New Regulations for Offering Foreign Mutual Investment Funds to the public in Israel
• Under new regulations which were recently adopted and will become effective in November 2016, the Israel Securities Authority is authorized to permit the offering of foreign mutual funds of major asset managers to the public in Israel, including by way of dual listing with the Tel Aviv Stock Exchange.
• Only foreign mutual funds which operate in accordance with the US Investment Company Act of 1940 or the European Directive (UCITS) are eligible to be offered to the public in Israel. The new regulations set forth additional criteria that should be met in order to obtain such permit (including with respect to the fund managers).
• The new regulations set forth the distribution fees that may be paid to Israeli banks in connection with foreign funds and the fees that Israeli banks may charge to their clients in this respect.
• As of the end of 2015, there were 1,392 mutual funds in Israel with an aggregate asset value of approximately $60 billion, 262 of which focus primarily on investments outside of Israel and have an aggregate asset value of approximately $5.4 billion.
• As of the end of 2015 the “ETF” market in Israel reached a total market value of approximately $26.5 billion (100% growth since 2010) out of which approximately $10.7 billion are attributable to “ETF”s tracking non Israeli indices.
1. Background
On May 5th, 2016 the long awaited regulations[1] for the offering of foreign (non-Israeli) mutual investment funds (including ETFs) of major asset managers to the public in Israel (the “New Regulations“), were finally published. The New Regulations will become effective 6 months following publication, i.e. beginning of November 2016.
The New Regulations reflect the Israel Securities Authority’s (the “ISA“) endeavor to open the Israeli retail investment market for competition and allow Israeli investors to access the global mutual investment funds (including ETFs)[2] of major asset managers.
The Joint Investment Law regulates the public offering and activity of mutual funds in Israel. Prior to the New Regulations, in order to offer foreign mutual funds to the public in Israel, such mutual funds had to comply with all the regulatory requirements imposed on Israeli funds, including the publication of a prospectus approved by the ISA. Therefore, in practice foreign mutual funds are not currently offered directly to the public in Israel.
The New Regulations allow the offer of foreign mutual investment funds in Israel by authorizing the ISA to grant permits to offer foreign mutual investment funds to the public in Israel subject to the submission of an application and fulfillment of certain criteria as specified under the New Regulations.
The following is a brief overview of the New Regulations.
2. Main Criteria for Offering Foreign Funds in Israel
The ISA is authorized to grant a permit to a foreign fund manager (the “Fund Manager“) to offer units of a foreign fund to the public in Israel, including by way of registration of the fund’s units for trade in the Tel Aviv Stock Exchange[3] (the “TASE“). The following is a brief summary of the main requirements for receiving such a permit:
1. The foreign fund operates in accordance with the US Investment Company Act of 1940 or the European Directive (UCITS)[4].
2. The total value of assets managed by the Fund Manager (including affiliates under joint control) is greater than USD 20 Billion.
3. The Fund Manager manages no less than five funds whose units are offered to the public for at least five years, and the total value of assets held in each of such funds was no less than USD 500 Million during a period of two years prior to the day the Fund Manager submitted an application to offer foreign fund units in Israel.
4. The price of the foreign fund units is continuously published on a website to which the public has access at no cost.
5. The foreign fund cannot be a fund that specializes in investments in Israel[5].
6. The net asset value of the foreign fund is at least USD 50 Million.
7. The foreign funds’ units will have been offered in Europe or in the United States no less than 12 months prior to the initiation of the offering of its units to the public in Israel.
8. As security for any administrative fine which may be imposed on the Fund Manager (in connection with breach of certain obligations) it shall deposit a bank guarantee issued by an Israeli bank for a sum of at least NIS 1 million[6] or, in lieu of a bank guarantee, a cash deposit or traded securities deposit[7] in an account with an Israeli bank.
9. The Fund Manager deposited for the benefit of the units holders in Israel cash or securities in an account in an Israeli bank, the amount of which shall vary based on the aggregate value of the units of its funds held through Israeli distributers (from deposit in the sum of NIS 250,000[8] for units value of NIS 250 Million up to a deposit in the sum of NIS 12[9] Million for units value of at least NIS 24 Billion with Israeli distributers)[10].
10. The Fund Manager appointed an authorized representative in Israel to serve as a liaison between the Fund Manager and the ISA, and between the Fund Manager and the unit holders in Israel. The representative may be either of the following: (i) an Israeli branch of the Fund Manager (or of a person controlling it or a company controlled by such person), provided that the appointed employee speaks Hebrew; (ii) an Israeli licensed Investment Advice/Investment marketing/portfolio management company; or (iii) an Israeli mutual fund manager.
11. The rights of a person who holds a unit of a foreign fund purchased in Israel, which derive from the holdings of such unit or share, shall be equal to the rights of any of the foreign fund’s unit holders or shareholders (outside Israel).
12. Foreign fund unit holders in Israel shall be entitled to file a suit against a foreign Fund Manager and its representative in an Israeli court for damages incurred due to a breach of law by either of them.
13. Application – in order to obtain the ISA permit for the offering of the foreign fund in Israel of for the registration of its unit on the TASE, the Fund Manager is required to submit an application to the ISA in accordance with the New Regulations. The application will be based on the foreign prospectus under which the funds units are offered outside of Israel and shall include other documents and certain information as required in the New Regulations.
14. Reporting Duties – in general, the Fund Manager is required to submit to the ISA (for publication to the public) every report which it is required to issue under the law of its country of origin (including under the rules of its regulator in such country) and under its prospectus in its country of origin[11]. Any report shall be written in either Hebrew or English. Furthermore, a Fund Manager shall submit a quarterly report for all of the foreign funds under its management offered to the public in Israel, detailing the units value held by distributors in Israel, and shall specify the unit value of each fund held by the a distributor.
3. Distribution Considerations
The success of marketing foreign mutual funds in Israel to Israeli investors may depend, among others, on marketing efforts of the banks in Israel, as most Israeli retail investors still invest in financial products such as mutual funds via their banking services and the advice of the investment advisers employed by the banks.
An Israeli bank may not refuse to distribute units of a foreign fund (i.e. to purchase or sell units of such funds for its clients) for reasons related to the fund or the Fund Manager. However an Israeli bank may decide not to distribute units of foreign funds at all.
According to the New Regulations, certain retractions regarding payments and benefits in connection with purchase, redemption, sale or holding of units, including the Israeli regulatory regime regarding distribution fees applicable to Israeli mutual funds, will apply to distribution of foreign mutual funds as well.
Although other distributers (such as local investment marketing agents) are not limited in the benefits they may receive from the Fund Manager, Israeli banks are limited in the distribution fee which they may receive from the Fund Manager. Specifically, under the New Regulations, the maximum daily distribution fee that may be paid by a Fund Manager or received by Israeli banks or other TASE members may not exceed the unit’s redemption price as published for that day (and if not published – the last one published) multiplied by 0.35%/365.
We note that some Israeli banks may consider entering into agreement with intermediary platforms which aggregate several fund managers.
In case the Fund Manager does not enter into an agreement with an Israeli bank regarding payment of distribution fee, the bank may charge its client (who holds the fund’s unit(s)) a fee in a sum which is no greater than the distribution fee it could have received from the Fund Manager. However if the fund’s units are listed for trade on the TASE, the bank may only be able to charge its clients an execution fee for the purchase or sell of units.
In any event, the fees charged by the bank to its clients may neither vary due to the fact that units were issued by different Fund Managers, nor due to the fact that the bank did not enter into an agreement with the Fund Manager for the payment of distribution fees, nor due to the fact that the fund is a foreign fund.
_____________
[1] Joint Investment in Trust Regulations (Offering Units of a Foreign Fund)-2016
[2] Currently, there are no “local” ETFs in Israel; since index products in Israel are structured more like ETNs (there is a proposed set of regulation intended to change their structure to funds for joint investments in trust).
[3] In which case the approval of the Tel Aviv Stock Exchange shall also be required, and the units of such funds will have to be listed for trade in an exchange outside Israel as well.
[4] Council Directive 200965ec on the coordination of laws, regulation and the administrative provisions relating to the undertakings for collective investment in transferable securities (UCIT).
[5] During the legislation process the ISA has clarified that this will not prevent such fund from investing in Israeli companies altogether. Currently funds denominated in NIS cannot be offered under these new regulations (the ISA will consider in the future the possibility to allow foreign funds denominated in NIS or which have a NIS exposure hedge).
[6] Currently – approximately USD 258K; this sum is linked to the CPI. This is required only once for a Fund Manager and not per every fund offered.
[7] According to the New Regulations the market value of such securities shall be discounted (discount factors vary per security type) for the purpose of calculating the value of the Deposit.
[8] Currently – approximately USD 64.5K; this sum is linked to the CPI.
[9] Currently – approximately USD 3.1 Million
[10] See footnote 7 for Securities deposit.
[11] It shall also be required to submit immediate reports regarding replacement of the authorized representative of the Fund Manager in Israel and regarding termination of the offering of its funds’ units in Israel.
* * *
For additional information please contact your GKH attorney or one of the following: Adv. Ofer Hanoh, head of the Banking, Insurance, and Finance department [Ofer@gkh-law.com], Adv. Yigal Binyamini, Partner in the Banking, Insurance, and Finance department [yigalb@gkh-law.com] or Adv. Dikla Peleg, Partner in the Banking, Insurance, and Finance department [diklap@gkh-law.com].
READ THIS UPDATE IN PDF FORM:
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. (GKH), is one of the leading law firms in Israel, with some 150 attorneys. GKH specializes, both in Israel and abroad, in various fields of law including Mergers and Acquisitions, Capital Markets, Technology, Banking, Project Finance, Litigation, Antitrust and Competition, Energy and Infrastructure, Environmental Law, Intellectual Property, Labor Law and Tax.
