 What are the key laws and other sets of rules that govern retail funds?

The sets of rules governing retail funds are, together with executive orders made thereunder, the SFA and the SFSA’s Regulations FFFS 2013:9 regarding securities funds, which govern UCITS, and the AIFMA and the SFSA’s Regulations FFFS 2013:10 regarding alternative investment fund managers, which govern special funds. Exchange-traded funds will also be governed by the rules of the relevant market.

The laws and regulations presented above are supplemented by guidelines issued by the SIFA that are considered as codifying good marketing practices.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes, the establishment and marketing of funds available to non-professionals require authorisation, either from the SFSA or by the regulator in an EEA state from where its licence can be passported. In connection with the SFSA’s authorisation process for retail funds, the fund rules of the funds that the applicant fund manager intends to manage, must be submitted to the SFSA for approval. The fund may not be marketed prior to such approval except under the circumstances described in question 9.

15 Who can market retail funds? To whom can they be marketed?

There are no formal restrictions governing who may market retail funds or the intended recipient of such marketing. Instead, retail funds can be marketed to any type of investor. Further, the marketing entity does not need to be licensed or authorised provided that the marketing does not include offering of the funds or otherwise would require a licence, pursuant to MiFID II and the SMA.

A Swedish professional fund distributor is normally authorised by the SFSA, either if it gives investment advice in the course of its distribution or if its distribution activities (such as the receipt and transmission of orders in respect of financial instruments and the execution of orders in respect of financial instruments on behalf of clients) comprise the regulated activity.

16 Are there any special requirements that apply to managers or operators of retail funds?

Retail funds are characterised by extensive consumer protection rules whereby a manager of a retail fund must comply with a variety of special requirements that are not applicable in relation to other types of investment funds.

The most prominent requirement is the obligation to act exclusively in the common interest of the unitholders. Further, the manager is required to, inter alia, maintain, or cause to be maintained, a register of all holders of units in the fund, immediately redeem a unit upon the request of a holder and maintain a suitable diversification of investments in accordance with the principle of ‘risk spreading’ (see question 17). Further, the AIFMA includes added provisions in relation to non-professional (retail) investors, including additional requirements for a Swedish marketing authorisation.

17 What are the investment and borrowing restrictions on retail funds?

Investment restrictions

The investment of retail funds shall follow the risk-spreading principle and be made in financial assets associated with high liquidity, including transferable securities, money market instruments, derivative instruments (excluding commodity derivatives), units in other UCITS and deposits with credit institutions. As a general rule, however, subject to exemptions, the value of the instruments issued by any single issuer may not exceed 5 per cent of the fund’s value.

Borrowing restrictions

Besides the possibility of raising short-term loans in an amount not exceeding 10 per cent of the fund’s value, a management company may not raise or grant cash loans or act as guarantor within the fund operations.

18 What is the tax treatment of retail funds? Are exemptions available?

Swedish retail funds that are organised as UCITS funds or as special funds are exempt from Swedish taxation. Swedish retail funds that are organised as limited liability companies are subject to Swedish taxation for all income as one source income – income from business – at a tax rate of 22 per cent. However, dividends and capital gains on shares held for business purposes are exempt from Swedish taxation.

Individuals, who are tax resident in Sweden, that hold units in UCITS funds or special funds are subject to a standard income tax on the units. Further, capital gains and dividends from UCITS funds and special funds held by individuals who are tax resident in Sweden, are generally subject to taxation as income of capital. Capital losses are tax deductible; however, rules regarding reduction of capital losses must be considered. Individuals, who are tax resident in Sweden, that invest in limited liability companies are subject to taxation on capital gains and dividends as income of capital. Capital losses are tax deductible; however, rules regarding reduction of capital losses must be considered.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The portfolio of assets of a retail fund must be held by a separate custodian, which does not need to be a local entity. A Swedish custodian must be a bank or a credit institution and have its registered office in Sweden or, where the custodian is a branch established in Sweden, in another country within the EEA. The engagement of a custodian may not be given to an entity whose interests may come into conflict with the management company or the unitholders.

The custody of financial instruments (including, for example, fund units) may only be conducted by an entity that has been granted an authorisation by the SFSA (or by the competent authority in another state within the EEA).

A Swedish custodian may be required to assume the management of a retail fund where the management company has entered into insolvency proceedings, liquidation or if the SFSA has revoked the management company’s authorisation to conduct fund operations.

In the event the custodian becomes subject to insolvency proceedings, the unitholders would be protected, as the ownership of the fund units is reserved for the unitholders who may easily be distinguished. However, any cash held by the custodian would most likely be unprotected.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

Governance requirements primarily include risk management, handling of potential conflicts of interest and acting in a manner that maintains the public’s confidence in the fund market. More detailed guidance is provided in guidelines issued by the SIFA.

In connection with the authorisation process (and upon revision), the management company is required to submit a number of documents to the SFSA, including, for example, the prospectuses, key investor information documents, an annual report and a semi-annual report. Upon authorisation being granted, the fund manager and the retail fund will be registered in the SFSA’s public register. The management company must have a board of directors that consists of at least three members and a managing director and is obliged to maintain, or cause to be maintained, a register of all holders of units in the fund.

In addition, a management company must document and preserve each portfolio transaction for all UCITS it manages. The documentation must be retained for at least five years and must contain sufficient information in order to reconstruct each transaction performed.

21 What are the periodic reporting requirements for retail funds?

A management company must submit a quarterly report containing a profit and loss account and a balance sheet for the management company itself to the SFSA. The quarterly report must also contain information on capital requirements and methods used for calculating the capital base.

Quarterly reports must also be submitted for each retail fund managed and must include information on, for example:

• the type of fund managed;

• the net asset value of the fund assets;

• dividends;

• fees charged for the subscription and redemption of units in the fund;

• average liquidity; and

• the assets and liabilities of the fund.

As from 1 August 2017, Swedish-based managers, and branches based in Sweden, are required to submit reporting in relation to their measures against money laundering and terrorism financing on an annual basis.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

A UCITS is by statute an open-ended investment fund available to the public. As such, the fund must accept investments. In general, no restrictions may be placed on the issue, transfer and redemption of units in the funds. However, it is possible to impose rules stipulating, for example, a minimum subscription amount. Upon the request of a unitholder, a unit must be redeemed immediately and may only be postponed under extraordinary circumstances.

A special fund may, however, subject to the SFSA’s consent, incorporate restrictions on the issue of units in the fund. In addition, a special fund may limit the possibility for investors to redeem their units to once per year. Restrictions must be incorporated in the fund rules that must be approved by the SFSA in connection with the formation of the fund.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Different types of legal vehicles may be used for the establishment of a non-retail fund and, in general, the fund type will govern the choice of vehicle. In this context, and from a Swedish perspective, non-retail funds comprise AIFs.

Owing to the investment restrictions described in question 17, a Swedish hedge fund may only be formed as a special fund intended for the public (ie, retail investors), and therefore of an open-ended nature.

Swedish private equity funds and real estate funds are primarily formed as limited partnerships but may also be formed as limited liability companies. An essential difference between a retail fund and a non-retail fund is that the latter does not have to be separate from the fund manager and merely consist of the fund assets. Consequently, a non-retail fund can be a legal person with the ability to assume rights and obligations. Furthermore, a non-retail fund could be internally or externally managed. In the former case, the fund is the manager and the entity is required to possess all functions necessary to be able to comply with applicable laws and regulations. It should be noted, however, that Swedish legislation does not allow for a limited liability company to have variable capital, which impedes the establishment of non-retail funds as limited liability companies and of any nature other than open-ended.

24 What are the key laws and other sets of rules that govern non-retail funds?

The sets of rules governing non-retail funds are the AIFMA and the SFSA’s Regulations FFFS 2013:10 regarding alternative investment fund managers.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

There is no requirement to obtain authorisation for the establishment of a non-retail fund. The activities requiring authorisation are, instead, management and marketing of a non-retail fund. However, where the fund is internally managed, the establishment would, in practice, require authorisation. A private equity fund would, for instance, need to apply for authorisation with the SFSA upon its establishment, which may in some cases correspond to its ‘first closing’. A non-retail fund may be marketed without authorisation under the circumstances set out in question 9.

26 Who can market non-retail funds? To whom can they be marketed?

Anyone can market a non-retail fund that has been authorised for marketing in Sweden, provided that the marketing does not go beyond the concept of ‘promotion’. The marketing entity would not need to be licensed or authorised unless the marketing activities include offering of the funds or otherwise would require a MiFID II licence or authorisation pursuant to the SMA.

As a main rule, non-retail funds may only be marketed to professional investors, as defined in the SMA. However, it is possible to market certain non-retail funds that have been formed as AIFs to retail investors.

In order to market a non-retail AIF to retail investors, the units or shares of the AIF have to be admitted to trading on a regulated market (ie, an exchange or a multilateral trading facility) and there has to be a key investor information document available for the fund.

Further, it is possible to market AIFs formed as private equity funds to a particular category of Swedish non-professional investor. This is permitted under the prerequisites that units in the fund may not be redeemed within five years of the first investment and that the fund generally invests in issuers or non-listed companies for the purpose of acquiring control. In addition, the investor must commit to invest an amount of at least €100,000 and confirm knowledge of the risks associated with the investment in writing.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

No. Even though a non-retail fund may only be marketed to retail investors subject to certain prerequisites, there is no prohibition on an investment being made by a retail investor on a reverse-solicitation basis.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

Fund managers of AIFs directed at professional investors are required to establish arrangements to avoid the funds being marketed to retail investors. In general, however, there are fewer requirements imposed on managers of non-retail funds than on managers of retail funds.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Non-retail funds organised as UCITS funds, special funds or limited liability companies are subject to the same tax regulations as described for retail funds. Individuals, who are tax resident in Sweden, that invest in non-retail funds are subject to the same tax regulations as described for individuals in retail funds. See question 18.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

For each AIF, the assets must be held by a separate custodian. The custodian does not have to be established locally but must have its registered office within the EEA. The obligation to appoint a custodian is intended to provide satisfactory protection of a fund’s assets in case of insolvency proceedings involving the manager. Similar to UCITS, the management of an AIF formed as a special fund may be assumed by the custodian.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The most prominent governance requirements include conducting operations in a professional manner so that the public’s confidence in the fund market is maintained, as well as adequate risk and liquidity management, handling of potential conflicts of interest and establishing a remuneration policy compatible with such requirements.

The authorisation process involves submission of various documents and upon authorisation being granted, the non-retail fund and the manager (as the case may be) must be registered with the SFSA. The management company of a non-retail fund must have a board of directors consisting of at least three members.

32 What are the periodic reporting requirements for non-retail funds?

The reporting requirements regarding non-retail funds vary depending on the fund type and the value of assets under management. In general, the manager or the fund (as the case may be) must report more frequently and in greater detail in relation to funds that are marketed to retail investors and whose asset value exceeds certain thresholds. The frequency of such reporting varies between quarterly, semi-annually and annually. Reports are submitted online using software provided by the SFSA. As from 1 August 2017, Swedish-based managers, and branches based in Sweden, are required to submit reporting in relation to their measures against money laundering and terrorism financing on an annual basis.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Management of separate accounts (ie, discretionary portfolio management) is typically structured through an agreement between the investor and the manager whereby an investment strategy (portfolio allocation, etc) is determined based on the investor’s investment horizon and risk profile. The manager then makes investments relating to the portfolio on a discretionary basis without having to obtain prior approval for each transaction from the investor.

34 What are the key legal issues to be determined when structuring a separately managed account?

Within a managed account, the manager receives funds from the investor subject to a reporting obligation. Initially, the manager has to categorise the investor as either professional or non-professional and such categorisation thereafter governs the obligations of the manager. The manager is required to safeguard the client’s interests and ensure best execution in terms of price, fees, etc, and to disclose information to the investor as required by law.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Management of separate accounts is a regulated activity under Swedish law and the entity providing the service must be regulated by, and obtain authorisation from, the SFSA. Management must be carried out by either a credit institution or a securities business authorised under the SMA. A fund management company that has obtained authorisation to manage a UCITS or an AIF may, however, also be granted separate authorisation from the SFSA to conduct discretionary portfolio management.

Marketing in the sense of ‘promotion’ of separately managed accounts is not a regulated activity and does not require authorisation. All marketing material is, however, subject to the Marketing Practices Act, which requires the marketing to be consistent with generally accepted marketing practices.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

In Sweden, it is currently only possible to establish a UCITS or a special fund on a contractual basis (ie, it is not possible to set up such funds on the basis of company law as a nationally regulated form of investment fund). A governmental inquiry has proposed that Sweden should introduce the possibility of establishing UCITS or special funds with a variable capital (similar to that of a SICAV) for purposes of enhancing Sweden’s competitiveness on the international fund market.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

In order to list a retail fund on Sweden’s largest stock exchange, NASDAQ Stockholm, the fund manager must prepare an information brochure or prospectus and have the units registered on central securities depositary registers at Euroclear Sweden or, subject to NASDAQ’s consent, with another Swedish or foreign central security custodian or the equivalent. Further, the listing of foreign retail funds on NASDAQ Stockholm requires prior registration or passporting of the relevant fund with the SFSA.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

Owing to the contractual basis on which UCITS and special funds are formed, it is not possible to redomicile a foreign UCITS or equivalent to a special fund in Sweden, and where the overseas vehicle has variable capital (eg, a SICAV), Swedish legislation would not permit the maintenance of such funds. However, Swedish legislation would allow for the merger between a Swedish UCITS and a foreign UCITS where the Swedish fund is the receiving fund. A merger between a foreign AIF and a Swedish AIF is not regulated by Swedish investment fund legislation.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

In relation to funds and investors domiciled within the EEA, the freedom of movement of capital provides that no restrictions may be placed on investments within the EEA. As regards funds and investors domiciled outside the EEA, Sweden has adopted a regime that imposes no general restrictions on foreign investments.

Update and trends

New Swedish regulations for fund managers entered into force on 1 January 2018, requiring the disclosure of sustainability aspects in fund management. The new regulations are applicable to Swedish UCITS and all AIFs marketed towards non-professional investors in Sweden. The relevant fund managers are, inter alia, required to disclose information on the methods used for implementing sustainability efforts. This information must, subject to some variation, be provided in the prospectus and annual reports and on the fund managers’ websites.

Fredrik Wilkens

emailatlawfirmdotcom

Emma Stuart-Beck

emma.stuart-beck@vinge.se

Lave Nilsson

lave.nilsson@vinge.se

Smålandsgatan 20

111 46 Stockholm

Sweden

Tel: +46 10 614 3000

Fax: +46 10 614 3190

www.vinge.se

Switzerland

Lukas Weinmann and Urs Hofer

HSW Legal Ltd

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Investment fund business in Switzerland is governed by the Collective Investment Schemes Act (CISA) and its implementing ordinances:

• the Collective Investment Schemes Ordinance (CISO);

• the Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes (CISO-FINMA); and

• the Ordinance of the Swiss Financial Market Supervisory Authority on the Bankruptcy of Collective Investment Schemes (CISBO-FINMA).

The CISA is a framework law leaving many matters to be regulated in detail to the implementing ordinances.

In addition, the Swiss Financial Market Supervisory Authority (FINMA), as the competent regulatory body and supervisory authority, has published several circulars addressing specific areas of collective investment schemes law (eg, distribution of collective investment schemes).

