Collective Investment Schemes in Securities and Other Financial Instruments

Date: 2006-06-30 | Page: 415

Collective Investment Schemes in Securities and Other Financial Instruments

Single Article: Approval of the Law contained in Decree No. 15317 dated 2005/10/05 concerning Collective Investment Schemes in Securities and Other Financial Instruments, as amended by the Joint Parliamentary Committees. This Law shall take effect upon its publication in the Official Gazette.

Signed: Emile Lahoud (President of the Republic) – 9 December 2005 Signed: Fouad Siniora (Prime Minister) – [Repeated]

Chapter One: General Provisions Article 1: For the purpose of applying this Law, the following terms shall carry the meanings set forth opposite each: "The Scheme": A collective investment scheme in securities and other financial instruments, whose purpose is strictly limited to the collective investment of funds received from the public, in accordance with the risk distribution principle, and which takes the form of a "Fund" or a "Company". "The Fund": A mutual fund for investment in securities and other financial instruments. "The Company": A variable capital company specialized in investing in securities and other financial instruments. "The Manager": The management company entrusted with managing the "Fund" or the "Company". "The Depositary": The institution where the assets of the "Fund" or the "Company" are deposited. "The Islamic Scheme": An Islamic collective investment scheme in Islamic financial instruments and other financial instruments, whose purpose is strictly limited to the collective investment of funds received from investors in accordance with the risk distribution principle and Sharia law principles, provided they do not conflict with applicable legal and regulatory provisions. The "Islamic Scheme" takes the form of an "Islamic Investment Fund" or an "Islamic Investment Company". "Islamic Investment Fund": A mutual fund specialized in investing in Islamic financial instruments and other financial instruments in accordance with Sharia law. "Islamic Investment Company": A variable capital company specialized in investing in Islamic financial instruments and other financial instruments in accordance with Sharia law. "Islamic Financial Instruments": Equal-value certificates issued and traded in accordance with Sharia law, representing common shares in the ownership of tangible assets, benefits, services, or a specific project/investment activity. "Mudarabah": An agreement between the capital provider and the entrepreneur, where the former provides capital and the latter provides labor/work, with profit sharing as agreed. (Footnote 1: Text of the Law published in Official Gazette No. 57 dated 2005/12/15, corrected per Official Gazette No. 1 dated 2006/1/5.)

Article 2: This Law applies to all "Schemes" and "Islamic Schemes" domiciled in Lebanon. Article 3: A "Scheme" is considered domiciled in Lebanon when the head office and general management of the "Manager" or the "Company" are located in Lebanon.

Chapter Two: Mutual Funds for Investment in Securities and Other Financial Instruments Article 4:

1. The "Fund" does not enjoy legal personality and is considered joint ownership in securities, managed according to the risk distribution principle. This ownership is represented by negotiable shares. The owners of shares are not liable for the "Fund's" debts beyond their capital contribution.
2. Articles 824 to 843 of the Obligations and Contracts Law regarding partnership/commercial companies, and Articles 247 to 253 of the Commercial Law regarding partnership companies (société en participation), do not apply to the "Fund".

Article 5:

1. The "Manager" establishes the "Fund" and drafts its system/rules.
2. The "Fund" is not liable for any obligations incurred by the "Manager" or by the share owners. The "Fund" bears exclusively and solely the obligations and expenses expressly stipulated in its system/rules.
3. Subscription to or acquisition of any share automatically implies acceptance of the "Fund's" system/rules.

Article 6:

1. Management of the "Fund" is entrusted to specialized companies.
2. The "Manager" is prohibited from using the "Fund's" assets for its own needs or merging its private investments with those of the "Fund".
3. The "Manager" represents the "Fund" vis-à-vis third parties and may appear in court to protect or defend the rights/interests of share owners.
4. The "Manager" must manage the "Fund" in accordance with its system/rules and exclusively for the benefit of share owners.

Article 7:

1. The "Manager" issues either registered certificates or registered/bearer bonds representing a share or group of shares in the "Fund".
2. The certificates and bonds issued by the "Manager" are signed.
3. Signing may be performed via mechanical or electronic means, according to the form and procedures specified in the "Fund's" system/rules.

Article 8:

1. Shares are issued at establishment at a price determined by dividing the net value of the "Fund's" assets by the number of issued shares. Net establishment expenses and commissions may be added to this value, subject to the Central Bank setting the maximum commission limit and collection procedures.
2. Shares cannot be issued before depositing an amount equivalent to their net issuance price into the "Fund's" assets, within the periods noted in its system and according to conditions set by the Central Bank. This prohibition does not prevent distributing free shares to existing shareholders.

