On 27 November 2019, the Romanian Parliament approved a Law on Regulation of Alternative Investment Funds (the "New AIF Law"), which will come into force within 30 days as of its publication in the Official Gazette – yet to occur in the following days. The Romanian Financial Supervisory Authority ("FSA") is the competent authority to apply the provisions of the New AIF Law, which is part of the FSA's plan to align Romanian legislation with recent EU developments and trends, according to which fund managers are regulated at EU and national level, while the alternative investment funds that they manage need to be regulated at national level only. The New AIF Law replaces the existing very limited legislation on undertakings for collective investment, other than UCITS1, in Romanian called "AOPC", a category that covers, among others, financial investment firms (in Romanian "SIF") and the Property Fund. This paper provides an overview of the main provisions of the New AIF Law.
What does the new law cover?
- Definition and types of funds
- Rules on authorization and functioning: general and specific to different types of funds
- For categories of funds: permitted investments, calculation of assets and valuation rules, transparency and reporting requirements
- Grandfathering provisions
- Repeal of existing pieces of legislation on AOPC
...but first just a quick reminder: what are investment funds and why / how did they get regulated?
Investment funds are investment products created with the sole purpose of gathering investors' capital and investing that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities.
In the aftermath of the global financial crisis, the G20 stressed, at its 2008 summit in Washington, the need for consistent international regulation and oversight with respect to every financial market participant and financial product. In this context, in 2009 the European Commission issued a proposal for a directive on alternative investment fund managers ("AIFMD"), aimed at laying the regulatory foundations for a secure financial system to support and stimulate the real economy, and the European Parliament and the Council finally adopted the directive in June 2011. Investment funds are currently regulated under two main regimes: the UCITS directive2 and the AIFMD3.
Alternative investment funds ("AIFs") are funds that are not regulated at EU level by the UCITS directive. They include hedge funds, private equity funds, real estate funds and a wide range of other types of institutional funds. As opposed to funds regulated by the UCITS directive, AIFs are funds that typically target qualified investors, can invest in a wide range of assets (including asset classes not eligible for UCITS) and have no restrictions on leverage.
Definition and types of alternative investment funds
The New AIF Law defines AIFs as entities set up in Romania that raise capital from investors, with a view to placing such capital in the exclusive interest of the respective investors, on the basis of a common investment policy.
AIFs are classified by:
the way they are set up
- Contractual AIF (in Romanian "de tip contractual - FIAC"): organized by contract under the provisions of the Romanian Civil Code regulating undertakings without legal personality
- Investment Companies AIF (in Romanian "societati de investitii – FIAS"): organized by constitutive act, under the Romanian Companies Law 31/1990
the possibility to redeem shares or units
Open-ended AIF: an AIF the shares or units of which are, at the request of any of its shareholders or unitholders, repurchased or redeemed prior to the commencement of its liquidation phase or wind-down, directly or indirectly, out of the assets of the AIF and in accordance with the procedures and frequency set out in its rules or instruments of incorporation, prospectus or offering documents4
closed-ended AIF: an AIF other than an open-ended one
the type of management
- self-managed AIF
- a fund with an external AIFM, i.e.:
- an AIFM authorized or registered with the FSA;
- an AIFM from another EU member state and notified to the FSA; or
- an AIFM from a non-EU state
- Retail Investors AIF (in Romanian "destinate investitorilor de tip retail – FIAR"): an AIF that can attract resources from retail and/or qualified investors
- Qualified Investors AIF (in Romanian "destinate investitorilor profesionali – FIAIP"): an AIF that can attract financial resources exclusively from qualified investors or retail investors asking to be treated as qualified5
Types of Retail Investors AIF
- Specialized Retail Investors AIF: owning assets or a total exposure of at least 75% of NAV only in the class of assets corresponding to its specialization. The New AIF Law provides for strict rules on what the Specialized Retail Investors AIFs can invest in.
- Diversified Retail Investors AIF: funds which are not Specialized Retail Investors AIF
Types of Specialized Retail Investors AIF
- Funds specialized in shares
- Funds specialized in real estate investments
- Funds specialized in participation titles issued by UCITS and/or Retail AIF
- Funds specialized in bonds
- Funds specialized in T-bills issued by the Ministry of Finance – only Contractual AIF
- long-term investment funds6
- money-market AIF7
Types of Qualified Investors AIF
- private equity: investing in high risk assets and having a minimum share capital of EUR 1 million, out of which at least 50% in cash and the rest in-kind contribution, excluding plots of land; for Qualified Investors AIF that are set up as investment companies, high risk assets are represented by the contribution or direct or indirect participation in a Romanian company
- speculative: which invest mostly in derivatives and/or use investment strategies and operations which imply the heavy use of leverage, its exposure being more than three times its net assets
- specialized in investments in assets and commodities (examples of areas where such funds invest: art, precious metals, agricultural lands and forests)
- real estate funds: investing at least 75% of its assets in real estate or in unlisted shares issued by a real estate company whose financial statements are audited at least once per year as well as when transactions with their assets occur
- capital funds – EuVECA - Regulated by Regulation No 345/2013 on European venture capital funds and focus on startups and early stage companies
- social entrepreneurship funds – EuSEF - Regulated by Regulation (EU) No 346/2013 on European social entrepreneurship funds.
