Circular

Finanstilsynet's Practice Under the New Securities Funds Act and Regulations, Particularly Regarding Securities Fund Articles of Association

CIRCULAR: 16/2012

DATE: 15.10.2012

THE CIRCULAR APPLIES TO: Management companies

FINANSTILSYNET Postboks 1187 Sentrum 0107 OSLO

---

Finanstilsynet's Practice Under the New Securities Funds Act and Regulations, Particularly Regarding Securities Fund Articles of Association

1. Introduction

The Act of 25 November 2011 No. 44 on Securities Funds entered into force on 1 January 2012. The Act implements EU Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS Directive) and introduces certain other rules that do not have their basis in EEA rules. The Regulation of 21 December 2011 No. 1467 to the Securities Funds Act entered into force simultaneously with the new Securities Funds Act. The Securities Funds Regulation provides supplementary rules to the Securities Funds Act and implements EU supplementary legislation to the UCITS Directive.

This circular addresses what Finanstilsynet will base its decisions on when handling certain types of management matters related to the new regulatory framework, particularly regarding securities fund articles of association, and certain matters of a more practical nature. Finanstilsynet will base its supervisory activities on the interpretations and assessments presented herein.

2. Application for Establishment of a Securities Fund

Articles of Association Determined by the Board

An application for the establishment of a securities fund must include the fund's articles of association determined by the management company's board, cf. Securities Funds Act (vpfl) § 4-1 (2) no. 1. It is not necessary to submit documentation of the board's decision to Finanstilsynet. Finanstilsynet assumes that the application for permission to establish a new securities fund is anchored in the management company's governing bodies prior to submission to Finanstilsynet, and that the articles of association form part of the internal decision-making basis.

Agreement with the Depositary

According to vpfl. § 4-1 (2) no. 2, an application for permission to establish a securities fund must include an agreement with the depositary. It is no longer a requirement that the agreement with the depositary be approved by Finanstilsynet, but Finanstilsynet must assess whether the requirements for the depositary are met when handling the application for permission to establish the fund. An agreement with the depositary may cover multiple funds, cf. Securities Funds Regulation § 10-2. It will therefore be sufficient for the management company's agreement with the depositary to be submitted to Finanstilsynet once. After Finanstilsynet has received the agreement for the first time, it will be sufficient for a subsequent application for the establishment of a new fund if the depositary confirms that it undertakes to act as depositary for the new fund and that the fund will be covered by the agreement previously submitted to Finanstilsynet. Such confirmation must be attached to the application. Previous practice where an updated attachment to the depositary agreement was to be submitted to Finanstilsynet upon activation of the fund is continued.

According to Securities Funds Regulation § 14-3 (4), agreements with depositaries approved by Finanstilsynet before 1 January 2012 must meet the requirements of Regulation § 10-2 by 1 July 2012. Reference is made to the new standard agreement prepared by the Norwegian Securities Funds Association (VFF). Finanstilsynet requests that management companies that have not already submitted updated agreements with depositaries meeting the requirements of the regulation submit them the first time a new securities fund is applied for. Thereafter, the aforementioned practice regarding confirmation from the depositary and submission of an updated attachment may be applied.

3. Requirements for Content of the Securities Fund's Articles of Association

The articles of association form part of the unitholders' contract with the management company and should be central as a steering document for the management of the fund. It remains the case that the articles of association must contain information identifying the specific fund and the fund's most important characteristics. It is therefore important that the management company, in its work on the articles of association, carefully ensures that the wording best reflects the fund's most important features. The Act's requirements for content follow from vpfl. § 4-4 and certain other provisions in the law and regulation. For special funds, there are specific requirements regarding what must be stated in the articles of association, cf. vpfl. § 7-3. The specific requirements for special funds are not discussed in further detail in this circular.

As a guide to what information should be included in the articles of association, emphasis must be placed on whether any changes would be of such a nature that the changes should only be made after the special procedures for amending the articles of association. In this way, unitholders are given the opportunity the law presupposes to take a stance on the changes by participating in the unitholders' meeting and potentially exercising the right to fee-free redemption.

It will simplify Finanstilsynet's case processing if the articles of association are based on a recognizable standard. Reference is made here to the fact that VFF has prepared an industry recommendation on articles of association for securities funds. However, it is important that the management company carefully assesses whether the standard fits the relevant securities fund wholly or partially, and makes necessary adjustments. Finanstilsynet will provide some comments below on the formulation of the securities fund's investment mandate. Information identifying the fund and its most important characteristics appears, among other things, through the checking of financial instruments and markets. In addition, the fund's investment area must be described in more detail as outlined in the recommendation from VFF. Finanstilsynet refers to the fact that the description can be concise, and e.g., can be "the fund is an equity fund that mainly invests in global energy shares," or "the fund is an equity fund that mainly invests in shares and equity certificates listed on Oslo Børs."