Article 9: The market value of a share is determined based on the securities and financial instruments constituting the "Fund". If these are listed on a regulated financial market, they are valued at the last announced price. For unlisted securities/instruments or those temporarily suspended from trading, valuation is based on potential sale value, estimated according to international accounting standards, particularly the prudence principle. The "Manager" may not buy/sell assets except at prices determined according to the principles and criteria in this Article.

Article 10:

1. Share owners or their creditors cannot request the division or liquidation of the "Fund".
2. The "Fund" may repurchase issued shares upon request by any share owner, if its system/rules permit.
3. Repurchase is based on a price calculated according to Article 9 above.

Article 11:

1. Subject to Article 8(2) and Article 10(2), the following measures may be taken: a. The "Manager" may temporarily suspend share repurchase by the "Fund" if exceptional circumstances and shareholder interests dictate, per conditions in the "Fund's" system. b. The "Manager" must promptly notify the Central Bank of its decision if any condition in (a) is met. c. The Central Bank may, serving shareholder interests and public interest, suspend share repurchase or new issuance (or both), especially if it finds non-compliance with legislative, regulatory, or contractual provisions governing the "Fund's" activity and proper operation.
2. Issuance or repurchase of shares is prohibited in the following cases: a. During periods when no "Depositary" or "Manager" exists for the "Fund". b. From the date the "Fund" enters liquidation, or upon a court order supervising management operations. c. From the date the "Manager" or "Depositary" benefits from a moratorium (consensual composition) or bankruptcy declaration.

Article 12:

1. The "Manager" drafts the "Fund's" system/rules.
2. The "Fund's" system must include at least the following information: a. Name of the "Fund", "Manager", and "Depositary"; duration of the "Fund". b. Investment policy to be followed per set objectives and guiding criteria. c. Risk distribution policy. d. Fees and remuneration the "Manager" may charge, and calculation method (all consolidated into a single, independent, explicit line item in the system). e. Provisions on information disclosure methods and frequency. f. Dates for closing the "Fund's" accounts. g. Dissolution cases, in addition to statutory reasons. h. Methods for amending the "Fund's" system. i. Principles and rules for share issuance. j. Procedures for repurchasing shares (if stipulated) and conditions for purchase, suspension, and repurchase. k. Clarification of the nature and degree of risks/obligations associated with offered investments. l. Determination of the currency for issuance, repurchase, net asset valuation, and accounting. m. Cases leading to suspension of sales and share repurchase by the "Fund".

Article 13:

1. The "Manager" acts in this capacity, indicating it acts on behalf of the "Fund".
2. The "Manager" fulfills its obligations under the liability of a hired agent (mandatary).
3. The "Manager" exercises all rights attached to the securities and financial instruments comprising its portfolio.

Article 14:

1. The "Fund's" assets must be deposited with a "Depositary" meeting Central Bank conditions.
2. The "Depositary" must be a bank, financial institution, or any other institution meeting Central Bank conditions.
3. The "Depositary" remains liable even if it delivers part or all of the deposited assets to a third party.

Article 15: The "Depositary" performs all routine administration actions regarding the "Fund's" assets and additionally: a. Verifies that issuance, sales, repurchases, and cancellations of shares executed for/benefiting the "Fund" comply with the Law and its system. b. Verifies that share valuation complies with this Law and the "Fund's" system. c. Executes the "Manager's" instructions unless contrary to the Law or system. d. Verifies that values corresponding to ongoing asset transactions are delivered within the periods specified in the Central Bank-approved system. e. Verifies that the "Fund's" income is used as specified in its system.

Article 16: The duties of the "Manager" and "Depositary" terminate in each case as follows: a. If the "Manager" withdraws, provided another qualified "Manager" replaces it. b. If the "Depositary" withdraws voluntarily or by the "Manager's" decision, it must take all necessary measures to protect shareholders' interests until another qualified "Depositary" is appointed. c. If the "Manager" or "Depositary" benefits from a moratorium, postponement of payment, bankruptcy declaration, management supervision, or liquidation. d. If either no longer meets Central Bank conditions. e. In any other case specified for this purpose in the "Fund's" system.

Article 17: The "Manager" must promptly notify the Central Bank if the market value of the "Fund's" shares drops by 25% from their beginning-of-financial-year value. In this specific case, the Central Bank may, by decision and considering new circumstances, compel the "Manager" to place the "Fund" into liquidation. This decision is not subject to appeal or ordinary/extraordinary review methods.

Article 18:

1. The "Fund" enters liquidation if any of the following occur: a. Expiry of the period specified in its system. b. Cessation of operations by either "Manager" or "Depositary" per cases in Article 16(c, d, e), without a replacement selected within Central Bank deadlines. c. Declaration of the "Manager's" bankruptcy. d. Drop in market value of shares to less than 75% of their beginning-of-year value. e. Any other case specified in the "Fund's" system.
2. Upon liquidation, the "Manager" (or "Depositary" if necessary) acts as liquidator. If not, the court appoints a liquidator upon request by any share holder.
3. The "Manager" (or "Depositary") must promptly declare and publish the liquidation status. If not, publication is done by the Central Bank at the "Manager's" expense.
4. Issuance and repurchase of shares are prohibited upon the occurrence triggering liquidation, under penalty of nullity.

