Riga, 17 October 2013 Regulations No 228

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Riga, 17 October 2013 Regulations No 228

(Minutes No 40, item 2

Meeting of the Board of the Financial and Capital Market Commission)

Regulations on the Requirements for Investment Objects of Investment Funds, Transactions and Specific Activity Funds

Issued in accordance with Paragraph 6 of Article 61

and Paragraph 4 of Article 65 of the Law on Investment Management Companies

Chapter IGeneral Provisions

1. The Regulations on the Requirements for Investment Objects of Investment Funds, Transactions and Specific Activity Funds (hereinafter – the Regulations) establish requirements for:

1.1. investment objects of investment funds (hereinafter – funds) for the purpose of the Law on Investment Management Companies and transactions performed by an investment management company (hereinafter – the company) on behalf of the fund;

1.2. funds that replicate the composition of securities index, funds, including index-tracking leveraged funds, exchange-traded funds;

1.3. information disclosure in the fund prospectus, key investor information document and other promotional materials on the funds and transactions hereof.

2. The Regulations shall be binding on investment management companies when they establish and manage funds in Latvia.

Chapter II

Transferable Securities

3. Transferable securities are eligible investment objects in accordance with the requirements of the Law on Investment Management Companies (hereinafter – the Law) provided that the potential loss from investments in those financial instruments is limited and does not exceed the amount paid for those financial instruments (full acquisition cost in case of a partly paid financial instrument) and those securities comply with all of the following criteria:

3.1. their liquidity does not compromise compliance with the redemption requirement for units (investment certificates) as set out in the Law;

3.2. they are reliably measurable;

3.3. appropriate information is available on them;

3.4. they are negotiable;

3.5. they comply with the investment policy of the fund;

3.6. their risks are adequately captured by the risk management process of the fund and both the risk associated with a transferable securities and its effect on the overall risk profile of the investment portfolio are assessed on an ongoing basis.

4. Transferable securities that are admitted to trading or traded on the regulated market (hereinafter – TRM) are deemed to be liquid and negotiable provided that the company does not have information to the contrary.

5. Where a transferable security is not TRM or the company has information to the effect that an investment in a transferable security that is TRM is likely to compromise compliance with the requirement for redemption of units, the company shall assess liquidity risk of the transferable security taking into account the following factors:

5.1. the volume and turnover of the transferable security;

5.2. where the price is determined by supply and demand in the market, the total issue size and the portion of the issue that the fund manager plans to buy, and also evaluation of the opportunity and timeframe to buy or sell, the volume of the transferable security compared to its turnover during a certain time period;

5.3. in separate cases, an independent assessment of bid and offer prices over a certain period of time that may indicate the relative liquidity and marketability of the transferable security, as well as provide the comparison of available prices;

5.4. analysis of the quality and the number of intermediaries and market makers dealing in the transferable security concerned when assessing the quality of secondary market activity in the transferable security.

6. Where a transferable security is assessed as insufficiently liquid, that transferable security may only be bought or held in the investment portfolio of fund provided that there is a sufficient amount of liquid securities in the portfolio that enable meeting the requirement of redemption of units.

7. Transferable securities shall be considered as reliably measurable where the following information is available:

7.1. in respect of TRM financial instruments, it is in the form of accurate, reliable and regular (periodically) updated prices that are either market prices or prices determined by a valuation system that is independent from issuers;

7.2. in respect of other financial instruments, it is in the form of a regularly (periodic) valuation that is derived from information provided by the issuer of the securities or from competent investment research that has been prepared in line with the requirements set out in the Law on the Financial Instruments Market or equivalent requirements.

8. Appropriate information about transferable securities shall be the following:

8.1. in respect of TRM transferable securities, it is in the form of regular, accurate and comprehensive information available to the market about the security or, where necessary, about the portfolio of the security;

8.2. in respect of other financial instruments, it is in the form of regular and accurate information available to the company about the security or, where necessary, about the portfolio of the security.

9. Transferable securities that are not TRM may be recognised as negotiable only where the company has assessed the possibilities to dispose of those securities and concluded that an investment in those transferable securities enable meeting the requirement of redemption of units.

10. In accordance with the risk management policy and risk management procedures of the fund, the company shall assess, on an ongoing basis, not only the risks associated with the respective transferable securities but also their effect on the overall risk profile of the investment portfolio of the fund.

11. The following investment objects shall be recognised as transferable securities provided that they comply with the requirements listed in Paragraphs 3-10 hereof:

11.1. investments in investment shares of closed-ended alternative investment funds that are constituted as investment companies or as unit trusts or constituted under the law of contract and fulfil the following criteria:

11.1.1. investment companies are subject to corporate governance mechanisms and companies constituted under the law of contract are subject to corporate governance mechanisms that apply to commercial companies or are equivalent to those applied to commercial companies;

11.1.2. investor protection requirements stipulated in national laws are binding on the asset manager of the closed-ended fund or external manager that manages the assets on behalf of the fund;

11.2. investments in financial instruments backed by other assets or linked to the performance of assets that may differ from the eligible investment objects of the fund.

12. When assessing corporate governance mechanisms of the closed-ended alternative fund, it shall be taken into account whether:

12.1. the rights of holders of investment shares are enforced by the prospectus of the closed-ended alternative investment fund (the fund rules or another contract that sets up the fund) and the following is ensured:

12.1.1. the rights to vote about essential operational issues in the decision-making processes of the closed-ended alternative investment fund (including appointment and removal of the manager of the closed-ended alternative investment fund, amendments to the prospectus or the fund rules, modifications of investment policy, merger, liquidation);

12.1.2. the rights to control compliance of the closed-ended alternative investment fund’s investment policy with the provisions set out in the prospectus or fund rules;

12.2. the assets of the closed-ended alternative investment fund is separate totality of assets held distinct from the assets of the manager and the closed-ended alternative investment fund is subject to liquidation rules protecting the ownership rights of the holders of investment shares.

