Act 35/2003 on Collective Investment Institutions ("Act 35/2003"), implementing UCITS III, introduced a new scenario for the Spanish collective investment institutions ("CII"). In order to develop this Act further, on October 13 2004, the Ministry of Finance published the first Draft Regulation on CII, which included one of the most eagerly-awaited developments: the regulation of hedge funds. However, it established requirements such as the calculation of daily NAV and the impossibility to invest in offshore hedge funds, which rendered the Spanish hedge funds market uncompetitive, since it was too restrictive.
On July 18 2005, a new Draft Regulation on CII (the "Draft") was published. This incorporates some of the industry's demands and establishes a less restrictive regulatory framework by, for example, eliminating the requirement for daily NAV and requiring the funds to provide it quarterly. This Draft will now have to be discussed by the Council of Ministers before its final enactment (expected in October); however, the final wording of the Regulation is expected to be very similar to this Draft since, as we mentioned, all the comments made by the sector and the regulatory bodies have already been discussed and, in some cases, incorporated.
Both alternative investment funds (Free investment Collective Investment Institutions - ie, single manager funds) and funds of alternative investment funds (Funds of Free investment Collective Investment Institutions - ie, multi-manager funds) are provide for.
The principal characteristics of single manager funds and multi-manager funds are the following:
Single Funds - Free investment Collective Investment Institutions
- Whereas (in the first Draft) only institutional
investors could acquire single manager funds,
the new Draft establishes only a requirement
of a minimum investment of €50,000.
- Marketing activities can only be carried
out when addressed to qualified investors (the
earlier version of the Draft established that
no marketing activities could be carried out).
- Minimum number of unit- or shareholders of
25.
- Possibility of subscription and reimbursement
in kind.
- The NAV must be calculated quarterly. However,
if it is required by the type of investments,
it can be calculated half-yearly. The subscriptions
and reimbursements shall be carried out with
the same recurrence.
- There is no restriction on investment in
any kind of assets, including credit derivatives,
irrespective of which are the underlying assets.
The only requirement is for the investment policy
to follow principles of liquidity, diversification
and transparency.
- There is no restriction for derivative leverage.
- Rules on maximum fee limits stated in Spanish
legislation for CII are not applicable.
- Possibility of indebtedness up to 5 times
the value of the assets of the single manager
fund.
- Possibility of pledging the assets of the
fund.
- The risk management system shall include
the performance of regular simulations in order
to evaluate the effects of adverse market developments
on the ability of the fund to fulfil its commitments.
- Before acquisition of share/units of this
type of CII, the investor shall declare in writing
that he is aware of the inherent risks of this
type of investment.
- The Free investment Collective Investment Institutions have to be registered in a special registry at the Spanish supervisor (CNMV).
Funds of Funds - Funds of Free investment CII
- No limits on investors to whom product can
be sold.
- Minimum investment of 60% of the assets of
the multi-manager fund in other Spanish Free
investment CII or other similar foreign funds
domiciled in OECD countries or funds whose management
has been entrusted to a management company subject
to supervision in an OECD country.
- Maximum investment of 10% of the assets of
the multi-manager fund in a single CII.
- The NAV must be calculated quarterly. However,
if required by the type of investments, it can
be calculated half-yearly. The subscriptions
and reimbursements shall be carried out with
the same recurrence.
- Legislation on maximum fee limits provided
by Spanish legislation for CII is not applicable.
- The Fund of Free investment CII has to be
registered in a special registry at the Spanish
supervisor (CNMV).
- Before the acquisition of share/units of
this type of CII, the investor shall declare
in writing that he is aware of the inherent
risks of this type of investment.
- The Prospectus, Simplified Prospectus and all marketing material shall include information about the special risks that implies the investment in this type of CII.
According to the above, it seems that - finally - Spain should have a flexible regulatory framework for the launch of hedge funds. However, there are still some issues that need further clarification:
- the scope of the prime brokerage agreements
that can be entered into by Spanish hedge funds;
- whether the Spanish multi-manager funds can
invest in funds of funds;
- the actual meaning of "management company
located in OECD" for the purposes of eligibility
for investment by Spanish multi-manager funds;
and
- which requirements would be imposed on the
Spanish management companies that intend to
manage alternative investment products.
