Investment institutions

Author: | Published: 8 Apr 2002
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The offering of shares or units in an investment institution (collective investment scheme) in The Netherlands is regulated by the Act on the Supervision of (Collective) Investment Institutions (ASII, Wet toezicht beleggingsinstellingen). The act has been worked out in more detail in the Decree on the Supervision of (Collective) Investment Institutions and various Rules (uitvoeringsregelingen, richtlijnen and circulaires) of the Dutch Central Bank (DCB, De Nederlandsche Bank). This article deals with the recent developments in the supervision of investment institutions in The Netherlands. Before doing so, we will briefly touch upon the framework of the ASII and some specific fund structures.

Framework

General prohibition

Under the ASII it is prohibited to solicit or obtain, in or from The Netherlands, moneys or other goods beyond a restricted circle of persons, in exchange for shares or units of an unauthorized collective investment institution or so to offer shares or units of such unauthorized collective investment institution. This prohibition does not apply to undertakings for collective investment in transferable securities (UCITS) that have obtained authorization in another member state of the European Union and have notified such registration to the DCB (the so-called European passport facility). Furthermore, investment institutions will be exempt from this prohibition, if they offer their shares or units to professional market parties only. Professional market parties under the ASII are defined as natural persons who or legal entities which, in course of their occupation or business, deal or invest in investment objects, which includes institutional investors as banks, pensions funds, insurance companies and investment institutions. High net worth individuals as such are not considered as professional market parties.

Requirements for an authorization

An application for an authorization is accepted by the DCB as soon as the following (summarized) requirements for an investment institution are met: (i) expertise and trustworthiness of the investment institution's managers who determine the day-to-day policy, (ii) equity of the investment institution should at least amount to €226,890, (iii) day-to-day management is conducted by at least two individuals, and (iv) a prospectus, containing certain prescribed details on the investments offered, shall be made publicly available. However, additional requirements apply to investment institutions that have no legal personality and Dutch UCITSs.

Foreign funds policy

For foreign non-UCITSs funds that are seeking authorization for marketing their shares or units in The Netherlands, it is relevant to note that the DCB distinguishes between funds that are established in a jurisdiction in which, in the opinion of the DCB, adequate supervision is performed and others. The DCB considers the supervision as performed in Jersey (only recognized funds), Guernsey, Luxembourg and the US (only funds that are subject to supervision of the SEC) as adequate. Although foreign funds that are subject to adequate supervision abroad must obtain authorization from the DCB before marketing their shares or units in The Netherlands, these funds may profit from some relaxations and exemptions with respect to the conditions to be met for obtaining authorization from the DCB. Those funds can generally suffice with the submission of certain documents including the articles of association of the fund, the prospectus, a copy of the domestic authorization and information on how the fund will provide information to (potential) investors in The Netherlands. For other foreign funds (ie funds that are not subject to adequate supervision), additional requirements have to be met to obtain authorization from the DCB. However, the DCB's foreign funds policy is announced to the revised. At this moment in time no details of the revised policy have been published yet but is expected to be published soon.

Specific fund structures

Umbrella funds

Umbrella funds are investment institutions that offer shares or units in a number of collective investment schemes (sub-funds) to investors under a single authorization from the DCB. The umbrella structure is usually time and cost efficient if it is intended to market several sub-funds in The Netherlands. The ASII does not provide any specific restrictions for investment institutions that want to obtain authorization as an umbrella fund from the DCB.

Fund in fund and master-feeder structures

Except for Dutch UCITSs, the ASII does not contain any investment restrictions and therefore does not prohibit investment institutions to invest in other investment institutions. Consequently, the ASII allows fund in fund and master-feeder structures for non-UCITS funds.

Until recently, the DCB did not accept applications for an authorization by Dutch feeder funds that were to act for one single foreign master fund if the latter was not subject to adequate supervision in its home country or home state. However, the DCB is changing its policy in this respect and authorization will be granted if certain terms and conditions are fulfilled that enable the DCB to supervise, to a certain extent, the activities of the foreign master fund. A publication from the DCB on this subject is expected soon.

Supervision

Recently, the Dutch Minister of Finance announced a restructuring of the supervision of investment institutions, securities institutions, credit institutions and insurance companies. Owing to this process of restructuring the supervision of financial institutions will be divided into supervision regarding business economics (prudentieel toezicht) and supervision regarding business conduct (gedragstoezicht). As from July 1 2002 the supervision regarding business economics will be dealt with by the DCB and the Pension & Insurance Chamber (Pensioen & Verzekeringskamer) and the supervision regarding business conduct will be dealt with by The Netherlands Authority for the Financial Markets (AFM, Autoriteit Financiële Markten). As the supervision of investment institutions qualifies to a large extent as supervision regarding business conduct, the supervision of investment institutions will move as from July 1 2002 from the DCB to the AFM.

Recent developments and amendments

General revision of the ASII

The Dutch Minister of Finance has made preparations for a general revision of the ASII. One of the proposed amendments to the ASII is for example that the fund itself will no longer need to be authorized but its fund manager must, which has the advantage that once a fund manager has obtained authorization it can relatively easy set up and market new funds without having to obtain an authorization for each such new fund. At this moment in time no details of the general revision have been published yet.