Market participants must also comply with self-regulation of industry organisations recognised by FINMA as a minimum standard, namely the code of conduct and various guidelines of the Swiss Funds & Asset Management Association (SFAMA) and the guidelines of the Swiss Bankers Association, which have great significance.

FINMA approves funds as products and is also responsible for the authorisation and supervision of the following institutions responsible for the management, safekeeping of assets or distribution of funds in Switzerland:

• fund management companies;

• investment companies with variable capital (SICAV);

• partnerships for collective investment (LP);

• investment companies with fixed capital (SICAF);

• custodian banks of Swiss collective investment schemes;

• asset managers of Swiss and foreign collective investment schemes;

• distributors; and

• representatives of foreign collective investment schemes.

SICAVs, LPs and SICAFs require a twofold FINMA authorisation of a fund product (in the form of a company) as well as an institution (in the form of a licence holder).

Further, it is worth noting that a ‘dual supervisory regime’ applies, which requires regulated entities to appoint a FINMA-recognised auditor to verify whether they comply with all applicable legal requirements.

2 Is fund administration regulated in your jurisdiction?

Fund administration forms part of the main duties of a fund management company of a contractual fund (FCP) or an externally managed SICAV, of a self-managed SICAV, of an LP or of a SICAF and is generally regulated and supervised as part of these licences.

The delegation of fund administration tasks to unregulated third-party providers is also permitted, provided that the delegation is in the interest of efficient management and that those persons appointed are properly qualified to execute the tasks. Furthermore, instruction, monitoring and control of the agent must be ensured.

The delegation of fund administration is subject to the prior authorisation of FINMA. For a delegation abroad, specific requirements apply.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Switzerland is a niche production market but ranks among the top distribution markets in Europe. As at March 2018, 9,415 funds were registered in Switzerland, of which only 1,644 are domiciled in Switzerland.

Timing and process for approval and authorisation depend on whether a fund is organised under Swiss or foreign law.

Domestic funds

CISA distinguishes between open-ended and closed-ended funds.

Open-ended funds may be structured in the form of an FCP or a SICAV. Investors have a direct or an indirect legal entitlement to redeem their units at the net asset value.

In the case of an FCP, the fund management company and the custodian must be authorised by FINMA and the fund contract, with the consent of the custodian, must be submitted to FINMA for approval. The FCP is the predominant legal form of collective investment scheme organised under Swiss law.

FINMA must authorise all SICAVs and approve their articles of association and investment regulations.

The timing and process of FINMA authorisation and approval largely depend on the complexity of the fund (investment policy, investment techniques, etc).

In closed-ended funds (LP or SICAF), investors have neither a direct nor an indirect legal entitlement to redeem their units at the net asset value.

Both the LP and the SICAF require authorisation by FINMA and their limited partnership agreement (for LPs) and the articles of association and investment regulations (for SICAFs) require FINMA’s approval.

Foreign funds

The majority of foreign funds approved for distribution in Switzerland are undertakings for collective investment in transferable securities (UCITS). FINMA has standardised the approval process for UCITS over the last few years. The application is to be filed by the Swiss representative together with the relevant fund documents for Switzerland.

As one of the very few non-UCITS funds, the first Hong Kong-based fund was approved for distribution to non-qualified investors in Switzerland in 2017.

Managers and operators

Anyone applying for FINMA authorisation to operate as an institution must meet the following minimum authorisation requirements:

• persons responsible for the management and business operations must have a good reputation, guarantee proper management and possess the requisite specialist qualifications;

• significant equity holders must have a good reputation and not exert their influence to the detriment of prudent and sound business practice;

• compliance with the duties stemming from CISA must be assured by internal regulations and an appropriate organisation;

• sufficient financial guarantees must be available; and

• any additional authorisation conditions set forth in CISA are met.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

CISA has an extraterritorial scope and governs the following fund business activities:

• domestic funds and persons responsible for the management and distribution of funds, and the safekeeping of assets;

• foreign funds distributed in Switzerland;

• persons managing foreign funds in or from Switzerland;

• persons distributing foreign funds in Switzerland; and

• persons representing foreign funds in Switzerland.

All legal or natural persons carrying on a regulated activity in Switzerland require authorisation from FINMA.

A foreign fund management company cannot act as a fund management company for domestic funds. However, a Swiss fund management company may delegate specific tasks to a foreign fund management company if this is in the interest of efficient management.

The asset management of a domestic fund may be delegated to overseas managers who are subject to a recognised supervision. Where foreign law requires an agreement on cooperation and the exchange of information with foreign regulators, a delegation to an overseas manager may only take place where such agreement exists between FINMA and the competent foreign regulator.

If the overseas manager is managed in Switzerland or conducts its business largely or exclusively in or from Switzerland, it must be organised in accordance with Swiss law. FINMA authorisation is required when an overseas manager employs persons in Switzerland who conduct asset management on its behalf on a permanent commercial basis in or from Switzerland.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

The direct or indirect holding and acquisition of significant equity holdings in a fund management company or in any other licensees or any change thereof requires the prior authorisation of FINMA.

All significant equity holders must provide proof that they have a good reputation and do not exert their influence to the detriment of prudent and sound business practice.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

The only fees and incidental costs chargeable to the fund are those set out in the relevant fund regulations in accordance with the statutory provisions of CISA and CISO. These include the management fee as well as any performance fee. The intended use of the management fee must be disclosed, as detailed in the SFAMA Transparency Guidelines recognised by FINMA as the minimum standard.

FINMA Circular 2010/1 sets out minimum standards for salary and remuneration policies of financial institutions that generally apply to licensees under CISA only on a voluntary basis.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

Any marketing of funds falling under the definition of ‘distribution’ (see question 8) may trigger authorisation requirements for the distributor and for the fund itself. In the case of distribution, the degree of regulatory requirements depends on the category of investors to whom the funds are marketed.

Domestic funds

Except for the approval requirement for the fund itself (see question 3), distribution of domestic funds is regulated only if directed to non-qualified investors. Distribution to non-qualified investors requires an authorisation as distributor by FINMA or another FINMA authorisation that already covers such activity. Only individuals, legal entities and partnerships domiciled in Switzerland can obtain a distributor licence. Branch offices of foreign financial intermediaries are not granted such licence under FINMA’s current practice.

Foreign funds

Distribution of foreign funds is regulated if non-qualified investors and certain qualified investors are targeted (see question 27).

Distribution to non-qualified investors requires the foreign fund to be approved by FINMA. Various registration requirements apply (eg, the appointment of a Swiss representative and paying agent). Only FINMA-authorised distributors or Swiss-domiciled regulated entities exempt from such authorisation may distribute foreign funds to non-qualified investors.

Distribution to qualified investors does not require FINMA approval for foreign funds concerned but requires, inter alia, the appointment of a Swiss representative and a Swiss paying agent. For distribution to qualified investors, distributors must be adequately supervised in Switzerland or in their country of domicile. Each distributor must enter into a written distribution agreement governed by Swiss law with the Swiss representative.

All distributors are subject to particular statutory and self-regulatory conduct rules (eg, mandatory record-keeping).

8 What marketing activities require authorisation?

Generally, any form of distribution of domestic and foreign funds in, into and from Switzerland, is regulated (see question 7).

Distribution is defined as any offering or marketing of funds with certain specific statutory exceptions. ‘Offering’ and ‘marketing’ include any type of activity that aims to encourage the acquisition of fund units. Translated into practice, this means that the circulation of any information about funds to potential investors might qualify as regulated activity if no statutory exception applies. There is no concept in Swiss law of ‘pre-marketing’. The SFAMA have outlined the likely scope of permitted pre-marketing activities in interpretative circulars issued to its members only.

The following marketing activities are not deemed distribution:

• offering or marketing to regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, central banks and supervised insurance companies;

• provision of information and acquisition of fund units at the instigation of (‘reverse solicitation’) or at the own initiative of investors, especially in the context of certain defined types of investment advisory agreements or execution-only transactions;

• provision of information and acquisition of fund units under a written discretionary asset management agreement with a regulated financial intermediary;

• provision of information and the acquisition of fund units under a written discretionary asset management agreement with an independent asset manager (IAM) that is subject to Swiss anti-money laundering regulations and the code of conduct of a recognised industry organisation, provided that the agreement itself complies with such code;

• publication of prices, rates, net asset values and tax data by regulated financial intermediaries, as long as no contact information is provided; and

• offering of stock option schemes in the form of a collective investment scheme to employees.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

See questions 4 and 7.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

The distribution of foreign funds in Switzerland requires the prior appointment of a Swiss representative and a Swiss paying agent. All distributors must enter into a written distribution agreement with the Swiss representative.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

Swiss law generally does not prohibit intermediaries from accepting and keeping commission payments in relation to their marketing activities, provided that certain transparency and consent requirements are met.

Licensees under CISA and their agents are under a regulatory duty of disclosure regarding compensation for distribution. This encompasses the nature and scale of all fees and other pecuniary benefits through which the activities of the distributor are to be compensated. According to the SFAMA Transparency Guidelines, licensees that pay such compensation have to comply with their duty to inform by disclosing in the fund documents that ‘retrocessions’ may be paid and the services for which they are payable. The recipients of the retrocessions must inform investors, unsolicited and free of charge, of the amount of the compensation they may receive for distribution and, upon request, of the amounts actually received. The SFAMA Transparency Guidelines extend the applicability of the respective duties to foreign intermediaries and foreign funds and their managers. In practice, the distribution agreements to be entered into with the appointed Swiss representative usually include a respective contractual undertaking.

Moreover, intermediaries must comply with any obligations in relation to their clients under applicable Swiss civil law. In a series of leading decisions beginning in 2006, the Swiss Supreme Court held that distribution fees paid to an intermediary acting as agent in connection with clients’ assets were subject to a statutory restitution duty and therefore must be passed on to the client unless otherwise foreseen by (written) agreement in which the client waives the right to receive the distribution fee and other benefits on the basis of sufficient disclosure of conflicts of interest and information about the amounts actually paid to the intermediary or, at least, the range of fees and their calculation.

Swiss pension fund legislation provides for a mandatory duty of restitution of all pecuniary benefits that cannot be waived by a Swiss pension institution.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

Open-ended retail funds may be set-up as FCPs or as SICAVs.

FCPs are based on a tripartite fund contract between investors, the fund management company and custodian bank. Under the fund contract, the fund management company commits itself to involving investors in accordance with the number and type of units they have acquired in the fund and to managing the fund’s assets in accordance with the provisions of the fund contract at its own discretion and for its own account. The custodian bank is a party to the contract in accordance with the tasks conferred on it by CISA and by the fund contract. The fund management company draws up the fund contract and, with the consent of the custodian bank, submits it to FINMA for approval. Any amendment to the fund contract requires the consent of the custodian bank and prior FINMA approval.

SICAVs must be authorised by FINMA as institutions and their articles of association and investment regulations require FINMA approval. A SICAV is a company whose capital and number of shares are not specified in advance, whose capital is divided into company and investor shares, for whose liabilities only the company’s assets are liable and whose sole object is collective capital investment. It is important to distinguish between self-managed SICAVs, which perform their own administration, and externally managed SICAVs, which delegate the administration (including distribution) to an authorised fund management company. The formation of a SICAV is largely based on the provisions of the Swiss Code of Obligations regarding the formation of companies limited by shares.

If closed-ended share companies are listed on a Swiss stock exchange, they do not fall under CISA. However, if they are not listed on a Swiss stock exchange, they qualify as SICAF and are subject to authorisation and supervision by FINMA. Since the introduction of SICAFs in 2007, none have been authorised in Switzerland, mainly owing to the unfavourable tax treatment that leads to taxation at both the company and the investor level.

13 What are the key laws and other sets of rules that govern retail funds?

See question 1.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

All domestic funds require FINMA authorisation or approval.

Furthermore, all foreign funds distributed to non-qualified investors in Switzerland require FINMA approval.

15 Who can market retail funds? To whom can they be marketed?

See question 7. Retail funds may be marketed to non-qualified and qualified investors.

16 Are there any special requirements that apply to managers or operators of retail funds?

There are no special requirements for managers or operators of retail funds. The requirements set out in question 3 apply.

17 What are the investment and borrowing restrictions on retail funds?

CISA distinguishes four types of open-ended funds based on the type of investment: securities funds, real estate funds, other funds for traditional investments and other funds for alternative investments. Each type of fund follows a different set of rules regarding permitted investments, investment restrictions and investment techniques.

Additional restrictions may be determined in the fund regulations.

Securities funds

Securities funds may invest in transferable securities issued on a large scale and in non-securities rights having the same function (uncertified securities), and that are traded on a stock exchange or another regulated market that is open to the public, in addition to other liquid financial assets.

The following investments are permitted:

• securities;

• derivatives;

• units in funds;

• money market instruments; and

• short-term deposits.

The following are not permitted: investments in precious metals or precious metal certificates, commodities or commodity certificates, as well as short-selling of investments.

The following investment techniques may be employed:

• securities lending;

• repurchase agreements;

• borrowing of funds of up to 10 per cent of the fund’s net assets; and

• pledging or transferring as collateral up to 25 per cent of the fund’s net assets.

Real estate funds

Real estate funds may invest their assets in:

• property;

• real estate companies;

• units in other real estate funds and listed real estate investment companies; and

• foreign real estate securities.

The use of derivatives is permitted for hedging purposes.

Other funds for traditional and other funds for alternative investments

Other funds for traditional and alternative investments are open-ended funds that neither qualify as securities funds nor as real estate funds. Permitted investments for both types of funds include, in particular:

• securities;

• precious metals;

• real estate;

• commodities;

• derivatives;

• units of other funds; and

• other assets and rights.

Investments may be of limited marketability, subject to strong price fluctuations, and may be difficult to value. Often these types of funds exhibit limited risk diversification.

The risk profile of these types of funds differs in terms of their investments, investment techniques and investment restrictions, in particularly with regard to the following:

Other funds for traditional investments

Other funds for alternative investments

Borrowing

Up to 25% of the fund’s net assets

Up to 50% of the fund’s net assets

Pledge or transfer as collateral

Up to 60% of the fund’s net assets

Up to 100% of the fund’s net assets

Overall exposure

Up to 225% of the fund’s net assets

Up to 600% of the fund’s net assets

Engagement in short-selling

Permitted

Permitted

Specific investment restrictions and techniques must be laid down in the fund regulations.

FINMA may grant derogations from the statutory provisions in the individual case.

For SICAFs, the provisions concerning permitted investments for other funds for traditional and alternative investments apply accordingly.

18 What is the tax treatment of retail funds? Are exemptions available?

Swiss tax law does not generally differentiate between domestic retail funds and non-retail funds. Taxation depends on the type of legal structure of the fund. The various types of domestic fund can be classified into two groups: FCPs, SICAVs and LPs; and SICAFs.

The first group is viewed in a transparent manner from a Swiss corporate income tax perspective. These types of funds are not subject to Swiss corporate income taxes on their income or gains. The fund’s income is taxed in the hands of the investors. An exception applies to income derived from directly owned real estate that is subject to corporate income tax at the fund level. A domestic fund holding real estate situated in Switzerland may nevertheless be tax exempt for the purpose of corporate income tax if its investors consist exclusively of tax-exempt pension schemes or social security institutions and compensation funds.

