Since July 1 2000, as a result of last years' late amendment to the government decree on the execution of the Hungarian Foreign Exchange Act, domestic entities seem to be provided with the possibility of acquiring investment units or other collective investment securities issued by investment funds registered in OECD member countries, without the prior approval of the National Bank of Hungary (NBH). According to the government decree, this is possible, if among other things:
(i) the registered seat of the investment fund manager is located in an OECD member country;
(ii) the investment fund's investment policy targets that more than 50% of the value of its assets be comprised of shares or other similar securities issued by a foreign company, the registered seat of which is located in an OECD member country;
(iii) the first series of the collective investment securities issued for the foreign investment fund are offered in OECD member countries; and
(iv) the investment funds' collective investment securities are ranked by an international rating agency, recognized by the NBH, as falling within a category proposed for investment.
According to the previous rules, the approval of the NBH was required for the offering of foreign collective investment securities in Hungary or for the purchase of such securities abroad. The granting of such approvals was refused by the NBH in almost every case. The approval granted by the NBH in 1998 concerning the offering of the investment units of the Templeton investment funds in Hungary should be treated as an exception to this restrictive practice and, indeed, the approval was later withdrawn. Under the existing rules, an advance notification to the NBH prior to the offering or purchase of foreign collective securities is sufficient. If the foreign fund manager would like to offer collective investment securities in Hungary issued for the investment funds managed by it, a notice to the NBH, allowing at least 30 days in the case of a public offering, and 15 days in the case of a private placement, must be given before the proposed transaction. If a domestic entity would like to purchase the investment securities issued abroad, then notice of such a purchase must be given at least 15 days in advance. Based on the notification, the NBH will examine whether the proposed transaction would fulfil the provisions of the government decree. If the proposed transaction would fulfil such provisions, then the NBH will acknowledge the notification. In any event, a Hungarian investment service provider (broker) must be used for the offerings in Hungary, and the purchases by Hungarian residents abroad, of foreign collective investment securities.
This liberalization of the Hungarian foreign exchange laws concerning the acquisition of foreign collective investment securities by domestic entities shocked Hungarian investment funds and Hungarian fund managers, since it is a unilateral move. The government decree does not provide the same facilitation for the offering of investment units of Hungarian investment funds abroad and for the acquisition of investment units issued on Hungarian open-end investment funds by foreign residents. The approval of the NBH is still required in relation to these transactions and the NBH does not seem to be willing to grant such approvals for foreign exchange policy reasons. As a result of the lobbying efforts of the Hungarian Fund Managers Association (BAMOSZ), as well as Hungarian fund managers, the Hungarian parliament adopted certain amendments to the Securities Act during the last session before the summer break. However, as a result of these amendments, the possibility of a public offering or a private placement of foreign collective investment securities in Hungary only exists in theory.
According to the amended Securities Act, certain sections of the Investment Funds Act will apply to foreign investment funds that issue foreign collective investment securities in Hungary. Among these regulations, the requirement that at least 15% of the net asset value of the foreign funds must be held in cash, or on deposit fixed for a maximum of three months or in central bank eligible securities, can be seen as especially disadvantageous. At the beginning of the 1990s, the main goal of such regulation was the protection of investors in the developing and ambiguous Hungarian market, but now such regulation can be seen to place a needless and abnormal burden on foreign investment funds proposing to seek investments in Hungary.
With regard to the amended Securities Act, and as to whether these amendments affect the private placement of existing collective investment securities in Hungary or whether these provisions are applicable only to the transactions dealing with newly-issued securities, it can be said that, according to the opinion of the State Supervisor of Financial Organizations and its legal predecessor, the sale of existing securities is not considered to be an offering and, consequently, the provisions of the Securities Act are not applicable to such transactions. With reference to the above-mentioned amendments, the supervisor changed its opinion and took the position that these provisions are applicable to the sale of both existing and newly issued collective investment securities in Hungary. Further to these amendments, Hungarian offerings or the sale to Hungarian residents of foreign collective investment securities is practically impossible for foreign investment funds, which cannot fulfil the requirements of the Hungarian regulations mentioned above. Such requirements are regarded as too strict if compared with those of highly developed capital markets, a view supported by the temporary withdrawal by certain foreign investment funds of their investment plans in Hungary.
In conclusion, it appears that the liberalization of the foreign exchange rules adopted at the end of last year has not had the proposed success, due to the amendments of the Securities Act. The concept of equal treatment of foreign and Hungarian investment funds will likely be implemented by the new act on investment funds, which is proposed to be adopted by the Hungarian parliament next year. However, the market does not have any specific information concerning the liberalization of the foreign exchange rules as regards the acquisition by foreign residents of collective investment securities issued on Hungarian open-end investment funds. Therefore, at present the timing of the implementation of the full liberalization of the Hungarian investment funds market cannot be foreseen clearly.
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