CAPITAL MARKET AUTHORITY INVESTMENT FUNDS REGULATIONS

Transcription

1

2 INVESTMENT FUNDS REGULATIONS English Translation of the Official Arabic Text Issued by the Board of the Capital Market Authority Pursuant to its Resolution Number Dated 3/12/1427H Corresponding to 24/12/2006 Based on the Capital Market Law issued by Royal Decree No. M/30 dated 2/6/1424H Arabic is the official language of the Capital Market Authority The current version of these Regulations, as may be amended, can be found at the CMA website: 1

3 TABLE OF CONTENTS PART 1:GENERAL PROVISIONS Article 1: Article 2: Preliminary Definitions PART 2: AUTHORIZATION Article 3: Article 4: Article 5: Article 6: Article 7: Article 8: Article 9: Article 10: Offer of Investment Fund Units Private Placement Requierments Public Offer Requirements Procedures and Powers of the Authority in Relation to an Application Right of Appeal Certification The Authority s Consent to Material Changes Reporting to the Authority PART 3: DISCLOSURE Article 11: Article 12: Article 13: Article 14: Investment Fund Documentation Reporting to Unitholders Requirement to Produce Terms and Conditions Investment Fund Advertisements PART 4: ORGANISATION OF INVESTMENT FUNDS Article 15: Article 16: Article 17: Contractual Form of Organization Foreign Organisation Termination of an Investment Fund PART 5: FUND MANAGER Article 18: Article 19: Article 20: Fund Manager Conflicts of Interest Administrative, Custodial and Other Service Fees 2

4 Article 21: Article 22: Article 23: Article 24: Article 25: Article 26: Article 27: Article 28: Provision of Third Party Services Appointment of a Liquidator or Replacement Fund Manager Fund Manager s Investment in Investment Funds Restrictions on the Fund Manager Limitations on Participations in Offerings of Securities Principal Transactions Directorships of Portfolio Companies Special Commission Arrangements PART 6: FUND GOVERNANCE Article 29: Article 30: Oversight of Investment Funds and Fund Managers Fund Directors Responsibilities PART 7: FUND MANAGEMENT Article 31: Article 32: Article 33: Article 34: Article 35: Article 36: Article 37: Article 38: Article 39: Article 40: Segregation Title to Units Record of Units Permitted Fees and Charges Distribution Costs Finanacial Statements Voting Rights Investment Policies and Practices Investment Limitations Breaches of Investment Limitations PART 8: SPECIFIC CATEGORIES OF FUNDS Article 41: Article 42: Article 43: Article 44: Funds Investing in Foreign Funds Specialised Investment Funds Funds of Funds Money Market Funds PART 9: OFFERS AND REDEMPTIONS OF UNITS Article 45: Initial Offers 3

5 Article 46: Article 47: Article 48: Article 49: Article 50: Article 51: Pricing, Valuation and Redemption Limiting or Deferring Redemptions Dilution Charge Use of Fund Manager s Cash to Fund Redemptions Investor Limits Eligibility to Invest PART 10: PUBLICATION AND ENTRY INTO FORCE Article 52 Publication and Entry into Force ANNEX 1 REQUIREMENTS OF TERMS AND CONDITIONS ANNEX 2 SUBSCRIPTION / REDEMPTION FORM 4

6 Article 1: Preliminary INVESTMENT FUNDS REGULATIONS PART 1: GENERAL PROVISIONS a. These Regulations aim at regulating the establishment, offering and management of investment funds and associated activities in the Kingdom. b. These Regulations should be read in conjunction with and in addition to the Authorized Persons Regulations and the Securities Business Regulations. Article 2: Definitions a. Any reference to the Capital Market Law in these Regulations shall mean the Capital Market Law issued by Royal Decree No. M/30 dated 2/6/1424H. b. Expressions and terms in these regulations have the meaning which they bear in the Capital Market Law and in the Glossary of defined terms used in the Regulations and Rules of the Capital Market Authority, unless the contrary intention appears. 5

7 PART 2: AUTHORISATION Article 3: Offer of Investment Fund Units a. The Offers of units in investment funds shall be in accordance with the provisions of these Regulations. b. For purposes of these Regulations, the offering of units in investment funds may be a public offer or a private placement. c. An offering of units in an investment fund is a public offer if it does not fulfill the conditions of a private placement specified in Article 4 of these Regulations. Article 4: Private Placement Requirements a. Units in an investment fund offered by way of a private placement, as specified in this Article, may only be made by or through a fund manager. b. An offer of units in an investment fund is a private placement if: 1) The amount payable by each person to whom the offer is made is not less than Saudi Riyals 1 million or an equivalent amount; and the offer is made to any of the following persons: (i) (ii) the government of the Kingdom; SAMA; (iii) any supranational authority recognized by the Authority; (iv) (v) (vi) (vii) (viii) the Exchange and any other stock exchange recognized by the Authority; the Depositary Center; authorized persons acting for their own account; institutions acting for their own account; or any other persons the Authority considers exempt. 2) The units are issued by the government of the Kingdom; 3) The units are issued by a supranational authority recognized by the Authority; or 4) The units are offered to no more than two hundred (200) offerees in the Kingdom and the minimum amount payable per offeree is not less than Saudi Riyals 1 million or an equivalent amount. A fund manager may not treat an offer of units in an investment fund it manages as being a 6