Profit distribution or accumulated profits from non-distributing (annual deemed distribution) FCPs, SICAVs and LPs are subject to a withholding tax at a 35 per cent rate. If such distributions or accumulated profits derive from real estate or capital gains, no withholding tax is due, provided that they are reported separately. The withholding tax on the distribution or accumulated profits can be reclaimed by Swiss investors if they declare the income in their tax return or account for it in their financial statements.

Non-resident investors may qualify for an exemption from Swiss withholding tax under the affidavit procedure or may reclaim the withholding tax in full, if at least 80 per cent of the fund’s earnings are foreign-sourced. If foreign-sourced earnings amount to less than 80 per cent, a non-resident investor can reclaim Swiss withholding tax based on an applicable double taxation treaty between Switzerland and its country of residence.

The second group is treated identically to any other corporation in Switzerland and therefore is not tax transparent for any type of tax. SICAFs are subject to corporate income tax and tax on net equity and their distributions (but not accumulated profits) to shareholders are subject to withholding tax at a 35 per cent rate.

In principle, regarding capital and income taxes, Swiss legislation does not distinguish between investments in a domestic or a foreign fund. In both cases, investments are subject to capital tax, distributed or accumulated income is subject to income tax, while capital gains are tax-free for investors holding their assets for private investment purposes.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Fund management companies of FCPs, SICAVs and SICAFs must entrust the safekeeping of assets to a custodian bank. Custodian banks must be authorised banks according to the Swiss Banking Act (BA) and have an appropriate organisational structure to act as custodian bank for funds. Unlike depositories and paying agents, custodian banks must, in addition to their banking licence, be authorised as such by FINMA.

The role of a custodian bank includes holding fund assets on deposit, issuing and redeeming units, and handling payments processing and ensuring that the fund management company or SICAV comply with the regulations.

A custodian bank may delegate the safekeeping of fund assets to regulated third-party custodians and collective securities depositories in Switzerland or abroad, provided this is in the interest of efficient safekeeping and is appropriate. Any change of custodian bank requires prior FINMA authorisation.

If a custodian bank becomes bankrupt, the assets held by it in custody are not included in the bank’s bankruptcy estate. Instead, the assets (except cash) are segregated from the bank’s bankruptcy estate in favour of the fund management company of an FCP or of a SICAV, subject to any claims by the custodian bank against the respective depositor.

In the case of bankruptcy of a fund management company of an FCP, assets and rights belonging to the fund will be segregated in favour of the investors. Debts of the fund management company that do not arise under the fund contract may not be set off against claims of the investment fund.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

Any party responsible for the management of funds, the safekeeping of assets held in it or the distribution of it to non-qualified investors, must obtain authorisation from FINMA. Authorisation is granted if, in particular, the requirements set out in question 3 are fulfilled.

If there is a change in the circumstances underlying the authorisation, FINMA’s authorisation must be sought prior to the continuation of activity. The following must be reported to FINMA without delay:

• changes in the persons responsible for the management and business operations and of significant equity holders;

• facts that might call into question the good reputation or the guaranteeing of proper management by the persons responsible for the management and business operations (eg, criminal proceedings);

• facts that might call into question the good reputation of significant equity holders or the prudent and sound business practice of the licensee owing to the influence of significant equity holders;

• change of executive persons entrusted with the performance of the custodian bank’s duties; and

• any change regarding financial guarantees.

Authorised institutions and their agents must fulfil the following statutory conduct rules:

• duty of loyalty: they must act independently and exclusively in the interest of the investors;

• due diligence: they must implement organisational measures that are necessary for proper management; and

• duty to provide information:

• they must ensure the provision of transparent financial statements and provide appropriate information about the funds that they manage and distribute and the assets that they hold in safekeeping;

• they must disclose all charges and fees incurred directly or indirectly by the investors and their appropriation; and

• they must notify investors of compensation for the distribution of funds in the form of commission, brokerage fees and other soft commissions in a full, truthful and comprehensive manner.

The statutory conduct rules are complemented by self-regulation of industry organisations that FINMA has recognised as minimum standards, particularly the Code of Conduct of SFAMA, as well as several guidelines.

21 What are the periodic reporting requirements for retail funds?

Domestic funds

Open-ended funds must keep separate accounts and publish an audited annual report within four months of the end of the fund’s financial year and an unaudited semi-annual report within two months after the end of the first half of the fund’s financial year.

The fund management company of an FCP or a SICAV must publish the prices at regular intervals in the designated publication instrument as indicated in the prospectus.

Changes to the fund regulations of FCPs, SICAVs or SICAFs must be communicated to investors by way of publication and require prior approval or authorisation by FINMA. In case of material changes, investors have a right to lodge objections. Changes to the prospectus, simplified prospectus and key investor information documents must only be notified to FINMA.

Foreign funds

Foreign retail funds approved for distribution must also publish an annual report within four months of the end of the fund’s financial year and a semi-annual report within two months of the fund’s first half of the financial year.

In addition, they must publish prices at regular intervals in the designated Swiss publication instrument as indicated in the prospectus.

Moreover, investors must be notified by way of publication about amendments to the fund documents, change of legal form, mergers, liquidations, changes of Swiss representative or paying agent and about measures taken by foreign regulators. The amended fund documents require (post-effective) FINMA approval.

Proposed changes of the Swiss representative or paying agent, as well as the termination of representative agreements, require prior FINMA approval.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

The fund management company of an FCP or the SICAV may temporarily or fully suspend the issue of units at any time and may reject individual applications to subscribe for, or switch, units without assigning any reason therefor.

There are no statutory restrictions on the transfer of units in open-ended retail funds.

The fund regulations of open-ended retail funds, however, may further restrict the issue and transfer of units.

Investors of open-ended retail funds are, in principle, entitled to request the redemption of their units and payment of redemption amount in cash. The fund regulations of open-ended retail funds whose value is difficult to ascertain, or which have limited marketability, however, may provide for notice to be served only on specific dates, subject to a minimum of four times per year.

FINMA may, in the event of a justified request, restrict the right to redeem at any time depending on the investments and investment policy. This can apply specifically in the case of investments that are not listed and not traded on another regulated market open to the public, mortgages and private equity investments. The right to redeem at any time may be suspended for a maximum of five years and this restriction on redemption must explicitly be disclosed in the fund regulations.

The fund regulations may provide for repayment to be deferred temporarily in certain circumstances (eg, market closures, trading restrictions or suspensions, emergencies, restrictions on asset transfers or large-scale withdrawals of units).

The auditor and FINMA must be informed immediately of any decision to defer redemptions and such decision must be communicated to the investors in a suitable manner.

The transferability of shares in SICAFs is regulated by the Swiss Code of Obligations. The SICAF’s articles of association can set out certain transfer restrictions. If there are no restrictions, the shares are freely transferable.

In the case of closed-ended retails funds, investors have neither a direct nor an indirect legal entitlement to request redemptions.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Open-ended non-retail funds may be set up as FCPs or as SICAVs. See question 12. Closed-ended non-retail funds may be set up as SICAFs (see question 12) or as LPs.

An LP is a partnership whose sole objective is collective investment. At least one member bears unlimited liability (general partner), while other members (limited partners) are liable only up to a specified amount (limited partner’s contribution). General partners must be companies limited by shares with their registered office in Switzerland. Limited partners must be qualified investors according to CISA (see question 27). An LP may only manage its own investments. An LP conducts investments in risk capital. The investments in companies or projects can take the form of equity capital, lending or mezzanine financing. Other permitted investments generally include construction, real estate and infrastructure projects as well as alternative investments.

24 What are the key laws and other sets of rules that govern non-retail funds?

See question 1.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

All domestic non-retail funds must be approved or authorised by FINMA. Foreign non-retail funds may not be approved for distribution.

26 Who can market non-retail funds? To whom can they be marketed?

See questions 7. Non-retail funds may exclusively be marketed to qualified investors.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

The circle of investors of non-retail funds is limited to the following qualified investors according to CISA and CISO:

• regulated financial intermediaries (banks, securities dealers, fund management companies, asset managers of collective investment schemes and central banks);

• regulated insurance companies;

• public entities and pension funds with professional treasury operations;

• companies with professional treasury operations;

• high net worth individuals meeting certain criteria (ie, thresholds of liquid assets, minimum level of knowledge) and having elected in writing to be deemed qualified investors; and

• investors who have concluded a written management agreement with a qualifying IAM or a regulated financial intermediary, provided that they have not declared in writing that they want to be treated as non-qualified investors.

IAMs themselves are deemed qualified investors if they fulfil certain requirements (see question 8) and confirm in writing to only use the information obtained for clients who are qualified investors.

The specific fund regulations may provide for additional restrictions in individual cases (eg, for tax exemption reasons).

28 Are there any special requirements that apply to managers or operators of non-retail funds?

The requirements that apply to managers or operators of non-retail funds are essentially the same as for retail funds. See questions 3 and 16. In the case of single investor funds (for regulated insurance institutions, public entities or pension schemes with professional treasury operations), the fund management company of an FCP or SICAV may delegate the investment decisions to the single investor. FINMA may exempt them from the duty to subject themselves to supervision for asset managers of collective investment schemes.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

See question 18.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

See question 19.

In the case of a SICAV that is exclusively open to qualified investors, FINMA may, under certain conditions, grant exemptions to appoint a custodian bank.

LPs do not have to deposit the fund’s assets with a Swiss custodian bank or any other regulated institution. Therefore, the assets are generally not subject to special treatment in the event of the fund’s bankruptcy. However, if the assets are held with a Swiss bank within the meaning of the BA, the assets deposited with that bank are, in the case of the bank’s bankruptcy, subject to the same rules as open-ended funds.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

See question 20.

32 What are the periodic reporting requirements for non-retail funds?

Generally, the same rules apply as for retail funds. See question 21.

FINMA may, upon request, fully or partially exempt non-retail funds from certain reporting requirements under CISA (eg, the duty to publish a semi-annual report or to publish prices). Exemptions must be established in the fund regulations.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Managed accounts are usually structured by arranging for the mainly institutional client to appoint a (Swiss) bank or securities dealer for the purpose of holding the client’s assets in an account. In addition, the respective bank or securities dealer, or an outside asset manager, is given discretionary investment management authority to acquire and dispose of assets in the account. Operational duties in areas such as investment compliance, risk management, reporting and accounting can be delegated to a fund management company.

34 What are the key legal issues to be determined when structuring a separately managed account?

The standard of care owed to the client, any limitation of liability, fee structure, transparency and reporting requirements and applicable investment limitations are often among the most important terms for a separately managed account.

The discretionary investment management mandate given by the client to the investment manager as well as the account relationship with the bank or securities dealer are typically governed by the statutory provisions set out in the Swiss Code of Obligations and by the relevant agreements between the parties. Guidelines and codes of conduct regarding investment management issued by FINMA and industry organisations (in particular, the Swiss Bankers Association and SFAMA) define accepted minimum standards for investment management mandates, which do not directly apply to the individual relationship with a separately managed account client, but clarify the scope of the general duty of care and other obligations of the investment manager.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The management or marketing of separately managed accounts is currently not subject to an authorisation requirement in Switzerland and, therefore, can be provided to investors in Switzerland on a cross-border basis also.

Domestic banks, securities dealers and asset managers of collective investment schemes offering their clients separately managed accounts, are supervised by FINMA also with regard to the provision of this (additional) service. On the other hand, domestic IAMs providing portfolio management services for separately managed accounts in accordance with a discretionary mandate given by a client, are not currently subject to an ongoing prudential supervision but are required to become a member of a recognised self-regulatory organisation for purposes of compliance with Swiss anti-money laundering regulations.

The rules on fund distribution must be considered if investment funds are used in separately managed accounts, whereas the discretionary investment management agreement entered into with a separately managed account client may qualify for an exemption if certain conditions are met (see question 8).

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

The Swiss financial market regulation is undergoing major changes. In November 2015, the Federal Council adopted the dispatch on the Financial Services Act (FinSA) and on the Financial Institutions Act (FinIA). FinSA, inter alia, sets forth new cross-sector prerequisites for providing financial services as well as requirements applicable to offerings of financial instruments. FinIA essentially harmonises the organisational requirements and authorisation rules for asset managers of individual client assets and collective assets (including funds and pension schemes), trustees, fund management companies and securities houses.

The new laws, if adopted by the Swiss Parliament, will not come into effect before the middle of 2019, with transitional periods for compliance with some of the new rules. As part of their introduction, there will be substantial carve-outs but also material amendments to CISA, which will still govern product-specific regulation for funds. The following aspects are particularly noteworthy in the context of fund management:

• licence requirements for fund management companies and asset managers of collective assets will be governed by FinIA;

• the concept of ‘distribution’ under CISA will be replaced by the concept of ‘offer’ under FinSA and the licence for distributors will be abandoned;

• a client adviser register for client advisers, which are not subject to prudential supervision, will be introduced;

• rules of conduct under FinSA will apply to fund management companies and asset managers;

• FinSA will introduce a client segmentation similar to the Markets in Financial Instruments Directive; and

• product documentation requirements will be improved for investors under FinSA.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The listing of domestic and foreign funds on a Swiss stock exchange is governed by the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading, and the applicable self-regulation of the respective stock exchange.

The listing rules of the main Swiss stock market, the SIX Swiss Exchange, contain specific requirements for the listing and the maintenance of the listing of different types of collective investment schemes, namely investment funds, exchange traded structured funds and – in practice, most relevant – real estate funds and actively or passively managed exchange-traded funds (ETFs). In particular, minimum capitalisation and free float requirements apply if no market maker is appointed for the fund units. Implementing trading provisions contain further conditions for market making of ETFs. Furthermore, it is a listing requirement that domestic and foreign funds are approved or authorised by FINMA. On the other hand, FINMA will not approve, for distribution, a foreign fund that is an ETF or has the term ‘ETF’ in its name unless all of its share classes are listed on a recognised Swiss stock exchange. The prospectus submitted to FINMA for approval serves as the listing prospectus. FINMA requires the fund regulations of an ETF to include specific information (eg, applicable replication method and market making).

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

There is neither a general regulatory system nor any general FINMA guidance on the redomiciliation of overseas vehicles to Switzerland.

FINMA may, in an individual case, accept two forms of repatriation of an overseas vehicle to Switzerland:

• transfer of assets of an overseas vehicle into a newly created domestic fund by exchange of units of the overseas vehicle or by redemption of units in kind to the investors of the overseas vehicle and following contribution in kind as new investors of the domestic fund on the same day. The then empty overseas vehicle will be liquidated; and

• transfer of domicile of the overseas vehicle to Switzerland, whereby the overseas vehicle needs to be transformed into a domestic fund, complying with all applicable Swiss laws and regulations.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Other than marketing restrictions referred to in question 7, there are no special statutory restrictions in this regard.

However, the ability of foreign investors to invest in domestic funds may be limited by the applicable fund regulations.

Certain domestic investors, such as Swiss pension schemes, may be restricted to a certain extent by law to invest in funds established or managed abroad.

