Regulation on Compensation to Investors and/or the Alternative Investment Fund (Official Gazette No. 16/19 and 150/22 – Unofficial Consolidated Text)

Croatian Financial Services Supervisory Agency, 10000 Zagreb, Franje Račkoga 6, P.O. Box 164, Croatia t: 01 6173 200, f: 01 4811 507, e: info@hanfa.hr, OIB: 49376181407, MB: 02016419, w: www.hanfa.hr REGULATION ON COMPENSATION TO INVESTORS AND/OR THE ALTERNATIVE INVESTMENT FUND (Official Gazette No. 16/19 and 150/22 – Unofficial Consolidated Text)

I. INTRODUCTORY PROVISIONS
Article 1.
This Regulation governs the procedure for compensation that the Alternative Investment Fund Manager (UAIF) is obliged to pay to investors of an Alternative Investment Fund (AIF) and/or the AIF itself in cases of incorrect calculation of net asset value per share or share price, or impermissible breach of investment limits within the meaning of Article 217(3) and (6) of the Law, as well as for damage caused to AIF assets due to UAIF omissions within the meaning of Article 94(1) and (2) of the Law, and for damage incurred by AIF share holders within the meaning of Article 165 of the Law.

II. INCORRECT CALCULATION OF SHARE PRICE
Article 2.
(1) The share price of an AIF is the net asset value per share, calculated in accordance with applicable regulations.
(2) An incorrect calculation of the share price exists when the initially calculated share price of an AIF differs from the subsequently accurately determined share price for the same day.
(3) The period of incorrect calculation is the period during which a material error in calculating the share price under Article 3 of this Regulation existed.

Material Error in Share Price Calculation
Article 3.
(1) The compensation procedure for incorrect share price calculation prescribed by this Regulation is conducted when the difference between the initially calculated and subsequently accurately determined share price for the same day exceeds 1% of the value of the initially calculated share price (material error in share price calculation). (2) Exceptionally from paragraph 1 of this Article, for money funds operating in accordance with Regulation (EU) No 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds, the UAIF is obliged to conduct a compensation procedure when the difference between the initially calculated and subsequently accurately determined share price for the same day exceeds 0.3% of the value of the initially calculated share price, and for bond funds when that difference exceeds 0.7%. (3) The compensation procedure for a material error in share price calculation consists of preparing the compensation plan under Article 7 of this Regulation, delivering the notice under Article 8 to investors, and compensating affected investors and/or the AIF.

Calculation of Overvalued Share Price
Article 4. (NN 150/22)
(1) A calculation of an overvalued share price exists when the initially calculated share price is higher than the subsequently accurately determined share price for the same day.
(2) In the case of an overvalued share price calculation, the UAIF is obliged to compensate the resulting damage to investors who acquired shares in the AIF during the period of incorrect calculation, by paying monetary funds or allocating shares, regardless of whether they are still AIF investors at the time of compensation payment. The UAIF is obliged to define in the AIF rules the situations in which compensation is carried out by monetary payment and those by share allocation. The amount of damage the UAIF is obliged to compensate equals the difference between the initially determined share price and the subsequently accurately calculated share price, multiplied by the number of issued shares during the period of incorrect calculation. (3) In the case of an overvalued share price calculation, the UAIF is obliged to compensate the resulting damage to the AIF when shares in the AIF were redeemed during the period of incorrect calculation. The amount of damage the UAIF is obliged to compensate equals the difference between the initially calculated share price and the subsequently accurately determined share price, multiplied by the number of redeemed shares during the period of incorrect calculation. (4) Compensation shall not be carried out for those investors whose determined damage amount during the period of incorrect calculation is less than 1.50 euros for a public offer AIF, 15.00 euros for a private offer AIF, or 150.00 euros for a venture capital AIF (with private offer).

Calculation of Undervalued Share Price
Article 5. (NN 150/22)
(1) A calculation of an undervalued share price exists when the initially calculated share price is lower than the subsequently accurately determined share price for the same day.
(2) In the case of an undervalued share price calculation, the UAIF is obliged to compensate the resulting damage to investors whose shares were redeemed by it during the period of incorrect calculation, by paying monetary funds or allocating shares, regardless of whether they are still AIF investors at the time of compensation payment. The UAIF is obliged to define in the AIF rules the situations in which compensation is carried out by monetary payment and those by share allocation. The amount of damage the UAIF is obliged to compensate equals the difference between the initially calculated share price and the subsequently accurately determined share price, multiplied by the number of redeemed shares during the period of incorrect calculation. (3) In the case of an undervalued share price calculation, the UAIF is obliged to carry out a correction of the number of allocated shares to investors who acquired shares in the AIF during the period of incorrect calculation. (4) Compensation under paragraph 2 of this Article shall not be carried out for those investors whose determined damage amount during the period of incorrect calculation is less than 1.50 euros for a public offer AIF, 15.00 euros for a private offer AIF, or 150.00 euros for a venture capital AIF (with private offer).

