√ First Romanian piece of legislation to extensively regulate AIFs
√ Introduction of several types of funds: (A) Qualified investors AIFs, including (i) private equity funds, (ii) speculative funds, (iii) funds specialized in investments in assets and commodities, (iv) real estate funds, (v) EuVECA funds or (vi) EuSEF and (B) Specialized Retail Investors AIFs, including specialization in (i) shares, (ii) real estate investment, (iii) participation titles issued by UCITS and/or real estate AIFs, (iv) bonds, (v) T-bills issued by the Romanian Ministry of Finance, (vi) long-term investment funds, (vii) money market AIFs
√ Rules regarding the mandatory authorization and functioning of AIFs customized per specific AIFs
√ Limitations on investments, valuation rules, reporting and other transparency requirements
√ Severe sanctions for failure to obtain authorization, including criminal liability in certain circumstances
√ Repeal of old legislation related to AOPCs and establishment of obligations for AOPCs currently authorized by the FSA
√ Measure for more liquidity in SIFs by repealing the restriction not to hold more than 5% shareholdings in SIFs
The Romanian Parliament has recently approved a law regulating, among others, the authorization, functioning and investment limitations of Alternative Investment Funds (the AIF Law).
The AIF Laws aims to regulate AIFs in more detail and replace the former (limited) legislation on undertakings for collective investment (other than UCITS), taking into consideration the EU developments in relation to AIF managers, AIFs and retail investor protection.
The AIF Law entered into force at the end of January 2020. The Romanian Financial Supervisory Authority (FSA) must issue secondary implementing legislation in at most three (3) months as of the date of the AIF Law’s entry into force.
Some of the main features of the AIF Law are detailed below.
Definition of an Alternative Investment Fund
AIFs are Romanian entities raising capital from qualified and/or retail investors with a view to placing it in accordance with an investment policy defined in the interest of such investors and which do not require authorization as UCITS (undertakings for collective investment in transferable securities).
In this context, an investment policy is, in short, a policy about how the pooled capital in the undertaking is to be managed to generate a pooled return for the investors from whom it has been raised. In determining whether an investment policy is in place, there are several factual factors which could indicate this.
Two main types of AIFs depending on targeted investors: Retail Investors AIFs (FIAIR) and Qualified Investors AIFs (FIAIP)
The AIF Law classifies AIFs in two main types depending on targeted investors, namely:
- Retail Investors AIFs (FIAIR) designed for attracting financial resources from retail investors and/or qualified investors; and
- Qualified Investors AIFs (FIAIP) designed, in principle, for attracting financial resources solely from qualified investors (retail can be targeted only in certain limited circumstances).
As a matter of principle, considering that one of the main aims of the AIF Law is to offer a higher degree of protection to retail investors, the limitations applicable to and the functioning conditions of FIAIRs are more severe.
The AIF Law provides in respect of both FIAIRs and FIAIPs that they can be:
- set-up in the form of a contractual AIF (under the rules set-forth in the Romanian Civil Code regulating entities without legal personality) or in the form of a company regulated by the Romanian companies’ law; and
- open-ended or closed-ended depending on whether or not their fund units can be redeemed or repurchased.
As sub-categories of each of the two main types of AIFs, the AIF Law regulates several types of AIFs, as detailed hereinafter.
Subcategories of AIFs – investment limitations and specific rules
1. SPECIALIZED RETAIL INVESTORS AIFs
The Specialized Retail Investors AIFs are characterized by the fact that they must own assets or have a total exposure of no less than 75% of the value of their net assets (VNA) exclusively in those assets corresponding to their specialization.
Under the AIF Law, there are several types of Specialized Retail Investors AIFs, including specializations in: (i) shares, (ii) real estate investment, (iii) participation titles issued by UCITS and/or real estate AIFs, (iv) bonds, (v) T-bills issued by the Romanian Ministry of Finance, (vi) long-term investment funds, (vii) money market AIFs.
A.3 Investment limitations and special functioning rules
Specialized Retail Investors AIFs are subject to certain investment limitations, of which we note the following:
- Not to hold more than 10% of its assets in securities of the same issuer, except for securities issued or guaranteed by an EU member state, local authorities of an EU member state, non-EU member states or international organizations comprised of one or more EU member state; the limit can only be exceeded in exceptional situations;
- Not to hold more than 50% of its assets in securities of companies from the same group (or 40% in case the AIF’s manager is part of that group);
- Not to hold more than 20% of its assets in cash;
- Cannot grant cash loans or guarantee cash loans for the benefit of a third party, except for the entities within the same group as the FIAIR incorporated as a company (as opposed to contractual FIAIR) and limited to 10% of its assets;
- Cannot set-forth bank deposits exceeding 30% of the value of its assets with the same bank;
- Cannot invest in securities issued by its manager, etc.