Authorization and functioning of alternative investment funds
An AIF is authorized after the FSA:
- authorized / registered its manager or approved the request of an AIFM from another EU state to manage its assets
- authorized the fund's rules or, as the case may be, its constitutive act and
- authorized its choice of depositary (registered with the FSA Public Registry and which must comply with certain legal requirements).
Beside authorisation, the FSA approves the conversion of participation titles, transformation of an AIF into an UCITS, merger, de-merger and withdrawal of license.
By derogation, the assets of a Retail Investors AIF are managed by an AIFM authorized by the FSA or other competent authority from a EU or non-EU state or an AIFM which also holds a license as an Investment Company ("SAI" in Romanian).
AIF rules / constitutive act can provide for different classes of participation titles, granting different rights to their holders. In exceptional cases (provided by the fund's rules or constitutive act or which could not be anticipated at set up) and only with a view to protect the interest of participation titles' holders, the manager may temporarily limit or suspend the issuance and/or redemption of such titles. Same effects can occur if the FSA decides so, under certain conditions.
Specific rules for Contractual AIFs
A Contractual AIF can offer fund units (of one or several classes) only after being authorized by the FSA on the basis of, among others, an offering document, and registered in the FSA Public Registry. A Contractual AIF can be set up by an FSA registered / authorized AIFM, an AFIM from another EU member state authorized under AIFMD and passported to Romania or an AIFM from a non-EU state for which Romania is a reference EU state member (in accordance with Regulation (EU) No 448/2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant to AIFMD).
Protection against creditors of the AIFM
Where an AIFM of a Contractual AIF holds shares / social parts issued by a company, such will not be considered as part of the AIFM's estate and cannot be subject to claims from the AIFM's creditors (including in the context of insolvency).
With a view to being authorized, the Contractual AIF, via its AIFM, will submit with the FSA, among others, the fund's rules (which require FSA approval) and an offering document the content of which is regulated by the Prospectus Regulation and the New AIF Law. In case the Contractual AIF is of a Retail Investor type, the offer document is published on the manager's website, the same being applicable for any further changes, after they are notified to the FSA. Any significant change (to be defined in secondary legislation) of the Contractual AIF rules will be submitted for FSA approval. In case investors do not agree with changes to the fund's offering document or rules, they have a right to be redeemed and withdraw from the AIF.
Qualified Investors AIFs
As opposed to retail funds, Qualified Investors AIFs can invest with little restrictions. NAV and NAVPS calculations are made once every four months and assets are evaluated as provided by the law, while managers inform investors with respect to such value via reports and detailed presentations of investments.
Private Equity Qualified Investors AIFs can have an exposure of no more than three times their net assets. As an exception, participation titles in this type of funds can also be distributed to retail investors under certain conditions.
A Real Estate Qualified Investors AIF cannot invest more than 50% of its assets in a sole real estate or in unlisted shares of a sole real estate company. For liquidity purposes, certain investments in money market instruments or derivatives are permitted, under certain limits. Assets of a Real Estate Qualified Investors AIF must be evaluated by an independent evaluator approved by the FSA, while the price of their disposal is also regulated by the New AIF Law.
Specific rules for Investment Company AIF
Investment Company AIFs issue shares that need to be fully subscribed for upon setting up.8 As opposed to Contractual AIFs, such funds can also be self-managed, in which case the fund has to be authorized / registered with the FSA as an AIFM. Self-managed Contractual AIFs that attract capital from, among others, retail investors, must be authorized by the FSA.
The offering document of an Investment Company AIF which attracts funds only from qualified investors on the basis of a private placement shall be drafted based on FSA secondary legislation and only notified to the FSA together with the other documents submitted for the fund's authorization. In case retail investors are also targeted, the prospectus needs to be drafted according to the Prospectus Regulation and approved by the FSA upon the fund's authorization9.