13. The company shall assess whether the investment of the assets in investment shares of the closed-ended alternative investment fund complies with the requirements for limitations stipulated by the Law and the prospectus of the fund.

Chapter III

Money Market Instruments

14. Money market instruments are eligible investment objects provided that they meet all of the following conditions:

14.1. they are TRM or are not TRM and comply with the criterion of "normally dealt in on the money market";

14.2. they are liquid;

14.3. their value is accurately measurable at any time.

15. Treasury and local authority bills, certificates of deposit, short-term commercial papers and bankers' acceptances are financial instruments that comply with the criterion of "normally dealt in on the money market".

16. Money market instruments are recognised as financial instruments normally dealt in on the money market provided that they comply with at least one of the following criteria:

16.1. their maturity at issuance is up to 397 days;

16.2. their residual maturity is up to 397 days;

16.3. their yield is adjusted regularly in line with money market conditions at least every 397 days;

16.4. their risk profile, including credit and interest rate risks, corresponds to the risks of the financial instruments whose maturity does not exceed 397 days or that are subject to the yield adjustment referred to in Paragraph 16.3 hereof.

17. Money market instruments that are normally dealt in on the money market and that are TRM shall be deemed to be liquid and their value accurately measurable at any time unless the company has information to the contrary.

18. Money market instruments shall be deemed to be liquid where they can be sold at a limited loss in a sufficiently short time frame taking into account the obligation of the company to redeem units from investors of the fund in line with the timing and the procedure set out in the prospectus.

19. When assessing liquidity of a money market instrument, the following factors shall be taken into account:

19.1. frequency of trades and quotes;

19.2. the number of dealers willing to purchase and sell the instrument and maintain a market in the instrument in question, the nature of market place trades, including the time needed to sell the instrument, the method for soliciting offers, the mechanism for making the settlement and for transferring the money market instrument;

19.3. the size of the issue or issue program;

19.4. the possibility to repurchase, redeem or sell the money market instrument in a short period (e.g., up to seven business days), at a limited loss evidenced by low fees and a small spread between bid/offer prices and a short settlement delay.

20. When assessing whether it will be ensured that the investment in the respective money market instrument does not adversely affect liquidity of the fund (the obligation to redeem units from investors in due time and in accordance with due procedure), the following factors shall be considered:

20.1. structure and concentration of the holders of the fund units (e.g., in accordance with the geographic criterion or concentration of units with specific holders);

20.2. characteristics of a typical investor (investor to which the fund is suitable);

20.3. quality of information about the fund cash flows;

20.4. limitations set out in the prospectus in respect of redemption of units.

21. Where the assessment of any factor referred to in Paragraphs 19 or 20 hereof suggests that it has an adverse effect on liquidity of the instrument, the company shall assess, in line with the risk management process, whether the money market instrument may still be deemed to be liquid.

22. Taking into account the liquidity assessment of money market instruments referred to in Paragraphs 19–21 hereof, the company shall correspondingly plan the investment portfolio structure and expected fund cash flows in order to match the anticipated fund cash flows with the possibility to sell appropriate liquid securities in the portfolio.

23. The value of money market instruments can be accurately measured at any time provided that there is an accurate and reliable valuation system that complies with the following criteria:

23.1. the valuation system enables calculation of the net asset value of the fund in accordance with the value at which the financial instrument held in the portfolio of the fund could be exchanged (sold) between knowledgeable willing parties in an arm’s length transaction;

23.2. the valuation is based either on market data or on valuation models that shall ensure that using of such models will not result in a material discrepancy between the value of the money market instrument and its market value (neither at the individual securities level nor the investment portfolio level).

24. Money market instruments that are not TRM are eligible investment objects provided that they meet the following requirements:

24.1. they are normally dealt in on the regulated market in accordance with the criteria specified in Paragraph 16 hereof;

24.2. they are liquid in accordance with the provisions of Paragraph 18 hereof;

24.3. their value can be accurately measured at any time in accordance with the provisions of Paragraph 23 hereof;

24.4. they are freely transferable;

24.5. appropriate information is available on them to assess the risks related to the investment, including for assessing the credit risks related to the investments in such instruments, in accordance with the requirements of Paragraphs 25–27 hereof.

25. Information about money market instruments that are not TRM and are issued by a commercial company whose securities are TRM or investor protection applies to an investment in those money market instruments (in accordance with the requirements of Subparagraph 5 of Paragraph 2 of Article 62 of the Law), or about money market instruments that are issued by the local government of a member state or by an international financial institution but are not guaranteed by the member state or, in case of a federal member state, any member of the federation, is compliant provided that the following requirements are met:

25.1. information about the issue or issue program as well as about the legal and financial situation of the issuer is available prior to the issue of the money market instrument;

25.2. information referred to in Paragraph 25.1 hereof is updated regularly, at least once a year, and also whenever a significant event occurs;

25.3. information referred to in Paragraph 25.1 hereof has been verified by an independent qualified third party. That person specialises in verification of financial and legal documents and meets professional standards of integrity;

25.4. reliable statistics is available on the issue or the issue program.

26. Information about money market instruments that are not TRM and are issued or guaranteed by a credit institution (in accordance with Subparagraph 4 of Paragraph 2 of Article 62 of the Law) is compliant provided that the following requirements are met: