Retail funds

Available vehicles

What are the main legal vehicles used to set up a retail fund? How are they formed?

Swedish retail funds are commonly referred to as being funds available and generally eligible for non-professional investors. ‘Professional investors’ are defined in accordance with the definition set out in the SMA and ‘non-professional investors’ are defined as investors other than professional investors.

Swedish retail funds include UCITS and AIFs in the form of special funds. These funds are construed as pools of assets without any legal capacity and thus cannot acquire rights or assume liabilities. In addition, such funds may not be sued in, or brought before, courts of law or any other public authority. Consequently, these funds merely consist of the fund assets. The fund manager represents the unitholders in respect of all issues concerning such a fund and it is also required by law that the assets of the fund are kept with a custodian that is independent of the fund management company. The fund is formed via capital contributions from investors and through the SFSA’s approval of the fund rules. Accordingly, the establishment of a Swedish retail fund requires a three-party relationship that is governed by contractual and statutory obligations. Collective investment structures established as legal vehicles other than UCITS, AIFs and special funds, such as a limited liability company or similar foreign entities, may come to fall within the scope of Swedish fund regulation, but it is currently not possible to set up the above-mentioned funds on the basis of company law as a regulated form of investment fund.

Laws and regulations

What are the key laws and other sets of rules that govern retail funds?

The sets of rules governing retail funds are, together with executive orders made thereunder, the SFA and the SFSA’s Regulations FFFS 2013:9 regarding securities funds, which govern UCITS, and the AIFMA and the SFSA’s Regulations FFFS 2013:10 regarding alternative investment fund managers, which govern special funds. Exchange-traded funds will also be governed by the rules of the relevant market.

The laws and regulations presented above are supplemented by guidelines issued by the SIFA that are considered as codifying good marketing practices.

Authorisation

Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

Yes, the establishment and marketing of funds available to non-professionals require authorisation, either from the SFSA or by the regulator in an EEA state from where its licence can be passported. In connection with the SFSA’s authorisation process for retail funds, the fund rules of the funds that the applicant fund manager intends to manage, must be submitted to the SFSA for approval. The fund may not be marketed prior to such approval except under the circumstances described in question 9.

Marketing

Who can market retail funds? To whom can they be marketed?

There are no formal restrictions governing who may market retail funds or the intended recipient of such marketing. Instead, retail funds can be marketed to any type of investor. Further, the marketing entity does not need to be licensed or authorised provided that the marketing does not include offering of the funds or would otherwise require a licence, pursuant to MiFID II and the SMA.

A Swedish professional fund distributor is normally authorised by the SFSA, either if it gives investment advice in the course of its distribution or if its distribution activities (such as the receipt and transmission of orders in respect of financial instruments and the execution of orders in respect of financial instruments on behalf of clients) comprise the regulated activity.

Managers and operators

Are there any special requirements that apply to managers or operators of retail funds?

Retail funds are characterised by extensive consumer protection rules whereby a manager of a retail fund must comply with a variety of special requirements that are not applicable in relation to other types of investment funds.

The most prominent requirement is the obligation to act exclusively in the common interest of the unitholders. Further, the manager is required to, inter alia, maintain, or cause to be maintained, a register of all holders of units in the fund, immediately redeem a unit upon the request of a holder and maintain a suitable diversification of investments in accordance with the principle of risk spreading (see question 17). Further, the AIFMA includes added provisions in relation to non-professional (retail) investors, including additional requirements for a Swedish marketing authorisation.

Investment and borrowing restrictions

What are the investment and borrowing restrictions on retail funds?

Investment restrictions

The investment of retail funds shall follow the risk-spreading principle and be made in financial assets associated with high liquidity, including transferable securities, money market instruments, derivative instruments (excluding commodity derivatives), units in other UCITS and deposits with credit institutions. As a general rule, however, subject to exemptions, the value of the instruments issued by any single issuer may not exceed 5 per cent of the fund’s value.

Borrowing restrictions

Besides the possibility of raising short-term loans in an amount not exceeding 10 per cent of the fund’s value, a management company may not raise or grant cash loans or act as guarantor within the fund operations.

