The New Era For Mutual Funds – I

November 2014 Ali Sami Er
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Structural changes will be observed this year in the mutual funds market that has risen to 34 billion TL, excluding pension funds[1], in line with the new regulations of the Capital Markets Board (CMB). Communiqué regarding the Principles of Mutual Funds (Communiqué) numbered II-52.1 entered into force on 01.07.2014; however, a mutual fund with the founder being a portfolio management company (PMC) has not yet been established, and most of the funds have to be restructured. This article sheds light on the new settlement and adaptation applications according to the Communiqué and the CMB’s resolutions.

The Adaptation Applications of Current Funds

The system of mutual funds has been completely changed by the Communiqué. Under the new terms, the founders are restricted to the PMC’s. The management service shall be provided only by the PCM’s, as well. As portfolio custodian, aside from Takasbank, the investment companies who have portfolio custody competence, and whose paid-in capital is 20 million TL, shall be determined.

Different from the old terms, by transitioning to the open-end fund structure, they are now established in the form of umbrella funds through the scope of the funds’ by-laws[2], offering circular[3] for each issue according to need, and key investor information document[4]. Thus, parallel to the European Union regulations, highest level of disclosure requirements will be met and all assets and liabilities of these funds will be operated separately from each other.

Prior to the CMB’s application regarding the adaptation of the current funds to the Communiqué, the PMC’s board of directors shall draft amendments as to the funds’ rules or the offering circulars, and the reasons for these amendments. Within this draft, an application to the CMB shall be submitted and, afterwards, the process below-mentioned shall be applied. Following the permission of the CMB, the amendment shall be registered with the commercial registry and announced in the commercial gazette.

It is also obligatory upon the founder to prepare a regular disclosure form to be published in the KAP, as well as in the fund’s by-laws, offering circular, and key investor information document.

We would like to emphasize that with respect to the adaptation to the regulations; firstly, the founding PMC shall form the necessary infrastructure and organization pursuant to the Communiqué on Portfolio Management Companies and Activities of Such Companies (PMC Communiqué). Hence, the application concerning the adaptation of the current funds, the conditions of the Communiqué and the PMC Communiqué shall be provided.

The fund founder may transfer its funds to other PMCs. If the founder transfers its funds to different PMCs, the CMB application may be made, separately. If the founder transfers all of the funds to the same PMC, the application shall be made at the same time. In this case, the transferee PMC shall apply, simultaneously, with the transferor founder.

Application Process for the New Establishments

The umbrella fund is established through registration of the fund’s by-law, following the approval of the CMB, as a result of the examination of the application that was made by submitting the fund’s by-laws and application form to the CMB. The examination shall be concluded within 2 months by the CMB.

After the registration, within 3 months, the founder shall present the offering circular that shall be prepared according to the below-mentioned fund types and key investor information document for the approval of the CMB. The CMB may extend this 3 month period once, for 3 months, in the event of reasonable exceptions. In addition, within this period, the necessary place, equipment, accounting system and technical personnel required for the fund shall be provided. The CMB concludes the examination within 20 work days. Following the approval, within 10 work days, the offering circular and key investor information document shall be disclosed in the KAP and on the formal website of the founder, and shall follow the timeframe set forth in the said document. The monies and other assets collected at the end of the issuance shall be assigned to the assets according to the fund type, the following work day after the issuance is completed.

Briefly, the establishment and issuance of a fund may continue for 3 or 6 months. Please note that the duration starts from the date of notification to the founder, and the duration of the CMB’s examination might vary.

Fund Types

The Communiqué notes the fund types in detail, but, with the permission of the CMB, new types of funds may be established. For example, pursuant to the Guide of the Communiqué published by the CMB, it gives permission to establish a “Mixed Umbrella Fund,” which includes at least two types of funds among partners’ interests, debt instruments, gold and other precious metals, as well as the capital markets instruments backed by such metals, and whose values are not less than 20% of the total fund value.

Another innovation brought by the Communiqué is the umbrella participation fund, established through the principles of profit sharing:

a) Funds that invest at least 80% of the portfolio on a continuous basis in,

  1. Local and / or foreigner public and/or private debt instruments shall be called “DEBT INSTRUMENTS UMBRELLA FUND”
  2. Stocks of local and/or foreign issuers shall be called “STOCK UMBRELLA FUND”
  3. Publicly traded gold and other precious metals, as well as capital markets instruments backed by such metals shall be called “PRECIOUS METALS UMBRELLA FUND”
  4. Units of other mutual funds and participation shares of exchange traded funds shall be called “FUNDS OF UMBRELLA FUNDS”

b) Funds that invest entire portfolios on a continuous basis in capital markets instruments with high liquidity that have a maximum of 184 days’ maturity, and the majority average maturity of the portfolio, with a maximum of 45 days shall be called: “MONEY MARKETS UMBRELLA FUND”