Lukas Weinmann

weinmann@hswlegal.ch

Urs Hofer

hofer@hswlegal.ch

Gartenstrasse 11

8002 Zurich

Switzerland

Tel: +41 44 542 3700

Fax: +41 44 542 3709

www.hswlegal.ch

United Kingdom

Michelle Moran and Rodney Smyth

K&L Gates LLP

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

Fund management is regulated in the UK by the Financial Services and Markets Act 2000 (FSMA), various statutory instruments made under the FSMA and the Financial Conduct Authority’s (FCA) rules. EU directives are typically implemented in the UK by statutory instruments under the FSMA and changes to the FCA’s rules. EU regulations apply directly in the UK, without any need for further implementation. In practice, though, where relevant, they are reproduced in the FCA’s rules. The FCA is the body responsible in the UK for regulating funds, fund managers and the entities marketing funds.

Following the UK’s referendum on continued membership of the EU in June 2016, there has been no change to UK law implementing EU directives, or to ongoing implementation in the UK of EU directives, and EU regulations still apply directly in the UK. However, the UK government has introduced the European Union (Withdrawal) Bill to repeal the European Communities Act 1972, which took the UK into the EU, and to incorporate EU law into domestic law, with effect from the ‘exit’ day – 29 March 2019. The Bill is now progressing through Parliament in the normal way. The Bill contains delegated powers to enable the government to adapt any laws on the statute book originating from the EU to the UK’s new relationship with the EU, following exit. See ‘Brexit’ in question 26.

2 Is fund administration regulated in your jurisdiction?

Fund administration will usually constitute the regulated activity of ‘establishing, operating or winding up a collective investment scheme’, which requires authorisation by the FCA. In addition, any administrator providing custody services in relation to investments must be authorised by the FCA.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

The UK authorisation (licensing) process for funds is outlined in question 20 (retail funds) and question 31 (non-retail funds).

Depending on the precise activity undertaken, a manager or operator of an investment fund must be authorised by the FCA to carry on the following in the UK (‘regulated activities’):

• managing an alternative investment fund (AIF) (typically, a non-retail fund);

• managing an undertaking for collective investment in transferable securities (UCITS) fund (typically, a retail fund);

• managing investments (eg, a manager not directly managing a fund, but doing so as a delegated investment manager appointed by the direct fund manager or a manager managing assets of a single investor (in a segregated account));

• advising on investments (in the case of a manager giving advice without the power to invest the assets advised upon);

• establishing, operating or winding up a collective investment scheme (in the case of an entity that operates a collective investment scheme but does not manage the scheme). Operating generally means being responsible for administering the scheme (eg, for the execution of orders to buy or sell fund shares or units, maintaining a register of fund investors, fund accounting and fund asset valuation); and

• arranging deals in investments (this is required for many intermediation activities, including entering into distribution agreements with independent financial advisers (IFAs) and issuing ‘direct offer’ advertisements).

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

The FSMA prohibits a person from carrying on a regulated activity (see question 3, for examples) in the UK without authorisation. Carrying on a regulated activity without authorisation is a criminal offence and any contract made in the course of carrying on an unauthorised activity is unenforceable against an investor. A person will carry on a regulated activity if it does so ‘by way of business’, which means carrying on the business of engaging in the activity. There is an exclusion for investment managers that are overseas persons. These are persons who carry on a regulated activity in the UK, other than from ‘a permanent place of business maintained by them in the UK’. To rely on this exclusion, the overseas manager’s contacts with UK clients must either be unsolicited by the manager or solicited by it in compliance with the UK financial promotion rules (see question 8).

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

Any person that ‘decides’ to acquire ‘control’ over an FCA-authorised firm must obtain the FCA’s consent before the acquisition. ‘Control’ for this purpose is holding 10 per cent or more of the shares or voting power in the firm (or its parent undertaking) or holding shares or voting power as a result of which the holder is able to exercise significant influence over the management of the firm (20 per cent for firms that are solely authorised to manage AIFs (see question 24)). Any person deciding subsequently to hold 20, 30 or 50 per cent of the shares or voting power must again obtain the FCA’s prior consent (30 or 50 per cent for managers of AIFs (AIFMs)).

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are four sets of remuneration rules applying to specified senior employees of UK fund managers.

An investment manager that is, broadly, a firm other than an AIFM or a UCITS manager is governed by the FCA’s BIPRU Remuneration Code (the BIPRU Code). An AIFM is governed by the FCA’s Alternative Investment Fund Managers Directive (Directive 2011/61/EU (AIFMD)) Remuneration Code (the AIFMD Code). A UCITS manager is governed by the FCA’s UCITS Remuneration Code (the UCITS Code). A manager may apply the rules in a way appropriate to its size, internal organisation and the nature, scope and complexity of its activities (the ‘proportionality’ principle). The requirements of each code are similar but not identical. In particular, the rules in the BIPRU Code requiring payment of part of the remuneration in equity of the fund or the manager and relating to deferral (ie, delayed payment) and the ratio of variable (bonus) to fixed remuneration are automatically disapplied in the case of most investment managers that are BIPRU investment firms, while the rules in the AIFMD and UCITS Codes relating to payment in equity and deferral may also be disapplied, but only on the basis of the amount and variable proportion of the employee’s remuneration.

Some investment managers are ‘IFPRU investment firms’ (broadly, a firm with FCA permission to hold client money or assets, to deal on own account or to underwrite or place financial instruments) and are governed by the FCA’s IFPRU Remuneration Code (the IFPRU Code). In particular, the IFPRU Code contains the ‘bonus cap’, so that the ratio of variable to fixed remuneration cannot exceed 1:1 (or 2:1 with shareholder approval) and all variable remuneration must be subject to clawback if there is subsequent poor performance.

The substance of the IFPRU Code will also apply where, broadly, a manager is part of a banking group.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

A UK investment fund will be classified either as a UCITS fund under the UCITS Directive (Directive 2009/65/EC) or an AIF under the AIFMD, unless it is a ‘fund of one’ (a fund vehicle exempt from the AIFMD, because it is servicing only a single investor). In broad terms, the marketing of a UCITS fund in the UK requires authorisation by the FCA (if it is UK-constituted) or notification to the FCA (if it is constituted in a European Economic Area (EEA) state other than the UK), while the marketing of an AIF in the UK again requires either authorisation by the FCA, if the AIFM is established in the UK, or notification to the FCA, if not. The notification procedure for non-UK AIFMs depends on whether or not both the AIFM and AIF are established in an EEA state other than the UK. If they are, they notify under an EEA-wide ‘passporting’ regime. If not, the UK ‘national private placement’ rules apply. Segregated accounts (mandates for a single investor) and joint ventures are outside the AIFMD and generally governed by terms negotiated by the relevant parties and rules derived from the EU Markets in Financial Instruments Directive II (Directive 2014/65/EU (MiFID II)). The marketing of segregated accounts and joint ventures is governed by the UK financial promotion regime (see question 9).

8 What marketing activities require authorisation?

Fund marketing activities in the UK are governed by the UK financial promotion regime (see question 9). In relation to funds, a financial promotion is an ‘invitation or inducement’ to invest in the fund and broadly covers all types of marketing activity (whether or not solicited by the investor). The concept of financial promotion is relevant to marketing both UCITS funds and AIFs and any other investment product or service. Under the UK AIFM regulations, there is, in addition, a more restricted concept of ‘marketing’, applying only to AIFMs. For these purposes, marketing is a ‘direct or indirect offering or placement’ by an AIFM at the initiative of or on behalf of the AIFM. It is generally interpreted as catching only the distribution of application forms, subscription agreements and similarly binding documents.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

The territorial scope of the UK financial promotion regime covers communications made within the UK and also promotions made from outside the UK to anywhere (inside or outside the UK) if they are ‘capable of having an effect in the UK’. Note here that the ‘UK’ excludes the Channel Islands and the Isle of Man. A promotion communicated to a website accessible in the UK will be capable of having effect in the UK. There is an exemption for communications ‘directed’ only at persons outside the UK. Financial promotion in the UK is prohibited, unless the promotion is made or approved by an FCA-authorised person or exempted from the financial promotion regime. Breach of the prohibition is a criminal offence, and any contract resulting from a prohibited promotion is unenforceable against an investor. Authorised persons are subject, in turn, to FCA rules on financial promotion and specific FSMA restrictions on promoting funds. The FSMA permits authorised persons to promote UCITS funds to the general public. The FCA rules and the FSMA restrict the promotion of non-UCITS funds by authorised persons to limited categories of investor, broadly the same as the exempted categories (see below).

Exemptions from the financial promotion regime allow financial promotion in the UK by non-authorised persons, including non-authorised overseas entities, to certain limited categories of investor. The main exempted categories, all (except for most AIFs) subject to conditions as to contents, are:

• investment professionals, including UK and non-UK local authorities;

• high net worth companies;

• high value trusts, including private sector pension funds constituted as trusts; and

• for most AIFs permitted to be marketed in the UK (see question 7), also all other institutional investors and pension funds.

See question 26 for more details.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

A local entity does not have to be involved in the fund marketing process in the UK. In practice, however, involving a locally authorised entity will facilitate marketing an AIF to individual investors (if desired), since an FCA-authorised firm can market an AIF to an individual it has certified as a sophisticated investor. Although in practice not straightforward, this is likely to be the most feasible way to market AIFs to individuals in compliance with the UK financial promotion rules. A sophisticated investor is an investor sufficiently knowledgeable to understand the risks associated with a proposed investment.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

A UK-authorised firm, such as an IFA, recommending a retail investment product, such as a UCITS, to a retail client other than a retail client outside the UK, can be paid for its advice only by fees agreed with the client. Payments, such as initial and trail (ongoing) commission, made by the product provider (typically, the fund manager) to the adviser are prohibited. In addition, where a retail client buys or sells a retail investment product through a platform service provider and no recommendation is made, the product provider may not offer or pay any related commissions.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

A retail fund will probably be established in the UK as an open-ended UCITS fund. An exchange-traded retail fund will typically be a UCITS fund listed on a stock exchange. Alternatively, a manager may establish a closed-ended vehicle, typically to invest in assets (such as real estate) in which a UCITS fund is not permitted to invest, and adopt the investment trust model (see below). An investment trust will typically be listed on a stock exchange to allow investors to realise their shares on the stock market and to enable a public offering of the shares (if desired).

Open-ended retail funds

Open-ended retail funds established in the UK are either UCITS funds or (much more rarely) non-UCITS retail schemes (NURS). A NURS is a type of non-UCITS fund authorised by the FCA for distribution to retail investors in the UK, with wider investment and borrowing powers than a UCITS – in particular, it can invest in real estate (land) and gold. In either case, the fund will be legally constituted in the UK as an open-ended investment company (OEIC), an authorised unit trust (AUT) or an authorised contractual scheme (ACS).

The term ‘investment company with variable capital’ is synonymous with OEIC. An OEIC is formed with an instrument of incorporation, at least one director and shareholders (investors). An OEIC must have an authorised corporate director (ACD), which must be an FCA-authorised person, responsible for managing the fund. Typically, the ACD is the OEIC’s sole director. An AUT is a trust and, as such, has no separate legal personality under UK law. It is constituted by a trust deed made between the trustee and the fund manager. The trustee holds the assets (investments) on trust for the beneficiaries (investors), who are known as ‘unitholders’, since their beneficial interests are represented by ‘units’ under the trust. Unlike an OEIC or AUT, an ACS is a tax-transparent vehicle constituted either as a co-ownership scheme or limited partnership. A co-ownership scheme is constituted by an agreement between the fund manager and the depositary (custodian), under which the investors’ rights to the assets are similar to those of AUT unitholders.

Any of these vehicles, except an ACS constituted as a limited partnership, can be an umbrella fund, with underlying sub-funds. The property of a sub-fund may be used only to discharge the liabilities of that sub-fund. Each sub-fund of an umbrella is therefore individually ring-fenced.

Closed-ended retail funds

Closed-ended retail funds established in the UK are typically companies listed on the London Stock Exchange’s (LSE) Main Market (traditionally called investment trusts, although nowadays in corporate form). The Main Market is the most liquid market in the UK (offering the widest investor base). It is also a ‘regulated market’ under EU law. Funds listed on the Main Market can accordingly be marketed to retail investors and also qualify for inclusion in institutional investors’ mandates limited to investments listed on a regulated market. Investment trusts must comply with requirements relating to, for instance, investment diversification, in order to qualify for favourable tax treatment (see question 18).

Some investment companies are traded on the LSE’s Alternative Investment Market (AIM) or its Specialist Fund Market. AIM is an exchange-regulated market, not a regulated market under EU law. As such, it is generally easier and quicker for a fund to make an initial offering of its shares on AIM rather than on the Main Market (and also follow-on offerings), provided the offering is limited to institutional investors, because compliance with the EU Prospectus Directive (Directive 2003/71/EC) is not then required. The Specialist Fund Market is designed for specialist investment funds targeting only professional, institutional or knowledgeable investors. Compliance with the Prospectus Directive is required. There are also special LSE regimes for closed-ended funds investing in venture capital (venture capital trusts) and real estate (real estate investment trusts).

Most investment companies listed or traded on the LSE are classified as AIFs, with the exception of some real estate investment trusts, because they have a commercial, not an investment, purpose.

13 What are the key laws and other sets of rules that govern retail funds?

The establishment and operation of open-ended retail funds in the UK are governed by the FSMA, various statutory instruments made under the FSMA and the FCA’s rules (in particular, the FCA’s collective investment scheme (COLL) rules). In addition, from 31 December 2019, the EU Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation (Regulation (EU) No. 1286/2014) may apply to all UK open-ended retail funds. Currently, UCITS funds are exempted, but it is unclear whether the exemption will continue from that date. This Regulation requires a standardised pre-contractual key information document for each fund. If the Regulation applies, this would replace the equivalent key investor information document currently required by virtue of the UCITS Directive. Closed-ended retail funds constituted as companies are not collective investment schemes in UK terms, and are therefore subject only to FSMA and FCA financial promotion rules and, if listed on the LSE’s Main Market, the FCA’s Listing Rules or, if traded on AIM or the LSE’s Specialist Fund Market, the rules of those markets.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Open-ended retail funds

To be marketed in the UK, open-ended retail funds must either be authorised by the FCA (if established in the UK) or recognised by the FCA (if established outside the UK). Any entity established as an open-ended retail fund in the UK must be authorised by the FCA. Most non-UK funds recognised by the FCA are UCITS funds established in other EEA jurisdictions. The authorisation process is outlined in question 20.

Closed-ended retail funds

Closed-ended retail funds listed on the LSE’s Main Market or traded on its Specialist Fund Market are not authorised as funds by the FCA, although the actual listing on the Main Market will require approval by the FCA in its capacity as the UK ‘listing authority’ and Main and Specialist Fund Market prospectuses will require its approval under EU ‘approved prospectus’ law. Closed-ended funds traded on AIM are also not FCA authorised, but will still be subject to the AIM rules. In addition, an AIM prospectus will require approval by the FCA if the shares are to be offered to retail investors. Any fund traded on AIM must appoint an independent adviser to act as a nominated adviser (NOMAD), whose function will be to confirm to the LSE the fund’s compliance with the AIM rules.

15 Who can market retail funds? To whom can they be marketed?

Open-ended retail funds authorised or recognised by the FCA, and closed-ended retail funds listed on the LSE’s Main Market or traded on its Specialist Fund Market, can be marketed to any type of investor in the UK (although, in practice, a fund traded on the Specialist Fund Market will not make a retail offering, because the LSE’s guidance indicates that it will admit to that market only funds targeted at professional, institutional or knowledgeable investors). A fund traded on AIM is also, in practice, rarely offered to retail investors in the UK (any retail offering would require compliance with the Prospectus Directive, and AIM-traded funds typically seek to avoid this expense). However, UK retail investors can and do acquire shares in AIM-traded funds on the secondary (as distinct from primary) market.

