Retail fundsAvailable vehicles
What are the main legal vehicles used to set up a retail fund? How are they formed?
French retail funds may take the form of FCPs (fonds common de placement) or SICAVs (Société d’investissement à Capital Variable). Retail funds are duly licensed and supervised by the AMF.
UCITS are a type of collective investment scheme that invest in transferable securities and comply with the harmonised regulatory framework set forth by the UCITS IV directive as implemented under French law. The main features of UCITS, in addition to benefiting from the European passport, is that they must invest solely in transferable securities that are either listed (for shares) or which provide sufficient liquidity (for bonds) and that they are subject to strict diversification rules (such as the requirement than no more than 5 per cent of the assets of the UCITS may be invested in securities issued by the same group of companies).
French real estate funds (OPCIs) are a type of AIF open to retail investors that invest at least 60 per cent of their assets in eligible real estate assets (rental properties), directly or through other eligible companies. OPCIs are also subject to diversification rules. To maintain liquidity for their unitholders, public OPCIs must invest at least 5 per cent of their assets in cash, deposits and liquid financial instruments. As the valuation of real estate assets held by an OPCI is a fundamental element of its viability, another feature of OPCIs is that the real estate assets held by the OPCI must be valued on a regular basis by two property appraisers acting jointly and which must draft a written report on such valuation.
General-purpose funds of alternative funds must be licensed by the AMF. As far as their investment policy is concerned, the main feature of French hedge funds is that they benefit from relaxed investment rules compared with those applicable to French UCITS. Specifically, funds of alternative funds may invest up to 100 per cent of their assets in foreign funds (meeting certain criteria) or in other types of French AIFs.
Venture capital funds belong to the category of AIFs and are subdivided into joint venture capital mutual funds (FCPR), innovation mutual funds and local investment funds. Private equity funds proposed to retail clients must be licensed by the AMF. The main feature of these funds is that they have the obligation to invest the main part of their assets in securities issued by unlisted companies and then, although formally open, to behave like closed funds whose units are intended to be held by investors until maturity. From a practical point of view, these funds are constituted for seven to 10 years, and unitholders will not be authorised to redeem their units during such period (lock-up period).Laws and regulations
What are the key laws and other sets of rules that govern retail funds?
The key rules that govern French retail funds are provided in the following documents, which specifically implement the European asset management regulations (the UCITS directive and the AIFMD) into French law:
- the MFC, with legislative and regulatory parts (Book II) that set out the main rules applicable to French investment funds (UCITS and AIFs); and
- regulations of the AMF, which encompass the RGAMF and other instructions and recommendations adopted by the AMF.
The policies and by-laws of professional associations such as the French Asset Management Association are not per se mandatory legislation, but they frequently lay down customs or rules that form part of the recommended market practices, and may be subject to specific approval by the AMF.
The main rules applicable to French retail funds are described in question 12.Authorisation
Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?
In order to be marketed in France, the retail funds must either be licensed by the AMF if they are established in France or be subject to completion of the passport application procedure provided for by the UCITS directive, if such retail funds qualify as UCITS established in other member states of the EU or EEA.Marketing
Who can market retail funds? To whom can they be marketed?
Frequently, intermediaries performing marketing activities in France regarding shares or units of collective investment schemes provide investment services to their clients or prospects, such as reception and transmission of orders, investment advice or, under certain conditions, the placing of financial instruments for third parties.
In addition, the marketing of funds in France (AIF or UCITS) may trigger the application of French solicitation rules (see question 8).
As a result of the above, entities conducting marketing activities in respect of retail funds in France generally qualify as regulated institutions (French or European passported credit institutions, French financial advisers, French or European passported SGPs etc).
Retail funds may be marketed towards any type of investors (ie, retail clients or professional clients).Managers and operators
Are there any special requirements that apply to managers or operators of retail funds?
French managers of retail funds are subject to the general requirements applicable to all types of SGPs licensed and supervised by the AMF and described in question 3.
The fact that retail clients are targeted is, however, taken into account by the AMF, in particular during the licensing process of the SGP. The AMF, in order to grant the licence, will verify in particular that the SGP has a structure and procedures in place tailored to the management of retail funds, regarding especially the marketing procedures and the investors’ information.Investment and borrowing restrictions
What are the investment and borrowing restrictions on retail funds?
As well as meeting eligible asset criteria, French UCITS and general-purpose French investment funds are subject to diversification requirements. In particular, they have to comply with the ‘5/10/40 rule’, whereby a maximum of 10 per cent of the investment fund’s assets may be invested in transferable securities and money market instruments issued by a single issuer, and whereby investments in transferable securities and money market instruments of an issuer exceeding 5 per cent of the assets of the UCITS may not make up more than 40 per cent of the whole portfolio.
French UCITS and general-purpose French investment funds are also subject to borrowing restrictions: as a matter of principle they are not authorised to borrow money, except on a temporary basis and if the loan does not represent more than 10 per cent of their assets.Tax treatment
What is the tax treatment of retail funds? Are exemptions available?
Each type of investment vehicle is governed by specific (and sometimes complex) tax rules; the following therefore constitutes only a very brief high-level summary.
Funds that do not have a legal personality (including all types of FCPs) are not generally subject to tax at the level of the fund - the income they earn is taxed at the level of their investors. The latter are generally taxed as if they had earned the income directly (ie, the income retains its qualification - dividends, interest, capital gains etc - and its source - French or non-French - for tax purposes), but as and when the income is actually distributed by the funds. Proceeds allocated to non-resident investors are subject to withholding taxes in France at rates depending on the nature of the underlying income, the source of such income and the location of the investors, subject to any applicable tax treaty.
