Draft bill out for consultation - introduction of investment funds and SIKAVs

Date 21 nov. 2011

 

Introduction

On 3 November 2011, the Danish National Financial Supervisory Authority put a draft bill out for consultation which, if adopted, will make the establishment of Danish “investment funds” (funds) and investment companies with flexible capital (in Danish, SIKAVs) possible, as an alternative to investment associations.


If the draft bill is adopted, the most significant change will solely be that, in the future, it will not only be possible to establish Danish investment associations, but also one of the new types. However, the rules regarding investor protection, permission, placement etc. are retained, and the rules in force will be identical for all three types in the future.


Background

On 1 June 2011, the new act on investment associations etc.[1] (in Danish: lov om investeringsforeninger m.v.) came into force. The rules implied that Danish investors gained easier access to invest in investment companies and investment funds established in the other member states. The law is an implementation of the UCITS IV directive (“Directive”).


The Directive authorises three methods by which to establish UCITS:

  1. as common funds managed by management companies (“funds”)
  2. trust law (as unit trusts), and/or 
  3. statute (as investment companies)

Whereas today it is only possible to establish a Danish UCITS as an investment association, the draft bill will make it possible for these to be established as investment funds and SIKAVs in the future.


The difference between investment companies (investment associations and SIKAVs) and investment funds is that investment companies are legal entities with shareholders (called members in the associations), while investment funds are not legal entities and have participants. However, it has been suggested that the terms be harmonised in the law with the result that both shareholders and participants are referred to as “investors”.


The third model, ”unit trusts”, is not interesting in a Danish context, since the structure differs significantly from the structures known in the Danish legal traditions, and since unit trusts have primarily been included in the UCITS directive in order to ensure that the Anglo-Saxon model for collective investment schemes may continue with authority in the directive.


With the draft bill, the two types of UCITS will be subject to the same rules regarding, for example, the investor protection and the requirement for permission from the Financial Supervisory Authority to conduct business. Furthermore, the draft bill contains certain technical changes and consequential changes. These are not described further here. 


Therefore, the draft primarily relates to the way in which the single types of UCITS are organised and for example not to the access to investment in new products or distribution of yields to investors.


In Denmark, it is currently only possible to establish UCITS as associations; investment associations.


In connection with the reading of the proposed draft bill to the LIA, the sector expressed a wish for the introduction of alternatives to the Danish investment associations. Against that background, a working group was appointed to review how the options could be expanded in order to make it possible for Danish investors to invest in both foreign and Danish investment companies and investment funds.


In May 2011, the working group published a report[2] in which two alternative investment association models are described. This resulted in a draft bill being put out for consultation. The general content of the draft bill is the introduction of the two alternative models; investment funds and investment companies with flexible capital.


The purpose of the introduction of these alternatives is to provide better opportunities for competition with foreign UCITS in both Denmark and on the other EU markets.


The most Significant Elements of the Draft Bill

The most significant elements of the draft bill are the introduction of new rules allowing the establishment of investment funds and SIKAVs.

 

In accordance with the Directive, rules regarding inter alia investor protection, including disclosure requirements, provisions regarding the handling of conflicts of interests, the annual report, auditing, emission and redemption of shares, liquidation as well as mergers and division have been suggested for both new types of UCITS.


Furthermore, it appears from the draft that the Financial Supervisory Authority must grant permission for SIKAVs and investment funds and, among other things, amendments to the articles of association and amendments to the provisions of the fund must be approved by the Authority.


Therefore, the rules for the SIKAVs and the investment funds will correspond to the rules applying to investment associations to a great extent. The draft puts SIKAVs and investment funds on the same footing as investment associations with regard to exclusive rights and the obligation to conduct business.


The different Legal Types and their Characteristics

Although the investment funds and the SIKAVs in most regards correspond to the investment associations, the different legal types and their characteristics entail that necessary adjustments to the underlying rules have been proposed.


In the following, the legal types of SIKAVs and investment funds and their characteristics will be briefly described.


SIKAVs

SIKAVs are companies with a share capital which may be continuously increased and decreased in connection with issue and redemption. However, the draft will not introduce rules for companies with a flexible capital in general, but only for companies covered by the Directive and therefore also covered by the act on investment associations etc.

 

In SIKAVs, investors hold limited liability.


Since the SIKAVs are an interpretation of the Directive’s investment funds managed by management companies, the company’s board of directors must choose an investment management company or a management company to handle the management. The investors’ decisions regarding the company are made at the general meeting.


The draft’s basic requirements on the SIKAVs are that they must have a flexible capital fluctuating depending on the issues and redemptions of shares carried out. Furthermore, it is required that the SIKAVs have a minimum share capital.  


SIKAVs may be organised with one or more departments, where each department, in principle, will only be liable for its own obligations and for its own share of the joint expenses.


Investment funds

Investment funds will be separate financial, but not legal, entities. The capital in investment funds are owned by the investors collectively.


Investment funds may only be established and managed by investment management companies or by management companies. Therefore, the investment management company or the management company will make the decisions regarding the investment fund.


Investment funds may be organised with one or more departments, each based on a certain share of the assets in accordance with the resolutions of the fund on this subject. The departments in the investment funds may assume liabilities in the same way as departments in investment associations. However, the investment management company or the management company will assume liabilities on behalf of the investment fund since investment funds have no management or employees. Therefore, where the legislation imposes obligations on investment funds or their departments, it will be the responsibility of the investment management company or the management company managing the fund to fulfil these obligations on behalf of the investment funds.


Consequences of the Draft Bill

If the draft bill is adopted, it will be possible for the Danish investment management companies to offer shares in SIKAVs and investment funds to investors in Denmark, in other member states and in EEA countries. Therefore, the draft is expected to enhance the competitive power of Danish investment management companies.

 

Furthermore, an adoption will increase flexibility with regards to the manner in which the Danish UCITS’ may be organised while the existing rules on, among other things, investor protection are retained.


Therefore, an adoption of the draft bill must mainly be assumed to be of importance in the cases where it is proposed that shares in an investment institute be offered in several countries and where contemplated that the rules of the countries mentioned be used.



If you have any questions or require additional information on the above, please contact Attorney Claus Molbech Bendtsen (cmb@mwblaw.dk), attorney Henning Hedegaard Thomsen (hht@mwblaw.dk) or junior associate Maria Thomsen (mth@mwblaw.dk).


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.


[1] Cf. Act no. 456 of 18 May 2011 on investment associations etc.

[2]Se the working group’s report here: http://www.ifr.dk/media(3345,1030)/Rapport_alternative_ucits_maj_2011.pdf - Rapport om fordele og ulemper ved at indføre alternativer til foreningsstrukturen på UCITS-området (”Rapporten”).