FRA Regulates New Tool for Funds to

The Financial Regulatory Authority (“FRA”) has – for the first time – issued rules regulating the fund investments in “alternative financial movable assets” as perceived by the Capital Market Law No. 95 of 1992 (the “CML”). Since the issuance of the CML in 1992, the FRA focused its regulation of tools of investment on securities (primarily shares and bonds) and lately real estate (as opposed to securities issued by real estate companies). In the new decision, the FRA permits the financing of micro-finance activities through purchasing micro-finance portfolios. These would be considered a type of “financial movable asset” which the CML allows investment in as per the executive regulations of the CML. Obviously such rules should have been issued as part of the executive regulations of the CML but were issued by an FRA decision. Nevertheless, the new decision gives the first interpretation of “alternative movable assets” and provides access to investment tools that were previously beyond the reach of investment funds.

Background

Article 35 of the CML provides that: “35.1 - Investment funds may be established with the purpose of investing savings in securities within the limits and in accordance with the rules set out in the executive regulations. 35.2 - The board of directors of the [FRA] may license an investment fund to transact over alternative financial movable assets, or in other fields of investment in accordance with the rules and conditions determined in the executive regulations.” Since the issuance of the CML in 1992 and until the issuance of the latest FRA decision, the executive regulations only focused on securities and real estate as investment tools, with investment in real estate being recently introduced and with strict limitations. The executive regulations name a few fund types such as mutual funds, private equity funds, fund of funds, index funds, and money market funds. Each of these funds may be authorized to invest in a specific type of security and within specific limits depending on whether it is open or closed and whether it is available for the public or only qualified investors. However, all funds have to invest in securities. For instance, mutual funds must invest in listed shares and/or bonds; private equity funds in listed and unlisted shares and bonds; fund of funds in investment certificates; index funds in listed shares; and money market funds must invest in treasury bills and bonds. The only exception is real estate funds, which were recently allowed to invest in property in addition to securities issued by real estate companies or in relation to real estate activity. Such limited range of investment tools restricts the ability of investment funds to finance different activities and expand their outreach. In this respect, the new FRA decision is highly welcomed.

The New FRA Decision No. 32 of 2018

On 3 April 2018, the FRA issued decision No. 32 of 2018[1] on the Rules Applicable to Investment Fund Transactions on Financial Movable Assets (“Decision 32/2018”), albeit the decision was only formally published on 12 May and becomes effective from the following day i.e. from 13 May 2018. Article 1 of Decision 32/2018 states that, as per Article 35 of the CML, the FRA shall be entitled to license investment funds that specialize in financing micro-finance activities to transact over financial movable assets through the purchase of micro-finance portfolios from the entities authorized by the FRA to undertake micro-finance activities. According to Article 3 of Law No. 141 of 2014 on the Regulation of Micro-Finance Activities, companies, associations and foundations are required to obtain a license from the FRA in order to be permitted to carry out micro-finance activities. The decision, however, limits that license to private equity funds, which are privately placed closed-ended funds, and whose purpose includes investment in financial movable assets through the finance of micro-finance entities licensed to do so by the FRA. It is important to note that, although financing micro-financing activities does not have to be the only purpose of the fund as per the wording of the decision, Article 3.2 of the decision limits the right of the fund to invest in other financial tools to only 10% of its assets and only for the purpose of maintaining liquidity. Clarification from the FRA is required to understand the purpose of said limitation. The investment policy of the fund is required to include the rules and conditions for accepting the assignment of micro-finance portfolios, such as the minimum guarantees that the assignor must provide to the fund, the concentration percentages according to which micro-finance portfolios may be assigned from one entity, the risks associated with micro-finance activities, the rights and obligations of the assignor and assignee, and the credit policy of the fund including in particular the rules and conditions for accepting micro-finance portfolios. Finally, investment funds financing micro-finance activities are required to ensure compliance by the assigning entities with FRA decisions number 173 of 2014 and 31 of 2015 with respect to the portfolios to be assigned to the fund. As to managers of funds authorized to finance micro-finance entities through the assignment of portfolios, they are required to observe the risk management system requirements applicable to entities authorized to undertake micro-finance activities and stated in FRA decision number 173 of 2014.

Conclusion

FRA Decision 32/2018 can be considered a breakthrough in light of the traditional investment tools that the investment funds have been previously limited to. It is also of great additional value to micro-finance activities as it opens another door for financing such important activity to the Egyptian economy. A few clarifications may be needed from the FRA and potentially a few tweaks to give investment funds greater flexibility in allocating their funds.   [1] FRA Decision No. 32/2018 on the rules regulating the fund investments in alternative financial movable assets, Egyptian Gazette, Issue No. 108, 12 May 2018.