An entity marketing a retail fund in the UK must be FCA-authorised if:

• it carries on a regulated activity in the course of marketing the fund, such as giving investment advice or arranging deals in investments; and

• it carries on that activity in the UK, subject to the overseas person exclusion described in question 4.

In practice, a professional UK fund distributor, such as an IFA, is normally FCA-authorised either because it gives investment advice to clients or because its distribution activities, such as taking clients’ investment orders and transmitting their investment subscription monies, constitute the regulated activity of ‘arranging deals’ in investments.

16 Are there any special requirements that apply to managers or operators of retail funds?

The manager of a UK UCITS fund, or a UK NURS, established as an AUT must be independent from the AUT trustee and a body corporate established in the UK or another EEA state. The manager of a UK UCITS fund established as an OEIC will usually be the ACD of the OEIC (see question 12).

The manager of a UK UCITS fund must be authorised by the FCA to carry on the regulated activity of ‘managing a UCITS’ or may be a firm established in another EEA state operating under the EU UCITS management passport. The manager of a NURS (see question 12) must be authorised to carry on the regulated activity of managing an AIF. The manager of a closed-ended retail fund must be authorised by the FCA, typically to carry on the regulated activity of managing an AIF. Alternatively, the fund itself can be authorised as a self-managed AIF if it has no external AIFM.

Under product governance rules introduced in 2018 by MiFID II, a firm ‘manufacturing’ a new fund (ie, creating, developing, issuing or designing a new fund) must identify the fund’s ‘target market’ of ‘end (ultimate) clients’, ensure its distribution strategy is compatible with that market and take reasonable steps to ensure the fund is in fact distributed to that market. Typically, it will be the manager or operator of a fund that will manufacture it for these purposes, although this will not necessarily preclude a primary distributor from also being a manufacturer. Although the rules apply to non-retail funds as well as retail funds, they will, in practice, have a greater impact on retail funds, simply because the end clients and distributors will be more numerous and identifying the target market and monitoring distributors will therefore be more difficult.

17 What are the investment and borrowing restrictions on retail funds?

Open-ended retail funds

The investment and borrowing powers for UCITS funds are set out in the FCA’s COLL rules, implementing the UCITS Directive. A UCITS fund can invest its portfolio in the following asset classes:

• transferable securities or money market instruments traded on an EEA regulated market. Transferable securities consist of shares, debt securities and other traded securities, such as depositary receipts. A regulated market is an EEA stock exchange classified as a regulated market under EU legislation;

• cash and near cash (including bank deposits and Treasury bills);

• units in other UCITS and non-EEA collective investment schemes, subject to conditions; and

• derivatives and forward transactions.

A UCITS fund is subject to investment spread and concentration requirements, including:

• up to 5 per cent of the fund’s assets can be invested in transferable securities or money market instruments issued by a single body. The 5 per cent limit can be raised to 10 per cent for 40 per cent of the portfolio;

• up to 10 per cent of the fund’s assets can be invested in unlisted securities;

• up to 20 per cent of the fund’s assets can be invested in cash deposits with a single body;

• exposure to a single derivatives or broker counterparty cannot exceed 5 per cent of the fund’s assets, except where the counterparty is an approved bank, where the exposure can be up to 10 per cent;

• up to 20 per cent of the fund’s assets can be invested in transferable securities and money market instruments issued by the same group;

• up to 20 per cent of the fund’s assets can be invested in units of (broadly) any one regulated collective investment scheme (eg, another UCITS fund) and up to 30 per cent in (broadly) all other regulated collective investment schemes;

• up to 35 per cent of the fund’s assets can be invested in government or public securities – or 100 per cent, subject to conditions, including:

• no more than 30 per cent can be invested in a single issue; and

• the securities must come from at least six different issuers;

• the fund cannot hold more than 10 per cent of the debt securities issued by a single issuer;

• the fund cannot hold more than 25 per cent of the units or shares issued by a single collective investment scheme; and

• the fund cannot hold more than 10 per cent of the money market instruments issued by a single body.

A UCITS fund can borrow up to 10 per cent of the fund’s assets on a temporary basis. It follows that, in practice, a UCITS fund cannot borrow for investment purposes, and so can do so only to cover redemptions of units or shares by selling investors.

A NURS has broader investment powers. It can invest in the investments permitted for UCITS schemes. It can also hold:

• 100 per cent of its assets in real property (land);

• up to 10 per cent of its assets in transferable securities issued by a single issuer;

• up to 10 per cent of its assets in gold;

• up to 20 per cent of its assets in unlisted securities; and

• up to 35 per cent of its assets in other collective investment schemes (including non-UK schemes whose investment and borrowing powers are equivalent to, or more restricted than, those of NURSs, and AIFs, provided that the combined value of unlisted securities and AIFs does not exceed 20 per cent of the NURS’s assets).

In addition, a NURS authorised as a ‘fund of alternative investment funds’ can invest in a range of AIFs. A NURS can borrow up to 10 per cent of its assets on a permanent basis and, if it is an index-tracking fund, can invest up to 20 per cent of its assets in transferable securities issued by a single body.

Closed-ended retail funds

Closed-ended retail funds listed on the LSE’s Main Market are not subject to restrictions on investment or borrowing, although, as a condition of listing, they must have a published investment policy covering asset allocation, risk diversification, gearing and maximum exposures as a condition of listing. In practice, a fund will have to draw up its own set of investment restrictions and require shareholder approval to amend them.

A UK closed-ended retail fund listed on the LSE’s Main Market must satisfy certain investment conditions in order to qualify for favourable tax treatment. For example, the business of the company must consist of investing its funds in shares, land or other assets with the aim of spreading investment risk and giving members of the company the benefit of the results of the management of its funds.

18 What is the tax treatment of retail funds? Are exemptions available?

Open-ended retail funds

Subject to special rules applying to tax-elected funds, and property authorised investment funds, AUTs and OEICs are generally exempt from UK tax on gains on the disposal of investments (capital gains), but subject to corporation tax at a special rate of 20 per cent on income, although dividend income (primarily from shares) is exempt, subject to conditions, and deductions are available, subject to conditions, for amounts distributed by funds primarily invested in debt securities (bond funds) as interest distributions.

UK-resident individual fund investors will be subject to tax on dividend distributions made, or (if the fund accumulates its income) deemed to be made, subject to a £2,000 annual dividend allowance, with no withholding. These dividend distributions are generally tax exempt for UK corporation taxpayers, such as companies.

UK-resident individual investors in bond funds will have their interest distributions generally treated as interest for tax purposes, subject to an annual personal savings allowance under certain circumstances, with no withholding. UK corporation taxpayers will be subject to corporation tax on interest distributions, again with no withholding.

UK-resident individual fund investors are subject to capital gains tax on gains realised on the disposal of units or shares in an AUT or an OEIC. UK non-resident individual fund investors are generally not directly subject to UK tax, and there is no withholding.

For tax purposes, individual ACS investors will be treated broadly as if they had invested directly in the underlying assets, if the ACS is structured as a partnership, whereas an ACS structured as a co-ownership scheme is transparent for income tax purposes, but opaque for capital gains, which are therefore taxed at ACS-level.

Closed-ended retail funds

UK investment trusts are exempt from tax on capital gains, but otherwise generally subject to UK corporation tax at 19 per cent. Individual investment trust investors are taxed in the same way as individual shareholders in other UK companies, except that investment trusts primarily invested in debt securities can elect to be treated in broadly the same way as AUT and OEIC bond funds to the extent they receive interest income.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Open-ended UK retail funds must appoint an independent entity (a custodian) to hold their assets. This must be a trustee, for an AUT, or a depositary, for an OEIC. A trustee must be independent from the manager and established in the UK, or, if established in another EEA state, have a place of business in the UK. A depositary must likewise be established in the UK, or, if established in another EEA state, have a place of business in the UK. Trustees and depositaries must be authorised by the FCA since these are regulated activities. They will be subject to the FCA’s client asset (CASS) rules on custody of assets, which are intended to ensure that custodians observe professional standards of care and diligence, including in the appointment of sub-custodians. Depositaries of UCITS funds, and trustees, in the case of AUTs, are subject to strict liability for the loss of assets held in custody, similar to AIF depositaries (see question 30).

Most closed-ended retail funds marketed in the UK are AIFs. Under the AIFMD, an AIF must appoint a depositary if the AIF is established and managed in the EEA (see question 30). Closed-ended retail funds not required under the AIFMD to appoint a depositary, because the fund or the AIFM is established outside the EEA (or the fund is managed by sub-threshold AIFMs – see question 25) will, in practice, appoint a custodian, where they hold assets, such as listed securities, requiring a custodian for trade settlement purposes.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

The registration and organisational governance requirements for UK UCITS funds established as AUTs, OEICs or ACSs are largely the same. All must be authorised by the FCA. Application is accordingly made to the FCA with:

• a draft prospectus;

• a draft instrument of incorporation, in the case of an OEIC;

• a trust deed, in the case of an AUT, or limited partnership agreement or co-ownership deed, in the case of an ACS;

• a model portfolio;

• an application form; and

• a solicitor’s certificate confirming that the constitutional documents comply with the applicable regulations.

The FCA has two months in which to consider a UCITS application.

UCITS funds established elsewhere in the EEA can be recognised by the FCA for sale in the UK under the EU passporting process. Under this process, the UCITS manager provides a notification letter and the fund documentation to its EEA home state regulator, which then approves the application and sends the documents on to the FCA.

Certain schemes considered comparable to UK-authorisable schemes can also be recognised by the FCA for sale in the UK. In practice, though, such funds are seldom recognised, unless established in Guernsey, the Isle of Man or Jersey.

As previously noted, most UK closed-ended retail funds, as distinct from their managers, are outside FCA regulation, although their manager, or the fund itself if (unusually) self-managed, will be subject to FCA regulation (see question 16). A listed or exchange-traded closed-ended retail fund is subject to the governance requirements of the rules of the exchange on which it is listed or traded. In particular, the FCA’s Listing Rules, applying to the LSE’s Main Market, require that the majority of the fund’s board of directors are independent of the investment manager.

21 What are the periodic reporting requirements for retail funds?

For UK open-ended retail funds, reports must be made available on request to investors and to the public generally, free of charge, annually and half-yearly. The reports must include certain prescribed information, including the accounts and, in the annual report, a report from the auditor and the trustee or depositary.

Closed-ended retail funds listed on the LSE’s Main Market, or traded on its Specialist Fund Market or AIM, must also publish a report twice a year, with a long report annually. A closed-ended retail fund listed on the Main Market must also report to the UK tax authority (HMRC) annually in order to secure approval for favourable tax treatment (see questions 17 and 18) and make ongoing notifications to HMRC to maintain the approval.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

UK open-ended retail funds must offer to issue and redeem (buy back) shares or units to or from investors on every dealing day. There must be at least two dealing days in each month, at least a fortnight apart. Retail funds can limit the number of shares or units in issue, provided this complies with the fund prospectus. Retail funds with a daily dealing day may defer redemptions to the next dealing day, if redemption requests for a particular day exceed 10 per cent of the fund’s value, or some other reasonable proportion stated in the prospectus, subject to certain conditions. Dealing in open-ended retail funds may also be temporarily suspended under exceptional circumstances and where justified in the interests of unit or shareholders. This must be immediately notified to the FCA. A NURS can impose limited redemption arrangements (to limit redemptions for up to every six months) if it is a property fund, has an investment objective providing for a specified level of return (capital protection) or is a fund of alternative investment funds.

Shares in UK-listed or exchange-traded closed-ended retail funds are dealt in on-exchange. It will usually be a condition of listing or admission to trading, and of admission of the shares to a trade settlement system, that there are no restrictions on share transfer, although limited restrictions (such as on transfers to US persons) can be permitted. A UK closed-ended retail fund can repurchase its shares out of distributable profits, a method sometimes used to reduce a discount of the trading price to the fund’s net asset (net investment) value.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Non-retail funds, other than limited partnerships, are typically established outside the UK, in an offshore jurisdiction, because there are no UK non-retail tax-exempt fund vehicles available, other than unauthorised unit trusts open only to UK tax-exempt unitholders.

In practice, closed-ended non-retail funds, such as private equity funds, are typically established as English or non-UK (offshore) limited partnerships and open-ended non-retail funds, such as hedge funds, as offshore open-ended companies or trusts. Scottish limited partnerships, which, unlike English limited partnerships, have separate legal personality, are occasionally used as non-retail fund vehicles (eg, for private equity ‘carried interest’ schemes, because they are closed-ended, but still tax-transparent). Commonly used offshore jurisdictions for non-retail limited partnerships are the Cayman Islands, Guernsey and Jersey and, for non-retail investment companies, the Cayman Islands and Ireland.

Exchange-listed closed-ended vehicles offered only to non-retail investors are typically formed in Guernsey or Jersey.

24 What are the key laws and other sets of rules that govern non-retail funds?

Non-retail funds are subject to the governing law of their jurisdiction of formation. Most offshore jurisdictions impose relatively light requirements on the establishment and operation of these vehicles, provided they are offered only to professional investors.

UK-based managers of non-retail funds are subject to UK law implementing the AIFMD, because they carry on the regulated activity of managing an AIF. The AIFMD requirements apply indirectly to an AIF, through imposing obligations on the AIFM (such as the appointment of a depositary). In addition, certain types of non-retail funds may qualify in the UK as a European venture capital fund or European social entrepreneurship fund under EU law applying to AIFMs. For example, sub-threshold AIFMs (see question 25) may obtain such a designation for a fund in order to allow it to be marketed to ‘professional investors’ (see question 26) throughout the EEA under an EU passport.

An AUT, OEIC or ACS may be established in the UK as a qualified investor scheme (QIS), a type of scheme authorised by the FCA available only to certain types of professional or experienced investor. In practice, because of this restriction, very few QISs have been established. As a QIS is not a UCITS, it will constitute an AIF under the AIFMD.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

A UK manager of a non-retail fund (wherever the fund is established) will have to be authorised under the FSMA – typically, as an AIFM, since the fund will be an AIF. UK AIFMs, unless ‘sub-threshold’ (see below), will be subject to the EU AIFMD for all purposes. The fund itself does not have to be (and cannot be) authorised or licensed, except in the specialised case of European long-term investment funds (ELTIFs), which must be authorised under the EU ELTIF Regulation. ELTIFs must be primarily invested in small companies and can allow investors only limited redemption rights. They can be marketed throughout the EEA, under an EU passport, to non-retail investors and (subject to conditions) also to retail investors.

Sub-threshold AIFMs are AIFMs whose aggregate AIF assets under management, across their entire portfolio, do not exceed €100 million or, where the funds are unleveraged and (for at least five years) closed-ended, €500 million. Sub-threshold AIFMs are not subject to the AIFMD (other than a limited registration regime), but are subject to FCA rules similar to those applying to discretionary investment managers that are not (directly) fund managers.