A.4 Calculation of assets value and valuation rules
VNA of Specialized Retail Investors AIFs must be calculated at least on a monthly basis considering the rules issued at EU level and further developed by the FSA.
The evaluation of the portfolio value shall be done in accordance with Law No. 74/2015 on AIF managers.
A.5 Reporting and transparency obligations
One of the main aims of the AIF Law is retail investor protection. As such, Specialized Retail Investors AIFs have several reporting and transparency obligations, such as:
- preparing monthly reports regarding the VNA;
- providing detailed status of investments;
- making the VNA always available either by publication on the AIFs website and/or by consultation at the headquarters of its manager,
- rules of the fund must be submitted to FSA, etc.
2. QUALIFIED INVESTORS AIFs
Qualified Investors AIFs are AIFs designed, in principle, for attracting financial resources solely from qualified investors, with their investment limitations being less severe than in case of Specialized Retail Investors AIFs.
According to the AIF Law, the Qualified Investors AIFs are divided in the following main categories: (i) private equity funds, (ii) speculative funds, (iii) funds specialized in investments in assets and commodities, (iv) real estate funds, (v) EuVECA funds and (vi) EuSEF.
B.3 Investment limitations and special functioning rules
Since the types of investors targeted by Qualified Investors AIFs are, in theory, more sophisticated, the level of protection provided by the AIF Law under the form of investment limitations is much lower than in case of Specialized Retail Investors AIFs.
As a matter of principle, they can invest in any type of assets.
- Private Equity Qualified Investors AIFs: (i) must have at least 50% of their share capital constituted by in cash contributions, (ii) cannot have an exposure of more than three times the value of their net assets, (iii) must invest at least 50% of their assets in non-listed companies.
- Real Estate Qualified Investors AIFs: (i) must invest at least 75% of its assets in real estate or non-listed shares of companies with a real estate profile, (ii) cannot invest more than 50% of the value of their assets in a single real estate asset, (iii) cannot set-forth bank deposits exceeding 30% of the value of their assets with the same bank, (iv) cannot have assets in cash of more than 10% of their assets, (v) cannot hold listed securities of the same issuer exceeding 10% of their assets, (vi) cannot have an exposure of more than three times the value of their net assets.
B.4 Calculation of assets value and valuation rules
VNA of Qualified Investors AIFs must be calculated at least on a quarterly basis based on rules issued at EU level and further developed by the FSA.
The evaluation of the portfolio value shall be done in accordance with Law No. 74/2015 on AIF managers.
B.5 Reporting and transparency obligations
- AIF manager must submit quarterly reports on VNA to the FSA.
Summary of authorization requirements
As a matter of principle, in order for an AIF to attract resources from its investors and have it invested in accordance with a pre-defined investment policy, it must at first go through the authorization procedure in front of the FSA.
According to the AIF Law, an AIF is authorized by the FSA after the authority (i) authorizes/registers the manager or approves passporting of an EU authorized manager, (ii) authorizes the AIF rules or, as case, its constitutional documents and (iii) authorizes the AIF depositary (there are certain requirements for a depositary to become eligible).
The AIF Law provides for more severe sanctions for failure to comply with its provisions. There are two types of liabilities provided by the AIF Law, namely:
- Criminal liability (Raspundere penala, in Romanian) – sanctioned with imprisonment from three (3) months to one (1) year or criminal fine for performing activities for which the AIF Law requires authorization without such being obtained; and
- Administrative liability (Raspundere contraventionala, in Romanian) – sanctioned with administrative fines up to RON 50,000 for natural persons or 5% of the net turnover from the previous year for legal entities.
AOPC transitory provisions
AOPCs currently authorized by the FSA must within six (6) months as of the AIF Law’s entry into force (i.e. end of July 2020), under the sanction of their authorization being withdrawn:
- Adapt their constitutional documents and activity to the provisions of the AIF Law; and
- Request the authorization of the amendments of the above-mentioned documents.
In requesting authorization as AIF, the AOPCs will chose between the different types of AIFs as follows: (i) AOPCs attracting public resources (such as SIFs) can only apply for one of the categories reserved for FIAIRs while (ii) AOPCs attracting only private resources can chose between either of FIAIRs or FIAIPs (certain conditions must be met), noting however that listed AOPCs can only apply for a FIAIR.
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