Article 19: The Central Bank sets the minimum asset value for the "Fund" at establishment and may adjust it.

Chapter Three: Variable Capital Investment Companies Specialized in Investing in Securities and Other Financial Instruments Article 20: For applying this Law, a variable capital investment company specialized in securities/financial instruments refers to covered companies meeting:

1. Restricted purpose of investing funds in securities/financial instruments for risk distribution to protect shareholders' investments.
2. Registered and negotiable shares.
3. System prohibiting existing shareholders from claiming pre-emption rights if the company issues new shares or repurchases its own.

Article 21: The Central Board of the Central Bank sets the minimum capital, fully paid in cash at the Central Bank within six months of board approval. The Board may adjust this minimum and grant grace periods to newly established companies.

Article 22:

1. The "Company" may issue new shares at any time, unless its system stipulates otherwise.
2. Shares are issued and repurchased by the "Company" at any time upon request by shareholders, at a price determined by dividing net asset value by issued shares.
3. Shares cannot be issued before depositing an amount equivalent to their net issuance price into the "Company's" account, within periods noted in its Central Bank-approved system. This does not prevent distributing free shares to shareholders.
4. The company's articles of association must include: a. Payment deadlines for share issuance/repurchase and principles/procedures for valuing net assets (per Article 41). b. Conditions for suspending issuance/repurchase (beyond paragraph 2) and statutory suspension reasons. c. Explicit reference to the Central Bank's authority to suspend repurchase if non-compliance with legislative/regulatory provisions is found, serving shareholders and public interest. d. Issuance/repurchase price calculation rate.
5. Full share value must be paid in cash at the Central Bank upon establishment.
6. The "Company" must buy/sell assets at prices determined per valuation principles in Article 41.

Article 23: Changes to the "Company's" capital occur automatically without requiring a general meeting or board resolution, and without adhering to publication/registration procedures for increasing/decreasing capital of covered companies.

Article 24:

1. If the "Company's" capital drops to two-thirds of its beginning-of-year value, it must convene an extraordinary general meeting within 15 days. Notice is published in two local newspapers at least seven days prior. The meeting is legally constituted by attendees and decisions are taken by majority of represented shares.
2. If capital drops to 75% of its beginning-of-year value, the "Company" must submit dissolution to the extraordinary general meeting within 15 days. The meeting is legally constituted by attendees, and dissolution may be decided by shareholders holding 25% of represented shares.

Article 25: The "Company" is not required to form a legal reserve and is exempt from Article 243 of the Commercial Code.

Article 26: The Chairman of the Board and/or General Manager must meet Central Bank conditions.

Article 27:

1. The "Company's" assets are held by one independent "Depositary" meeting Central Bank conditions.
2. The articles of association specify the "Depositary" and replacement procedures without amending the system.
3. The "Depositary" remains liable even if it delivers part/all assets to a third party.
4. The "Depositary" must perform: a. Verifying company resolutions comply with articles of association. b. Verifying issuance, sales, repurchases, and cancellations comply with the Law and articles. c. Verifying values for ongoing transactions are delivered within agreed periods. d. Verifying company income is allocated as specified in its articles.

Article 28: The "Depositary" must meet Central Bank conditions (bank, financial institution, or other).

Article 29: The "Depositary" remains liable to shareholders for any damage resulting from wrongful or non-performance of its obligations.

Article 30:

1. The "Depositary's" duties terminate if: a. It withdraws voluntarily or by the "Company's" decision, taking necessary measures to protect shareholders until another qualified "Depositary" is appointed within three months. b. Bankruptcy of the "Company" or "Depositary" is declared (from judgment date, moratorium/postponement/liquidation request date, or court order ending management). c. It no longer meets Central Bank conditions.
2. The "Depositary" must continue duties until a replacement is appointed, except in bankruptcy declaration cases or other system-specified cases.

Article 31: The "Depositary" must act exclusively for the benefit of shareholders while performing its duties.

Chapter Four: Common Provisions Article 32: Establishment of any "Scheme" in Lebanon and opening of any "Company" branch require prior licensing from the Central Bank. The "Fund's" system or the "Company's" articles of association (or any amendment) require prior Central Bank approval. The Central Bank grants licenses/approvals as it deems serving public interest, exercising discretionary power.

