Comparison of regulatory regime for small funds’ manager in Estonia and Latvia

Estonia

Overview:

Under Estonian law, a person who intends to manage an investment fund should hold an activity license (the ‘License’) issued by the Financial Supervision Authority (the ‘Regulator’) and comply with organizational requirements under the Securities Market Act (the ‘Act’).

The organizational requirements include that a fund manager should be established as a public limited company or private limited company with a seat of business in Estonia. The share capital of a fund manager should be EUR 25,000 (to be increased up to EUR 50,000 within three months after the incorporation). The company should have at least 2 directors, while there is no requirement that they must reside in Estonia. Furthermore, there are some requirements concerning qualification of the managers and employees of a fund manager.

As the general rule, these obligations apply also to managers of small investment funds (the ‘Small Fund Managers’), who are regulated by the special regime provided in the Act.

In order to qualify as the Small Fund Manager, the volume of assets under its management should not (a) exceeds 100 million EUR; or (b) exceed 500 million EUR provided that the portfolio of the alternative funds consists of unleveraged alternative funds and the right to redeem the units or shares cannot be exercised within five years after the date of making investments in each alternative fund.

The unique characteristic of the Small Fund Manager is that they are exempted from some of the provisions of the Act compared to ‘regular’  fund managers (those that do not qualify as a Small Fund Manager), for example, they need not have a depository.

Furthermore, the Act provides for even more relaxed regulation of the Small Fund Managers who manage non-public funds in the form of a limited partnership fund (the ‘Small Fund Managers of the LPF’). Such managers need not to be licensed and may operate after registration with the Regulator. Also, requirements in respect to officials and share capital as well as other requirements provided in the Act that are applicable to the Small Fund Managers do not apply to the Small Fund Managers of the LPF. That means that only requirements provided in the Commercial Code for a particular type of entity will be applicable in respect to formation of entities intended to be used as the Small Fund Managers of the LPF.

Small Fund Managers of the LPF:

The Small Fund Managers of the LPF may commence their business as soon as they are registered with the Regulator.

In order for the Small Fund Managers of the LPF to be registered, it should make an application to the Regulator and submit the following documents:

1. the contact details and articles of association of the Small Fund Manager;
2. the number and the names of funds managed;
3. the dates of foundation or establishment of the funds managed and the country under which law the funds were founded or established;
4. the information concerning the investment policy of the funds, including the investments and instruments traded, trading venues of the fund, main risks of the fund, and composition and the total value of the assets managed.

After the application is submitted, the Regulator will register the Small Fund Managers of the LPF within 2 months.

The process of obtaining a license (for the Small Fund Managers), compared to the process of registration (for the Small Fund Managers of the LPF), is much more complex and requires more documents to be submitted. Furthermore, the decision to issue a license may take up to 6 months following the receipt of the application, compared to 2 months with respect to registration.

Additionally, fund managers (including the Small Fund Managers of the LPF) should apply for an AML license from the Financial Intelligence Unit. In order to get the license, a fund manager should submit its internal anti-money laundering and counter-terrorism financing procedural rules. This AML license is provided within 2 months after the application is received and the application can be made simultaneously with the application for registration.

Estonian law provides that a fund manager of a limited partnership fund may be either a third party service provider with whom management contract is concluded or a general partner of a fund, provided it is registered (or licensed) as a fund manager.

After the Small Fund Managers of the LPF is registered, it is possible to apply for the registration of a limited partnership fund. The rules concerning registration of a limited partnership fund are almost the same as for the registration of limited partnership. However, there is no need to identify in a petition for entry the names, personal identification codes or registry codes of the partners and include the amount of the contribution of limited partners. Furthermore, the application for the registration should additionally include the following information:

1. a notation that the limited partnership fund is a fund established pursuant to the Act;
2. the business name, registry code, and seat of the general partner of the limited partnership fund;
3. the business name, registry code, and address of the fund manager, if the fund is managed by a fund manager on the basis of a management contract;
4. the business name, registry code, and address of the registrar of the shares of the limited partnership fund; and
5. a confirmation of the Financial Supervision Authority that a general partner or appointed fund manager of a limited partnership fund has been registered.

The Small Fund Managers (including the Small Fund Managers of the LPF) are obliged to submit to the Regulator (once a year) certain information about the funds they manage, that include: names of funds, dates, and country where they were established, and their investment policy. Furthermore, the Small Fund Managers (including the Small Fund Managers of the LPF) should appoint an audit firm for fund they manage.