New Calculation of Share Price
Article 6.
The UAIF is obliged to prepare a new calculation of the share price for each day of the period of incorrect calculation.

Compensation Plan
Article 7.
(1) In the cases under Article 3(1) of this Regulation, the UAIF shall without undue delay, and no later than within 60 days of becoming aware of the material error in share price calculation, prepare a compensation plan and deliver it without delay to HANFA, or if the AIF is managed by a UAIF from another Member State, also to the competent authority of the UAIF's home Member State. (2) The compensation plan under paragraph 1 of this Article must contain:

1. an appropriate timeframe, method, and procedures by which it will compensate the incurred damage to the AIF and/or investors,
2. measures that will be taken with the aim of eliminating the identified material errors and compensating for damage,
3. a new calculation of the share price for each day of the period of incorrect calculation, and
4. the number of investors who acquired and/or redeemed shares during the period of incorrect calculation, as well as the individual and total amount of compensation to be paid to investors and/or the AIF, by monetary payment or allocation of a proportional number of shares.

Notification to Investors
Article 8.
(1) When, due to a material error in share price calculation, the UAIF is obliged to compensate certain affected investors, the UAIF is obliged to notify those investors of the existence of a material error in share price calculation from which they should receive compensation.
(2) The notice under paragraph 1 of this Article contains the following information:

1. what is the cause and nature of the material error in share price calculation,
2. the amount of damage and compensation obligation,
3. deadlines and method of compensation.
   (3) The notice under paragraph 1 of this Article is delivered by post or on another appropriate permanent medium in accordance with Article 96 of the Law, within 10 days from the preparation of the compensation plan.

Implementation of Compensation Procedure
Article 9.
(1) After the UAIF has prepared a compensation plan in accordance with Article 7 of this Regulation, it shall without delay proceed to compensate affected investors and/or the AIF.
(2) Costs incurred for the purpose of implementing the compensation procedure and measures for incorrect share price calculation are costs of the UAIF and cannot be charged to the AIF or investors.

III. BREACHES OF INVESTMENT LIMITS
Article 10. (NN 150/22)
(1) For the purposes of this Regulation, a breach of investment limits refers to impermissible breaches of investment limits under Article 217(6) of the Law, namely those breaches resulting from transactions concluded by the UAIF, which at the time of their conclusion violated investment limits prescribed by the Law, regulations adopted under the Law, AIF rules and/or the AIF prospectus (where applicable). (2) The compensation procedure for breach of investment limits prescribed by this Regulation is conducted when:

1. the breach of investment limits exceeds 10% of the total allowed investment prescribed in accordance with Article 217(1) of the Law, and
2. the implementation of transactions or adjustment of investments in another appropriate manner under Article 13(1) of this Regulation has resulted in a loss or damage to the AIF and/or investors.
   (3) The compensation procedure for breaches of investment limits under paragraph 2 of this Article consists of preparing the compensation plan under Article 11 of this Regulation, delivering the notice under Article 12 to investors, and compensating affected investors and/or the AIF.
   (4) The period of investment limit breach is the period from the moment of impermissible breach of investment limits under paragraph 2 of this Article until its elimination.

Compensation Plan
Article 11.
(1) In the cases under Article 10(1) and (2) of this Regulation, the UAIF shall without undue delay, and no later than within 60 days of becoming aware of the breach of investment limits, prepare a compensation plan and deliver it without delay to HANFA, or if the AIF is managed by a UAIF from another Member State, also to the competent authority of the UAIF's home Member State. (2) The compensation plan under paragraph 1 of this Article must contain:

1. an appropriate timeframe, method, and procedures by which it will compensate the incurred damage to the AIF and/or investors,
2. information on the asset position in the AIF portfolio relative to which the breach of investment limits occurred, duration and reasons for such a breach,
3. measures that will be taken with the aim of adjusting investments and compensating for damage,
4. the number of investors who acquired and/or redeemed shares during the period of investment limit breach, as well as the individual and total amount of compensation to be paid to investors and/or the AIF.

Notification to Investors
Article 12.
(1) When, due to a breach of investment limits, the UAIF is obliged to compensate certain affected investors, the UAIF is obliged to notify those investors of the existence of such a breach.
(2) The notice under paragraph 1 of this Article contains the following information:

1. what is the cause and nature of the breach of investment limits,
2. the amount of damage and compensation obligation
3. deadlines and method of compensation.
   (3) The notice under paragraph 1 of this Article is delivered by post or on another appropriate permanent medium in accordance with Article 96 of the Law within 10 days from the preparation of the compensation plan.