Tax treatment

What is the tax treatment of retail funds? Are exemptions available?

Swedish retail funds that are organised as UCITS funds or as special funds are exempt from Swedish taxation. Swedish retail funds that are organised as limited liability companies are subject to Swedish taxation for all income as one source income - income from business - at a tax rate of 21.4 per cent. However, dividends and capital gains on shares held for business purposes are exempt from Swedish taxation.

Individuals who are tax resident in Sweden and hold units in UCITS funds or special funds are subject to a standard income tax on the units. Further, capital gains and dividends from UCITS funds and special funds held by individuals who are tax resident in Sweden are generally subject to taxation as income of capital. Capital losses are tax deductible. However, rules regarding reduction of capital losses must be considered. Individuals who are tax resident in Sweden and invest in limited liability companies are subject to taxation on capital gains and dividends as income of capital. Capital losses are tax deductible. Again, however, rules regarding reduction of capital losses must be considered.

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 portfolio of assets of a retail fund must be held by a separate custodian, which does not need to be a local entity. A Swedish custodian must be a bank or a credit institution and have its registered office in Sweden or, where the custodian is a branch established in Sweden, in another country within the EEA. The engagement of a custodian may not be given to an entity whose interests may come into conflict with the management company or the unitholders.

The custody of financial instruments (including, for example, fund units) may only be conducted by an entity that has been granted an authorisation by the SFSA (or by the competent authority in another state within the EEA).

A Swedish custodian may be required to assume the management of a retail fund where the management company has entered into insolvency proceedings, liquidation or if the SFSA has revoked the management company’s authorisation to conduct fund operations.

In the event that the custodian becomes subject to insolvency proceedings, the unitholders would be protected, as the ownership of the fund units is reserved for the unitholders who may easily be distinguished. However, any cash held by the custodian would most likely be unprotected.

Governance

What are the main governance requirements for a retail fund formed in your jurisdiction?

Governance requirements primarily include risk management, handling of potential conflicts of interest and acting in a manner that maintains the public’s confidence in the fund market. More detailed guidance is provided in guidelines issued by the SIFA.

In connection with the authorisation process (and upon revision), the management company is required to submit a number of documents to the SFSA, including, for example, the prospectuses, key investor information documents, an annual report and a semi-annual report. Upon authorisation being granted, the fund manager and the retail fund will be registered in the SFSA’s public register. The management company must have a board of directors that consists of at least three members and a managing director and is obliged to maintain, or cause to be maintained, a register of all holders of units in the fund.

In addition, a management company must document and preserve each portfolio transaction for all UCITS it manages. The documentation must be retained for at least five years and must contain sufficient information in order to reconstruct each transaction performed.

Reporting

What are the periodic reporting requirements for retail funds?

A management company must submit a quarterly report containing a profit and loss account and a balance sheet for the management company itself to the SFSA. The quarterly report must also contain information on capital requirements and methods used for calculating the capital base.

Quarterly reports must also be submitted for each retail fund managed and must include information on, for example:

  • the type of fund managed;
  • the net asset value of the fund assets;
  • dividends;
  • fees charged for the subscription and redemption of units in the fund;
  • average liquidity; and
  • the assets and liabilities of the fund.

As from 1 August 2017, Swedish-based managers, and branches based in Sweden, are required to submit reporting in relation to their measures against money laundering and terrorism financing on an annual basis.

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?

A UCITS is by statute an open-ended investment fund available to the public. As such, the fund must accept investments. In general, no restrictions may be placed on the issue, transfer and redemption of units in the funds. However, it is possible to impose rules stipulating, for example, a minimum subscription amount. Upon the request of a unitholder, a unit must be redeemed immediately and may only be postponed under extraordinary circumstances.

A special fund may, however, subject to the SFSA’s consent, incorporate restrictions on the issue of units in the fund. In addition, a special fund may limit the possibility for investors to redeem their units to once per year. Restrictions must be incorporated in the fund rules that must be approved by the SFSA in connection with the formation of the fund.