For many years, the Israeli market has attracted sizeable foreign direct inward investment. The reverse phenomenon of the offering to Israeli investors of units in foreign investment funds has been far less significant. In the absence of a conducive regulatory framework applicable to foreign investment funds, these funds effectively found themselves prevented in practice from entering the Israeli market, other than by way of private offerings to which the restrictions against offers to the public did not apply.
A recent amendment to the Joint Investment Trust Law, 1994 ("the JIT Law"), though, which was passed on July 30, 2014, ("the Amendment"), aims to change this picture. Broadly, the Amendment, initiated by the Israeli Securities Authority ("the ISA"), will create a realistic route to allow foreign fund managers who satisfy certain criteria to offer units in Israel to the general investing public (though its coming into force depends on the enactment of enabling regulations, as discussed below).
Until now, under the JIT Law, the offering of units in a foreign fund to the Israeli public had to be made by way of the issue, in Israel, of a prospectus (in Hebrew) approved by the ISA. While the ISA did, in theory have authority to exempt such an offer from this requirement if it determined that the foreign law in the country of origin was sufficient to safeguard the Israeli investor public, our understanding is that such authority was never in fact exercised.
Under the Amendment, the above regulatory framework is to be amended, and a foreign fund is now to be permitted to offer units in Israel (including by registering the fund's units for trade in the Tel Aviv Stock Exchange) provided it meets certain conditions in regulations to be drawn up by the Minister of Finance and approved by the ISA. In their current form, the regulations, while not final, include the following main requirements:
- The foreign fund must operate under the US Investment Company Act of 1940 or European Directive (UCITS) and have received a permit from the regulatory authority in its country of origin to offer securities in that country.
- The net asset value of the foreign fund must be at least US$50 million and its units must be available for purchase in the EU or the US.
- The total value of the foreign fund’s assets and client portfolios managed by the fund manager, a person controlling it or a company controlled by such person must be at least US$20 billion.
- The foreign fund manager must manage no fewer than five funds whose units are offered to the public for at least five years, and the total value of assets held in each fund for the past two years must be at least US$500 million.
- Unit prices of the foreign fund must be regularly published on a website and be freely available to the public.
- The foreign fund must not specialize in investments in Israel.
- The foreign fund manager must deposit a bank guarantee issued by a bank in Israel for at least NIS 1 million (or equivalent value thereof in securities) for the benefit of the ISA or, in lieu of a bank guarantee, a deposit in an account at a bank in Israel.
- The foreign fund manager must deposit in an account at a bank in Israel a certain sum calculated on the basis of the value of units held by Israeli distributors in a cash deposit or in a securities account.
- The manager of the foreign fund must appoint a representative in Israel to serve as liaison between itself and the ISA and between itself and the unit holders in Israel.
- If the fund is a traded fund, the offered units must be listed for trading on a foreign stock exchange.
- The rights of unit holders or shareholders of a foreign fund purchased in Israel are identical to the rights of any unit holder or shareholder of the foreign fund.
The Amendment is a big step towards further sophisticating and increasing competition in the mutual funds market in Israel. It is envisaged that it will improve the quality and variety of products in the market and benefit Israeli investors in enabling them to diversify their portfolios and gain access to the world's leading investment houses.