Investment funds in Russian Federation: regulatory overview

A Q&A guide to investment funds law in Russian Federation.

This Q&A is part of the global guide to investment funds. It provides a high level overview of investment funds in Russian Federation, looking at both retail funds and hedge funds. Areas covered include a market overview, legislation and regulation, marketing, managers and operators, restrictions and requirements, tax and upcoming reform.

To compare answers across multiple jurisdictions, visit the Investment Funds Country Q&A tool. For a full list of jurisdictional Q&As visit www.practicallaw.com/investmentfunds-mjg.

Contents

Retail funds

1. What is the structure of the retail funds market? What have been the main trends over the last year?

The Russian retail funds (паевые инвестиционные фонды) market is relatively young and is not as economically developed as in other European countries or the US. Compared to some countries the Russian retail funds market has a very high degree of regulation. This can create difficulty when structuring specific purpose retail funds.

There are four basic types of retail funds in Russia:

  • Open-ended funds.

  • Exchange-traded funds.

  • Interval funds.

  • Closed-ended funds.

Open-ended funds

The unitholder has a right to redeem all, or any part, of its units at any time.

Exchange-traded funds

The unitholder has a right to demand that a person authorised by the trust manager (authorised person) purchases all, or any part, of its units at any time and a right to sell its units on the stock exchange specified in the fund's trust management rules and on the terms specified in those rules at any time. The authorised person is then entitled to redeem all, or any part, of its units on the dates established by the fund's trust management rules.

Interval funds

The unitholder has a right to redeem all, or any part, of its units, but only on the dates established by the fund's trust management rules.

Closed-ended funds

The unitholder does not have a right to redeem its units until the term of the trust management contract has expired.

Main trends over the last year

As a result of the US and EU sanctions and the downgrading of Russia's sovereign rating, the Russian retail funds sector has been subject to significant pressure and has seen a large withdrawal of both Russian and foreign investors.

Regulatory framework and bodies

 
2. What are the key statutes, regulations and rules that govern retail funds? Which regulatory bodies regulate retail funds?

The principal statute which regulates all types of retail funds in Russia is Federal Law On Investment Funds No. 156-FZ dated 29 November 2001 (Investment Funds Law). The Investment Funds Law sets out the overarching regulatory framework. Specific detailed regulations issued by the Russian Government and the Central Bank of the Russian Federation (CBR) govern the day-to-day activity of retail funds.

The CBR is the main regulator of Russian retail funds. It also supervises the activity of retail funds. In addition, it regulates:

  • The activities of retail funds, management companies, specialised depositories and agents for issuance.

  • The redemption and exchange of investment units.

  • The persons that keep registers of investment unitholders.

The Russian Government has adopted standard rules for the trust management of retail funds. The Russian Federal Service for Financial Markets, whose functions were transferred to the CBR from 1 September 2013, has approved the standard procedure for convening general meetings of investors and rules for the formation of retail funds' capital.

 
3. Do retail funds themselves have to be authorised or licensed?

Retail funds do not have to be authorised or licensed in Russia. However, each retail fund must have its own rules which must be registered with the CBR. Retail funds must also have a trust manager who is licensed by the CBR. To obtain a licence, a trust manager must have sufficient equity capital and a CEO who is eligible for this position. A single trust manager may have several retail funds under its management. A trust management licence is issued for an unlimited period of time.

Marketing

4. Who can market retail funds?

Russian retail funds' units can be marketed by either a trust manager of the retail fund or by an agent appointed by the fund's trust manager. Under Russian law, only specialised custodians, licensed brokers or security depositories may act as agents engaged in sale, redemption and exchange of the retail funds' units.

 
5. To whom can retail funds be marketed?

As a general rule, Russian retail funds' units can be marketed to any investor, however, with certain exceptions.

Closed-ended and interval funds

The trust management rules of a closed-ended or interval retail fund might (or, in case of hedge funds and certain other types, must) stipulate that the units of the funds can only be marketed to qualified investors.

There are two types of qualified investors under Russian law:

  • Those legally defined as qualified investors, such as credit institutions, retail funds, clearing companies, international financial institutions, management companies of retail funds, insurance companies, the CBR, the International Monetary Fund, the World Bank and others.

