Fund management regulation

Regulatory framework and authorities

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

In France, fund management is regulated by European regulations of direct application in France (such as the Market Abuse Regulation) and by French asset management legislation and regulations that specifically implement the European asset management regulations (the UCITS (undertaking for collective investment in transferable securities) directive and the Alternative Investment Fund Managers Directive (AIFMD)) into French law, in particular the regulations enacted by the French portfolio management companies regulator, the AMF.

The AMF is the prudential supervisor of portfolio management companies and the investment funds they manage. The main duties of the AMF include especially the preparation of regulations and rules of good conduct applicable to the asset management industry and to the licensing of French asset managers (SGPs).

A separate and independent enforcement committee of the AMF may also impose disciplinary sanctions on SGPs, investment funds and depositaries.

Fund administration

Is fund administration regulated in your jurisdiction?

Fund administration activities are carried out in France under the supervision of the SGP, which generally delegates such functions (including inter alia the net asset value (NAV) calculation of funds) to specialised entities that are not themselves specifically licensed or authorised under French law for performing fund administration activities.

Authorisation

What is the authorisation or licensing process for funds? What are the key requirements that apply to managers and operators of investment funds in your jurisdiction?

Certain funds must be authorised by the AMF before any marketing action. This applies, in particular, to funds distributed to the public and to certain funds directed to professional investors. For licensing by the AMF, a fund (or its SGP) must submit an application file to the AMF, which will review the documentation (prospectus, Key Investor Information Document etc).

Legal entities that manage one or several UCITS (French or foreign) or alternative investment funds (AIFs), compliant with the AIFMD (ie, SGPs) must hold a fund manager licence.

In this respect, a company that wishes to manage French collective investment schemes, whatever their form (UCITS, private equity funds or real estate funds), must, as a matter of principle, first be duly licensed by the AMF as an SGP (the same requirements apply to self-managed investment funds).

Before licensing a company as an SGP, the AMF will verify in particular that:

  • the company’s registered office and central administration are located in France;
  • the company has sufficient initial capital (minimum share capital of €125,000 plus additional amounts of share capital above certain thresholds depending on the assets under management);
  • the company has provided the names of shareholders with significant equity holdings to allow the AMF to assess their qualifications; and
  • the company is managed and its policies are determined by individuals with the necessary integrity, qualifications and experience commensurate with their positions.

An additional and key condition is that SGPs must have a structure and procedures in place tailored to the specific asset management activities, most importantly skilled managers, sufficient human and technical resources, suitable internal controls and risk management (with internal procedures preventing conflicts of interests), and a viable business plan.

SGPs managing AIFs are also subject to additional requirements (additional own funds, liquidity management, valuation policy etc).

The licensing procedure consists of submitting an application file to the AMF, which has a maximum of three months in which to grant the licence to the SGP.

Territorial scope of regulation

What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

French asset management regulations have a territorial scope of application.

Any person or legal entity providing investment services on French territory on a regular basis must, as a matter of principle be duly licensed as an investment services provider (ie, being duly licensed by the French supervisory authorities as an investment services provider or benefiting from the European passport).

This is particularly the case for the provision of the investment services of portfolio management and investment advice.

Similarly, the management of French funds may, as a matter of principle, only be carried out by regulated and licensed portfolio management companies.

Non-compliance with such provisions may expose the offender to criminal sanctions.

Therefore, as a matter of principle, an overseas manager (with the exception of EU passported managers) cannot perform management activities on a regular basis or provide asset management services to clients residing in France without prior authorisation from the French banking and financial regulator.

Acquisitions

Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

The AMF must be notified in advance of any transaction that enables a person (acting alone or in concert with other persons) to acquire, increase, decrease or dispose of a directly or indirectly held equity interest in a French SGP when one of the following conditions are met (the Qualifying Interest):

  • voting rights held by the aforementioned person increase above or below the threshold of a tenth, fifth, third or half of the voting rights of the SGP; or
  • the SGP becomes, or ceases being, a subsidiary of the aforementioned person.

Transactions whereby a person acquires or increases a Qualifying Interest in an SGP are subject to prior authorisation from the AMF.

