Capital markets and structured investments

Generally

In general terms, the establishment, marketing and management of Italian investment funds (having either contractual or corporate form) are regulated activities, exclusively reserved to duly licensed entities, subject to authorization requirements and ongoing supervision and to be performed in compliance with the relevant rules and regulations.

Collective Investment Schemes

Under the Italian regulatory framework, the overall operation and activities of Collective Investment Schemes shall comply with a set of rules and provisions, involving, inter alia:

• disclosure and authorization procedures vis-à-vis the competent supervisory authorities in relation to:
  • the funds, especially when qualifying as retail funds (in this context the applicable provisions set forth different requirements regarding, inter alia, minimum content of the fund documents, disclosure obligations of such fund documents vis-à-vis the supervisory authorities, investment limits, risks fractioning and diversification requirements etc); and
  • the management companies (in this context, the applicable provisions require, inter alia, the obtainment of an authorization to perform collective asset management activities, the compliance with sound and prudent management safeguards, as well as with minimum capital requirements and ongoing prudential thresholds, transparency provisions towards the investors and rules of conduct); and
• procedures to be followed for the promotion, offer and marketing of the funds, differently modulated based on the cross-border operation, if any, the target investors (retail or professional), the type of vehicles etc.

Generally, the rules set forth for retail funds are more stringent than those relating to reserved funds exclusively for professional investors. Fewer and less stringent investment limits, for example, are imposed on reserved funds, as well as less onerous disclosure and reporting requirements.

Different categories of funds may be identified, based, inter alia, on the:

• subscription and redemption modalities adopted (open-ended or closed-ended funds);
• types of subscribers addressed (retail or reserved);
• risk level involved (recourse to leverage on a substantial basis or not); and
• relevant investments to be made (real estate funds, private equity funds, master-feeder structures, fund of funds etc).

In this context, the most common investment structures, as anticipated, can be divided between:

• investment vehicles having a contractual form (ie investment funds, either qualifying as Undertakings for Collective Investment in Transferable Securities (UCITS) or alternative investment funds (AIFs)), established and managed by a manager as a segregated pool of assets divided into units and collected, through one or more issues of units, among a plurality of investors, managed as a whole in the interest of (and independently from) the unit holders; and
• corporate vehicles (ie Società di Investimento a Capitale Variabile (SICAV) and Società di Investimento a Capitale Fisso (SICAF), depending on the open-ended or closed-ended nature, either qualifying as UCITS or AIFs) which may be both self-managed or externally managed by an asset management company.

Please note that some common characteristics may be identified, such as the basic presence of a plurality of investors, the establishment of a predetermined investment policy to be followed, certain management independence and autonomy principles and the general pooling of investors contributions, profits and incomes.

Retail funds

Italian retail funds are subject to stringent regulatory requirements, comprising, inter alia, minimum contents of the fund rules, authorization procedure vis-à-vis the Bank of Italy, approval of the management rules and of its subsequent amendments, investments' limits and risk mitigation, fractioning and diversification criteria.

Institutional/professional funds

Italian reserved funds, as expected, are subject to fewer and less stringent investment limits, as well as less disclosure and reporting requirements towards the relevant supervisory authorities. No authorization is required for the establishment of reserved funds and generally the fund rules are not subject to approval by the Bank of Italy.

Establishing funds

As anticipated, the establishment, marketing and management of Italian investment funds (having either contractual or corporate form) represent activities exclusively reserved to duly licensed entities and subject to authorization requirements and ongoing supervision. Such activities, as a consequence, are to be performed in compliance with all the relevant applicable rules and regulations. Every potential breach or evasion (eg 'ghost companies') of the aforesaid rules and regulations may trigger the application of administrative and criminal sanctions associated to an unlawful exercise of financial activity or to the violations of the applicable regulatory provisions.

Investing in funds

No specific issue arises. Any specific risk and the overall risk profile connected with any investment in a fund is mandatorily disclosed in the fund’s offering and subscription documentation.