c) Funds that invest entire portfolios on a continuous basis in lease certificates, participation accounts, partners’ interests, gold and other precious metals, and umbrella funds formed by other money and capital market instruments that are accepted by the CMB, and which are not subject to interest, shall be called a “PARTICIPATION UMBRELLA FUND”

d) Funds that cannot be classified as any one of the types, above, with regard to portfolio restrictions shall be called “VARIABLE UMBRELLA FUNDS”

e) The funds whose participation shares are intended to be distributed only to qualified investors shall be called “HEDGE UMBRELLA FUNDS”

f) Funds where a part, or all, or the initial amount of the investment, plus a certain return is undertaken to be paid to the investor on the basis of an appropriate investment strategy and the guarantee provided by the guarantor as per the principles specified in the information documents within a specific term, shall be called “GUARANTEED UMBRELLA FUNDS”

g) Funds, where a part, or all, or the initial amount of the investment, plus a certain return is targeted to be paid to the investor on the basis of an appropriate investment strategy, and best efforts strategy as per the principles specified in the information documents, within a specific term, shall be called “PROTECTIVE UMBRELLA FUNDS”

In addition, it is obligatory to use the title “Foreign” for the mutual funds that are invested in foreign exchange and capital market instruments with a proportion of at least 80% of its total value. It is also obligatory to use the title “Undertaking” for the mutual funds of the undertakings that are included within the scope of the regulations of the CMB concerning the financial report standards, which are formed by money and capital markets instruments.

Asset Limits Subsumable under the Assets of the Fund

Pursuant to the Communiqué, we would like to emphasize the below-noted limits regarding the assets that are subsumable under the assets of the funds.

ASSET TYPES / AT LEAST HOW MUCH % OF THE TOTAL FUND VALUE MUST IT FORM?

Stock Certificates and related derivatives (same issuer) / 10

Stock Certificates (invested in more than 5% by different issuers) / Total 40

Money and Capital Market Instruments (belong to the same union association) / 20

Money and Capital Market Instruments / 5, Total 25

Mortgage and Asset Guaranteed Securities / 25

Debt Instruments (same issuer) / 10

Public Debt Instruments / 100

Public Debt Instruments (unique asset) / 35

Capital Market Instruments of Asset Leasing Companies (same issuer) / 25

Capital Market Instruments of Asset Leasing Companies established by the Law regarding Public Finance and Debt Management Regulations / 100

Brokerage Company, Partners’ Warrants and Certificates / 10, same issuer 5

Short-Term Deposit less than 12 months, Participation Accounts, Certificate of Deposit / 10, same bank 3

Partners’ interests that the founder intermediates in the group associations included within the scope of the financial reporting standards of the CMB for the public offering, on condition to be traded at the exchange / maximum 10% of the issue, and maximum 5% of the total fund value

Money and Capital Markets Instruments of the issuers

a) who are directly and indirectly the controlling manager

b) who are a controlling shareholder of the manager or controlling shareholder of the directors of the manager / 20

Fund and participation shares of exchange traded funds and shares of securities investment associations / 20

Repo transactions / 10

Reverse Repo transactions / 10 (over the counter 10)

Takasbank Money Market Transactions / 20

In addition, the funds may obtain assets over the counter. In this case, the said asset shall have a valuation grade equivalent to the investment level, and shall be transacted at a fair value, and shall be converted to cash at a fair market price.

The open position amount caused by derivatives cannot exceed the total fund value. In the calculation of the fund’s open position, the reverse positions taken in the transactions of the warrants, certificates and derivatives that are relevant to the same asset shall be clarified.

Funds shall not be involved in short sales or credit security transactions.

Conclusion

With the new law of mutual funds, the operation and adaptation units need to work on funds’ by-laws and structural amendments closely and comprehensively. It is crucial to apply the amendments set forth in this article as soon as possible by the founders, for the development and settlement of the system brought by the Communiqué. Currently, as only 18 PMC has submitted their adaptation applications[5], beyond a shadow of a doubt, to restructure the mutual funds, a busy agenda awaits the CMB Institutional Investors Chamber, till the last day of the adaptation period that is 01.07.2015. With our following article, to present the new system of the Communiqué, we will touch on the operational proceedings that are to be adhered to by the mutual funds during their daily proceedings.

[1] Turkish Capital Markets November Review 2014

[2] Its minimum qualifications are noted in Communiqué Annex-1

[3] Its minimum qualifications are noted in Communiqué Annex-2

[4] Its minimum qualifications are noted in Communiqué Art. 12

[5] Turkish Institutional Investment Managers’ Association Review October-December 2014

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