  • Persons or entities which have obtained the status of a qualified investor under a statutory order which establishes certain criteria, such as the value of securities, cash deposits or other assets, having certain experience in transactions with securities and others. Whether a person or entity meets such criteria must be confirmed by the trust manager of a retail fund.

A specialised custodian, registrar, audit organisation or appraiser of a retail fund cannot hold units of a retail fund.

Managers and operators

6. What are the key requirements that apply to managers or operators of retail funds?

Only an entity that holds a CBR licence for trust management of retail funds can act as a trust manager of a Russian retail fund. A trust manager must comply with the following requirements:

  • It must not have among its managers:

    • any disqualified persons;

    • any persons that previously worked as CEO of financial institutions which had licences revoked for breach of legislation;

    • any persons convicted of commercial or political crimes.

  • The Russian Government, any regional and local Russian governments cannot be shareholders of a trust manager.

  • Its own capital cannot be less than the amount set out by the CBR. Currently, the minimum own capital requirement for a trust manager of a retail fund is set at RUB80 million.

  • It must have an internal control policy to ensure its compliance with Russian regulations of retail funds. These internal control rules must be registered with the CBR.

This applies to all types of retail funds.

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?

The trust manager of a retail fund holds and operates the portfolio of the retail fund's assets. The trust manager is also entitled to exercise any rights certified by the units of the retail fund, including voting rights.

The trust manager of a retail fund is liable to the investors of the retail fund for actual loss which the investors may incur as a result of the failure of the trust manager to manage the fund's assets in accordance with Russian law and regulations.

Debts associated with obligations that arise as a result of a retail fund's activity must be repaid out of its assets.

This applies to all types of retail funds.

Legal fund vehicles

8. What are the main legal vehicles used to set up a retail fund and what are the key advantages and disadvantages of using these structures?

Russian law is inflexible with regard to the vehicles available for setting up a retail fund. Russian law does not recognise a retail fund as a legal entity. In practical terms, the only way to set up a retail fund is by selecting a trust manager and registering the fund's rules with the CBR.

Investment and borrowing restrictions

9. What are the investment and borrowing restrictions on retail funds?

Investment restrictions

Retail funds may generally invest in:

  • Cash.

  • Foreign currencies.

  • Government securities of:

    • Russia and its constituent subjects;

    • other foreign states.

  • Shares and bonds of Russian and foreign companies.

  • Russian depositary receipts.

Nevertheless, a number of general restrictions apply. For example, retail funds intended for unqualified investors may invest in securities issued by foreign states and international financial institutions only if the information about the trade in those securities is posted by Bloomberg or Thomson Reuters or provided such securities are traded in an organised securities market. Retail funds may acquire shares and bonds of foreign corporations or foreign depositary receipts only if these securities are listed on certain stock exchanges such as the American Stock Exchange, Deutsche Borse and the Shanghai Stock Exchange.

In addition, there is an exhaustive list which specifies the types of assets that each type of fund is permitted to acquire. Assets not included on the list may not be acquired. For instance, hedge funds may not invest in real estate assets.

Each retail fund must have an investment declaration specifying the types of assets in which it may invest. This declaration forms part of the fund's rules. A retail fund may not invest into assets which are not specified in its investment declaration.

Borrowing restrictions

Under the Investment Funds Law, a trust manager acting as a trustee of a retail fund must not enter into any loan or facility agreements or repo trades. This restriction does not apply when the monies are borrowed for exchange or redemption of units in case of insufficient funds in the retail fund. In this case, the total debt under the loan or facility agreements or repo trades must not exceed 20% of the net asset worth of the relevant retail fund. The term of each loan or facility agreement or repo trade may not exceed six months.

These restrictions apply to all types of retail funds.

 
10. Can the manager or operator place any restrictions on the issue and redemption of interests in retail funds?

The detailed procedure for the issuance and redemption of units in a retail fund must be set out in the trust management rules which are to be based on the standard rules approved by the Russian Government. The trust manager cannot impose additional restrictions on the issuance or redemption of that retail fund's units. This applies to all types of retail funds.

The Investment Funds Law also provides for some restrictions with respect to certain types of the retail funds (see Question 8).

 
11. Are there any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties?

The Investment Funds Law governs the restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties.

Closed-ended and interval funds

The trust management rules of a closed-ended or interval retail fund might (or, in case of hedge funds and certain other types, must) stipulate that investment units of the fund are intended only for qualified investors (for the types of qualified investors under Russian law, see Question 5). These investment units can only be transferred to qualified investors.

The trust management rules of a closed-ended or interval retail fund can also provide the trust manager with a right to reject the application for acquisition of units in the retail fund. The trust manager can only do so if the application is filed by a non-member of that retail fund except for the transfer of units in case of a general legal succession.

Reporting requirements

12. What are the general periodic reporting requirements for retail funds?

The Investment Funds Law provides for reporting requirements for the trust managers of retail funds but does do so not for individual investors. The procedure and terms for reporting are set out in the CBR regulations. Depending on the particular information to be reported, trust managers of retail funds must provide the CBR with certain documents and information on a monthly, quarterly and annual basis.

These requirements apply to all types of retail funds unless otherwise stated.

Documents and information to be provided on a monthly basis

Those need to be presented to the CBR within 15 days of the reporting month's end and include:

  • Balance of any assets making up the retail fund.

  • Report of any value gained or lost by the assets making up the retail fund.

  • Certificate of the value of the retail fund's assets, as of the last business day of the calendar month.

  • Report on investment unitholders. This only applies to open-ended retail funds.

  • Certificate of the value of the retail fund's net assets, as made on the last business day of the calendar month.

Documents and information to be provided on a on a quarterly basis

Those need to be presented to the CBR within 45 days of the reporting quarter's end and include:

  • Quarterly accounts of the retail fund's trust manager.

  • Report on investment unitholders. This only applies to interval and closed-ended retail funds.

Documents and information to be provided on an annual basis

Those need to be presented to the CBR on or before April 1 of the year following the reporting year and include:

  • Annual accounts of the retail fund's trust manager.

  • Auditor's report following an annual audit of accounts, bookkeeping and reporting as regards any assets making up the retail fund, and any transactions involving such assets.

  • Report on the fees of the retail fund's trust manager and any expenses associated with trust management of the retail fund.

Tax treatment

13. What is the tax treatment for retail funds?

As retail funds are not treated as legal entities, they are not subject to income tax.

Investors into Russian retail funds are subject to the general taxes applicable to income derived from investing into units of retail funds, namely:

  • 13% income tax payable by Russian individual resident investors.

  • 30% income tax payable by individual non-resident investors.

  • 20% income tax payable by Russian corporate investors.

  • 20% income tax payable by non-Russian corporate investors.

This applies to all types of retail funds.

Quasi-retail funds

14. Is there a market for quasi-retail funds in your jurisdiction?

There is no regulated market for quasi-retail funds in Russia.

Reform

15. What proposals (if any) are there for the reform of retail fund regulation?

According to the CBR some closed-ended retail funds are occasionally used for illegal transactions, such as for the creation of "inflated assets" shown on the balance sheet of banks. Therefore, the CBR has proposed certain reforms of this market in order to increase the quality of management and transparency of closed-ended retail funds. The exact changes to the existing regime and the timing for implementation of these reforms are unclear at this stage.

 

Hedge funds

16. What is the structure of the hedge funds market? What have been the main trends over the last year?

There are two types of hedge funds under Russian law:

  • Interval.

  • Closed-ended funds.

Interval funds

The unitholder has a right to require the managing company to redeem all, or any part, of the units on the dates established by trust management rules.

Closed-ended funds

The unitholder does not have this right until the term of the trust management contract has expired.

Please see Question 1 for the main trends over the last year.

Regulatory framework and bodies

17. What are the key statutes and regulations that govern hedge funds in your jurisdiction? Which regulatory bodies regulate hedge funds?

Please see Question 2, which also applies to hedge funds.

 
18. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice?

The assets which can be owned by hedge funds are restricted and can only include the following (eligible assets):

  • Cash including foreign currencies, held on accounts with or deposited at credit institutions.

  • Shares in Russian joint stock companies.

  • Shares in foreign companies.

  • Debt instruments.

  • Units or shares in investment funds, except those in investment funds that fall under the funds of funds category.

  • Units or shares in certain listed foreign investment funds.

  • Russian or foreign depositary receipts for securities which the hedge fund may hold.

  • Precious metals, including claims to a credit institution to pay their monetary value at the current rate.