Italy selling restrictions

The offer of securities in Italy is covered under the CONSOB financial promotion regime provisions, respectively implementing Undertakings for Collective Investment in Transferable Securities Directive regime and Alternative Investment Fund Managers Directive regime.

Undertakings for Collective Investments in Transferable Securities (UCITS)

UCITS, including those established in Italy, have an EU passport which enables fund promoters to create a single product for marketing in all EU member states and, on the completion of the appropriate notification procedure, a UCITS established in one member state can be sold in any other.

A UCITS intending to market in another member state must complete and submit to its home regulator a notification including certain specified information, including copies of key investor documents. The home regulator then completes a notification file which is sent in a regulator-to-regulator transmission, following which the UCITS can be sold in the other member state.

Alternative Investment Funds (AIFs)

Under the Alternative Investment Fund Managers Directive, marketing is defined as: a direct or indirect offering or placement at the initiative of the Alternative Investment Fund Manager (AIFM) or on behalf of the AIFM of units or shares in an AIF it manages to or with investors domiciled or with a registered office in the EU.

An AIFM may only market an AIF to EU investors if it is authorized by a relevant EU regulator – registration with one EU regulator opens access, subject to certain further limited conditions, to marketing to professional investors across the EU under a EU passport or if it complies with national private placement regimes (please note that NPPR has not been yet implemented in Italy).

Reverse solicitation and the definition of 'marketing'

In general terms, reverse enquiry mechanisms refer to situations in which clients contact managers, on their own initiative, in order to subscribe for units or shares of a fund, and no placement or marketing activity are performed by the managers towards such clients.

Italian law and regulation does not contain specific provisions on the reverse solicitation scheme. The qualification of the operation as a 'genuine' reverse solicitation, in this sense, will derive from an assessment, made by the competent Italian supervisory authorities, of the procedural and documentary evidences underlying the transaction. More precisely, the Italian supervisory authorities, in order to prove the legal construction of the reverse inquiry, adopt a stringent ‘substance over form’ approach.

In relation to the definition of 'marketing', the Consolidated Financial Act defines this as 'the offer, also indirect, on the initiative or on behalf of the manager, of the AIF units and shares managed, addressed to resident investors or those with a registered head office in the EU'.

Fund management in Italy is regulated under the Consolidated Financial Act, various statutory instruments and the supervisory authorities' rules and regulations. The Bank of Italy is mainly responsible for regulating funds and fund managers, as well as the criteria for the obtainment of the relevant authorizations.

The various restrictions imposed by the aforesaid provisions (including, inter alia, structuring, management autonomy and independence, conflict of interest and remuneration issues) shall be proportionate to the managers' size, internal organization, scope and complexity of activities.

Alternative Investment Fund Managers (AIFMs) are also subject to regulation under the Alternative Investment Fund Managers Directive (as implemented in Italy) and managers of Undertakings for Collective Investments in Transferable Securities (UCITS) are subject to certain requirements under the Undertakings for Collective Investment in Transferable Securities Directive.

More precisely, the authorization procedure with the Bank of Italy to perform collective asset management activities, is granted upon positive evaluation of, inter alia, the business plan, activities plan and organizational structure of the manager, integrity, professionalism and independence of its directors and controllers’ integrity, and professional competence of its shareholders and their representatives.

The entity willing to exercise the collective portfolio management activity must submit to Bank of Italy certain documentation confirming the above prerequisites, and the Bank of Italy will have 90 days from the filing to grant or deny authorization (this term may be suspended in case the Bank of Italy requires clarifications or additional information).

In terms of incorporation costs, the Bank of Italy usually requires the Società di Gestione del Risparmio (SGR) to be provided with excess cash in order to cover incorporation costs without reducing the minimum corporate capital.

Special provisions are set forth for SGR managing assets below predefined thresholds (so called SGR sotto soglia), which are subject, inter alia, to simplified capital and authorization requirements, assets evaluation criteria, control functions, outsourcing, conflict of interest and portfolio and management regimes, as well as to simplified guidelines on remuneration.