Finanstilsynet assumes that the fund will be positioned over time in accordance with the indication of the investment area in the articles of association, for example regarding which markets, sectors, or financial instruments the fund is to invest in. Management companies cannot expand the management mandate as stated in the articles of association through the prospectus or key information, nor narrow the mandate in such a way that the articles of association no longer identify the fund's most important characteristics. It is natural that more comprehensive information about the management mandate is given in the prospectus. A securities fund where the articles of association indicate a broad investment mandate is assumed to be managed broadly and not as a focused fund, such as one that mainly invests in instruments on a more limited market. Without further specification in the articles of association, Finanstilsynet understands the indication of such a wide framework in the way that the fund will actually be managed broadly over time, and that the articles of association thus govern the management of the fund's assets. If the fund is normally invested more narrowly than the outer scope of action indicated through the checking of types of financial instruments and markets, this narrower scope must also be described. For example, for a European equity fund where the checking indicates that the fund may also invest outside Europe, it should be stated that the fund's main purpose is to invest in European shares.

For a sector fund, it should be stated which sector the fund normally invests in. The description of how a fund should be managed can e.g., be that "the fund mainly invests in shares issued by companies worldwide that operate in connection with real estate," or "that it is mainly placed in listed companies with operations directed towards the oil and gas industry."

4. Changes to the Securities Fund's Articles of Association

Information to Unitholders Regarding Amendments to Articles of Association

The notice of meeting for the unitholders' meeting to handle amendments to the articles of association as mentioned in vpfl. § 4-4 (1) no. 2 to 9 must contain information that enables unitholders to make an informed assessment of the proposal, cf. vpfl. § 4-15 (1). This means that the information must be comprehensive and given in a clear and understandable manner for the unitholders.

If a proposal for amendment to the articles of association achieves sufficient majority at the unitholders' meeting, an application for amendment to the articles of association must be sent to Finanstilsynet. The information that was sent to the unitholders must be attached to the application. It follows from vpfl. § 4-14 (4) that Finanstilsynet must approve the changes if the law's requirements for the content of the articles of association and the procedures for amending the articles of association are met. This means that Finanstilsynet must, among other things, control that the information to unitholders contains at least the information specified in § 4-15 (2), and that the information is formulated in such a way that it gives unitholders a good basis for taking a stance on the proposal. Finanstilsynet does not perform prior control of the information to unitholders.

Right to Fee-Free Redemption

Unitholders have the right to fee-free redemption of their shares in connection with amendments to the articles of association as mentioned in vpfl. § 4-4 (1) no. 2 to 9. Name changes are not covered by changes that give the right to fee-free redemption, cf. vpfl. § 4-14 (6). The information to unitholders must provide information about the right to fee-free redemption, cf. vpfl. § 4-15 (2).

Securities Funds Act § 4-14 (6) does not indicate from what point in time the right to fee-free redemption applies. Unitholders must be given the opportunity to redeem fee-free in a period that starts at the latest from the time of publication, and runs until a time before the changes are implemented. The management company may determine that the changes are only implemented a few days after the period for fee-free redemption has expired, but implementation can in that case not occur later than five days after the expiration of the right to fee-free redemption, cf. vpfl. § 4-14 (6).

Finanstilsynet assumes, furthermore, that it may be practical if unitholders are given the right to submit claims for fee-free redemption from the time unitholders receive information about the unitholders' meeting, and that redemption occurs at the share's value at the first calculation of the redemption price after the redemption claim is received.

Information on Times for Implementation of Amendments to Articles of Association and Right to Fee-Free Redemption

The information to unitholders must provide information on the expected time for implementation of the amendment to the articles of association, cf. vpfl. § 4-15 (2) no. 5. The time for implementation depends, among other things, on when Finanstilsynet has finished processing the application. The law does not contain rules on processing time for approval of amendments to articles of association. An application for the establishment of a new securities fund, including approval of new articles of association, must be decided within two months after Finanstilsynet has received a complete application. Correspondingly, applications for amendments to articles of association will normally be processed within two months. Finanstilsynet assumes that in most cases it will be sufficient to inform unitholders that the amendments to the articles of association will be implemented as soon as they are approved by Finanstilsynet, but without setting a specific date. It should be stated in the information to unitholders that the changes are not implemented until they are published, and that the time for implementation will appear in the publication.

