Capital markets and structured investments

Generally

 

Establishing a fund, offering fund securities and operating a fund, amongst other things, are regulated activities under the Act on Mutual Funds (the MFA). The MFA governs common funds, which are Undertakings for Collective Investments in Transferable Securities (UCITS) funds as provided in the Undertakings for Collective Investments in Transferable Securities Directive,.

Mutual fund activity is defined in the MFA as raising of funds from the public for their joint investment and the investment thereof mainly in financial instruments as well as the management of a common fund and the marketing of units in accordance with the UCITS Directive and the MFA.

Only a management company authorized as provided in the MFA may establish one or more common fund (UCITS fund) and carry out mutual fund activities.

Only a management company authorized or registered as provided in the Act on Alternative Investment Fund Managers may establish one or more special common fund or other alternative investment fund.

Custodial activity of a common fund, a special common fund or other alternative fund may only be carried out by a custodian, which has an authorization for the custodial activity.

There are two main categories of funds: Undertakings for Collective Investments in Transferable Securities (UCITS) funds (common funds) and non-UCITS funds (special common funds and other alternative investment funds).

Risk in a special common fund does not need to be diversified as broadly as with UCITS funds. A special common fund is also an alternative investment fund as provided in the Act on Alternative Investment Fund Managers.

Common (UCITS) funds

Common funds are regulated by the Act on Mutual Funds, implementing the UCITS directive, which specifies the eligible investment types and the required diversification between investments in Chapter 11 of the Act. The Finnish Financial Supervisory Authority (FIN-FSA) approves the fund rules.

Special common (Non-UCITS) funds and other alternative investment funds

Special common funds are non-UCITS, alternative investment funds deviating from the principle of diversification of risk pursuant to Chapter 13 of the Mutual Funds Act. If the units of a special mutual fund shall be offered to non-professional clients, the risk must be diversified (but to a lesser amount than in an UCITS fund) and the rules of the fund must indicate the deviations from the principles of Chapter 13 of the MFA. The rules regulating the subscription and redemption of the units in a special common fund may also deviate from those of a UCITS fund. The name of the fund must indicate that it is a non-UCITS fund. The Finnish Financial Supervisory Auhority has to be notified of the rules of a special common fund.

The investment operations of other alternative investment funds are not regulated, but the Act on Alternative Investment Fund Managers specifies the information that the funds must provide on themselves. Subject to certain exceptions as to e.g. family offices and business angel investors, alternative investment funds may be marketed to non-professional investors only, if the fund manager has been authorized and rules and a key investor information document (KIID) have been prepared for the fund. The FIN-FSA does not approve the rules of alternative investment funds.

Retail funds

Undertakings for Collective Investments in Transferable Securities (UCITS) funds must be open for all investors and are therefore subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications, concentration requirements and other matters. The information to be provided to investors in an UCITS fund is regulated by Mutual Funds Ac. The Act does not make a distinction between non-professional and professional/institutional investors in an UCITS fund.

Non-UCITS funds can restrict the scope of eligible investors in their fund rules. However, if the units of a special mutual fund shall be offered to non-professional investors, the risk must be diversified (but to a lesser amount than in an UCITS fund) and the rules of the fund must indicate the deviations from the principles of Chapter 13 of the MFA. As a main rule, a special mutual fund shall have a minimum of ten investors.

Subject to certain exceptions as to e.g. family offices and business angel investors, the units in an alternative investment fund may be marketed to non-professional investors only if the fund manager has been authorized, the rules and a key investor information document (KIID) have been prepared for the fund and all the required documents and information has been provided to the FIN-FSA. The legal forms and domiciles of alternative investment funds (AIFs) allowed to be offered to non-professional investors is restricted. Further, the AIF units may not be offered to non-professional investors if the subscription obligates to additional investments and any such obligations are non-binding on a non-professional investor.

Professional investors may waive their legal right to receive information from the alternative investment fund manager in writing. As mentioned, if the AIF units are only offered to professional investors the key investor information document (KIID) does not need to be prepared.

When offering and marketing the funds to consumers, also the provisions of the Finnish Consumer Protection Act shall also be adhered to.

Establishing funds

It can be noted that as a main rule, the fund documentation shall be drafted in Finnish or Swedish if no other language is approved by FIN-FSA, when the fund is marketed to non-professional investors.

Several acts regulate marketing a fund; the Mutual Funds Act as well as the Act on Alternative Investment Managers regulate specifically the marketing of funds. Further, the Consumer Protection Act regulates all marketing directed at consumers and the Unfair Business Practices Act regulates marketing in general. All these regulations shall be taken into account when marketing a fund, as applicable.

The Finnish Financial Supervisory Authority (FIN-FSA) has also given instructions and regulations on marketing funds. These instructions contain, amongst other things, information on:

• what kind of language shall be used in marketing (a non-professional investor should be able to understand the language that is used);
• how comparisons between different funds shall be made; and
• how the funds shall be identified in marketing.

Undertakings for Collective Investments in Transferable Securities (UCITS) funds

The management company may not begin to market the units in a common (UCITS) fund to the public or receive funds from public into the common fund before the fund rules have been confirmed by the FIN-FSA.

A UCITS fund manager from another EEA country may market units in such fund in Finland if the competent authorities of its home Member State have submitted to the FIN-FSA a notification of the commencement of marketing.