An Italian client entering into derivative contracts in Italy might be a private or corporate client or a public client (such as central and local authorities).

Italian private and corporate clients

There are no restrictions on private or corporate clients entering into derivatives contracts.

Nevertheless, when entering into a derivative contract with a corporate client it is advisable to check whether the relevant constituting documents and by-laws of such client:

• Encompass any provision evidencing the authority of the party entering into this type of agreement and the performance of its obligations under such agreement; or
• Encompass any limit in relation to entering into derivatives contracts (in particular, it may be possible that only derivatives contracts with hedging – and not speculative – purposes may be permitted).

Italian public clients

As of June 2008, all Italian public authorities (including local entities, regions, metropolitan cities etc) are prohibited from entering into any type of new derivative contract.

Banks authorized in Italy and/or authorized to carry out in Italy financial services on a cross-border basis

Entering into derivative contracts entail the provision of financial services. Therefore, in order to provide such service, banks and/or financial intermediaries selling a derivative product must be duly authorized to carry out this service (on its own account) in Italy, whether on a cross-border basis or by establishing a branch.

In the event that the bank/financial intermediary is at the same time advisor and counterparty to the client of the derivative contract, Italian law provides a wide range of further information to be disclosed to the client (in order to comply with both appropriateness and suitability rules in favour of the client).

In Italy, derivative contracts are entered into for the following purposes:

• hedging; and
• trading (including trading for speculation purposes).

Derivatives may be traded over-the-counter (OTC) or on an organized exchange (ETD, Exchange Traded Derivatives).

The most common types of derivative contract in Italy entered into for hedging purposes are:

• swaps (in particular interest rate swap or currency swap), as OTC derivative; and
• forwards (to hedge foreign exchange rate risk).

The underlying asset is often constituted by a loan (denominated in euro), linked to the fluctuation of Euribor (or other similar reference rates).

The most common types of derivative contract in Italy entered into for trading purposes are:

• futures;
• swaps; and
• options (call options and put options).

The value of the derivative contract is based on the value of the underlying assets and on other market factors. The most common underlying assets considered in the Italian market are:

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

Derivative contracts (in particular OTC derivative contracts) are also regulated by the European Market Infrastructure Regulation (EMIR) and the implementing regulation of Regulatory Technical Standards (RTS) which attempts to ensure the same degree of protection to clients within all EU countries by providing comprehensive information and transparency on over-the-counter derivative position, and reduce counterparty risk by increasing the use of central counterparty clearing.

It is worth noting that the derivatives market hassignificantly changed in light of the implementation of the MiFID II starting from January 2018, as summarised above.

Due to a recent increase in disputes over OTC derivatives in Italy, a specific focus is attributed to the following items:

• complete disclosure of all costs related to the initial mark-to-market of the OTC derivative contract (distinguishing each line item such as hedging cost and bank remuneration); and
• comprehensive information to be provided to the client before the entering into the derivative contract with particular reference to the appropriateness and suitability of the derivative.

The level of information required by law depends on the MiFID II classification of the client (retail or professional).

The risk related to the non-disclosure of the above information to the client is that the derivative contract might be declared null and void by an Italian court. Pursuant to current case law in Italy a client (professional or retail) shall explicitly receive detailed information and give its consent on the value of the hedging costs and any further charge applied to the derivative transaction to be concluded by it.

According to the provisions of EMIR the counterparties to derivatives transactions must verify the need to enter into specific arrangements for risk reducing. More particularly, for those transactions entered into between clients classified as FC (Financial Counterparties) or as NFC+ (Non-Financial Counterparties above a certain threshold) it will be necessary to establish security arrangements for the calculation and exchange, on a daily basis, of the “variation margin” to be exchanged between the parties to cover the relevant exposure under the master agreement governing the entire set of derivatives transactions.