  • Property interests arising from option agreements or contracts and futures agreements or contracts with commodities as their underlying asset.

  • Property interests arising from option agreements or contracts with futures agreements or contracts as their underlying assets which, in turn, have commodities as their underlying assets.

The assets structure of a hedge fund must meet the following criteria:

  • Cash deposited at any one credit institution must not exceed 25% of the asset value.

  • For at least two-thirds of the business days in a calendar quarter, the appraised value of the eligible assets, apart from cash, should be at least 70% of the asset value.

  • The number of units and shares in investment funds or units and shares in foreign investment funds must not exceed 30% of the number of issued units and shares in each such fund.

  • The number of units and shares in investment funds or units and shares in foreign investment funds must not exceed 30% of the number of issued units and shares in each of such funds.

  • The appraised value of non-marketable securities must not exceed 70% of assets of interval retail funds.

Marketing

19. Who can market hedge funds?

Please seeQuestion 4, which also applies to hedge funds.

 
20. To whom can hedge funds be marketed?

The units of hedge funds are intended for qualified investors only (for the types of qualified investors under Russian law, see Question 5). A specialised custodian, registrar, audit organisation and appraiser of a retail fund cannot hold units of that retail fund.

Investment restrictions

21. Are there any restrictions on local investors investing in a hedge fund?

The units of hedge funds are intended for qualified investors only (for the types of qualified investors under Russian law, see Question 5). A specialised custodian, registrar, audit organisation and appraiser of a retail fund cannot hold units of that retail fund.

Assets portfolio

22. Who holds the portfolio of assets? What regulations are in place for its protection?

Please see Question 7, which also applies to hedge funds.

Requirements

23. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

Please see Question 12, which also applies to hedge funds.

 
24. What are the key requirements that apply to managers or operators of hedge funds?

Please see Question 6, which also applies to hedge funds.

Legal fund vehicles and structures

25. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures?

Russian law is inflexible with regard to the vehicles available for setting up a hedge fund. Like any other retail fund, a hedge fund is not recognised as a legal entity under Russian law. In practical terms, the only way to set up a hedge fund is to select a trust manager and to register the hedge fund's rules with the CBR.

A hedge fund can be established in the form of either an interval or a closed-ended fund. The unitholder of an interval fund has the right to redeem all, or any part, of units on the dates established by the trust management rules. The unitholder of a closed-ended fund does not have this right until the term of the trust management contract expires.

Tax treatment

26. What is the tax treatment for hedge funds?

Please see Question 13, which also applies to hedge funds.

Restrictions

27. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties?

The trust management rules must stipulate that the investment units of the fund are intended only for qualified investors (for the types of qualified investors under Russian law, see Question 5). These investment units can only be transferred only to qualified investors.

Please also see Questions 10 and 11, which also apply to hedge funds.

Reform

28. What (if any) proposals are there for the reform of hedge fund regulation?

Please see Question 15, which also applies to hedge funds.

 

Online resources

Central Bank of the Russian Federation

W www.cbr.ru/eng

Description. Official website of the Central Bank of the Russian Federation.

Russian legislation

W www.szrf.ru

Description. Official periodical of Russian legislation. The website provides unofficial translations into English of a selection of laws.



Contributor profiles

Grigory Marinichev, Partner

Morgan Lewis

T +7 495 212 2420
F +7 495 212 2400
E gmarinichev@morganlewis.com
W www.morganlewis.com

Professional qualifications. Lawyer, Russian Federation.

Areas of practice. International finance, bankruptcy and restructuring.

Non-professional qualifications. St. Petersburg State University, Law Faculty, 2001.

Languages. Russian; English.

Professional associations/memberships. Member, St. Petersburg Baltic Bar Association.

Publications. Many publications in the fields of corporate, taxation and trust law.

Alexey Chertov , Associate

Morgan Lewis

T +7 495 212 2504
F +7 495 212 2400
E achertov@morganlewis.com
W www.morganlewis.com

Professional qualifications. Lawyer, Russian Federation.

Areas of practice. Transactional finance; bankruptcy and restructuring; emerging business and technology; corporate, finance and investment management.

Non-professional qualifications. Bachelor of Law, Moscow State Institute of International Relations, 2009; Master of Law, Moscow State Institute of International Relations, 2011

Languages. Russian; English.


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