Restrictions on compensation and profit sharing

Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

Compensation of investment managers is governed by French regulations that implement the relevant provisions deriving from the AIFM and UCITS directives.

The purpose of this regulatory regime is to permit sound risk management in the portfolio management companies and enabling supervision of employees’ behaviour in relation to risk taking.

In particular, SGPs must establish remuneration policies and practices that are compatible with sound and effective risk management and that apply to all categories of staff whose professional activities have a material impact on the risk profile of the UCITS and AIFs under management.

Fund marketing

Authorisation

Does the marketing of investment funds in your jurisdiction require authorisation?

Yes. Investment funds that are marketed on French territory must be duly authorised for marketing or benefit from the European passport.

As far as UCITS are concerned (ie, European coordinated), any foreign UCITS must be notified to the AMF by the competent authority of the fund’s home member state (which authorised the UCITS) before it can market its shares or units in France. Foreign UCITS in France must also appoint one or more financial correspondents in France whose duties are, inter alia, the treatment of subscriptions, redemptions, providing information to shareholders and payment of the AMF annual royalty.

The passport regime for marketing foreign AIFs in France to professional clients was implemented in July 2013 and was further specified by the AMF in July 2014. It should be noted that non-EU AIFs managed by an alternative investment fund manager (AIFM) based outside of the EEA or based inside the EEA do not benefit from the AIFMD passport when marketed towards professional clients, and must therefore be authorised by the AMF, subject to certain conditions. The passport mechanism may be extended to this type of fund at a later stage. The appointment of a centralising correspondent by the foreign AIF marketed in France is required only when the foreign AIF is passported in France and is marketed towards non-professional clients, or when the foreign AIF is marketed in France under a procedure of marketing without a passport.

What marketing activities require authorisation?

The AMF defines the marketing of shares or units of investment funds (be they UCITS or AIFs) as the presentation of the relevant shares or units of UCITS or AIFs through different means (advertising, solicitation, advice etc) with a view to encouraging an investor client to buy or subscribe to them.

The AMF also admits that in certain specific cases, investors may become shareholders or unitholders of such UCITS or AIFs through the mere purchase, sale or subscription of shares or units of an AIF without a marketing action being characterised in France.

In July 2016, the AMF introduced the concept of ‘premarketing’ of funds in France. In particular, the practice of management companies contacting up to a maximum of 50 investors (professionals or individuals whose initial subscription would be at least €100,000) to assess their interest prior to the launch of such a UCITS or AIF is not an act of marketing, provided that the investors are not given a subscription form or documentation containing definitive information on the fund’s characteristics. However, any subsequent subscription by the investors contacted will be considered to constitute an act of marketing.

Also in July 2016, the AMF clarified other situations that would not trigger the application of marketing rules in France, such as the participation by a management company in conferences or meetings of professional investors, provided the investors are not asked to invest in a specific product, over-the-counter trades between investors, or the purchase, sale or subscription of units or shares in UCITS or AIFs in the context of a management company’s compensation policy.

French SGPs must also comply with specific rules when marketing the investment funds they manage.

The marketing of investment funds (AIFs or UCITS) on French territory falls under the provisions of French regulations (the French monetary and financial code (MFC) and the General Regulations of the AMF (RGAMF)) applying to the provision of certain investment services, such as the investment services of reception and transmission of orders, investment advice and (under certain conditions) placing of financial instruments.

In addition, marketing of funds in France (AIF or UCITS) may trigger the application of French solicitation rules. Such rules apply whenever banking or financial products are marketed directly in France. It should, however, be noted that the solicitation regime will not apply if the targeted investors qualify as professional clients within the meaning of French regulations.

Territorial scope and restrictions

What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

French marketing rules apply as long as the relevant shares or units of UCITS or AIFs are presented to French residents through different means (advertising, solicitation, advice etc) with a view to encouraging such French residents to buy or subscribe to them, and irrespective of the nature of the French resident (retail client, professional client or eligible counterparty), the amount of the subscription by the French resident or whether the offer is intended for a restricted circle of investors (ie, fewer than 150 investors).

