I. General Overview of the Legislation
In Turkey, the general rules and principles regarding investment funds are mainly regulated under Articles 52-57 of the Capital Markets Law No. 6362. Additionally, the Capital Markets Board ("CMB") has regulated further details regarding the establishment and activities of investment funds under the Communiqué on the Principles of Investment Funds (III.52.1) ("Communiqué"). The CMB has also introduced the Investment Funds Guide ("Guide") with its resolution numbered i-SPK.52.4 (dated June 20, 2014, and numbered 19/614), in order to clarify the rules and principles stipulated in the Communiqué.
The Communiqué Amending the Communiqué (III-52.1.c) ("Amending Communiqué") entered into force upon its publication in the Official Gazette No. 30712 on March 12, 2019. The CMB has also amended the Guide on the same date to reflect the changes introduced through the Amending Communiqué. This article will focus on the novelties introduced by the Amending Communiqué and the Guide into the investment funds regime in Turkey.
II. What is an Investment Fund?
Under the Turkish capital markets laws, an investment fund can be defined as a group of assets that does not have legal personality, which are formed by portfolio management companies in accordance with certain applicable regulations.
Portfolio management companies are Turkish capital market institutions, which are required to be established as joint-stock companies with the main objective of operating and managing investment funds. Compliance with certain conditions and obtaining the CMB license are prerequisites for establishing and operating a portfolio management company.
Investment funds are operated and managed by portfolio management companies on behalf of their investors in exchange for a consideration that is known as "a participation share." The portfolio of an investment fund can consist of cash and/or other assets and rights that are owned by the investors. The portfolio is managed by the portfolio management company based on the principle of fiduciary ownership.
III. What has Changed as a Result of the Amendments to the Communiqué?
Before the Amending Communiqué entered into force, portfolio management companies in Turkey were allowed to include only 20% of the participation shares in their portfolios. Following the amendment made to Article 15/6 of the Communiqué, such portfolio management companies are now permitted to include participation shares in their portfolios without being restricted by a limited threshold. Additionally, an advance payment may be granted by the portfolio management companies to the investment funds, prior to commencement of the sale of the participation shares.
Article 17 of the Communiqué stipulates certain limitations on the assets to be included in the portfolios of investment funds and on the issuers of such assets. For instance, a fund cannot invest more than 10% of its net asset value in a single issuer, regardless of whether such investment is in the form of monetary funds, capital market instruments, or other derivatives based on such instruments. Furthermore, if an issuer receives investments exceeding 5% of the total value of the investment fund, the total value of money and capital market instruments of the relevant issuer cannot be more than 40% of the total value of the said investment fund.
The Central Bank of the Republic of Turkey, the Ministry of Treasury and Finance, as well as mortgage finance institutions, are exempt from the limitations regarding the assets to be included in the portfolios of investment funds. Following the amendment made to Article 17/1 of the Communiqué, the exemption was also extended to money and capital market instruments issued by the Turkey Wealth Fund; however, the limitation was maintained whereby the investments that are issued by said institutions with respect to a single asset cannot exceed 35% of the net asset value of the investment fund. With this limitation, it can be reasonably concluded that the CMB intends to minimize the concentration (i.e., non-diversification) risks arising from concentrated investments on a single asset.
Lastly, the Amending Communiqué has authorized the CMB to determine different minimum and/or maximum rates for assets and transactions to be included in the portfolios of the investment funds, as well as the upper limit of the management fees, depending on the type of the fund.
IV. What has Changed as a Result of the Amendments to the Guide?
The principles relating to the operation of money market funds have been specified through the newly introduced Article 4.7 of the Guide. Accordingly, at least 50% of the total value of money market funds must be utilized in deposit/participation accounts. However, the amount that may be deposited in a single bank cannot exceed 6% of the total value of the fund. Furthermore, the total amount of investments made by such funds in reverse repo transactions, and in the Settlement and Custody Bank money market and domestically organized money market transactions, cannot exceed 40% of the total value of the fund.
Furthermore, it has been determined that the management fees that will be derived from money market funds shall be set at 1/2 of the management fee amounts specified in the fund prospectus and the investor information forms. Finally, it is provided that any applications made for the purpose of increasing the current management fees will not be taken into account by the CMB, as of March 15, 2019.
In conclusion, in order to meet the expectations of portfolio management companies, the threshold for the participation shares to be included in the portfolios of such companies has been removed, which has enabled portfolio management companies to include their own participation shares in their portfolios to boost investment environment in Turkey. Moreover, the Turkey Wealth Fund has been exempted from the 10 limitations on the assets to be included in fund portfolios, in order to enable funds established by the Turkey Wealth Fund to invest in capital market instruments issued by the Turkey Wealth Fund, thereby contributing to the diversity of the investment vehicles in the capital markets. However, the CMB has also introduced a 35% threshold to this exemption to avoid concentration risk arising from investing on a single market. Following the amendment made to the Communiqué, the CMB has gained discretionary powers to determine different rates for assets and transactions to be included in the fund portfolios, as well as the upper limit of the management fees. Lastly, the amendments made to the Guide have introduced certain limits on the treatment of money market funds and they have determined the management fees to be received from this specific type of funds.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2019. A link to the full Legal Insight Quarterly may be found here
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