Special Common Funds and other alternative investment funds (AIFs)

The management company may not market units in a special common fund or receive money to the fund before the board of directors of the fund management company has approved the rules and the FIN-FSA has been notified of the rules and the commencement of marketing of the fund.

The alternative investment fund manager may market the units in an AIF managed by after a notification to the FIN-FSA as regards the AIF and receipt of a notification from the FIN-FSA regarding the same. The same applies also to the marketing by an investment firm of the AIF units. However, subject to certain exceptions as to e.g. family offices and business angel investors, the units in an AIF may be marketed to non-professional investors in Finland only if the fund manager has been authorized, the rules and a key investor information document (KIID) have been prepared for the fund and all the required documents and information has been provided to the FIN-FSA.

The manager of an AIF from another EEA country or from a third country may market its units in Finland when it has submitted to the FIN-FSA a notification of the commencement of marketing and received a notification from the FIN-FSA regarding the same.

Reverse solicitation and the definition of ‘marketing’

‘Marketing’ is not defined in the Act on Alternative Investment Fund Managers. In the relevant government Bill, it has been viewed that in order to qualify an action as ‘marketing’, it has to be made by the alternative investment fund manager (AIFM) or on its behalf and it has to contain the offering of the units in an alternative investment fund managed by it. The offering can be direct or indirect.

It has been held in the government Bill that an action which does not include offering of units cannot be seen as marketing and, consequently, actions taken by the AIFM or on its behalf to map the interest of investors to invest in a certain type of investment (‘soft circling’) would not be qualified as marketing. Further, actions directed towards professional investors, which do not aim to a binding subscription to the fund units, should not be labelled as marketing in the context of the Act. These can include for example road shows initiated by the AIFM, provided such events do not include a specific sale or purchase offer of the AIF units (although comparable events initiated by issuers or investment service providers may qualify as marketing of securities). In addition, reverse soliciting ie the investor contacting the AIFM and the AIFM providing information on different investment opportunities, should not be seen as marketing.

Provision of offering documents related to an established fund managed by the AIFM is considered as negotiations on the terms of an investment and subject to prior FIN-FSA notification. Provision of various agreements related to a fund which has not been established yet does not, however, require that the AIFM must adhere to the provisions of law regarding marketing. When a binding subscription is made, the AIFM must be able to demonstrate that it has adhered to the marketing provisions of the AIFM Act and duly made a notification to the FIN-FSA.

Fund management is a regulated activity in Finland under the Mutual Funds Act. Managing a fund is subject to authorization granted by the Finnish Financial Supervisory Authority (FIN-FSA) that also supervises fund management companies. Under the Mutual Funds Act, each mutual fund must be managed by an authorized fund management company.

A fund management company must separate fund assets from its own assets by assigning the former to a custodian. Fund management companies may engage only in the fund activity and other essentially related business (as defined in the applicable legislation), if doing so does not materially conflict with the interests of holders of mutual fund shares. In addition, fund management companies may provide asset management services and investment advice as well as safekeeping and administration of shares in mutual funds and undertakings for collective investment in transferable securities (UCITS).

Fund management companies must have sufficient financial strength to operate effectively and must not be closely associated with companies or individuals that could prevent effective supervision of the management company. A management company shall carry out fund activity independently, in compliance with the applicable legislation, and with care and expertise and in the best interests of the common fund and its unitholders.

Alternative Investment Fund Managers (AIFMs) are also subject to regulation under the Act on Alternative Investment Fund. Under the Act, an AIF may only be managed by and AIFM authorized by the FIN-FSA. However, some AIFM can be exempted from full regulation on certain grounds, including managing assets under €500 million where assets are not leveraged and investors have no redemption rights for five years, and managing assets under €100 million including assets acquired through leverage. Exempted managers must still register with the FIN-FSA and are subject to limited reporting.

Under the Act on Investment Services, investment services (including derivatives contracts) may only be offered by authorized entities, unless a specific exemption applies.

There are no general restrictions in relation to the counterparty, however, certain entity specific restrictions may apply (for example the Mutual Funds Act provides restriction on mutual funds when entering into derivatives agreement).

The European Market Infrastructure Regulation (EMIR) applies to all derivative transactions and requires transactions to be reported to regulators, for transactions between dealers to be cleared or subject to other risk mitigation techniques such as initial margin and variation margin requirements.

The main types of derivatives contracts used in Finland include inter alia:

• swaps (such as interest rate and currency swaps);
• forwards;
• options;
• futures; and
• commodity-linked derivatives.

The value of the derivative contracts is based on the value of the underlying assets. The main classes of underlying assets are:

• equity;
• fixed income instruments;
• commodities;
• foreign currency; and
• credit events.

Since the global financial crisis in 2007-to-2008, derivatives and particularly over-the-counter derivatives have attracted significant regulatory attention. The European Commission has sought, in particular, to:

• enhance transparency by requiring the provision of comprehensive information on over-the-counter derivative position;
• reduce counterparty risk by increasing the use of central counterparty clearing; and
• improve the management of operational risk by increasing the standardization of derivatives contracts.

As a result, the derivatives market has seen, and continues to see, the introduction of a significant amount of new regulation and this has led to substantial compliance costs for market participants.