Concerning marketing, units of a fund managed by the Small Fund Manager may only be offered privately, meaning that a public offer of its units is prohibited. However, under Estonian law an offer will not be a public offer if:

1. It is addressed only to qualified investors; or
2. addressed to fewer than 150 persons per one EU country (excluding qualified investors); or
3. fund’s units are offered with at least EUR 100 000 value per unit; or
4. an offer of fund’s units is addressed to investors who acquire them for a total consideration of at least EUR 100,000; or
5. an offer of securities with a total consideration of less than 100,000 euros per all EU States in total calculated in a one-year period of the offer of the securities

Sub-funds:

Estonian law allows the creation of sub-funds only for a common fund so that assets of a public limited fund or a limited partnership fund cannot be divided into sub-funds.

Therefore, in case fund managers intend to register a fund with sub-funds, it should be licensed (and not just registered) and the fund should be in a form of a common fund.

Taxes:

Estonian Limited Partnership Funds are tax transparent, meaning that a fund itself is not liable for taxes in Estonia. All profit is treated as a profit of the fund’s investors who will be responsible for relevant taxes.

Latvia

Overview:

Latvian law, similar to Estonian, provides that fund managers should be licensed by the Financial Supervision Authority (the ‘Authority’) in order to provide fund management services. However, some fund managers, depending on the value of assets they manage and other considerations may provide fund management services after registering with the Authority. In that case, there will be no need to acquire a license.

A fund manager shall be founded as a joint stock company or a limited liability company in Latvia and has at least three board members. Furthermore, there are some criteria that should be satisfied with respect to the board members of Latvian fund managers and persons who are authorized to manage a fund and/or to issue orders in respect of the fund property. Such officials should have sufficient competence in the field for which they will be responsible, have higher education and corresponding professional experience of not less than three years, and others.

The initial capital of a fund manager should be EUR 125,000 or more. However, for the Registered Fund Managers, the initial capital requirement is relaxed and it shall be not less than EUR 15,000.

Registered Fund Managers:

Unlike the Estonian approach, Latvian approach does not expressly introduce the concept of small fund managers. At the same time, it states that fund managers whose assets under management do not reach EUR 500 million in total and whose fund’s operational rules do not provide for the use of leverage as well as the repurchase of investment units for a period of five years need not be licensed and may operate after the registration with the Authority (the ‘Registered Fund Managers’). Furthermore, in contrast to the Estonian approach, rules on the Registered Fund Managers apply to them irrespective of the type of funds they manage.

The Registered Fund Manager may provide fund management services and non-core services such as administrative management of a fund (arrangement of legal affairs and accounting of the fund, maintenance of the register of holders of the fund investment units,  provision of information upon request of the fund investors and other) and marketing of investment units. The marketing may be aimed only to professional investors and those non-professional investors who provide written confirmation that he or she is capable of independently taking a decision to invest in the relevant fund and is aware of all risk, provided that a minimum amount of such investor’s purchase is EUR 20,000 or more.

In order to register a fund manager an application should be sent to the Regulator and submit the following information: its constitutive documents, a document confirming payment of the initial capital, the information on the number and names of funds, and the total value of assets intended to be managed, and offering document or a general description of the investment strategy of funds.

The decision to register a fund manager takes up to 1 month following the receipt of the application. The fee for reviewing the documents submitted for the manager’s registration is EUR 250.

The process of obtaining a license for fund managers, compared to the process of fund manager registration, is much more complex and requires more documents to be submitted. Furthermore, the decision to issue a license may take up to 3 months following the receipt of the application, compared to 2 months with respect to the Registered Fund Manager.

Fund managers are also required to pay certain annual fees. For the Registered Fund Managers, the fee is EUR 900 a year. For the Licensed Fund Managers, the fee is EUR 4,000 a year plus 0.0025 to 0.0125 percent of the average assets of the funds under management per quarter;

After a fund manager is registered, it may register a fund. However, before registering a fund, there is a need to form an entity that will act as a fund. Fund may be formed as an aggregate of assets, a limited partnership, or a joint stock company. Therefore, the exact rules in relation to the formation of an entity (a fund) will depend on the type of a legal entity chosen for a fund.

The documents required to register a fund include:

1. information on the investment strategy;
2. information on a risk profile and other characteristics of activities of the fund, including information on Member States or third countries in which the fund operates or intends to operate;
3. information on the master fund if the fund is a feeder fund;
4. a document of incorporation of each fund;
5. information on the custodial bank and custodial bank agreement;
6. a fund management contract between the fund and the manager;
7. operational rules of a fund; and others.

The registration of a fund takes up to two (2) months after the application is received by the Regulator. The fee for examination of documents submitted for fund registration is EUR 1,422.

Furthermore, fund managers (including the Registered Fund Managers) should appoint an auditor for funds they manage.

Sub-funds:

Latvian law provides for the possibility of establishing sub-funds within the structure of a fund irrespective of the legal form of a fund.

Taxes:

Latvian funds in a form of a limited partnership are tax transparent, meaning that a fund itself is not liable for taxes in Latvia. All profit is treated as the profit of the fund’s investors who will be responsible for relevant taxes.

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