For marketing to non-retail (‘professional’) investors (see question 26), AIFs can be separated as follows (see further question 31):

• an EEA fund managed by a non-threshold EEA AIFM, which can be marketed throughout the EEA (including the UK) under an EU passport, subject to compliance with the AIFMD;

• a non-EEA fund managed by a non-threshold EEA AIFM, which can be marketed in the UK (but not throughout the EEA), following notification to the FCA, subject to compliance with the AIFMD;

• a fund managed by a non-EEA AIFM (including a sub-threshold non-EEA AIFM), whether the fund is established within or outside the EEA, which can be marketed in the UK, but not throughout the EEA, following notification to the FCA, subject to compliance with AIFMD (unless the AIFM is sub-threshold) transparency and ongoing regulatory reporting rules; and

• a fund managed by a sub-threshold EEA AIFM, which can be marketed in the UK, but not throughout the EEA, subject to compliance with the general UK financial promotion regime (see question 9).

26 Who can market non-retail funds? To whom can they be marketed?

Non-retail funds can be marketed in the UK by AIFMs (EEA (unless sub-threshold) or non-EEA) as set out in question 25 to professional investors (professional clients, within the meaning of MiFID II, including individuals (eg, investing through family offices) and local authorities satisfying the financial conditions to be treated as professional investors). In practice, it can be difficult for individuals and local authorities to satisfy these financial conditions. Separately, the UK financial promotion rules allow non-retail funds to be marketed to a number of other types of institutional and individual investor. In particular, non-retail funds can be marketed under those rules to local authorities and various classes of individual investor (such as certified sophisticated investors – see question 10), subject to conditions as to contents.

A person marketing a non-retail fund in the UK must be FCA-authorised if it:

• carries on a regulated activity in the course of marketing the fund, such as giving investment advice or arranging deals in investments; and

• carries on such activity in the UK, within the meaning of the FSMA (subject to the overseas person exclusion referred to in question 4).

In practice, UK intermediaries (eg, advising managers on UK marketing strategy or locating prospective UK investors) are normally FCA-authorised.

Brexit

Following the UK’s referendum on continued membership of the EU in June 2016, the UK will leave the EU on 29 March 2019. There will, however, be a transitional period following the UK’s exit, during which it is expected EU law existing at exit will continue to apply in the UK. It is not yet clear, though, whether EU law coming into effect in the EU after exit, but during the transitional period, will apply in the UK. Currently, the period is expected to last 21 months, ending on 31 December 2020. It is possible it may end on different dates for different EU financial services legislation, although, for practical reasons, this seems unlikely. At the end of the transitional period, the UK will be free to retain, amend or repeal EU legislation applying in the UK (whether directly or indirectly). The crucial point here is that, although EU-derived, this legislation will then apply only in the UK, rather than throughout the EEA, unless (but then only to the extent) any special (bespoke) EU–UK deal preserves its wider EEA ambit (eg, through an ‘equivalence’ regime for UK fund managers, allowing them ‘market access’ to the EEA, provided applicable UK regulation is ‘equivalent’ to EU regulation). Again, it is unclear whether any bespoke deals will in fact be concluded for the UK financial services industry, although the industry is pressing the UK government to negotiate, in particular, the continuation of EU passporting rights for UK managers (retail and non-retail) and for UK retail funds.

If there are no bespoke deals, the most important impact of EU exit, at the end of the transitional period, will be that UK financial services firms will lose these passporting rights, which currently allow them to:

• conduct ‘cross-border’ business throughout the EEA (including servicing clients in the EEA from the UK);

• establish branches throughout the EEA;

• sell UCITS and AIFs throughout the EEA; and

• access all EEA-regulated financial markets, central clearing counterparties and securities and derivatives clearing systems.

Also, without a bespoke deal, at the end of the transitional period, UK UCITS funds will automatically lose their ‘UCITS’ labels, and any delegation of investment management by EEA UCITS funds to UK managers will probably require a more substantial EEA (non-UK) administrative and governance presence than now, making this a less attractive option for EEA fund managers.

Following the referendum, the FCA stated that UK firms should continue with implementation plans for EU legislation that is not yet in effect, but is intended to be before EU exit.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

There are no UK investor-protection rules restricting ownership of non-retail funds (including exchange-listed funds) to certain classes of investor. There are rules that limit the marketing in the UK of non-retail funds to certain classes of investor (see question 26), and certain types of investor, such as UK pension funds and UK charities, are subject to rules governing the types of investment they can make, for prudential or risk management reasons. In addition, FCA-authorised persons must ensure that any investment recommended to a client, whether retail or non-retail, is suitable for the client. There are also rules that apply to firms selling ‘complex’ financial products, including non-retail funds, on an execution-only basis to retail clients (ie, without giving advice) to ensure that any product sold is ‘appropriate’ for the purchasing client.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

The FCA’s rules (in particular, its FUND rules) contain rules, derived from the AIFMD, for AIFMs on (among other things) financial resources, risk and liquidity management, valuation, delegation, the appointment of a fund depositary, regulatory reporting, investor disclosure (transparency) and anti-‘asset stripping’. These rules represent accepted international standards of best practice for managers, including hedge fund managers. The manager of a non-retail fund must also comply with any applicable locally derived rules of the jurisdiction in which the fund is established. For example, Ireland imposes rules on the governance and reporting required for funds established in Ireland.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Funds structured as partnerships are typically exempt from UK direct taxes. Broadly, then, partnership investors are taxed as if they had invested directly in the underlying partnership assets.

Funds structured as offshore companies are also typically not subject to UK direct taxes, provided that, where their activities would otherwise constitute trading in the UK for UK tax purposes (including through a dependent agent permanent establishment), the manager qualifies for the UK’s ‘investment management’ tax exemption.

Under the UK offshore funds rules, UK-resident investors are generally subject to income tax on gains realised on the disposal of holdings in offshore companies, unless, very broadly, the fund is approved by HMRC as a ‘reporting fund’ and reports its income annually to UK investors and HMRC. If so, UK-resident investors pay capital gains tax on gains realised on their reporting fund holdings, but will have been subject to income tax (where applicable) on any income reported by that reporting fund (whether distributed or not). Special rules can apply to prevent ‘double counting’ in relation to the taxation of holdings in a reporting fund and special rules can treat distributions from bond funds (see question 18) broadly as if they were interest for tax purposes and require UK corporation tax payers to pay tax on bond fund holdings on an annual fair value basis.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The AIFMD requires an EEA manager of an EEA AIF to appoint a depositary to hold the fund’s assets, as the custodian, and to perform certain other oversight duties, such as monitoring the fund’s cash accounts and its asset valuation process. An AIF depositary is liable for the loss of any of the fund’s assets by itself, as custodian, or by a sub-custodian of any of the fund’s assets (strict liability), unless it can prove that the loss arose as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts by it to the contrary. If the depositary carries on business in the UK, that business will also be subject to the FCA’s CASS rules on custody of assets, designed to ensure that custodians observe professional standards of care and diligence, including in the appointment of sub-custodians.

An EEA manager of a non-EEA AIF not marketed in the EEA need not appoint a depositary. An EEA manager of a non-EEA AIF marketed in the EEA must appoint one or more entities to perform the depositary’s custody and monitoring functions (‘depositary-lite’ functions), but the strict liability custody rule will not apply.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The UK manager of a non-retail UK fund (a UK AIF) must be authorised by the FCA as an AIFM. A UK AIFM (unless sub-threshold) must apply to the FCA for approval to market a UK (or EEA non-UK) AIF in the UK and provide details of the AIF and a copy of its prospectus to the FCA. The FCA then has 20 working days in which to grant or refuse permission to the AIFM to market the AIF.

A UK AIFM (unless sub-threshold) must notify the FCA prior to marketing a non-EEA AIF in the UK and provide prescribed information. It may market the AIF following the notification (although, in practice, it will wait for acknowledgement of the notification from the FCA, which typically takes a day or so).

A UK AIF is not itself subject to organisational rules, although its manager (the AIFM) is subject to such rules (see question 28). The AIFM must disclose information regarding the AIF to investors on a periodic basis (see question 32).

32 What are the periodic reporting requirements for non-retail funds?

A UK AIFM (unless sub-threshold) must, for each EEA AIF it manages and for each AIF (wherever established) it markets in the EEA:

• prepare an annual report. The report must contain the fund’s financial statements and disclose, for example, the total remuneration paid by the AIFM to its staff, split into fixed and variable amounts, and also the total remuneration paid to its senior management and staff members whose actions materially impact the particular AIF’s risk profile;

• disclose information regarding the AIF (such as changes in liquidity, leverage or risk profile) to the AIF’s investors on a periodic basis; and

• regularly report to the FCA on, among other things, the AIF’s principal exposures, risk profile and asset categories (Annex IV reporting).

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

A UK separately managed (segregated) account is typically structured by the client appointing a custodian to hold its investments in the account, under a custody agreement, and giving an investment manager full discretion to acquire and dispose of the investments in the account, under a separate investment management agreement (IMA) (see question 34), subject to the investment objectives and restrictions set out in the IMA.

34 What are the key legal issues to be determined when structuring a separately managed account?

The terms for a separately managed UK account are typically set out in an IMA between the investor and manager. Often, this is a heavily negotiated document. An investor will seek, in particular, to negotiate terms relating to:

• the manager’s fees, including any performance fee;

• the standard of care required of the manager (eg, reasonable care (avoidance of negligence) or only the avoidance of gross negligence);

• any limitation of the manager’s liability (eg, to the value of the assets under management);

• any indemnity granted by the manager to the client (eg, if the manager breaches its standard of care) or by the client to the manager (eg, provided the manager acts within its authority); and

• the term (duration) and termination of the agreement.

FCA rules relating to, for example, best execution, aggregation and allocation of client orders, record-keeping, outsourcing, risk management and conflicts of interest, will apply to the manager.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Management of a separately managed UK account will constitute the regulated activity of managing investments, and require authorisation by the FCA.

A separately managed UK account is unlikely to constitute an AIF. Marketing a separately managed account in the UK is subject to the UK general financial promotion regime (see question 9). Broadly, a non-FCA-authorised person can market a separately managed account in the UK only to professional investors, local authorities, high net worth companies, high value trusts (such as private sector pension funds) and certified sophisticated or individual investors. An FCA-authorised person can market a separately managed account in the UK to any investor, subject to complying with the FCA’s suitability and investor communication rules (eg, requiring the communication to be fair, clear and not misleading).

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

For the impact of Brexit on the UK fund management industry, see ‘Brexit’ in question 26.

Regarding the AIFMD, the European Commission is currently assessing whether to extend the AIFMD EEA-wide marketing passport to non-EEA AIFMs, and to EEA AIFMs marketing non-EEA AIFs to AIFMs or AIFs from specified non-EEA states (third countries), on the basis of those countries’ deemed compliance with the AIFMD. The (supervisory) EU European Securities and Markets Authority (ESMA) issued its final advice to the European Commission in July 2016 on the extension of the passport to third countries, confirming there were no significant obstacles to the grant of the passport in relation to AIFMs and AIFs established in Canada, Guernsey, Japan, Jersey and Switzerland, and giving qualified advice in relation to Australia, Bermuda, the Cayman Islands, Hong Kong, the Isle of Man and the United States (noting aspects of those regimes that must change prior to granting the passport). Since receiving this advice, the European Commission has not taken any further substantive steps on the extension of the passport to third-country AIFMs and AIFs. It is currently not clear whether or, if so, when, it will do so. Brexit complicates the issue, since, from the end of the transitional period (see ‘Brexit’ in question 26), the UK will itself become a ‘third’ (non-EEA), non-passported, country, unless a bespoke EU–UK deal allows the UK’s AIFMD passport to continue as now, or in some modified form. The AIFMD also envisages ESMA issuing advice to the European Commission on the termination of EEA states’ current (non-AIFMD) national private placement regimes for non-EEA AIFMs and EEA AIFMs managing non-EEA AIFs (see question 7). No such advice has yet been issued, and it is not clear when (or whether) it will be.

In addition, in March 2018, the European Commission proposed further harmonisation of the implementation of the AIFMD in EEA states. In particular, it suggested a wider interpretation of ‘marketing’ an AIF (see question 8). If adopted while the UK is still subject to EU law (see ‘Brexit’ in question 26), this would significantly advance the time at which marketing in the UK of non-EEA AIFs, and by non-EEA AIFMs, would have to be notified to the FCA (see question 25).

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

See questions 12 to 22 regarding the stock-exchange listing, and trading, of closed-ended funds in the UK. Most closed-ended funds listed on the LSE’s Main Market will be AIFs, although their listed status will allow them to be distributed to retail investors (if desired). Many (open-ended) UCITS exchange-traded funds are now also listed on the LSE’s Main Market.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

It is not possible to redomicile an overseas fund into the UK. It is, though, possible to put in place a scheme of arrangement, whereby an overseas fund is liquidated and investors receive interests instead in a UK fund, depending on the local non-UK law governing the overseas fund.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Other than the marketing restrictions referred to in question 7, there are no special rules in this regard.

While the UK remains a member of the EU (see ‘Brexit’ in question 26), EU law will prohibit the introduction of any such rules if they prevent citizens of other EEA states investing in the UK or UK citizens investing in other EEA states.

Update and trends

The most significant known future event for the UK fund management industry as a whole is undoubtedly Brexit, discussed further in questions 26, 36 and 39. Both the likely regulatory and economic consequences for UK fund managers (whether or not UK-domiciled) can currently most accurately be described as speculative. The ‘fog’ is likely (but not by no means certain) to clear over the coming year.

For the clients of commodity derivatives fund managers, commodity derivatives position limits on EEA exchanges and in ‘economically equivalent’ off-exchange contracts are progressively being introduced (for the first time) by EEA national regulators, including the FCA, according to formulae and rules prescribed under MiFID II, following its implementation on 3 January 2018.

For all EEA investment firms (including UK fund managers), the European Commission is proposing new capital adequacy requirements. If adopted by the EU, these are likely to apply from some time in 2020 (no date has yet been fixed, since the legislation is still pending). They would be more risk-oriented than the current rules, and would be expected to result in some increase in the capital required for most fund managers.

Cryptocurrencies are currently generating much debate in the UK. UK UCITS funds are not permitted to invest in cryptocurrencies (directly or indirectly), but UK non-retail funds and UK segregated accounts are free to do so (directly or indirectly), if and to the extent permitted by the investment restrictions and objectives set out in their fund rules or IMAs and any legal restrictions relating to their clients, such as those applying to pension funds and charities. In practice, though, permission, even if available, is currently most unlikely to be utilised.

Michelle Moran

michelle.moran@klgates.com

Rodney Smyth

rodney.smyth@klgates.com

One New Change

London EC4M 9AF

United Kingdom

Tel: +44 207 360 8255/8218

Fax: +44 207 648 9001

www.klgates.com

United States

Michael W McGrath, Clair E Pagnano and Pablo J Man

K&L Gates LLP

Fund management

1 How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The US Securities and Exchange Commission (SEC) is the regulatory authority primarily responsible for oversight of fund management and offering activities in the US. The substantive regulation is as follows:

• the US Investment Company Act of 1940, as amended (the 1940 Act), which governs the structure and operation of funds (or ‘investment companies’ as they are referred to under US law);

• the US Securities Act of 1933, as amended (the 1933 Act), which governs the offer and sale of securities, including fund interests;

• the US Investment Advisers Act of 1940, as amended (the Advisers Act), which governs the activities of fund sponsors and portfolio managers; and

• the US Securities Exchange Act of 1934, as amended (the Exchange Act), which governs the marketing and sale of fund interests by broker-dealers.

