Portugal Regulation. 2.0 Regulation. 2.1 Type of funds. 2.2 Laws

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1 Portugal Regulation FUNDS AND FUND MANAGEMENT Regulation The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários, CMVM) is the regulator of the funds industry in Portugal. 2.1 Type of funds Undertakings for collective investment (UCI) in Portugal may be organized as the following: Real estate/property investment funds (fundos de investimento imobiliário, FII), which may be open-ended (the number of units vary), close-ended (the number of units is fixed), or mixed (the fund has the two types of units). UCITS (undertakings for collective investment in transferable securities), that may assume the form of an investment fund, which may be openended or close-ended, or an investment company in transferable securities (fundos de investimento mobiliário and sociedades de investimento mobiliário). Please note that the legal regime of the investment companies in transferable securities has not yet been approved. Venture funds (fundos de capital de risco, FCR), which are autonomous assets that invest in the share-capital of non-listed companies. Credit securitization funds and companies (fundos de titularização de créditos, FTC and sociedades de titularização de créditos, STC). FII, UCITS, and FTC can be open or close-ended. FCR and FIIAH can only be close-ended. 2.2 Laws The following legislation rules the organization and supervision of funds in Portugal as well as their service providers:

2 2 Portugal Regulation Legislation FII: Decree-Law no. 60/2002, of 20 March, republished by the Decree-Law no. 13/2005, of 7 January. UCITS: Decree-Law no. 252/2003, of 17 October, updated by Decree-Law no. 52/2006, of 15 March by Decree-Law no. 357-A/2007, of 31 October, and by Decree-Law no. 148/2009, of 25 June. According to the legal regime foreseen for UCITS, the investment companies in transferable securities are ruled by special legislation. Please note that no specific legislation has been issued in relation to these types of UCITS. FCR: Decree-Law no. 375/2007, of 8 November, which revoked Decree- Law no. 319/2002, of 28 December. FTC: Decree-Law no. 453/99, of 5 November, updated by the Decree-Law no. 303/2003, of 5 December, and by Decree-Law no. 52/2006, of 15 March. FIIAH: Approved by the Law no. 64 A/2008, of 31 December and the Ministerial Order no A/2008, of 31 December Regulatory rules (not exhaustive) CMVM Regulation no. 1/2009, of 15 July 2009: establishes the information and advertising due on complex financial products subject to CMVM supervision. FII CMVM Regulation no. 2/2005 of 18 May 2005, which revoked CMVM Regulation no. 11/2002, of 24 August (establishes the accounting principles for FII). CMVM Regulation no. 7/2007, of 19 December, updated and republished by CMVM Regulation no. 8/2002, of 16 June (with changes introduced by CMVM Regulation no. 1/2005, of 14 February). Establishes the reporting obligations of FII to the public and the CMVM, as well as, the rules governing the composition and valuation of FII assets. UCITS CMVM Regulation no. 15/2003, of 21 January 2004, with the changes introduced by CMVM Regulation no. 9/2005: Collective Investment Undertakings, revokes CMVM Regulation no. 24/99, of 6 January and reviews the regulation applicable to investment funds, with the purpose of adapting them to the international standards. It also regulates, together

3 3 Portugal Regulation with CMVM Regulation no. 9/2003, the incorporation and the functioning of the special investment funds (fundos especiais de investimento, FEI). CMVM Regulation no. 7/2007, of 19 December, updated CMVM Regulation no. 15/2003, of 21 January CMVM Regulation no. 16/2003, of 26 January 2004: establishes the accounting principles for UCITS applicable from 2005 onwards. Accordingly, CMVM Regulation no. 31/2000, of 5 September, applicable until the end of 2004, is hereby revoked. CMVM Regulation no. 15/2003, of 21 January, which revoked the CMVM Regulation no. 3/2002, of 11 February: establishes the rules governing the valuation of UCITS assets. CMVM Regulation no. 2/2007, of 10 December, which revoked CMVM Regulation no. 21/2000, of 17 June: rules the registration and the exercise of financial intermediation activities. FCR CMVM Regulation no. 1/2008, of 7 March, which revoked CMVM Regulation no. 1/2006 of 20 of January 2006: establishes the rules governing the FCR (valuation of assets, acquisition of units, information requirements, etc.). CMVM Regulation no. 12/2005 of 9 December 2005, which updated CMVM Regulation no. 13/2003, of 16 January: establishes the accounting principles for FCR. FTC CMVM Regulation no. 1/2002, of 5 February: establishes the accounting principles for FTC. CMVM Regulation no. 2/2002, of 1 February: establishes the rules governing the functioning of FTC. CMVM Regulation no. 12/2002, of 24 August: establishes the rules governing the credit securitization companies. 2.3 Managers, trustees, and custodians Managers The following entities are allowed to act as managers of investment funds:

4 4 Portugal Regulation FII Open ended funds: FII or UCITS management companies. Close-ended (article 41 of Decree-Law no. 13/2005, of 7 January): o o FII or UCITS investment companies; and any credit institution referred to in article 3 (a) to (f) of the General Regime of Credit Institutions and Financial Companies (Regime Geral das Instituições de Crédito e Sociedades Financeiras, RGICSF), approved by the Decree- Law no 298/92, of 31 December and modified by Decree-law no. 211-A/2008, of 3 November, which own funds are not less than EUR 7.5 million, namely, commercial banks and their equivalents, investment banks, investment companies, or leasing companies. UCITS Open-ended funds: UCITS managing companies. Close-ended: o o UCITS managing companies; and any credit institution referred to in article 3 (a) to (e) of the RGICSF, which own funds are not less than EUR 7.5 million (banks and their equivalents, credit financial institutions or investment companies). FCR Depending on the type of FCR the managing entity may vary: FCR which participation units are commercialized exclusively to qualified institutional investors: o o o venture companies (sociedades de capital de risco); regional development companies; entities legally authorized to manage close-ended UCITS (article 3 (a) to (e) of the RGICSF); and o FCR which participation units are publicly commercialized only by entities legally authorized to manage close-ended UCITS (article 3 (a) to (e) of the RGICSF).

5 5 Portugal Regulation FTC credit securitization funds managing companies. The investment funds managing companies and credit securitization funds managing companies must have their head office or place of effective management in Portugal. Investment funds managing companies and credit securitization funds managing companies are financial companies, which assume the legal form of a company limited by shares (sociedade anónima, S.A. company). The share capital of the investment funds managing companies and of the credit securitization funds managing companies must be represented in nominal shares. In accordance with government order (portaria) Nr. 95/94, of 9 February, the share capital of an investment funds managing company, should not be less than EUR 250,000, or EUR 375,000, depending on whether the company is a securities or real estate/property investment funds managing company. According to government order (portaria) no. 676/2002, of 19 June, the share capital of a credit securitization funds managing company should not be less than EUR 250,000. The own funds of investment funds managing companies and credit securitization funds managing companies cannot be lower than the following percentages of the global net value of the funds managed: Up to EUR 75 million: 0.5 percent In excess: 0.1 percent. Please note that the members of the board and the employees of an investment funds managing company or of a CSC are not allowed to carry out any activity in other managing companies. Custodians The assets of the funds must be held under custody of a single custodian, which must have its registered head office in Portugal. Alternatively, it may have its head office located in a Member State of the European Union (EU), provided that it has a branch in Portugal. The depositary entities of UCITS, FII and FTC may be the above-mentioned entities foreseen in article 3 a) to e) of RGICSF. In relation to FII and FTC this function may also be carried out by leasing companies. In all the mentioned situations, the own funds of the depositary must be of at least EUR 7.5 million.

6 6 Portugal Regulation The custodian must ensure that the obligations of the investment funds managing company (manager) are enforced within the parameters of the above frameworks, having as functions, among others, the following: Sale, flotation, reimbursement, and cancellation of participation units Assessment of the participation units market value Application and investment of income generated by the fund Execution of instructions determined by the manager The management of funds and the activity of the depository cannot be carried out by the same entity, in relation to the same funds. The manager and custodian of the investment fund are jointly liable to third parties for the fulfillment of obligations imposed by the legal and regulatory frameworks that govern investment funds. The custody of investment funds is remunerated by a custody commission paid by the investment funds managing companies to the custodians. There are no legal limits as to the custody commission that may be charged by the custodians but this must be established in the fund s rules presented to CMVM. The CMVM may determine the conditions according to which the commissions and other costs to be supported by the fund are allowed. These fees are limited to management, issuance, redemption, and deposit/custody commission. 2.4 Investment restrictions The incorporation of investment funds is subject to the approval by the CMVM further to the presentation of a request by the investment funds managing companies. The submission must include the following items: Draft of the fund s prospectus (complete and summarized version) Draft of the contracts to be signed between the investment funds managing company and the custodian Draft of the contracts to be signed between the investment funds managing company and other service provider companies Documents confirming the acceptance of functions by all the entities involved in the activity of the funds

7 7 Portugal Regulation FII In general, FII may only invest in immovable assets and liquidity, namely, money, bank deposits, and bonds. The shareholding in companies which trade in the acquisition, sale, leasing, and management of real estate/property (sociedades imobiliárias) may not exceed 25 percent of the total assets of the fund. The total investment made in immovable assets must represent at least 75 percent (open-ended FII) and 50 percent (close-ended FII) of the global net value of the fund. Moreover, the global net value of the fund can be invested in property with the purpose of further construction thereon up to 25 percent, in the case of open-ended funds and up to 60 percent in the case of close-ended funds. A single investment cannot exceed 20 percent of the global net value of an open-ended fund or 25 percent in the case of close-ended funds. UCITS An UCITS cannot hold more than 10 percent of its net value in securities and money market instruments issued by the same entity. Moreover, the securities and money market instruments that, per issuer, represent more than 5 percent of the global net value of an UCITS, cannot, as a whole, exceed 40 percent of that value. Additionally, the global net value of an UCITS cannot exceed the following limits: Twenty percent in participation units of one single UCITS. Thirty percent (25 percent in the case of close-ended funds) in participation units in harmonized UCITS, provided they are subject to a supervising entity, prepare annual, and half-yearly reports allowing the evaluation of the assets and do not invest more than 10 percent of its assets in units of other UCI. Ten percent for open-ended funds investing in derivatives when the counterparty is a credit institution resident in the EU or in a third country provided it is subject to equivalent prudential rules as the ones foreseen in the EU legislation, or 5 percent whenever the counterparty is another entity. Twenty percent in securities issued by related companies. FCR FCR are subject to the following restrictions:

8 8 Portugal Regulation The total investment in movable assets which are listed on stock exchanges cannot exceed 50 percent of the global net value of the fund. The shareholding cannot be held for more than 10 years, consecutive or alternate. FTC FTC are subject to the following restrictions: The total investment in credits cannot represent less than 75 percent of the fund s assets. Credits of the fund cannot be charged by any kind of obligations nor sold, except in certain situations specifically foreseen in the respective regime or it respects to overdue credit. 2.5 Borrowing Managing companies are not allowed to enter into loan agreements on behalf of the investment funds, except in the following situations: UCITS: For the period of 120 consecutive or alternate days during a year and with a limit of 10 percent (open-ended) and 20 percent (close-ended) of its global value. FII: With a limit of 25 percent of the global net value of an open-ended fund or 33 percent in the case of close-ended funds. FTC: According to article 13 of the Decree-Law no. 453/99, of 5 November, with the wording provided by the Decree-Law no. 303/2003, of 5 December, the management regulation may allow the establishment of loan agreements entered into by the managing company on behalf of the credit securitization funds. 2.6 Accounts and prospectus The accounting and mandatory information of investment funds are ruled by the CMVM, which regulations complement the particular requirements set out in each investment funds legal regime. The accounts of the investment funds must close on 31 December and must be published within three months after the year-end. These accounts must be audited by an independent auditor listed in the CMVM. Every semester and annually, reports must also be issued, which must contain a description of the UCI s activities as well as the necessary information for

9 9 Portugal Regulation decision making by the unitholders. The managing company must also publish, on a monthly basis, the details of the fund s portfolio, its global net value and the number of participation units issued in the stock market quotation report. An investment fund that offers its participation units to the public must inform the public of its characteristics by issuing a prospectus, which is subject to previous approval by the CMVM. The information provided must be sufficient to allow the investors to establish an accurate judgment of the investment that is offered by the fund. Note: KPMG in Portugal has confirmed with CMVM that currently no tacit approval applies to the prospectus (such as article 118 of CVM Code). The information on the prospectus should be disclosed according with Regulation no 809/2004 of the EEC Commission, of 29 of April and the modifications introduced by Regulations no. 211/2007 of the EEC Commission, of 27 February and no. 1289/2008 of the EEC Commission, of 12 December Is important to mention that if is implied complex financial products subject to the CMVM supervision, the funds have to fulfill the obligations of information and advertising foreseen in the CMVM Regulation n. º 1/2009, of 15 July. 2.7 Supervision The regulatory authority for investment funds in Portugal is: CMVM Comissão do Mercado de Valores Mobiliários Av. da Liberdade, no Lisbon Tel: Fax: The Bank of Portugal supervises and regulates the activities of financial institutions. Banco de Portugal Rua do Ouro, no Lisbon Tel: Fax: Fund ownership Under the various legal frameworks referred to above, there are specific limitations to the fund ownership.

10 10 Portugal Regulation UCITS Close-ended: A minimum of 30 unitholders is required. Open-ended: Within a period of six months after the incorporation of the fund a minimum of 25 percent of the participation units of the fund must be held by a minimum of 100 holders to avoid revocation of the authorization granted by the CMVM. The same rule is applicable whenever, within the referred period, the global net value of the fund is less than EUR 1,250,000. Moreover, the managing company is not allowed to acquire, on its own, participation units in investment funds, except for cash-funds (fundos de tesouraria) that are not managed by it. FII The managing company is not allowed to acquire units in the FII or UCITS, except for cash-funds. The offer of units in close-ended FII may be private or public (when for more than 100 investors). FCR FCR managing companies are allowed to acquire participation units in the FCR they manage, up to the limit of 30 percent of the units issued by each of the FCR. 2.9 Fund structure Funds of funds, grouping of funds as well as, special investment funds are available in Portugal. Funds of funds Funds of funds are allowed in Portugal but are subject to limitations. A fund of a fund must invest, at least, two thirds of its net assets in units of other funds. These funds are allowed to be wholly composed of participation units of funds managed by the same managing company or by related managing companies, provided those funds are identified in the management regulations and there will be no issuance or redemption commissions to be charged to the fund. The grouping of funds (umbrella funds), which permit unitholders to enjoy advantages with the simultaneous redemption and subscription of the different funds within the group is allowed. They are open-ended UCITS and the respective units may not be commercialized outside the group.

11 11 Portugal Regulation Fundos de gestão de património imobiliário, FUNGEPI Real estate property management funds (fundos de gestão de património imobiliário, FUNGEPI) are regulated by Decree Law no. 316/93, of 21 September. They are open-ended FII that invest only in immovable assets of companies involved in investment projects of financial restructuring, rationalization or technological and financial conversion and internalization, with a minimum capital of EUR 4, The above investments are subject to the following restrictions: At least 60 percent of the fund s assets must consist of the above mentioned assets after three years of the fund s incorporation. Not more than 25 percent of the net assets of the fund may be invested in one single asset. The sale value of any asset may not be less than 75 percent of its acquisition value. This rule is due to the fact that, under certain conditions, the state itself may support the capital losses. Stock investment savings funds (fundos de poupança em acções, FPA) FPA are open-ended funds ruled by Decree Law no. 204/95, of 5 August, updated by Law no. 85/2001, of 4 August, designed to manage long-term individual saving plans, of six years, with the possibility of being extended for consecutive periods of three years, with associated tax benefits. These funds may only invest in: stocks of companies quoted on the Portuguese stock exchange; participation units of investment funds in transferable securities in which at least 50 percent of the assets are shares of companies quoted on the Portuguese stock exchange; and money, bank deposits, and inter-banking applications. Retirement savings funds (fundos de poupança reforma, FPR) Fundos de poupança reforma (FPR) are open-ended funds regulated by Decree Law no. 158/2002, of 2 July, designed to manage long-term individual saving plans, in which redemption is only allowed on retirement, in case of unemployment or long time sickness and when the subscriber reaches the age of 60, with associated tax benefits (however, no more as far as personal income tax (PIT) is concerned).

12 12 Portugal Regulation Education savings funds (fundos de poupança educação, FPE) Fundos de poupança educação (FPE) are open-ended funds also regulated by Decree Law no. 158/2002, of 2 July, to manage medium and long-term individual saving plans, in which redemption is only allowed after five years and only in order to meet education expenses, with associated tax benefits (however, no more as far as IRS is concerned). Hedge funds Hedge funds are allowed in Portugal and fall under the scope of the regime foreseen for special investment funds (fundos especiais de investimento, FEI) Stock exchange Under the CMVM regulations in force, units in UCITS may be admitted to trading in the stock exchange. In respect to units in foreign UCITS, they may be quoted on the Portuguese stock exchange, provided previous approval by the CMVM is granted and only if they meet the general requirements applicable to every security, namely, they must be incorporated according to their own internal legislation Bank secrecy Portugal has tax avoidance and money-laundering laws (Law no. 11/2004, of 27 March and Instruction no. 26/2005, of 16 August 2005 from the Bank of Portugal, which revokes no. 8/2002,). Financial, banking, and equivalent institutions must provide, upon request by a court or the tax authorities, information on deposits or other assets belonging to individuals who are suspected of tax avoidance and criminal activity. According to the Portuguese General Tax Law (article 63-A), credit institutions and financial companies must automatically inform the tax authorities about international transfers that are not related to: payments already subject to tax-related disclosure requirements foreseen in the law, namely tax withheld on payments to non-residents; commercial transactions; and and transactions made by public entities. The terms under which this information is to be provided will be defined by the Minister of Finance through a government order further to the opinion of the Bank of Portugal.

13 13 Portugal Regulation According to the regulations on the access by the Portuguese tax authorities to banking information and documents, stated in the General Tax Law (article 63- B), the tax authorities have direct access to the bank information and documents without requiring the approval of its owners, whenever there is a suspicion of tax felony or there are facts that allow to conclude that there is a lack of veracity in the statements. The tax authorities may also access the banking documentation whenever the tax payers refuse its presentation in order to verify if the conditions that determine the application of tax benefits or more favorable tax regimes are met. Please note, however, that the tax authorities must expressly base the decision to access banking information and documents on the concrete motives that justify the suspicions. This decision can only be taken by the General-Director of Tax or his/her legal substitutes, without any possibility of delegation. Additionally, for the purposes of verifying the accomplishment of the requirements to apply tax benefits or a more favorable tax regime, the decision to access the banking information requires the preliminary hearing of the tax payer and may be subject to court appeal. However, as a general rule, this appeal does not have a suspense effect. Furthermore, the General Tax Law (article 63-C), foresees that companies are required to possess, at least, one bank account through which should be exclusively made the payments and receiving regarding the entrepreneurial activity carried out. Moreover, shareholder loans as well as any other operations to or by the company should be made through such bank account(s). Finally, payments regarding invoices or similar documents equal or higher than 20 times the minimum monthly wage (currently set at EUR 475, which gives EUR 9,500) should be made through a type of payment that allows to identify the respective beneficiary, namely bank transfer, nominative check, or direct debit. On the other hand, pursuit to the Decree-Law no. 94/2009, of 1 September (and the Ministerial Orders no. 1066/2009 of 18 September), taxpayers should communicate to DGCI any cross-border money transfers made to beneficiaries located within countries, territories or any other region with a more favorable tax regime, until the end of July of each year, by means of a special form (Form-38) Fund set-up The incorporation of a fund in Portugal takes, usually, between three and four months. No fees are charged by the regulatory authorities for the authorization process. Capital duties are not levied on the flotation of a fund s participation units.

14 14 Portugal Regulation As previously mentioned, the managing companies have to be incorporated as a company limited by shares (sociedade anónima, S.A. company), thus incurring the legal costs associated with that incorporation Foreign funds In Portugal, there are some restrictions to the marketing of participation units of UCI incorporated under the jurisdiction of a country other than Portugal. If the UCI were incorporated under the rules of the European Union Directive 85/611/EEC, of 20 December (with changes introduced by European Union directive 2008/18//EEC, of 11 March), prior communication should be made to CMVM, together with the presentation of additional information. If an unfavorable decision is not given within two months from this communication, the UCI participation units may be promoted and traded in Portugal. In the case of investment funds not incorporated under the terms of the above mentioned directive, prior authorization from CMVM is required, after which the investment funds may begin to operate in Portugal. However, in the case of real estate/property investment funds, these always require prior authorization from the Minister of Finance, regardless of being a fund incorporated under the rules of the EU Directive or not Bearer shares As mentioned in 1.3, the share capital of UCI managing companies should be represented by nominative shares. Therefore, it is not possible to incorporate a UCI managing company represented by bearer shares Use of the internet The use of the Internet is possible as a marketing tool. Additionally, other operations such as subscription and redemption of investment funds units are also possible via the Internet.

15 15 Portugal Regulation KPMG in Portugal Luís Magalhães KPMG & Associados - Sociedade de Revisores Oficiais de Contas, S.A. Edifício Monumental Av. Praia da Vitória, 71 - A, 11º Lisbon Portugal Tel Fax lmagalhaes@kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.