Therefore, as a matter of principle, an overseas entity cannot perform marketing activities in France regarding foreign UCITS or AIFs without being authorised to conduct marketing activities in France and without having the relevant UCITS or AIFs being duly authorised for marketing in France.

If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

The marketing of funds may be performed from abroad by entities duly regulated and passported for this purpose without a requirement to have a physical presence in France. However, it is mandatory in certain circumstances to appoint a centralising correspondent, as described below.

The distribution of investment funds falls under the provisions of French regulations implementing MiFID applying to the provision of the investment services of reception and the transmission of orders and investment advice.

The provision of such investment services is restricted to duly licensed investment service providers (French, or passported from another EU or EEA member state, such as investment firms and portfolio management companies) and to French financial advisers that benefit from an exemption that authorises them to provide investment advice, or to receive and transmit orders in respect of units or shares of investment funds without necessarily being licensed as investment services providers.

A foreign UCITS (ie, European coordinated) authorised for marketing in France must appoint a centralising correspondent in France and, if need be, other financial correspondents.

The centralising correspondent, which must be a regulated entity (in particular credit institutions or investment firms authorised to perform the activity of account custody) established in France (including, under certain conditions, French branches of European investment firms authorised to act as custodians of financial instruments), is contractually bound to provide certain financial services including supplying investment documents to investors and providing shareholders and unitholders with special information in the cases provided in the above instruction.

A foreign AIF authorised for marketing in France must also appoint a centralising correspondent in France and, if need be, other financial correspondents, but only if the AIF is marketed to retail clients.

Commission payments

What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

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.

As a result, such intermediaries will generally have to be regulated for rendering investment services in France (ie, duly licensed as investment services providers or registered as financial advisers) and must comply with the rules of good conduct deriving from the implementation under French law of the MiFID II directive.

Compliance with the aforementioned rules of good conduct restricts the ways in which regulated distributors may be compensated in relation to their marketing activities in France. In particular, investment services providers or financial advisers providing the investment service of investment advice on an independent basis are generally prohibited from accepting and retaining fees from third parties in relation of the provision of their services to their clients.

In addition, regulated distributors providing investment services (other than the provision of discretionary portfolio management services and investment advice on an independent basis) may accept and retain fees, in relation to the provision of their service to clients, subject to the following conditions:

  • these payments enhance the quality of service to the client;
  • they do not impair compliance with the distributor’s duty to act honestly, fairly and professionally in accordance with the best interest of its clients; and
  • the existence, nature, amount and calculation method of these payments is clearly disclosed to the client prior to the provision of the service.

Retail funds

Available 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).

Non-retail pooled funds

Available vehicles

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

French non-retail funds may generally be set up by using one of the following legal forms (ie, whether they are constituted under a corporate form or not incorporated):

  • a corporate form: a French corporation with variable share capital subject to general corporate regulations applicable to limited liability companies and to specific asset management regulations; or
  • a mutual fund (FCP): a form of co-ownership that issues units to be subscribed to by its unitholders. The FCP is the most common form of investment fund on the French market (except for real estate funds). An FCP (which is not a legal entity but a co-owned form of assets) must be established by an SGP (which represents the FCP and manages its assets).

Many types of non-retail funds must be licensed by the AMF (such as real estate funds), whereas professional venture capital funds are not subject to any licensing requirements, but need only be notified to the AMF within one month of their constitution (such as professional venture capital funds called FPCIs).

Laws and regulations

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

The key rules that govern French non-retail funds are provided in the MFC, the RGAMF and the Articles of Association or fund rules, and in the relevant fund’s prospectus (if any).

The key rules common to each type of non-retail investment funds are the following:

  • more flexible licensing requirements (see question 25);
  • more flexible investment policy rules; the diversification rules are frequently relaxed compared to retail funds, and some non-retail funds are authorised to determine contractually their investment policy (such as specialised professional funds, FPS);
  • relaxed liquidity rules; and
  • relaxed distribution and liquidation rules.
Authorisation

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

Certain types of non-retail funds must be licensed by the AMF before being established and marketed (such as for the professional OPCI, used for real estate investments), whereas other non-retail funds, such as the professional venture capital funds (FPCIs) are not subject to any licensing requirements but need only be notified to the AMF within one month of their constitution.

