Following the entry into force of Law no. 243/2019 regarding alternative investment funds (AIFs, respectively the AIF Law) in January, the Romanian Financial Supervisory Authority (the FSA) has recently issued the much-awaited secondary implementing legislation meant to complete the legal framework applicable to AIFs, in the form of Regulation no. 7/2020 regarding the authorisation and functioning of AIFs (the AIF Regulation), into force starting with 24 April 2020.
The AIF Regulation provides rules regarding topics such as the authorisation of AIFs, the valuation and the calculation of AIFs’ NAV, depositary requirements, merger, spin-off and liquidation of AIFs and it also further details aspects already tackled by the AIF Law, such as transparency and reporting requirements.
The above-mentioned list speaks for itself with regard to the technical nature of the provisions of the AIF Regulation, but the latter also addresses key matters with increased commercial impact, which we are aiming to depict in the following rows.
- Authorisation of AIFs
The AIF Regulation details the authorisation procedure for AIFs, with distinct rules applicable depending on whether the AIF is set up as a contractual AIF or as a company and with specific attention being paid on contractual AIFs with multiple sub-funds (on which we are taking a closer look below) and contractual AIFs admitted to trading, in this later case both in terms of listing particularities and redemption procedure.
The detailed minimum content of the contract on the basis of which a contractual AIF is set up and of its offering document, as well as of the rules of a contractual AIF, regardless of its type, are described in the schedules of the AIF Regulation.
In terms of general provisions regarding the authorisation, the following are noteworthy:
- the period of the initial subscription offer of fund units (in case of contractual AIFs) is of maximum 365 days from the AIFs’ authorisation date;
- the contractual AIFs’ documentation must include details regarding the subsequent offers of fund units, if such are envisaged;
- the minimum share capital of an AIF set up as a company is the RON equivalent of EUR 125,000 (which must be fully paid up upon its incorporation), unless other thresholds are provided in the AIF Law (such as the EUR 1 million threshold for private equity AIFs); and
- the existence of an agreement already concluded with a financial auditor is a requirement for the authorisation to be granted in case of an AIF set up as a company.
- Features of contractual AIFs’ sub-funds
Once the framework for contractual AIFs with multiple investment compartments (i.e., sub-funds) was created by the AIF Law, the AIF Regulation sheds light on the characteristics of such sub-funds by providing rules regarding their investments and the connections between the sub-funds of the same contractual AIF.
- Each sub-fund shall have a separate investment policy, described in the offering document and, with regard to specific investment limitations, a sub-fund cannot invest in the fund units issued by another sub-fund of the same contractual AIF.
- The assets of all sub-funds of the same contractual AIF shall be entrusted to the same depositary, whilst the assets of one sub-fund may not be used for covering another sub-fund’s obligations.
- From an investor’s perspective, the advantage brought by the existence of multiple sub-funds within the same contractual AIF is that the transfer from one sub-fund to another is allowed, in line with the conversion procedure described in the offering document.
- Each sub-fund may issue one or more classes of fund units, targeting various investors, it being possible that structuring aspects such as minimum initial investment, commissions and currency differ from one class of fund units to another.
With regard to process particularities, the authorisation steps shall be followed for each sub-fund (or, as the case may be, for each sub-fund’s units’ classes) and, symmetrically, the liquidation of one sub-fund does not determine the liquidation of the other sub-funds of the same contractual AIF.
- AIFs with guaranteed assets
On top of the numerous types of AIFs designed by the AIF Law by reference to criteria such as setting up procedures, type of management or targeted investors, the AIF Regulation sets-forth a few specific rules in regard of AIFs with guaranteed assets, of which we note the following:
- AIFs are supposed to offer to their investors a guarantee regarding the recovery of their initial investment or of their initial investment increased with a certain amount;
- the guaranteed amount, as well as other relevant details related, inter alia, to the guarantee’s offering and payment method and the identification details of the guarantor shall be presented in the relevant AIF’s constitutive documents;
- the guarantee may be (i) internal, in which case it is granted to the AIF itself or (ii) external, in which case it is granted directly to the AIF’s shareholders or unitholders;
- upon the expiry of the guarantee’s validity period, the difference between the guaranteed amount and the real value of the investment shall be paid by the guarantor to the AIF, in case of an internal guarantee, respectively directly to the AIF’s unitholders or shareholders in case of an external guarantee; and
- the guarantor must be a credit institution, headquartered in Romania or in another EU member state and the specific period of the guarantee’s validity shall be mentioned in the AIF’s offering document, prospectus or constitutive act.
