What are the New Rules to Comply to Investments Funds?

The Armenian Financial Regulator Clarifies Its Policies Regarding Investments Funds. 

What are the New Rules To Comply With?

In recent years, Armenia has been attracting more and more investors and managers who are willing to establish and operate an investment fund due to immense changes in legislation. Armenia has created a beneficial and fertile sphere for investment funds, and when it comes to founding and operating an investment fund (especially non-public investment funds) the Armenian regulatory framework is one of the most robust.

With the same purpose of promoting the development of the non-public investment fund sector and establishing an official approach, the Board of Central Bank of Armenia (the “CBA”), who’s the regulator of the sphere, adopted a decision on the establishment of Regulation No 10/33 “On criteria for evaluating the purpose of creating or operating a person (a pool of assets) as an investment fund” (the “Regulation”) very recently.

By this Regulation, the CBA determines explicit criteria which should be met by a manager or a General Partner to be able to establish and operate as an investment fund. Section 2 of the Regulation provides specific assessment criteria for the objective of establishing (operating) an investment fund. 

In particular, paragraph 4 of the Regulation distinguishes that a pool of assets does not correspond to the purpose of an “investment fund” established by the Law “On Investment Funds” (the “Law”), and therefore cannot be considered as such if such a fund meets at least one of the following criteria:

1. carries out activities that are not characteristic of the collective investment activity carried out by the investment fund, including

1. production, purchase, sale and/or exchange of goods;
2. construction (development) of buildings or structures;
3. performance of works and/or provision of non-financial services,

2. does not have an established investment policy, according to which it should be managed.

As an exception, the Regulation highlights that point (ii) above, does not include activities specific to real estate funds provided by Article 45 of the Law (paragraph 5 of the Regulation). 

Within the purpose of the abovementioned exception, the CBA specifies that the activities are not considered specific to real estate funds if 

1. the investments in real estate are carried out for other purposes other than changing the market value and /or obtaining benefits from lease payments, 
2. the investments are made in real estate (buildings, structures), the construction of which has not yet been completed, 
3. the functions of restoration, modernization, and improvement of acquired buildings, and structures are directly carried out by the fund or by the manager of the fund.

In other words, in cases when a fund carries out activities specified above, it cannot be considered a real estate fund, and such activities can be interpreted as inappropriate activity under Section 2 Point (1) of the Regulation.,

To provide more certainty on CBA expectations, the Regulation (paragraph 6), states that an investment policy is considered established if it at least describes:

1. types of assets, minimum and/or maximum limits of investments therein,
2. specific investment strategies applied,
3. the purpose and limitations of leverage if such leverage is envisaged by the fund rules.

Summarizing the above, CBA establishes the following approach with respect to investment funds:

1. an investment fund should have purely investment purposes: it cannot be involved in commercial activities and generate profit from it;
2. an investment fund should have a precise investment policy determining investment targets and thresholds, investment treatment policies, investment limitations, and restrictions, etc.

As a result, the CBA uplifts its official approach to the legislative level, which means that failure to comply with it upon state registration will be a ground for the rejection of state registration of an investment fund (investment fund’s rules).

NOTE: This material is for general information only and is not intended to provide legal advice

Lilit Hakobyan

Associate, Attorney-at-Law

[email protected]