All the non-retail regulated funds listed in the MFC, whether they are licensed or merely notified to the AMF, are regulated funds and are therefore supervised by the AMF.

Marketing

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

The marketing of non-retail investment funds on the French territory falls under the provisions of French regulations (MFC and RGAMF) applying to the provision of investment services, such as reception and transmission of orders, investment advice and, under certain conditions, the placing of financial instruments.

In addition, marketing of AIFs may trigger the application of French solicitation rules. However, it should be noted that the solicitation regime will not apply if the targeted investors qualify as professional clients within the meaning of French regulations.

Investment in non-retail funds is open to professional investors (within the meaning of MiFID) and also to any investor subscribing to units or shares of the funds for more than €100,000 or, with respect only to professional venture capital funds and specialised investment funds, to individuals and companies subscribing to the units or shares of the funds for more than €30,000 and meeting certain criteria (concerning in particular their previous experience in the private equity sector).

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

See question 26.

Managers and operators

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

See questions 3 and 28, as the SGPs managing non-retail funds are generally subject to the same licensing requirements those applicable to SGPs of retail funds.

As non-retail funds necessarily qualify as AIFs, their SGP will generally need to have an AIFM licence. The scope of the licence will depend on the type of investment strategy implemented by the AIF.

Under the French licensing procedure, the licence granted by the AMF to the SGP is not generic but specific to the type of investment strategy implemented. This means that an SGP authorised to manage professional venture capital funds will need to be further authorised by the AMF if it wishes to manage professional AIFs investing, for instance, in real estate assets or receivables. In addition, the SGP may also ask to restrict its AMF licence to funds subscribed to by professional clients only.

Tax treatment

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

See question 18.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Please refer to our answers to question 19 above, as the assets of the non-retail funds benefit from the same protections as the retail funds.

However, some relaxed rules apply due to the professional nature of such funds. In particular, regarding French hedge funds constituted as specialised investment funds and general-purpose professional funds, it is possible for the French depositary to enter into an agreement with the hedge fund whereby it limits its obligation of return of the financial instruments under custody in the event of delegation of this function to a third party.

Governance

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

See question 20 as the governance rules applicable to French retail funds also apply as a matter of principle to French non-retail funds.

It is, however, not uncommon in French non-retail funds (in particular in French professional private equity funds) to have an advisory committee set up with representatives of investors. The recommendations or advice formulated by the advisory committee must always be non-binding for the SGP, according to the principle of autonomy of management.

Reporting

What are the periodic reporting requirements for non-retail funds?

See question 21, as the reporting requirements applicable to French retail funds also apply as a matter of principle to French non-retail funds.

Specific additional reporting may be provided by the portfolio management company to investors in the non-retail funds, as specified in the prospectus of the regulation of the said fund.

Separately managed accounts

Structure

How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts are typically structured in France in the form of a discretionary mandate, which is a written agreement whereby a client authorises a manager (investment services provider or SGP) to manage a portfolio of financial instruments (shares, debt securities units of investment funds etc), in accordance with the investment objective of the client and taking into account the financial experience and financial situation of the client (assessed by the manager prior to the conclusion of the mandate).

Key legal issues

What are the key legal issues to be determined when structuring a separately managed account?

The key legal issues to be considered by a portfolio manager when structuring a discretionary mandate are in particular the definition with the client of its investment objectives. In particular, if the discretionary mandate is proposed to retail clients, the investment manager must enquire itself as to the investment objectives and financial situation of its clients. The investor must also receive, prior to signing the mandate, a presentation of the risk and reward profile of the mandate, according to the target allocation, in the form of a summary indicator (on a scale of one to seven) based on the terms prescribed for UCITS. The summary indicator would thereby rate the discretionary mandate.

Another key legal issue for the portfolio manager is the determination of the financial instruments in which the discretionary mandate may be invested. The following financial instruments are authorised by French regulations:

  • financial instruments listed on a financial market;
  • French retail investment funds (UCITS or AIFs); and
  • certain types of financial contracts listed on regulated markets.