Registered and private funds

Investment companies that are marketed and sold to the general public must be registered under the 1940 Act (registered funds). Registered funds can be open-ended or closed-ended and diversified or non-diversified. Private funds are excepted from the definition of investment company and are not registered or regulated under the 1940 Act, save for certain limitations when investing in registered funds.

Shares of registered funds are typically offered to the public and registered under the 1933 Act. In contrast, private funds issue securities in private offerings that are exempt from registration under the 1933 Act, although they will typically seek to adhere to an offering regime promulgated under the 1933 Act that provides a safe harbour from registration. It is also possible for a fund to be registered as an investment company under the 1940 Act, but not conduct a public offering. In this case, similar to a private fund, the registered fund would offer its shares pursuant to an exemption from registration under the 1933 Act.

Fund managers (investment advisers)

Investment advisers with a principal place of business in the US generally must register with the SEC or with the state securities agency for the state of their principal place of business. Generally, investment advisers with at least US$100 million of assets under management must register with the SEC, and smaller advisers must register at the state level. Absent an exemption, non-US advisers that provide investment advisory services in the US must also register with the SEC. Registration with the SEC or a state securities agency requires the filing of Form ADV. Among other things, Form ADV requests information about an adviser’s business, services, strategies, and the attendant conflicts of interest and risks to clients of the adviser.

Marketers

The marketing of registered and private funds is generally conducted by broker-dealers registered under the Exchange Act. The SEC is primarily responsible for oversight of broker-dealers, but broker-dealers must also become members of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organisation. For an in-depth discussion of marketers, see question 7 (marketing generally), question 15 (marketing of registered funds) and question 26 (marketing of private funds).

Other regulators

The US Commodity Futures Trading Commission (CFTC) is the regulatory authority responsible for the regulation of commodity trading. Fund managers that invest in commodities on behalf of clients, including registered funds, may be required to register with the CFTC and become members of the National Futures Association, or seek an exemption from registration. Many fund managers are subject to regulation by both the SEC and the CFTC because they trade both securities and commodities.

The US Employee Retirement Income Security Act of 1974, as amended (ERISA), applies to most employee retirement and welfare benefit plans maintained by private corporate employers, and by extension to the management of assets for such plans. Regulations under ERISA are issued by the US Department of Labor. Under ERISA and related regulations, if plan investors in the aggregate hold 25 per cent or more of the value of any class of equity interests in a private fund, the fund’s assets will be treated as ‘plan assets’. In such case, the fund manager will be subject to a heightened fiduciary standard under ERISA, including certain express prohibitions imposed on fiduciaries by ERISA.

2 Is fund administration regulated in your jurisdiction?

Fund administration activities such as accounting, financial reporting and performance-related services are generally not subject to regulation in the US. Often, funds outsource these activities to third-party administrators.

3 What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

To register as an investment company, an issuer must file a registration statement with the SEC that contains the fund’s prospectus as well as certain additional disclosure documents and other information regarding the issuing fund. The registration statement is subject to review and comment by SEC staff. Registered open-ended funds may, and typically do, offer several classes of shares, certain expenses of which may vary. Registered closed-ended funds may not offer multiple share classes, except pursuant to an exemptive order granted by the SEC.

Investment advisers registered under the Advisers Act are deemed to be fiduciaries and are subject to an anti-fraud regime that imposes several obligations and restrictions with respect to, among other things:

• best execution and trading practices;

• advertising and marketing;

• proxy voting;

• performance-based fees;

• solicitation arrangements;

• political contributions;

• record-keeping; and

• custody of client assets.

Advisers are subject to periodic SEC examinations and must adopt written compliance policies and procedures designed to detect and prevent violations of the Advisers Act.

4 What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

In general, an investment adviser that provides advice to US clients must comply with US regulation, regardless of whether its principal place of business is located in the US or abroad. However, certain exemptions and other arrangements can limit the application of US regulation to investment advisers with a principal place of business outside the US (non-US advisers).

Foreign private adviser exemption

A non-US adviser is exempt from the obligation to register with the SEC if it:

• has no place of business in the US from which it provides actual investment advice;

• has in the aggregate fewer than 15 clients and investors in the US in private funds it advises;

• manages less than US$25 million attributable to US clients and investors; and

• does not hold itself out to the US public as an investment adviser.

Private fund adviser exemption

A non-US adviser may be deemed an ‘exempt reporting adviser’, exempt from registration under the Advisers Act, if:

• it provides investment advisory services only to one or more qualifying private funds; and

• the aggregate assets managed by the adviser at a place of business in the US are less than US$150 million.

Exempt reporting advisers are subject to limited SEC reporting and other requirements; this exemption is sometimes referred to colloquially as ‘registration lite’.

Participating affiliate arrangement

A non-US adviser that is an affiliate of an SEC-registered adviser (participating affiliate) may provide investment advice to US clients subject to certain conditions, including:

• the registered adviser and participating affiliate are separate legal entities;

• the participating affiliate appoints a US agent for service of process and submits to US jurisdiction;

• personnel of the participating affiliate that provide advisory services to US clients or who have access to certain information regarding US persons are treated as associated persons of the registered adviser; and

• the participating affiliate maintains certain records required by the Advisers Act.

In a participating affiliate arrangement, the participating affiliate is not required to register with the SEC, but its activities on behalf of US clients are subject to the substantive requirements of the Advisers Act.

5 Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

The acquisition of a controlling stake in an investment adviser is not subject to prior authorisation by the SEC or any other US regulatory authority. However, the acquisition of a controlling stake in an investment adviser may be considered an assignment of the adviser’s contracts with clients, which requires client consent. Where the investment adviser is an adviser to a registered fund, such an assignment automatically terminates the existing advisory agreement between the adviser and the fund, typically resulting in the need to obtain a majority approval of the fund’s shareholders for a new contract. For these purposes, a 25 per cent ownership stake is presumed to confer ‘control’ of an investment adviser, but certain circumstances, such as mergers among affiliates, fall outside these requirements.

6 Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are no regulatory restrictions on the structuring of an adviser’s asset-based management fee. However, the Advisers Act restricts an investment adviser from receiving compensation based on a share of realised or unrealised capital appreciation (ie, a performance-based fee) unless the fee is charged to a ‘qualified client’, which includes a natural person or institution with a net worth of at least US$2.1 million or with at least US$1 million in assets under the adviser’s management; or a ‘fulcrum fee’ that increases and decreases proportionately with the investment performance of a managed fund.

Fund marketing

7 Does the marketing of investment funds in your jurisdiction require authorisation?

A person engaged in the business of marketing securities in the US, including fund interests, is generally subject to regulation as a broker-dealer. A limited exemption exists for certain associated persons of a fund’s sponsor who do not receive commissions or transaction-based compensation, are not associated persons of a broker-dealer and who perform substantial duties other than offering the fund’s shares. Many fund sponsors avoid broker-dealer registration requirements by engaging an affiliated or third-party broker-dealer to solicit investments by potential investors.

8 What marketing activities require authorisation?

Generally, the receipt of transaction-based compensation in connection with a securities transaction, including compensation based on the outcome or size of the transaction, is considered the hallmark of broker-dealer activity that would require registration. However, participation in the solicitation, negotiation or execution of a securities transaction may also require registration, depending on the facts and circumstances.

In addition, marketing materials are subject to differing regulatory regimes. Advertisements of investment advisers are subject to rules and guidance under the Advisers Act. Advertisements disseminated by a broker-dealer are subject to FINRA rules. The CFTC also regulates advertisements for commodity pool operators.

9 What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

All broker-dealers conducting activities in the US, even if their activities are directed only to investors outside the US, must register in the US. Conversely, a non-US broker-dealer that induces or attempts to induce securities transactions by any person in the US must register in the US or work with a US broker-dealer to chaperone their activities.

10 If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

Many fund managers engage a US broker-dealer to market their funds. The US broker-dealer acts as the placement agent for the securities of the fund and representatives of the broker-dealer accompany fund manager personnel at meetings with potential investors.

11 What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

When selling registered fund shares, broker-dealers are subject to a FINRA rule that imposes caps on a broker-dealer’s sales compensation and distribution fee levels. The amount of sales compensation that will be deemed excessive, and therefore in violation of the rule, is dependent on whether the fund has an asset-based sales charge or is a fund of funds.

Retail funds

12 What are the main legal vehicles used to set up a retail fund? How are they formed?

US law does not require registered funds to be organised using a particular corporate form. Various legal forms may be used, although in practice registered funds are typically organised under state law as Massachusetts business trusts, Delaware statutory trusts or Maryland corporations. In addition, the 1940 Act requires registered funds to establish a board of directors or trustees (the board).

13 What are the key laws and other sets of rules that govern retail funds?

The 1940 Act and the 1933 Act, and the rules thereunder, primarily govern registered funds and the public offering of their securities. In addition, the SEC has issued no-action letter guidance and interpretive statements and publications clarifying the application of these laws and rules. Investment advisers to registered funds are subject to the Advisers Act and the rules and guidance thereunder.

Registered exchange-listed closed-ended funds and open-ended exchange-traded funds (ETFs) are also subject to the listing and trading rules of the relevant exchange.

14 Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Registered funds must be registered under the 1940 Act. To market or sell their securities in a public offering, registered funds must also register their securities under the 1933 Act and comply with the attendant requirements.

15 Who can market retail funds? To whom can they be marketed?

Registered funds are principally marketed by broker-dealers, although banks and insurance companies may also distribute registered fund shares.

Shares of registered open-ended funds (except ETFs) may be offered and sold to any investor. Registered closed-ended funds listed on an exchange are typically offered to investors via an initial public offering where broker-dealers act as underwriters to the publicly offered shares.

ETF shares are only sold to certain broker-dealers that are ‘authorised participants’ in large blocks known as ‘creation units.’ The authorised participants then sell individual ETF shares on an exchange.

16 Are there any special requirements that apply to managers or operators of retail funds?

An investment adviser to a registered fund generally must be an investment adviser registered with the SEC under the Advisers Act. A registered fund, and in practice its investment adviser, must also maintain policies and procedures to comply with the 1940 Act, including a code of ethics. In addition, a registered fund must have a written investment advisory agreement with an investment adviser, and the agreement must be approved at least annually by the fund’s board.

17 What are the investment and borrowing restrictions on retail funds?

Fundamental investment policies

A registered fund’s registration statement must recite the fund’s fundamental investment policies with respect to certain types of investments and investment practices, and the fund cannot deviate from these policies without a shareholder vote. Fundamental investment policies include:

• diversification (ie, whether a registered fund will operate as a diversified or non-diversified fund);

• concentration in a particular industry or group of industries;

• policies around borrowing money and the issuance of senior securities;

• underwriting;

• making loans; and

• investing in commodities or real estate.

To be considered ‘diversified’, at least 75 per cent of a registered fund’s total assets must be represented by cash, government securities, securities of other investment companies and securities of other issuers, subject to certain additional restrictions.

Non-fundamental investment policies

In addition to fundamental investment policies, a registered fund may adopt non-fundamental investment limitations, which may be changed by the fund’s board without shareholder approval. Common non-fundamental investment policies include ‘names rule’ policies and policies regarding a registered fund’s investments in illiquid securities (as described below).

Names rule policy

Under the 1940 Act, a registered fund that has a name suggesting that the fund focuses its investments in a particular type of investment or in a particular industry must adopt a policy to invest, under normal circumstances, at least 80 per cent of the value of its assets in the particular type of investments suggested by the fund’s name. Likewise, if a registered fund’s name suggests that the fund focuses its investments in a particular country or geographic region, at least 80 per cent of the value of its assets must be invested in assets that are tied economically to the particular country or geographic region.

Illiquid securities

According to SEC staff guidance, a registered open-ended fund may invest no more than 15 per cent of its assets in illiquid securities. Many registered funds have adopted non-fundamental investment policies in order to comply with this guidance. In 2016, the SEC adopted a new Liquidity Rule, which codifies the 15 per cent limit on illiquid investments and requires registered funds (including ETFs, but excluding money market and registered closed-ended funds) to establish and implement written liquidity risk management programmes (see ‘Update and trends’).

Borrowing

A registered open-ended fund may borrow money, provided that the borrowing is from a bank and the fund has asset coverage at least equal to 300 per cent of such borrowings. A registered closed-ended fund may borrow money from a bank or from a private source, and must also meet the asset coverage limitation of 300 per cent. A registered closed-ended fund may also issue preferred shares, subject to a 200 per cent asset coverage limitation.

Certain financing and derivative transactions such as reverse repurchase agreements, short sales, options, forwards and futures, can create economic and legal exposure that are similar in some respects to the issuance of senior securities. To address this concern, the SEC and its staff have generally taken the position that these transactions will not be subject to the limitations on borrowing and issuing senior securities if a registered fund segregates liquid assets sufficient to meet its future obligations arising from such transactions.

18 What is the tax treatment of retail funds? Are exemptions available?

The tax treatment of registered funds is governed by the Internal Revenue Code (IRC). Under the IRC, registered funds receive pass-through tax treatment, meaning that the fund itself is not subject to federal income tax, but rather that income and capital gains are passed through to the fund’s investors. To qualify as a regulated investment company, and therefore receive pass-through tax treatment, a fund must meet certain eligibility requirements.

19 Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of a registered fund must be held by a ‘qualified custodian’ under conditions designed to assure the safety of the fund’s assets. Assets may also be posted to a futures commission merchant to support trading futures and swaps, or held by a foreign custodian that segregates fund assets from its proprietary assets.

20 What are the main governance requirements for a retail fund formed in your jurisdiction?

All registered funds must establish a board of directors or trustees. At least 40 per cent of the board members must be independent; however, to take advantage of many exemptive rules under the 1940 Act, a majority of the board’s members must be independent. The board retains overall responsibility for the operation of the fund, which specifically includes the review and approval of the fund’s advisory contract or contracts, underwriting agreements, distribution plans and related agreements, the selection of the fund’s independent auditors and oversight of potential risks and conflicts faced by the fund. Although the board is not involved in the day-to-day management of the fund, it is also responsible for approving the fund’s compliance policies and procedures.

All registered funds must designate an individual as chief compliance officer (CCO). The CCO is tasked with administering the fund’s compliance policies and procedures and must have sufficient authority to compel others to adhere to them. The CCO reviews the adequacy and application of the compliance policies and procedures, and provides an annual written report to the fund’s board.

21 What are the periodic reporting requirements for retail funds?

Registered funds must maintain registration statements with the SEC, and are also required to file periodic reports including annual and semi-annual shareholder reports with the following detailed financial information:

• Form N-CSR: disclosure of a fund’s complete portfolio holdings required within 10 days of delivery of any semi-annual or annual shareholder report;

• Form N-PX: annual disclosure of the proxy record for all portfolio securities; and

• Form N-MFP: monthly disclosure of portfolio holdings and other information required for money market funds.

In 2016, the SEC imposed extensive new disclosure and reporting obligations for most registered funds. In addition to amending existing forms, the SEC adopted three new forms:

• Form N-PORT: portfolio-wide and position-level disclosure of holdings data filed monthly;

• Form N-CEN: census-type disclosure filed annually; and

• Form N-LIQUID: confidential disclosures required by the Liquidity Rule upon certain triggering events.