Amount of Compensation
Article 13. (NN 150/22)
(1) The UAIF is obliged to immediately, upon becoming aware of a breach of investment limits, adjust investments by implementing transactions necessary for the complete elimination of the breach of investment limits or ensure adjustment in another appropriate manner (e.g., maturity of deposits, new payments or withdrawals by investors causing the cessation of the investment limit breach, change in valuation method and methodology for positions that caused the investment limit breach when applicable, etc.). The UAIF is obliged to adjust investments in such a way as to completely eliminate the breach of investment limits. (2) When implementing a transaction or adjusting investments in another appropriate manner under paragraph 1 of this Article results in profit, such profit shall be allocated to the AIF. The UAIF is obliged to compensate the AIF for costs incurred in conducting transactions that caused the breach of investment limits, as well as costs incurred to eliminate the aforementioned breach of investment limits. (3) When implementing transactions or adjusting investments in another appropriate manner under paragraph 1 of this Article results in a loss, the UAIF is obliged to compensate such a loss to the AIF by paying an amount corresponding to the difference between the purchase and sale price of assets that led to the breach of investment limits. In cases where the elimination of the investment limit breach is carried out in another appropriate manner, the UAIF is obliged to compensate such a loss to the AIF by paying an amount corresponding to the difference in value of assets that led to the breach of investment limits on the day the breach occurred and the value of assets on the day the investment limit breach was adjusted. The UAIF is obliged to compensate the AIF for costs incurred in conducting transactions that caused the breach of investment limits, as well as costs incurred to eliminate the aforementioned breach of investment limits. (4) In the cases under paragraph 3 of this Article, the UAIF is obliged to compensate affected investors who redeemed shares from the AIF during the period from investment adjustment to compensation of the loss to the AIF, by paying monetary funds or allocating shares. The UAIF is obliged to define in the AIF rules the situations in which compensation is carried out by monetary payment and those by share allocation. (5) Compensation shall not be carried out for those investors whose determined damage amount during the period from investment adjustment to compensation of the loss to the AIF is less than 1.50 euros for a public offer AIF, 15.00 euros for a private offer AIF, or 150.00 euros for a venture capital AIF (with private offer).

Implementation of Compensation Procedure
Article 14.
(1) After preparing the compensation plan, the UAIF shall without delay proceed to compensate affected investors and/or the AIF.
(2) Costs incurred for the purpose of implementing the compensation procedure and measures for breaches of investment limits are costs of the UAIF and cannot be charged to the AIF or its investors.

Article 15.
The provisions of this Regulation relating to breaches of investment limits under Article 217(6) of the Law also apply to cases of breaches of investment limits under Article 217(3) of the Law that last longer than the periods prescribed by Articles 217(3) and (4) of the Law. The day a breach of investment limits occurs is considered to be the first day after the expiration of the period specified in Articles 217(3) and (4) of the Law.

IV. AUDIT OF THE COMPENSATION PLAN
Article 16.
(1) The implemented compensation procedures for cases of incorrect calculation of share price and for cases of breach of investment limits are audited by an auditor within the audit of AIF annual reports.
(2) In the case under Article 7 of this Regulation, the auditor's report and opinion must contain the auditor's assessment of whether, in the compensation procedure, the new calculation of share prices under Article 6 of this Regulation has been accurately determined and whether the calculation procedures and compensation amounts paid to the AIF and/or investors were in accordance with the conditions of this Regulation. (3) In the case under Article 11 of this Regulation, the auditor's report and opinion must contain the auditor's assessment of whether the calculation procedures under Article 13 of this Regulation and the compensation amount paid to the AIF and/or investors were in accordance with the conditions of this Regulation. (4) If, within the audit of AIF financial reports, a breach of investment limits or incorrect calculation of share price is identified, the UAIF is obliged to take appropriate measures without delay in accordance with the provisions of this Regulation.