- Investments of AIFs targeting retails investors – prudential rules
In order to ensure an increased protection of retail investors, the AIF Regulation details prudential rules regarding the permitted investments of AIFs targeting retail investors (Retail Investor AIFs), such as:
- a contractual Retail Investor AIF managed by an AIF manager (AIFM) may not have an exposure of more than 50% of its assets on financial instruments issued by entities within the AIFM’s group;
- redemption in kind and exchanges of financial instruments against cash or other financial instruments is not permitted for Retail Investor AIFs;
- investments in corporate bonds not admitted to trading (on a regulated market or on a multilateral trading facility, such as the AeRO Market) are permitted only in certain restrictive conditions, including:
- the issuer has at least two (2) years of activity on the placement date or the bonds it issues are fully guaranteed (either by an authorised credit institution or by other liquid/ due for payment guarantees);
- the issuer has registered profit at least in the three (3) consecutive financial years prior to the bond issuance or, in case of an issuer with less than two (2) years of activity, in all financial years since its incorporation; and
- the issuer’s financial statements are audited and do not indicate material risks which might trigger the non-fulfilment of its bond-related payment obligations.
- Examples of exceptional circumstances in which the suspension or the limitation of fund redemption might be activated
Out of the liquidity management tools meant to address financial stability risks generated by liquidity mismatches to which AIFs are exposed, suspension of redemption at the discretion of the AIFM is an instrument of last resort, which may impose high costs on investors temporarily unable to cash in their investments in open-ended AIFs, but which might also be of an utmost importance for AIFMs under stressed market conditions.
In this context, the AIF Regulation provides a non-exhaustive list of situations and conditions which are to be considered exceptional, thus entitling AIFMs of open-ended contractual AIFs to limit or suspend the issuance and the redemption of fund units (subject to fulfilment of certain requirements aiming at investor protection), namely:
- the AIFM ascertains that there are difficulties in accurately assessing the valuation of the contractual AIF’s assets due to the existence of a limited number of counterparties at a reasonable price level;
- the AIFM ascertains an unanticipated high level of subscriptions or redemptions of fund units;
- the impossibility of reaching the investment targets of the contractual AIF due to reasons not attributable to the AIFM is ascertained.
The limitation or suspension of the issuance and the redemption of fund units may also be temporarily decided by the FSA, in the following circumstances:
- there are difficulties in accurately assessing the valuation of the AIF’s assets due to the existence of a limited number of counterparties at a reasonable price level;
- the AIF’s NAV is significantly exposed to financial instruments suspended from trading on the basis of a decision issued by the FSA, ESMA or other competent authority within an EU member state;
- there are discrepancies between the AIFM and the depositary with regard to the valuation of the AIF’s assets, which might lead to the depositary’s refusal to certify the NAV; and
- in other situations justified by the protection of the public interest and of the investors’ interest.
The legal framework now completed by the AIF Regulation might stimulate the Romanian capital market and, on the brink of a potential financial crisis, this much expected piece of legislation is a material practical step in opening the doors for domestic AIFs, which, considering an emerging Romanian investments market with significant available cash, will likely be welcomed by both local and SEE professionals and high net-worth individuals. Of course, it is the future practice’s appanage to reveal the actual appetite for AIF investments on the Romanian market and questions on the applicability of the AIF legislation will surely rise, but the first steps on making Romanian domiciled alternative investment funds a reality have been made.
 Is it noteworthy that, with a view to protecting existing AIF shareholders from adverse price effects caused by transactions executed by other investors, both partial and full swing pricing are permitted in case of open-ended AIFs targeting qualified investors only.
 The AIF Regulation details in its schedules the minimum content of the reports to be submitted to the FSA by AIFs targeting retail investors or qualified investors only and it also provides the frequency of such reports (higher in case of AIFs targeting retail investors), as well as the publication requirements.
 These restrictions do not apply if the corporate bonds are issued by an entity in which the relevant Retail Investor AIF owns at least 51% of the share capital.
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