22 Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Registered open-ended funds (except ETFs) may set minimum investment requirements. Minimum investment requirements are typically related to the type of investor the fund intends a share class to be sold to (eg, shares with a higher minimum typically will be marketed or sold to high net worth individuals or institutional investors). Although a share class may have a distinct investment minimum and certain expenses may vary by share class, all share classes of a fund must charge the same advisory fee. In addition, a registered fund’s board may adopt a policy of not selling shares to certain investors whose ownership in the fund may be disruptive to the fund’s operations (eg, market timers that exploit pricing inefficiencies).

A registered fund generally must pay redemption proceeds to a shareholder within seven days of receiving the redemption request. Exceptions exist in certain instances (eg, when the SEC issues an order delaying redemptions to protect shareholders in the fund). Registered funds are permitted to charge a redemption fee when shareholders redeem; however, the SEC has limited the fee to 2 per cent.

Registered closed-ended funds do not issue redeemable securities.

Non-retail pooled funds

23 What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Most funds that are excluded from regulation under the 1940 Act are referred to as ‘private funds’ regardless of the investment strategy pursued by the fund. Private funds may be organised in various forms, including as limited partnerships, limited liability companies (LLCs) and statutory trusts. Private funds can also be organised in non-US jurisdictions. The most common jurisdictions are Delaware for domestic funds and the Cayman Islands for offshore funds.

Most domestic funds are organised as Delaware limited partnerships, which have a general partner (GP) or sponsor that is responsible for the management of the private fund, while the limited partners (LPs) are passive investors. Typically, the GP delegates management responsibility to an investment adviser via an investment management agreement (IMA).

Delaware limited partnerships are formed under the Delaware Revised Uniform Limited Partnership Act by filing a certificate of limited partnership signed by the GP. The limited partnership agreement (LPA), the IMA and other organisational documents are not publicly filed. A Delaware limited partnership must maintain a registered agent and office in Delaware; however, most limited partnerships hire a service provider to satisfy this requirement. LLCs are substantially similar to limited partnerships, but receive different tax treatment in certain jurisdictions.

24 What are the key laws and other sets of rules that govern non-retail funds?

Many of the key rules that govern the activities of private funds relate to the perfection and maintenance of their exceptions from US federal securities laws and the obligations they impose on registered funds.

Private funds rely on exceptions from the registration provisions of the 1940 Act, most commonly section 3(c)(1) and section 3(c)(7). Section 3(c)(1) is an exception available to a fund with 100 or fewer investors, and section 3(c)(7) is an exception available to a fund offered only to ‘qualified purchasers’ (generally, natural persons with US$5 million in investments or institutions with US$25 million in investments). To rely on these exceptions, private funds must also avoid conducting a public offering and registering the sale of their securities under the 1933 Act.

The SEC has promulgated a set of rules under the 1933 Act, collectively designated Regulation D, that provide a safe harbour for private offerings. Regulation D generally requires that a private offering be directed exclusively to ‘accredited investors’, although non-accredited investors may be admitted under certain circumstances. Historically, private funds could not use general solicitation or general advertising, including offerings made via the radio, newspaper or any other public medium. However, the SEC has recently allowed for the use of general solicitation, subject to certain conditions, including enhanced requirements to ensure that sales are made only to accredited investors.

There are eight categories of accredited investors, although, in practice, most investors typically fall under one of the following:

• an individual with a net worth (or joint net worth with spouse) in excess of US$1 million, excluding the value of their primary residence;

• an individual with income in excess of US$200,000 (or US$300,000 joint income with spouse) in each of the previous two years and who reasonably expects to have income in excess of US$200,000 (or joint income in excess of US$300,000) in the current year; and

• a corporation, partnership or LLC with assets in excess of US$5 million that was not formed for the specific purpose of acquiring the securities offered.

Private funds structured as limited partnerships are governed by an LPA, which provides a framework for the operations and structure of the limited partnership, and grants the GP authority to enter into agreements on behalf of the LPs. A private fund’s principal offering document is its private placement memorandum, which provides investors with information regarding the fund.

Private funds are excepted from the governance and other restrictions of the 1940 Act; consequently sponsors enjoy extraordinary latitude in structuring the operations of the fund. However, managers of private funds (other than certain private funds that invest in real estate) are investment advisers. All investment advisers operating in the US (regardless of registration status) are fiduciaries to their clients and are, among other things, subject to anti-fraud provisions of federal and state law.

25 Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

No. Private funds are not subject to authorisation or licensing requirements in the US, although funds that seek to rely on the safe harbour provisions of Regulation D discussed above must make a brief notice filing known as Form D.

26 Who can market non-retail funds? To whom can they be marketed?

As described in question 7, a person engaged in the business of marketing a private fund in the US is generally subject to registration as a broker-dealer, although a limited ‘issuer exemption’ may be available to personnel of the sponsor. Private funds are generally marketed only to accredited investors or qualified purchasers, as described in question 24.

27 Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

The private offering exemption and rules discussed in questions 24 and 26 effectively restrict private funds from offering securities to investors without a minimum threshold of assets or income.

28 Are there any special requirements that apply to managers or operators of non-retail funds?

Generally no, except that if a private fund is considered to be ‘plan assets’, the manager of the fund generally must comply with certain ERISA requirements. The requirements of ERISA and when a fund’s assets will be treated as plan assets are discussed in question 1.

29 What is the tax treatment of non-retail funds? Are any exemptions available?

Like registered funds, most private funds organised as LPs or LLCs receive pass-through tax treatment under the IRC, meaning that the fund itself is not subject to federal income tax, but rather income and capital gains are passed through to the fund’s investors. See question 39 for a discussion of tax withholding rules applicable to foreign investors in private funds.

30 Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of a private fund do not need to be held by a separate local custodian; however, in order to comply with the ‘custody rule’ under the Advisers Act, a fund manager that is a registered investment adviser will generally maintain the assets of a private fund with a qualified custodian, and, among other things, will distribute the fund’s audited financial statements to investors within 120 days of the fund’s fiscal year end.

31 What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The private fund’s GP has broad authority over the operations of the fund, subject to any limitations provided in the LPA. Unlike registered funds, US private funds are not required to have a board of directors or trustees; however, under state law and the Advisers Act, the GP owes certain fiduciary duties to each LP. Many LPAs of private equity and real estate private funds will establish an ‘advisory committee’ of LPs that can receive disclosure or consent to conflicts of interest, or both, that arise during the life of the fund.

32 What are the periodic reporting requirements for non-retail funds?

Registered investment advisers must identify the private funds they manage on Form ADV, and must disclose certain information about the private fund, including the types, size, leverage, liquidity, and the types of investors, on Form ADV or Form PF, or both. Form PF is required for all registered investment advisers with at least US$150 million in private fund assets under management. A private fund’s LPA will also typically provide for certain reports to be provided to the LPs, including financial statements, performance reports and annual tax reports.

Separately managed accounts

33 How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts (SMAs) are typically managed by a registered investment adviser. The adviser will typically enter into an investment management agreement with a client that grants the adviser authority to manage the client’s assets in accordance with a designated investment strategy. Institutional investors in the US typically hire a separate custodian to hold assets and assist with the administration of the account, and will hire an investment adviser directly. Retail SMAs are frequently sponsored by a broker-dealer that is responsible for the operations, custody and administration of the account and for engaging an investment adviser on behalf of account holders.

34 What are the key legal issues to be determined when structuring a separately managed account?

An investment management agreement for an SMA should define the investment strategy to be employed by the investment adviser and identify any investment policies and restrictions that must be observed by the investment adviser when managing the account. In addition, the agreement generally should address, among other things, the following topics:

• appointment (and acceptance) of investment manager as investment adviser to the client;

• delineation of voting responsibilities between adviser and client with respect to corporate actions, proxy voting and class actions;

• authorisation to select trading counterparties, generate research from brokerage and ‘block’ trades, as applicable;

• delivery of Form ADV to the client;

• calculation of management fees and time frame for payment;

• indemnification and liability standard;

• ERISA obligations (if the SMA client is a benefit plan investor); and

• ‘assignment provision’: the Advisers Act prohibits the assignment of an advisory agreement by the adviser without client consent. The assignment provision should define the term ‘assignment’ within the meaning under the Advisers Act and allow flexibility for negative consent.

Additional issues arise in the context of ‘wrap fee’ programmes, which charge investors a bundled fee, based on a percentage of assets, for investment advice and brokerage through a ‘sponsor’ of the programme. For example, advisers that provide discretionary advice to multiple clients using a similar strategy must be cautious to avoid the creation of an unregistered investment company.

An adviser must also be cognisant of its fiduciary duties to clients, including the obligation to disclose all material conflicts of interests. An adviser also owes a duty to seek best execution for securities transactions. ‘Soft dollar’ arrangements are permitted under US law, subject to certain conditions, including that the adviser makes a good faith determination that trading commissions borne by clients are reasonable in relation to the value of products and services received by the adviser from trading counterparties.

35 Is the management or marketing of separately managed accounts regulated in your jurisdiction?

Investment advisers owe the same fiduciary duties to fund clients and SMA clients, but the marketing of SMA strategies is governed by the Advisers Act, rather than the Exchange Act and FINRA rules. An SEC advertising rule expands on the anti-fraud provisions of the Advisers Act, and an intricate disclosure regime, particularly with respect to the presentation of investment performance, has developed over several decades of guidance from SEC staff and enforcement actions. Certain record-keeping obligations also apply with respect to materials that include performance.

In addition, many institutional managers choose to comply with CFA Institute’s Global Investment Performance Standards (GIPS). GIPS are voluntary, ethical principles for the reporting of investment performance results and are designed to facilitate apples-to-apples comparison of investment performance. While the SEC does not formally endorse GIPS compliance, it will bring enforcement actions against firms that claim GIPS compliance, but do not adhere to the Standards.

General

36 Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

In October 2017, the US Department of the Treasury (the Treasury) released a report summarising and providing recommendations regarding certain regulations governing the US financial system, including regulations governing the US fund management industry. Although the SEC is not required to act on these recommendations, the Treasury suggested that the SEC consider, among other things, rules to simplify the creation of ETFs, modernisation of shareholder reporting and rules aimed at promoting the creation of registered closed-ended funds that invest in smaller public companies and private companies. In addition, the Treasury report recommended that the SEC and the CFTC work to limit the cross-border application of contradictory rules by harmonising their regulations with the rules of non-US jurisdictions.

In April 2018, the SEC proposed a package of new rules and interpretations designed to define and describe retail investors’ relationships with investment advisers and broker-dealers. First, under a new proposed rule called Regulation Best Interest, a broker-dealer would be required to act in the best interests of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations. This ‘best interest’ duty would be satisfied if, among other things, the broker-dealer:

• discloses to the retail customer the material facts relating to the scope and terms of the relationship, including any material conflicts of interest;

• exercises reasonable diligence, care, skill and prudence when making a recommendation; and

• establishes and maintains written policies and procedures designed to identify, disclose and eliminate material conflicts of interest associated with the recommendation.

Second, the SEC proposed new and amended rules that would require investment advisers and broker-dealers to provide to retail investors a customer or client relationship summary. Form CRS would provide retail investors with a brief summary regarding their relationship to their investment adviser or broker-dealer and would, among other things, disclose the fees and expenses associated with the services provided and their standard of conduct and would supplement other more detailed disclosures. Finally, the SEC also proposed an interpretation seeking to reaffirm, and in some cases clarify, aspects of the fiduciary duty that investment advisers currently owe to their clients under existing laws and regulations. The SEC is seeking public comments on these new rule proposals and interpretations until 7 August 2018.

37 Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Registered closed-ended funds and ETFs are the only type of registered funds listed on an exchange. Private funds are not listed on an exchange.

Each exchange imposes various requirements for the listing of fund shares. The New York Stock Exchange, for example, requires certain corporate governance measures (ie, the fund must have an independent audit committee), annual shareholder meetings and reporting with respect to holdings of fund shares by certain insiders. Additionally, an annual certification is provided to the exchange to indicate compliance with the listing requirements.

38 Is it possible to redomicile an overseas vehicle in your jurisdiction?

It is possible to redomicile an overseas vehicle in the US, although the process will vary depending on state law in the chosen state of incorporation.

39 Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

Foreign investors generally may invest in US-registered or private funds without limitation, although certain income paid by such funds to the foreign investors may be subject to US withholding tax of 30 per cent (or at a lower rate under an applicable tax treaty). There are exemptions from such US withholding tax, including for certain items of capital gain and interest income earned through a private fund, as well as for registered fund distributions of net capital gains, net short-term capital gain dividends and interest-related dividends. The withholding tax will apply to other registered fund dividends and on US corporate dividends. Foreign investors may also be subject to regular US income tax on certain types of business income earned through private funds and on gains from investments related to US real property.

US investors may invest in foreign private funds or another country’s registered fund equivalent, which may subject the investor to foreign tax withholding. In addition, there may be adverse US income tax treatment for a US taxable investor who invests in certain foreign private funds and registered fund equivalents that are not treated as pass-through entities for purposes of US tax law under the passive foreign investment company rules.

Update and trends

Cybersecurity

In its 2018 examination priorities, the SEC staff indicated that its examinations would continue to focus on cybersecurity issues, including with respect to governance and risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response. The SEC staff also stated that it would seek to keep pace with advancing technology in order to monitor for cybersecurity risks, engage with the industry in efforts to help combat cybersecurity attacks and prevent investor harm.

Liquidity Rule

As discussed in question 17, the SEC recently adopted the Liquidity Rule, which requires registered funds (other than registered closed-ended funds) to, among other things, establish a liquidity risk management programme. The compliance dates for the provisions of the rule have recently been in flux. As of 22 February 2018, the compliance dates for the classification, highly liquid investment minimum, board approval and related reporting requirements on Form N-LIQUID and liquidity disclosures on Form N-PORT are expected to be 1 June 2019 for larger entities and 1 December 2019 for smaller entities. For all other provisions of the rule, the compliance dates are 1 December 2018 for larger entities and 1 June 2019 for smaller entities.

Cryptocurrency and initial coin offerings (ICOs)

In December 2017, the chairman of the SEC released a statement on the recent growth of ICOs and the potential for regulation of tokens offered in ICOs as securities under US securities laws. The SEC simultaneously filed an Order against a cryptocurrency issuer concluding that the issuance of a particular token constituted an unregistered offering of securities. Amid regulatory uncertainty, the SEC is expected to continue to give careful consideration to certain disclosures and whether any given ICO is subject to US securities laws.

Qualified Financial Contracts Rule

New rules set to be phased-in starting on 1 January 2019 will require certain US banks to include terms in a range of financial contracts that will delay or restrict a fund’s termination and other rights in the event that the bank or one or more of its affiliates become subject to insolvency proceedings. The implementation of these rules by regulated banks could limit a fund’s ability to exercise cross-default rights and may cause funds to reconsider the risks presented by the use of certain derivative instruments.

Fiduciary Rule reform and Regulation Best Interest

As discussed in question 36, the SEC has proposed new rules and interpretations related to investment advisers’ and broker-dealers’ relationships with their retail customers. The regulatory package is designed to enhance transparency by, among other things, requiring investment advisers and broker-dealers to provide certain disclosures, exercise due care and address conflicts of interest arising from the relationships and services provided.

Michael W McGrath

michael.mcgrath@klgates.com

Clair E Pagnano

clair.pagnano@klgates.com

Pablo J Man

pablo.man@klgates.com

State Street Financial Center

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Boston

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Fax: +1 617 261 3175

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