Financial information leaflet

On January 1 2002 the decree on the financial information leaflet (Besluit financiële bijsluiter) came into force. As from July 1 2002 financial institutions as investment institutions must draw up and make available a financial information leaflet for each complex financial product that they are offering to investors in The Netherlands. The financial information leaflet has to be made available by an investment institution to a (potential) investor in a complex financial product before entering into the agreement, free of any charges.

According to the decree a complex financial product is defined as a financial service or product that has been manufactured with components belonging to different kinds of financial services or products from which the value of at least one component depends on the (price) development at financial markets or other market places. Examples of complex financial products are, inter alia, investment mortgages (beleggingshypotheken), security-lease products (effecten-leaseproducten) and life insurance policies (levensverzekeringen) containing an investment component.

The DCB has used its authority under the decree to list all the products of authorized investment institutions as complex financial products. This means that all authorized investment institutions in The Netherlands have to draw up financial information leaflets for their products before July 1 2002. However, the decree does not apply to foreign UCITSs that offer their products in The Netherlands. For investment institutions with an umbrella structure the requirement applies for each sub fund.

Transparent investment institutions

The DCB is to publish a circular letter on the so-called transparent investment institutions. In this letter the DCB will formulate its policy regarding transparent investment institutions. Transparent investment institutions are investment institutions that exclusively invest in one (investment) institution and do not (actively) perform their own investment policy. As a matter of fact a transparent investment institution is a normal participant in the underlying fund in which it invests. So generally, the same terms and conditions that apply to investors in the underlying fund, will also apply to the participants in the transparent investment institution. Therefore, the DCB takes the view that under certain conditions, which will be elaborated in the circular letter, a transparent investment institution does not need to apply for an authorization. At this moment in time no details of this circular letter have been published yet but the circular letter is expected to be published soon.

Offering of shares or units under various names

In its news letter of June 2001 the DCB has published rules for the offering of shares or units in an investment institution under various names on the Dutch market. This enables investment institutions that use intermediary brokers (intermediairs) in The Netherlands to offer their shares or units to investors, to profit from the familiarity of the name of such brokers with the Dutch investors. Permission to market its shares or units under various names is given by the DCB, if an investment institution notifies the DCB in advance and the following documents are filed: (i) a draft of the distribution agreement to be concluded between the intermediary broker and the investment institution, (ii) a statement of the investment institution in which it is confirmed that the contents of the prospectus offered by the intermediary broker is identical to the contents of the prospectus offered by the investment institution itself and (iii) a copy of the signed agreements. The board of the investment institution itself remains responsible for the offering of shares or units to the investors via an intermediary broker. Furthermore, the prospectus and any public offering notice and/ or advertisement must clearly state under which name the investment institution has been registered with the DCB.

Costs transparency and close connections

The DCB published on December 7 2001 the circular letter on the transparency of costs and close connections (nauwe banden). This circular letter contains various policy rules and recommendations regarding the disclosure in the prospectus and financial reports of an investment institution of the costs charged to the (potential) investors when investing in an investment institution and information on close connections the investment institution and its management maintain with parties linked to the management.

Regarding the costs, the circular determines, inter alia, that: (i) all relevant information regarding the costs must be included in one (cost) paragraph, (ii) it should be possible, based on the information provided in the financial reports, to make a simple link between the costs as set out in the prospectus and the costs actually charged to the investors as reflected in the financial reports and (iii) the (semi) annual report should contain a so-called expense ratio.

In respect of the close connections, the circular determines, inter alia, that: (i) all foreseeable conflicts of interest that could arise from the close connections should be disclosed in the prospectus, (ii) the existing close connections have to be disclosed in the prospectus in one paragraph and (iii) regarding transactions between persons or companies that have a close connection with the investment institution or its management, the conditions under which these transactions are or will be executed must be disclosed in the prospectus, and the (semi) annual accounts.

Outsourcing of core activities

The DCB has published a circular letter on the outsourcing of core activities (kerntaken) in January of this year, in which the DCB has described the conditions under which investment institutions may outsource core activities to third parties. Nevertheless, the investment institution will remain responsible and liable for the core activities that have been outsourced. The outsourcing of core activities is accepted by the DCB as soon as the following (summarized) requirements are met: (i) the outsourcing has to be formalized in an agreement with the third party involved, (ii) such agreement has to contain information and arrangements on a number of issues specified within the circular letter, (iii) the investment institution has to ensure that the outsourcing will not result in a conflict of interest regarding the investors, (iv) the investment institution has to ensure that the outsourcing will not restrict the DCB's possibilities to supervise and (v) the investment institution has to state in its prospectus and (semi) annual accounts that it has outsourced certain core activities. If an investment institution decides to outsource its portfolio management to a third party additional requirements will apply including that the third party's manager(s), who determine(s) the day-to-day policy, meet requirements on expertise and trustworthiness. This circular letter applies both to existing and future outsourcing of core activities. This means that a description of the core activities that had already been outsourced must be included in the existing documentation of the investment institution.


Steins Bisschop Meijburg & Co
Hullenbergweg 300
Amsterdam 1101 BV
Netherlands
Tel: +31 20 656 1777
Fax: +31 20 656 1700