Article 33:

1. Both the "Fund"/"Manager" and any "Company" must provide the Central Bank with all requested documents before/during operations in Lebanon.
2. All collective investment schemes operating under foreign laws are prohibited from offering shares/shares to the public in Lebanon unless meeting: a. Legal permanent supervision by a designated authority in the country of origin. b. A license from the Central Bank.

Article 34: Inducing any client to invest in collective investment schemes is prohibited unless provided with all information enabling informed understanding of obligations, risks, and burdens associated with the offered investment.

Article 35: The "Company" may own necessary real estate, subject to the Law on non-Lebanese acquisition of property rights (Decree No. 11614 dated 1969/01/04 and amendments).

Article 36:

• The "Scheme" may not own more than 15% of securities issued by a single issuer.
• The "Scheme" may not invest more than 15% of its assets with one issuer in a specific category of securities, except Lebanese treasury bonds and bonds issued by the Ten Low-Risk Countries (10G). The "Scheme" must ensure investments reflect at least 65% of its policy regarding bond type, geographic distribution, and risk ratio.
• At least 85% of the total investments of variable capital companies must be in liquid financial instruments.
• The Central Bank may adjust ratios, conditions, and criteria per economic circumstances.

Article 37: The "Scheme" may borrow exceptionally to repurchase shares of the "Fund" or "Company", per ratios/conditions set by the Central Board.

Article 38: The "Scheme" may not own shares in other collective investment schemes if their systems/rules conflict with this Law.

Article 39:

1. The "Fund's" system and the "Company's" articles of association specify December 31 each year as the financial account closing date.
2. The "Manager" must appoint an audit commissioner for the "Fund" per procedures/rules for bank auditors.

Article 40: Each "Scheme" must publish:

1. A Prospectus containing information enabling investors to properly evaluate the offered investment.
2. An annual detailed report by the audit commissioner including: status of "Manager"/"Fund"/"Company"; activities for the past year; profit/loss account. Published before March 31 each year.
3. Quarterly reports, published within one month following each quarter's end.

Article 41: The Central Bank sets principles/procedures for valuing net assets of the "Fund" and "Company".

Article 42:

1. The "Fund" and "Company", and all transactions/operations they or third parties perform on their behalf, are exempt from all taxes/fees arising from general/specific provisions (unless expressly excepted or specified herein, particularly paragraphs 2-4).
2. Income tax (Part I of the Income Tax Law) is exempted on profits generated by the "Fund" or "Company", and upon liquidation of either, unless these profits enter revenues of an existing banking/financial institution in Lebanon (considered as deriving from the institution's business).
3. Profits distributed by the "Fund" or "Company" at any time are subject to income tax (Part III of the Income Tax Law).
4. Interest accruing to the "Fund" or "Company" is subject to a 5% withholding tax, per conditions of this law (Article 51 of the 2003 Finance Law and implementing provisions).
5. Except for tax/fee-exempt operations performed by the "Fund" or "Company" on movable/non-movable assets, all related to these assets (including income and profits) remain subject to respective taxes/fees per applicable provisions.

Article 43: "Schemes" and branches of foreign schemes operating in Lebanon are granted a six-month transition period from the publication date in the Official Gazette to comply with this Law, particularly Article 32.

Article 44: Violations of Articles 6(2,3), 8(2), 9, 11(1)(b), 13(1), 14(1), and Articles 32, 33, 34 are subject to imprisonment from six months to three years and/or a fine up to ten times the minimum annual wage.

Chapter Five: Special Provisions for "The Islamic Scheme" Article 45: The "Islamic Investment Fund" is managed under two models: a. Based on "Mudarabah": The "Manager" (entrepreneur) receives a known profit percentage. Losses are borne by the capital provider, and the Manager gets no remuneration for work/effort. If the Manager breaches/trespasses or violates agreed conditions, it bears all resulting losses. b. Based on "Wakalah" (Agency): The "Manager" (agent) receives a fixed commission (pre-determined amount), a percentage of contributions (converted to a lump sum), or a percentage of net asset value. Combinations are permitted where commission is primary and profit share is due upon reaching a threshold.

Article 46: Contrary to Article 6(2), the "Manager" may participate and obtain shares in the Islamic Fund it manages, entitled to a profit share proportional to its participation as capital provider, plus:

1. Another profit share as Mudarabah at the agreed percentage.
2. Its commission if management is based on Wakalah.

Article 47: In addition to Article 12(2), the "Islamic Investment Fund's" system must include: a. Explicit reference to establishment under Sharia law principles. b. Principles governing sales of assets from the Fund to the Manager or interested parties. c. Principles governing joint operations between the Manager and the Fund. d. Principles governing investments the Manager may conduct for its own benefit in the Fund it manages. e. Commission payable to the Manager, strictly either a lump sum or calculated based on a known percentage of the Fund's profit.