Mutual fund and Asset Management companies considering international expansion are often faced with fund structures that are different to the ones they may be used to in their home territories. Although known by different names, there are essentially two main types of fund structures to choose from:
(1) a corporate legal vehicle (usually a joint stock company) with investors owning a specified number of shares and;
(2) a trust (sometimes called a Unit trust) which does not have a legal personality and is based on contract. Trusts (or Unit trusts) are managed by Asset management companies where the fees and other terms are spelled out in a governing agreement between the asset manager and investors. The fund has no legal status but is a pool of assets (Unit Trust) with investors owning a specified number of units of the trust.
In the US, mutual funds are usually of the former type, overseen by boards of directors that are required by the Investment Company Act of 1940 to be organized and operated in the best interests of shareholders. In the European Union (and especially Luxembourg – the main destination of registration for mutual funds expanding internationally), two corporate structures exist, the SICAV “Société d’Investissement à Capital Variable” (capital is the net value of assets) or the SICAF “Société d’Investissement à Capital Fixe” (fixed capital). In the US, Unit trust structures are not common except in some Exchange Traded Funds (but in theory can be set up as Delaware trusts). In the European Union, (and again in Luxembourg) this form of trust is called “Fonds Commun de Placement” (FCP) consisting of a pool of assets managed by an investment management company. FCP’s are generally open-ended, but they may also be structured as closed-ended. The structure of a mutual fund in India is similar to that of open ended FCPs, constituted in the form of a trust and managed by an asset managed company appointed by the fund sponsor
The SICAF and closed ended FCPs are the vehicles principally used to establish venture capital/private equity and real estate funds in Luxembourg. SICAVs and open ended FCPs, are used as the UCITS funds typically investing in transferable securities or derivatives where shareholders/unitholders need to purchase or redeem their shares/units freely. These UCITS can be passported freely throughout the European Union (more on this in another post). Although Switzerland is not a part of the European Union and does not benefit from the European passport, SFBC, the Swiss regulator has a memorandum of understanding for investment restrictions and registration of funds for distribution into EU countries with individual EU country regulators such as the Commission des Operations de Bourse in France or BAFin (Bundesanstalt für Finanzdienstleistungsaufsicht) in Germany.
Structuring a fund as an FCP can provide flexibility in the funds investment policy in some EU countries to provide windows for over or under allocation to a particular asset class, which may give fund managers more flexibility in protecting themselves against sharp downside movements. This runs into problems in Switzerland which has very strict rules for fund names which must be consistent with the fund's investment policy. Luxembourg-domiciled funds structured as SICAVs whose investment rules may not be as strict in their home countries resolve this issue by rewriting their prospectuses in Switzerland. British, German and French funds which commonly use the FCP structures may find rewriting prospectuses difficult since these structures have no mechanisms for shareholder approval of changes. Hence some regulators such as BAFin do not allow rewriting of fund prospectuses.
Another choice to make for funds expanding internationally is that of a depository (also known as custodian). For all types of collective investment funds, regulators require this outside entity to ensure that the fund is indeed run by the fund’s manager in accordance with governing rules, regulations and fund investment guidelines. The depository should be a reputable local bank with settlement systems that seamlessly integrate with the funds systems.
- Eric
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