V. OTHER CASES OF COMPENSATION
Article 17. (NN 150/22)
(1) The UAIF is responsible to the AIF and investors for the proper and diligent performance of its business, and is liable for damage caused to AIF assets resulting from UAIF omissions in performing and executing its duties prescribed by the Law, regulations adopted under the Law, AIF rules or AIF prospectus (where applicable). (2) The UAIF is also liable for damage incurred by AIF share holders due to the issuance or redemption of AIF shares, as well as for failure to redeem AIF shares, if the share holder performed these actions or omissions based on documents or notices under Article 164 of the Law, which contained untrue or incomplete data and information, or misleading data and information, or based on incorrect or incomplete data and statements provided to the share holder by persons performing AIF share distribution services on behalf of and for the account of the UAIF. (3) Compensation under paragraphs 1 and 2 of this Article shall not be carried out for those investors whose determined damage amount during the period of incorrect calculation is less than 1.50 euros for a public offer AIF, 15.00 euros for a private offer AIF, or 150.00 euros for a venture capital AIF (with private offer). (4) The compensation procedure in the cases under paragraphs 1 and 2 of this Article consists of preparing the compensation plan under Article 18 of this Regulation, delivering the notice under Article 19 to investors, and compensating affected investors and/or the AIF.

Compensation Plan
Article 18.
(1) In the cases under Articles 17(1) and (2) of this Regulation, the UAIF shall without undue delay, and no later than within 60 days of becoming aware of the damage incurred, prepare a compensation plan and deliver it without delay to HANFA, or if the AIF is managed by a UAIF from another Member State, also to the competent authority of the UAIF's home Member State. (2) The compensation plan under paragraph 1 of this Article must contain:

1. an appropriate timeframe, method, and procedures by which it will compensate the incurred damage to the AIF and/or investors, as well as measures that will be taken with the aim of eliminating the causes of damage,
2. information on the reasons for the occurrence of damage,
3. the number of investors who suffered damage, as well as the individual and total amount of compensation to be paid to investors and/or the AIF.

Article 19.
(1) When, in the cases under Articles 17(1) and (2) of this Regulation, the UAIF is obliged to compensate certain affected investors, the UAIF is obliged to notify those investors of the existence of such an obligation.
(2) The notice under paragraph 1 of this Article contains the following information:

1. cause of damage,
2. amount of damage and compensation obligation
3. deadlines and method of compensation.
   (3) The notice under paragraph 1 of this Article is delivered by post or on another appropriate permanent medium in accordance with Article 96 of the Law within 10 days from the preparation of the compensation plan.

Implementation of Compensation Procedure
Article 20.
(1) After the UAIF has prepared a compensation plan in accordance with Article 18 of this Regulation, it shall without delay proceed to compensate affected investors and/or the AIF.
(2) Costs incurred for the purpose of implementing the compensation procedure and measures for incorrect share price calculation are costs of the UAIF and cannot be charged to the AIF or investors.

VI. SIMPLIFIED COMPENSATION PROCEDURE
Article 21. (NN 150/22)
(1) The compensation plan under Articles 7, 11 and 18 of this Regulation does not need to be delivered to HANFA or the competent authority of the UAIF's home Member State:
– if, for a public offer AIF, the total compensation amount under this Regulation is less than 10,000.00 euros and the compensation amount per investor is less than 1,000.00 euros – if, for a private offer AIF, the total compensation amount under this Regulation is less than 15,000.00 euros and the compensation amount per investor is less than 1,500.00 euros – if, for a venture capital AIF (with private offer), the total compensation amount under this Regulation is less than 27,000.00 euros and the compensation amount per investor is less than 2,700.00 euros. (2) In the cases under paragraph 1 of this Article, it is not necessary to conduct an audit of implemented compensation procedures within the audit of AIF annual reports.

VII. FINAL PROVISIONS
Article 22.
(1) The UAIF is obliged to deliver the compensation plan under Articles 7, 11 and 18 of this Regulation in the manner and in accordance with the Technical Instruction for Using the WEB Forms Entry Service and Documentation Submission in Electronic Form and the Instructions for Filling Out WEB Forms for Management Companies. (2) It is considered that the UAIF has delivered the compensation plan under Articles 7, 11 and 18 of this Regulation at the moment when the documentation is recorded on the server for sending such documentation. (3) In justified cases of technical impossibility or improperly executed delivery (e.g., system failure, inability to read received documentation as prescribed by paragraph 1 of this Article), the UAIF is obliged to deliver the documentation in written form, directly or by post for timely reporting purposes. The UAIF is obliged to deliver the documentation in the manner prescribed by paragraph 1 of this Article as soon as the reasons for such delivery impossibility cease, and no later than within 8 days from the cessation of circumstances causing technical delivery impossibility. (4) HANFA may, if necessary, request the UAIF to deliver certain documentation prescribed by this Regulation in original or certified copy, regardless of electronic delivery.

Article 23.
This Regulation shall be published in the "Official Gazette" and enters into force on the eighth day after publication.
FINAL PROVISIONS
Regulation on Amendments and Supplements to the Regulation on Compensation to Investors and/or the AIF (Official Gazette No. 150/22) entered into force on January 1, 2023.
Article 7.
This regulation shall be published in the "Official Gazette" and enters into force on January 1, 2023.