"Free Investment Funds" (FIF) Regulation
Existing Turkish investment funds regulation was not allowing hedge funds to be launched in Turkey. The amendments to the Communiqué Regarding Investment Funds which has been published at the Turkish Official Gazette on 22 September 2006 would permit the establishment of ‘Turkish domiciled hedge funds' as a new type of investment fund. In this Communiqué, Turkish on-shore hedge funds are called "Free Investment Funds". The aim of this regulation is to increase the competitiveness and product/service range of Turkish fund industry. Meanwhile it is expected to increase investor base with the introduction of new types of funds.
The envisaged amendments relate only to the establishment of hedge funds in Turkey and will not affect the sale of foreign hedge funds or other foreign mutual fund units.
Free Investment Funds (FIFs) have two main characteristics;
- they are able to set their investment strategies and limits in their fund's internal statute/fund rules without being subject to the restrictions governing other types of investment fund portfolios.
- the fund units are only marketed to the qualified/sophisticated investors.
The establishment procedures for hedge funds are similar to other investment funds. Banks, intermediary institutions, insurance companies, pension funds and employee funds that meet the requirements of the Capital Markets Board of Turkey (CMB) are allowed to establish hedge funds. Hedge funds are required to be registered with the CMB, and a prospectus should be prepared for the sale of fund units.
The definition of Qualified Investors for FIF
FIFs are able to set any minimum investment amount (including no investment amount) and to determine the number of investors. FIF units can only be sold to qualified investors which are defined as;
"local and foreign investment funds, pension funds, securities investment trusts, venture capital investment trusts, real estate investment trusts, intermediary institutions, banks, insurance companies, portfolio management companies, pension and relief funds, foundations, funds established according to Temporary Article 20 of Social Securities Law, no. 506, benevolent societies and other investors to be accepted as similar to these organizations by the Board, and real and legal persons that have total asset amount equal to at least 1 million TRY in terms of cash in Turkish and/or foreign currencies and in terms of capital market instruments."
Types of Free Investment Funds
FIFs would be established as
- A single manager hedge fund or
- Funds of hedge funds.
FIF's Investment Strategies and Limits
- Able to set their own investment strategies and any concentration limits in their fund's internal statute/fund rules without being subject to the restrictions governing other types of investment fund portfolios.
- Able to use more sophisticated portfolio management technics and stratejies involving short selling, leverage and derivatives within the limits stated in their fund's internal statute/fund rules.
Distribution Channels of FIFs
- FIFs units are only marketed to the qualified investors and FIFs are not allowed to publish any advertisement or announcement for any reason.
- The companies that will act as a broker for selling units of FIFs must employ the sales staff that has sufficient knowledge and experience and sales of these funds must be performed by this staff.
- Companies entitled to trade units of FIFs are liable to obtain and properly keep the information and documents proving that the investors, to whom these units are sold, are meeting the criteria of qualified investors.
Additional Requirements for Investment/Portfolio Managers and Founders of FIFs
- It is required that at least one member of the Board of FIF and all portfolio managers, who will undertake to manage the portfolio of free investment funds must be successful in the license examination for advanced level of capital market operations and in the license examination for derivatives and must have necessary knowledge and experience regarding these funds.
- The founder and investment manager must form an internal audit system including the risk management systems pertaining to the management of FIFs.
Reporting and Disclosure Requirements of FIFs
- Principles for preparing prospectus by FIFs are determined by the the Capital Markets Board of Turkey. FIFs are exempted from preparing and publishing circular which is a disclosure document similar to simplified prospectus.
- FIFs are able to declare their price on a monthly basis as opposed to daily basis applicable to other regulated investment funds.
- Financial accounts and statements of investment funds are subject to semi-annual and annual independent external audits. However, interim financial statements of FIFs are exempted from independent auditing.
CMB Draft Regulations About Portfolio Management Companies
- In Turkey, investment funds could only be constituted under law of contract as common funds. Investment company structure (with variable capital) has not been regulated in Turkish legislation.
- According to current Capital Markets Law, the "founders" of the investment funds are restricted to banks, insurance companies, intermediary institutions, employee funds, pension funds. On the contrary to the UCITS Directive, management companies (in Turkish legislation they are referred as portfolio management companies) are not allowed to establish and manage investment funds.
- The founder is responsible for the protection and safekeeping of the fund's assets, there is no requirement for the existence of a depositary. ISE Settlement and Custody Bank (Takasbank A.Ş.) acts only as a safekeeper for investment funds assets, and has no legal and financial responsibility in the content of UCITS Directive.
- The Capital Markets Board (Sermaye Piyasasi Kurulu, ‘SPK') has called for consultation with interested parties on the proposed changes to the Communiqué regarding portfolio management companies which would allow portfolio management companies to establish investment funds as well as Turkish domiciled hedge funds.
For further information please contact
Specialist in CMB of Turkey
Tel: +90 312 292 84 21