Shareholders of an Investment Company AIFs are organized in general meetings. With a view to decrease the share capital, the fund reimburses its shareholders pro rata with their contributions, once per year. As an exception, supplementary distributions can also occur provided that (i) such distribution is approved by the GMS and is made exclusively out of the AIF's own sources; and (ii) the AIF has registered profit in the last 3 financial audited years. Similar requirements apply for buy-back of shares followed by share capital decrease.
Specific rules for Retail Investors AIF
A Retail Investors AIF can be either contractual or investment company and is subject to certain restrictions, such as:
- it can only perform short selling for hedging purposes;
- cannot invest in instruments issued by its own AIFM and
- can only invest in certain types of assets, such as: money-market securities and instruments registered or traded on a trading venue, newly issued securities within an IPO, provided that they are to be traded on a regulated market, participation titles of UCITS or AIF under certain conditions, social parts issued by limited liability companies whose financial statements are annually audited, real estate assets under requirements provided by the FSA.
Investments can be made within further quantitative limits, such as:
- no more than 10%10 of assets in securities or money market instruments issued by the same issuer, except if guaranteed by a member state, local authorities, non EU state or international organizations comprising one ore more EU member states;
- no more than 50% of assets in securities or money market instruments issued by entities belonging to the same group;
- no more than 20% cash, etc.
Retail Investors AIFs must calculate their NAV at least monthly according to detailed rules set up at EU level and FSA secondary legislation, while portfolio assets are evaluated according to the AIFM Law. With a view to protecting investors, the New AIF Law provides for specific transparency and reporting rules for Retail Investors AIFs, such as (i) monthly reports on Net Assets Value and Net Assets Value Per Share calculated by the manager and certified by the depositary, as well as the detailed status of investments.
What do current funds need to do?
AOPCs authorized by the FSA (except for certain money-market funds) must:
- adapt their constitutive and functioning documentation and
- request the necessary authorizations thereof
within 6 months as of when the New AIF Law enters into force, under the sanction of withdrawal of license.
The type of AIF to be chosen by such AOPC depends on whether they attract private or public resources. If public resources are attracted, the respective AOPC can only be a Retail Investors AIF (e.g. all SIFs and Property Fund), while if resources attracted are only private, the AOPC can choose to be either Qualified Investors AIR (but bearing in mind that investors must meet the requirements to be considered "qualified") or Retail Investors AIF. Listed AOPCs can only be categorized as Retail Investors AIFs.
Investors of closed-ended funds which need to transform under the New AIF Law do not have the right to withdraw only on the basis of such transformation. Same principle applies to SIFs and Property Fund, which cannot request the de-listing in this context, nor can their shareholders request withdrawal in case such funds change their business object.
Repeal of existing legislation. Important change for SIFs
The New AIF Law repeals, within a six-month term as of its entry into force, the following, among others:
- the legislation that set up SIFs (i.e. Law 133/1996 on the transformation of the Private Property Fund into investment firms)
- the classification of the Property Fund as an AOPC " parts of legislation in the Capital Markets Law 297/2004 regulating AOPCs and the 5% limit to shareholdings in SIFs.
The FSA is bound to approve relevant secondary legislation within three months as of the date when the New AIF Law enters into force.
1. Undertakings for the collective investment in transferable securities. ↩
2. Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). Funds authorised under the UCITS Directive are typically targeted at retail investors and are subject to specific requirements, including diversification, limits on counterparty risk and restrictions on leverage ↩
3. Directive 2011/61/EU on Alternative Investment Fund Managers ↩
4. The following shall not be taken into account for the purpose of determining whether or not the AIF is of the open-ended type: (i) a decrease in the capital of the AIF; and (ii) whether an AIF's shares or units can be negotiated on the secondary market and are not repurchased or redeemed by the AIF.↩
5. A Qualified Investors AIF can transform into a Retail Investors fund under conditions provided by the New AIF Law.↩
6. Regulated by REGULATION (EU) 2015/760 on European long-term investment funds, which focus on investing in various types of alternative asset classes such as infrastructure, small and medium sized enterprises and real assets. ↩
7. Although the New AIF Law does not mention this, money-market funds are regulated at EU level by Regulation 2017/1131 which applies to funds set up as UCITS or AIF and investing in short-term assets, also having distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment. ↩
8. Except for shares subscribed by the Romanian State in case of funds set up via special legal enactments. ↩
9. In case an Investment Company AIF is set up by public subscription, the FSA will authorize it only after the closing of such subscription performed on the basis of an issuing prospectus approved by the FSA. Such funds are obliged to also request the admission to trading on a regulated market. ↩
10. Or up to 40% under certain conditions. ↩
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