It will correspondingly be difficult for the management company to specify the exact time (date) for the expiration of the right to demand fee-free redemption. The information to unitholders must state that unitholders will have the opportunity to submit fee-free redemption claims in a period after publication, and that the deadline for this will appear in the publication itself.

Publication of Amendments to Articles of Association

The legislation no longer contains rules on how approved amendments to articles of association should be published. The management company must therefore find a suitable way to publish the change, e.g., on the company's website, by email, or by letter. The information to unitholders should state how publication will occur.

Securities Funds Where No Redemption Fee is Charged

In many securities funds, unitholders are not charged a redemption fee. Vpfl. § 4-14 (6) clarifies that unitholders have a claim to redemption in connection with amendments to the articles of association, and that this can be done fee-free. It is essential that a unitholder who does not wish to be a unitholder in a fund subject to a process of amending the articles of association is given information about the possibility to redeem before the change is implemented. This applies regardless of whether a redemption fee is charged or not. Finanstilsynet therefore believes that the above guidelines on how the redemption right can be organized should apply generally to redemption in connection with amendments to the articles of association, but with necessary adjustments in the information to unitholders for funds where no redemption fee is charged.

Transition to New Recommended Fund Articles of Association

Most articles of association for existing securities funds are based on standard articles of association under the previous Securities Funds Act. Finanstilsynet will not require management companies to change articles of association for existing funds to the new recommended articles of association from VFF, but assumes that the management company, in connection with future amendments to the articles of association, also updates legal references from the old law to the new law. The management company must simultaneously ensure that the requirements for the content of the articles of association are met, cf. vpfl. § 4-4, including that the articles of association must state when the fund is open for subscription and redemption according to § 4-4 (1) no. 7 and whether the fund should have different share classes according to no. 9. Securities funds that are to be used as sub-funds must, as a main rule, state in their articles of association that the securities fund may invest a maximum of 10 percent of the fund's assets in securities fund shares, cf. vpfl. § 6-2 (1).

Finanstilsynet assumes that updating legal references to the new law and transitioning to new recommended articles of association from VFF must be handled in the unitholders' meeting if changes are made to provisions covered by vpfl. § 4-4 (1) no. 2 to 9.

Application for Amendments to Articles of Association

When applying for approval of changes to fund articles of association, including transition to new recommended articles of association from VFF, the management company must describe which changes are sought approved. Furthermore, the management company must confirm that no other material changes have been made to the sample of articles of association than the changes presented to unitholders, or no other changes than those reported to Finanstilsynet upon submission. A comprehensive description of the changes will simplify case processing at Finanstilsynet.

Finanstilsynet requests that consolidated articles of association, both one marked and one clean version, be attached to the application.

5. Implementation of Unitholders' Meeting

Finanstilsynet assumes that vpfl. § 4-17 must be understood such that management companies must prepare/plan for the holding of a physical meeting in the notice of meeting for the unitholders' meeting.

It is not sufficient that only electronic voting from unitholders is arranged. With only electronic voting, unitholders would be barred from asking questions and discussing matters, as physical meetings allow. The technological possibilities, including electronic voting, are a means to promote participation in the unitholders' meeting and unitholder democracy, but cannot be used as a substitute for holding the actual unitholders' meeting.

Finanstilsynet assumes that the management company informs about the result of the handling in the unitholders' meeting, e.g., by posting information on the company's website.

6. Submission of Key Information and Prospectus to Finanstilsynet

According to vpfl. § 8-2 and 8-4, the prospectus and key information must be sent to Finanstilsynet before subscription is invited. The same applies to changes in the information. The documents are requested to be submitted electronically to post@finanstilsynet.no. The documents will not be reviewed continuously by Finanstilsynet, but will be used in any supervisory visits to the management companies.

Finanstilsynet reminds that as of 1 July 2012, key information must be prepared for all securities funds, cf. Securities Funds Regulation § 14-3 (1), except for special funds, cf. Securities Funds Regulation § 7-3 (1).

Anne Merethe Bellamy Acting Director for Market Supervision

Britt Hjellegjerde Section Chief

Contact Persons: Special Advisor Elisabeth Huse, tel. 22 93 96 57, email: elisabeth.huse@finanstilsynet.no Senior Advisor Hege Bach Hande, tel. 22 93 98 17, email: hege.bach.hande@finanstilsynet.no

---

FINANSTILSYNET Postboks 1187 Sentrum 0107 Oslo POST@FINANSTILSYNET.NO WWW.FINANSTILSYNET.NO