Funds that do have a legal personality (such as SICAVs) generally fall within the scope of French corporate income tax but are generally exempted from such tax (in respect of all or certain items of income), so income earned by these funds is therefore also taxed as and when distributed to their investors. Certain funds are obliged to make regular distributions, failing which they could lose their tax exemption. Income allocated to investors sometimes keeps its qualification and source, and otherwise is treated as distributed income.
Capital gains earned by resident investors are in most cases taxable in France (as personal or corporate income tax, either upon disposal or every year on a mark-to-market basis for corporations), whereas non-resident shareholders are generally exempt when disposing of their shares in funds.
Specific regimes furthermore exist for certain types of funds, providing for an exemption at investor level subject to certain conditions being met. As an example, French-resident individual investors investing in certain types of FCPs can benefit from a full personal income tax exemption if they invest for at least five years and do not receive any income from the funds during this period.Asset protection
Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?
The assets of French investment funds (UCITS or AIFs) must be held by independent depositaries.
The assets of the funds are protected as follows:
- the depositary shall hold in custody those financial instruments that can be registered in a financial instruments account opened in the depositary’s books, and all financial instruments that can be physically delivered to the depositary; for other assets, the depositary shall verify the ownership of the fund (UCITS or AIF), and shall maintain a record of those assets when it is satisfied that the SGP acting on behalf of the fund holds the ownership of such;
- the depositary shall, in general, ensure that the fund’s cash flows are properly monitored, and shall particularly ensure that all payments made by or on behalf of investors upon the subscription of units or shares of an AIF or UCITS have been received, and that all cash of the AIF or the UCITS has been booked in cash accounts opened in the name of the AIF; and
- the depositary shall monitor the SGP’s decisions to ensure that they comply with French regulations and the articles of association or regulations of each investment fund.
In addition, the depositary must be chosen from a limited list of entities, including a credit institution (or investment firm) authorised to perform custody activities by the French Prudential and Resolution Supervisory Authority (the regulator in charge of supervising credit institutions and investment firms).
The depositary may delegate total or partial custody of the assets of the investment funds to a third party, but remain, as a matter of principle, responsible for the return of any fund assets that may be lost while held in sub-custody. A limitation of such liability may be contractually provided for AIFs under specific conditions. Such arrangements for the limitation of liability are, however, prohibited with respect to UCITS.Governance
What are the main governance requirements for a retail fund formed in your jurisdiction?
Under French asset management regulations it is the SGP of the retail fund (UCITS or AIF) which is entitled to take the decisions regarding the financial management of the fund on a discretionary basis, whereas the shareholders or unitholders have financial rights (and information rights) deriving from the ownership of their shares or units but do not generally have any right to influence the financial management of the funds.
This is the case for the retail funds set up as FCPs (which are not legal entities) but also for retail funds set up as investment companies (SICAVs) where the board of directors (or the supervisory board) elected by shareholders is legally entitled to oversee the management of the company by the SGP but is not entitled to take financial investment decisions.Reporting
What are the periodic reporting requirements for retail funds?
French retail funds (in particular UCITS and general-purpose French investment funds) are required to publish at least annual and semi-annual reports, containing information on the fund’s assets and liabilities.
The latest version of such reports (as well as the latest version of the prospectus) must be made available free of charge to investors at their request, by the investment company (SICAV) or by the portfolio management company managing the fund set up as FCP.
French retail funds (the SICAV or the SGP of the FCP) must also report on a regular basis to the AMF about their activities, and must notify the AMF each time a change to their activities or organisation is contemplated, certain modifications having to be authorised by the AMF on a prior basis (such as a change in the investment strategy of the fund).Issue, transfer and redemption of interests
Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?
With respect to French retail funds that are open-ended funds, limitation of issue of shares or units is not as a matter of principle permitted, except in exceptional circumstances and if required by the interest of the shareholders or unitholders or the public (in case, for instance, of very difficult market conditions).
It is also prohibited for retail funds set up as investment companies to restrict the transfer of shares by providing in their by-laws an approval clause whereby the transfer of its shares by a shareholder would be subject to the prior approval of the SGP.
Redemption of shares or units by retail funds may be limited to a certain extent for the purpose of managing the liquidity of the fund. Gates mechanisms (whereby the French fund may provide in their prospectus that the redemption of their units or shares may be limited, at each date of establishment of their net asset value, to a fraction of the units or shares issued by the fund) in French retail funds are generally permitted, subject to informing the unitholders (with, in particular, an indication of the threshold and a detailed description of the procedure to be applied in the fund’s prospectus) and provided that such gating mechanisms are applied on a temporarily basis. Mandatory notices for the submission of subscription and redemption orders are also permitted for certain type of retails funds (funds of alternative funds in particular).
It is also possible for the SGP of a French retail fund to use side-pocket mechanisms, allowing the SGP of the fund, in the event that the fund contains illiquid assets, to split the original funds into two new funds, one of which (a contractual side-pocket fund) will receive the illiquid assets to be managed in a run-off mode and for which no subscription or redemption of units will be possible.
Lock-up provisions (a period of time during which the unitholders are not authorised to request the redemption of their units) are not, as matter of principle, permitted in open-ended French retail funds, except for venture capital funds opened to retail investors (such as FCPR or joint venture capital mutual funds).