Draft Law On Alternative Investment Funds

The draft law that regulates the functioning and foundation of alternative investment funds as a new institutional framework for the investment market of the Republic of Serbia is currently in the lawmaking process awaiting for the public debate.

After adoption of the this law, which regulates the field of investment funds management for the first time, the proposer of the law fashions the draft of the law which thoroughly regulates closed and private investment funds, contributing to the capital market development. Without the doubt, one of the key factors concerning adoption of this regulation pertains to process of harmonization of law with the Europe Union regulations, above all with Directive 2011/61/EU of the European Parliament.

Who will be affected by this law provisions? Besides investors which are motivated to invest capital in investment funds in order to multiple their profit, micro, small and middle size enterprises which cannot fulfill conditions for obtaining bank’s loans, have the possibility to ensure alternative manner to finance their ventures via joint venture capital funds and private equity funds.

Concretely, this draft law proposes open and closed types of alternative investment funds conditioned upon the fact whether the investment units of such funds can be purchased by request of the owners i.e. shareholders. Further clarifications of closed alternative funds prescribe that such can be founded without being enveloped in the status of a legal person but solely as separate assets, as the legal person in the form of Joint Stock Company or Limited Liability Company or as the legal entity with internal management.

Moreover, draft law classifies investors and to such extent determines professional and half-professional investors can obtain investment units regardless of the type of alternatives investment funds, but small investors can obtain investment units of only specified funds according to the law.

One novelty in relation to the Law on investment funds is regulation of closed alternative investment fund with the status of the legal entity, which manages its assets independently and not by means of Company for Management of the Alternative Investment Funds (“Management Company”), which shall be governed by the provisions of the draft law that regulate functioning of the Company regardless of its peculiar form.

With the exception to funds with internal management, Management Company is authorized to manage the alternative investment funds on the basis of a license issued by the Security Commission that is inscribed in the specific public register. License relates to specifically determined business activity to which Management Company has previously fulfilled necessary conditions. Management Company can be founded as Limited Liability Company or non-public joint stock company which has to contain in its business name the phrase “Company for Management of the Alternative Investment Funds” regardless of its legal form.

Aside from primary business activity of the Management Company there are also other business activities including managing portfolio on a discretionary and individual basis, investment counseling, reception and transfer of the orders in relation to financial instruments as well as maintaining and administering of the investment units in such funds. Adding to that, it is important to underscore that Management Company can manage UCITS funds conditioned upon issuance of the appropriate license.

Also, dependent upon the alternative investment funds value, Management Company can be categorized as big, middle and small sized which would be then regulated accordingly. In case of change of the category in relation to the increase of the fund assets value, Management Company is mandatory to request the issuance of license regarding the new category of the Management Company. Concerning monetary contributions of Management Company, they are predefined and only payable before inscription such company in the public register.

Terminology substitution brought by this draft law of term depositary for the custody bank has its legal effect as well. In accordance with the Law on Investment Funds, custody banks include only banks that can perform custody services but with the more general term of depositary it encompasses over other institutions such as Investment Company provided that necessary license is issued for performing additional services of maintaining and administering financial instruments.

Due to efficiency and systematicity, draft law sets organizational requirements that relate to the Management Company and persons that manage the company and such encompasses management of the risk and liquidity, conflict of interests, assessment rules, compensations policy, etc.

In the area of cross border activity, this draft law improves the level of cooperation and communication between Securities Commission and competent bodies of other countries in order to check fulfillment of the legal conditions for performance of this activity that leads to more efficient business operation of the Management Company beyond the territory of the country. Certainly, provisions concerning cross border activity and delegation of depository works shall be postponed until the accession of the Republic of Serbia to European Union.

Trade and distribution of the alternative investment fund investment units are not solely conducted by Management Companies but it is prescribed that other legal persons can do so on the basis of business cooperation agreement provided that they fulfill all necessary conditions accompanied with the notice delivered to Securities Commission.

One of the important provisions that contribute to the transparency is the provision concerning Management Company duty to report to members or shareholders of alternative investment fund including a thereby clear description of the investment policy that company exerts. Also of great importance for the members or shareholder shall be the draft law provisions which oblige for the Management Company to establish suitable procedures for adequate resolution of the member or shareholders remarks.

In upcoming weeks we will be able to see the final version of this law, when it becomes Proposal and introduced to the Parliament.