For investment of the discretionary mandate in other types of financial instruments (such as investments in French professional funds), the prior and specific agreement of the retail client must be obtained (with the indication of the maximum investment or exposure that the client is willing to accept).

Regulation

Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The management of discretionary mandates is regulated under French law, as it qualifies as the provision of the MiFID investment service of portfolio management. Therefore, as a matter of principle, any person carrying out such activity must be duly licensed as an investment services provider or as an SGP.

The marketing of discretionary mandates is subject to the same type constraints as the marketing of funds (in this respect see question 10).

General

Proposed reforms

Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

In anticipation of a no-deal Brexit, the French government adopted emergency legal and regulatory measures in the first quarter of 2019 to prepare the French financial industry to deal with a withdrawal of the United Kingdom from the European Union.

As far as the French asset management industry is concerned, such measures have, in particular, the purpose of allowing the temporary eligibility of UK securities and UK funds in the context of the management of French investment funds.

Public listing

Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

Shares or units of UCITS or AIFs qualifying as general-purpose investment funds may be traded on a regulated market or multilateral trading facility in France, provided that the admission to trading is requested by the SGP of such funds and provided that that shares or units are traded at their net asset value (increased or decreased, as the case may be, of the proportionate shares of subscription and redemption costs).

In addition, shares or units of listed funds whose investment objective is to replicate (through synthetic or physical replication) the performance of indices (exchange traded funds (ETFs)) may be listed on a regulated market or multilateral trading facility, provided that such funds implement procedures that allow them to ensure that the price of the shares or units does not vary significantly from their net asset value (ie, the variation shall not exceed 5 per cent).

Overseas vehicles

Is it possible to redomicile an overseas vehicle in your jurisdiction?

French regulations do not specifically provide for a legal regime for redomiciliation of overseas funds. However, funds set up as corporation will in certain cases, be able to domicile in France. Therefore, an overseas fund, in order to be sold to French investors, must either be authorised for marketing in France by the AMF or be licensed by the AMF as a French fund, which will require in particular the setting up of a new vehicle in France (FCP of investment company) and the appointment of a French depositary for the custody of assets.

It should, however, be noted that French regulations having implemented the UCITS directive, authorise the cross-border merger of UCITS, including therefore the absorption of a foreign UCITS by a French UCITS.

Foreign investment

Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no specific restrictions relating to the ability of foreign investors to invest in funds established and managed in France, subject to complying with the subscription rules applicable to each type of fund and subject to the marketing rules applicable in the jurisdiction where the investor is established. Certain SGPs may, however, apply additional restrictions (eg, compliance with US Foreign Account Tax Compliance Act regulations).

Regarding the ability for French investors to invest in funds managed abroad, this will depend on the type of funds (UCITS or AIF), the place of location of the fund and its manager (EU, EEA or third country) and whether or not the fund benefits from the European passport.

For instance, a foreign non-EU AIFM (or EU AIFM) may only market units or shares in non-EU AIFs to professional investors in France following the prior authorisation given by the AMF. The same procedure will apply in respect of EU AIFs marketed in France by non-EU AIFMs.

Funds investing in derivatives

Are there any special requirements in your jurisdiction relating to funds investing in derivatives?

French funds are authorised to invest in derivatives (OTC derivatives or listed derivatives), subject to certain limits depending, in particular, on the type of funds (retail or non-retail) and the investment objectives of the funds.

As far as UCITS are concerned the basic requirements to be met are the following:

  • limited type of underlying assets: the underlying of the derivative consists of financial instruments, financial indices, interest rates, foreign exchange rates or currencies, in which the fund may invest according to its investment objectives as stated in its fund rules or instruments of incorporation;
  • limited type of counterparties: UCITS may only enter into derivatives transactions with counterparties that qualify as regulated entities (credit institutions, investment firms etc) established by the Organisation for Economic Co-operation and Development;
  • permanent termination right: a French retail fund must have the contractual right to unwind or liquidate any derivative transaction at any time at market price; and
  • independent valuation: the derivatives are subject to reliable and verifiable valuation on a daily basis, and the SGP does not rely solely on market prices provided by the counterparty.