General Reform of the Act on Common Funds – Government proposal published

The government proposal (HE 243/2018) for the general reform of the Act on Common Funds have been given to the parliament 22.11.2018. The proposal concerns enacting the new Act on Common Funds. In addition, changes to the Act on Alternative Investment Funds Managers, the Act on the Financial Supervisory Authority and the Gift Promises Act are proposed. The changes to most of the Acts would be technical.

In addition to national changes, the regulation of the European parliament and of the council on money market funds, the regulation of the European parliament and of the council amending regulation on European venture capital funds and regulation on European social entrepreneurship funds and the regulation of the European parliament and of the council on transparency of securities financing transactions and of reuse and amending Regulation will be implemented nationally.

According to the proposal, the Acts shall enter into force 1.3.2019.

The most relevant changes of the general reform of the Act on Common Funds are presented below.

The scope of the Act on Common Funds will be clarified and the incoherence in the legislation will be removed

Technical solutions:

The new Act on Common Funds is based structurally on the solutions adopted in the Act on Alternative Investment Funds Managers.
The paragraphs will be named, and the numbering goes according to the chapters.

Clarifying the differences between investment funds and alternative investment funds (including special mutual funds):

Regulation concerning special mutual funds is transferred from the Act on Common Funds to the Act on Alternative Investment Funds Managers.
Highlighting the differences between business in accordance with the Directive on Common Funds and AIFM-Directive by connecting the definition of investment funds clearer to a fund in accordance with the Directive on Common Funds and the definition of investment fund operations stronger than before with the investment policies in accordance with the Directive on Common Funds instead of the juridical form of the fund.
Clarifying the definition of investment fund operations, so that, for example, managing an alternative investment fund is not included in the investment fund operations.

Compartments regulated in the Directive on Common Funds shall be allowed in the Act on Common Funds

Regulation allowing compartments (sub-funds) are added to the Act on Common Funds. An investment fund can consist of one or several compartments in ways that are described more closely in the regulation, and the compartments in question can further be divided into unit classes and unit types.
In the compartment structure, an investment fund would consist of one or several compartments, and each of them could have a different investment policy. Similarly, as in the structure of only one fund the compartments could have profit and growth units and unit classes. In the proposed compartment model, the compartments would together form the assets of an investment fund, but the assets of the compartments should be hold separately from each other in accounting.
The same rules would apply to compartments as what has been regulated for investment funds. In the compartment structure, the investment fund would be a so-called umbrella fund.

The administrative burden shall be lightened for the fund management companies

The annual meeting of the unit-holders shall be replaced with a meeting called together upon request. For protection of the unit-holders’ position, it is proposed that a possibility to call together a meeting for the unit-holders shall be preserved, when the initiator is a unit-holder, the board of the fund management company, an independent board member or the accountant.
A fund management company’s duty to give a physical certificate of the fund unit upon the unit-holder’s request is removed.
The accountant’s inspections of the authenticity of the investment fund’s value calculations shall be reduced from six times a year to a model, where the accountant inspects the authenticity annually at least once, and in addition to that, the authenticity of the values at the turn of the year.

The minimum number of unit-holders

The minimum number of unit-holders shall be lowered from 50 unit-holders to 30 unit-holders. The aim is to lower the threshold to enter the field, and at the same time ensure, that investment fund operations are still collective investment operations.
The minimum number of unit-holders should be reached in one year’s time, and it is not possible to apply for extension of this time from the Financial Supervisory Authority.
No changes are proposed to the minimum amount of capital (2M €)

An independent board member instead of a member chosen by the unit-holders

As a consequence of waving the annual unit-holders’ meeting, a board member and accountant appointed by the unit-holders will also be waived.
The regulation about a board member appointed by the unit-holders will be replaced with new regulation about an independent board member.
The independence includes, according to the new regulations, independence from the investment fund, of its controllers and other corporations in the same group of companies as the investment fund, custodians used by the investment fund, the investment firms responsible for portfolio management and generally other investment funds and custodians. The independent board member cannot be:
- an employee of an investment fund or custodian;
- a controller intended in the Accounting Act or a representative of a controller;
- management of a corporation belonging to the same concern as the investment fund;
- management or employee of an investment firm responsible for portfolio management or other similar service provider;
- management or board member of another investment fund or custodian; or
- a spouse, brother, sister, parents or children of the management.
In addition to independence, the board member is required to have general knowledge of investment fund operations and investment service operations, if the investment fund has an operating licence for fund management.
In the future it is required that at least a third of the board members fulfil the requirement of independence.

The restriction of unit-holders’ redemptions

A new liquidity management, the restriction of redemptions, shall be regulated in addition to the suspension of investment fund’s redemptions to management companies as well.
In the future a management company could provide in investment fund’s rules requirements for management company’s redemptions that shall be executed within the investment fund’s opening hours during several days.
The aim is to prevent the detrimental effect on investment fund’s liquidity caused due to an individual extensive redemption and to enable the continuation of smaller redemptions alongside with the extensive redemption instead of managing the redemptions on a first come.

Management company’s right to redeem fund units

In the future, the grounds for management company’s right to redeem fund units in exceptional circumstances without the unit-holder’s assignment or consent can be regulated in the investment fund’s rules in accordance with the further specifications in law and fund rules.

Transition periods for the entry into force and the practical effect

The Act is estimated to enter into force 1.3.2019. According to the proposition there will be a transition period of twelve (12) months for updating the fund rules in accordance with the requirements of the new Act. Insignificant technical changes can be updated later on.
Investment fund shall take measures in order to choose an independent member of the board by the end of year 2020.
Regulation regarding the verification of the correctness of fund unit’s calculated value and the verification of the value before the end of the year shall enter into force at the same time as the Act.
The assignments of the accountant chosen by the unit-holders shall end at the latest by the end of the following accounting period after the entry of the Act.
The unit-holders’ meeting can be preserved even though the requirement to keep it is withdrawn according to the proposition. Should an investment fund waive the unit-holders’ meeting, fund rules shall be updated before the right not to convene unit-holders’ meeting shall be used.
The Financial Supervisory Authority shall inspect the rules of investment funds. Rule amendments shall enter into force within one (1) month from Authority’s confirmation and the unitholders have been informed of the amendments as set forth in the rules. It is likely that the Financial Supervisory Authority will be jammed when the majority of the operators within the field shall amend their rules after the entry of the new Act (presumably) at the beginning of March which may increase the processing time of the confirmation of rule amendments.
It is likely that the rule amendments will not be confirmed in time at least for all operators but for the year 2019 operators shall act in accordance with the old legislation for example regarding unit-holders’ meetings. Thus, the year 2020 would be the first year with the new rules.

Teksti: Olli Kiuru