8 private placement by virtue of this paragraph more than once in a 12- month period after the date of approval of the offer. c. The Authority may, in circumstances other than those described in paragraph (b) of this Article and upon application of a person seeking to make an offer of units in an investment fund, determine that such an offer of units shall be treated as a private placement subject to compliance with such limitations as the Authority may impose. d. An offeror of units in investments funds through private placement must notify the Authority in writing at least 15 days prior to the proposed date of the offer and must include with the notice a copy of the private placement memorandum or other offering documents to be used in connection with the offer. e. If the Authority determines that the proposed private placement of units in investment funds is not in the interest of investors in the Kingdom or may result in a breach of the Capital Market Law or its Implementing Regulations, the Authority may, after giving the offeror a suitable opportunity to be heard, issue a "notification" to the offeror stating that the offer is not to be made, or publish a "notice" prohibiting the offer, sale or transfer of the investment units to which the private placement relates. f. The offeror has the right to appeal to the Committee in respect of any decisions or actions that the Authority takes under the provisions of this Article. g. The following restrictions must be adhered to: 1. A person (referred to as a transferor ) who has acquired units in investment fund pursuant to a private placement may not offer or sell such units to any person (referred to as a transferee ) unless the price to be paid by the transferee for such units equals or exceeds Saudi Riyals 1 million. 2. If what is provided for in paragraph (1) of this Article cannot be fulfilled because the price of the units being offered or sold to the transferee has declined since the date of the original private placement, the transferor may offer or sell securities to the transferee if their purchase price during the period of the original private placement was equal to or exceeded Saudi Riyals 1 million. 3. If what is provided for in paragraphs (1) and (2) of this Article cannot be fulfilled, a transferor may offer or sell the units if he sells his entire holding of such units to one transferee. 4. The provisions of paragraphs (1), (2) and (3) of this Article shall apply to all subsequent transferees of such units. 7

9 5. The restrictions in this Article shall cease to apply upon approval of the investment fund under the application process specified in Article 5 of these Regulations. h. A fund manager must pay such fees as the Authority may prescribe. Article 5: Public Offer Requirements a. Units in an investment fund may not be offered by way of a public offer unless the Authority has first received and approved the information and fee payment referred to in paragraphs (c) and (d) of this Article. b. An application to the Authority for approval to offer units in a new investment fund, or to continue to offer units in an existing investment fund, may only be made by a person authorized by the Authority to conduct managing activities. c. Except to the extent that the Authority waives any or all of these requirements, an application to the Authority for approval to offer units in a new investment fund, or to continue to offer an existing units in investment fund, shall include: 1) Details regarding the fund manager's organizational structure, including a description of the investment decision making process of the fund manager or any fund sub-manager, including the names and functions of any registered persons involved in those decisions (for example: research analysts, portfolio managers, or investment committee, if any); 2) The names of the compliance officer and/or the members of the compliance committee; 3) Procedural manuals including the fund manager s Code of Conduct and a description of administrative systems employed and adopted in respect to the operation of the fund manager, including any procedures specifically regarding the investment funds; 4) For each investment fund the following information: (i) (ii) (iii) (iv) (v) The terms and conditions; Subscription/redemption forms; Any contracts entered into by the fund manager (for the benefit of the fund), including those made with affiliates or third parties in relation to the fund including, but not limited to, contracts for investment sub-management services, custody services to be performed by appropriately authorized persons, maintenance of any register of unitholders, and any other services related to the distribution of units; The investment fund's latest audited report (if any) and, if more recent, the latest unaudited report; and Any fees payable to the Authority. 8

10 d. A fund manager must pay such fees as the Authority may prescribe. e. The terms and conditions in accordance with Annex 1 shall be marked in the margin so as to indicate where particular items from Annex 1 have been met. f. If a fund manager has already provided to the Authority any of the materials specified in paragraph (c) of this Article, it need not provide an additional copy with its applications provided that it notifies the Authority that it has already provided such materials. The Authority reserves the right to request from the fund manager additional copies of any materials previously provided to the Authority. Article 6: Procedures and Powers of the Authority in Relation to an Application a. In considering an application to offer units in an investment fund, the Authority may: 1) carry out any enquiries that it considers appropriate; 2) require the applicant or its representative, to attend before the Authority to answer questions and explain any matter the Authority considers relevant to the application. For the purpose of these Regulations, an applicant means a fund manager applying for approval to offer units in an investment fund. An applicant becomes subject to these Regulations from the date of submission of an application; 3) require the applicant to provide such additional information as the Authority considers appropriate within 30 days of the request; and 4) verify any information furnished by the applicant. b. The Authority may refuse to consider the application to offer units in an investment fund where an applicant has failed to provide information requested from it, or has failed to provide information requested from it within the time requested under paragraph a (3) of this Article. The Authority retains the right to refuse an application if the Authority believes that the fund would not be in the best interests of investors. c. The Authority shall, upon receipt of all information and documents required, notify the applicant in writing of the same, and shall take any of the following decisions within a maximum period of 30 days from the date of the notice: 1) approve the application in whole or in part; 2) approve the application subject to such conditions and limitations as it considers appropriate; 3) refuse the application, giving reasons. 9

11 d. If the Authority resolves to permit the applicant to offer units in an investment fund, it will inform the applicant of this in writing and of any limitations that the Authority may consider appropriate. e. If the Authority resolves to refuse the application, it will notify the applicant in writing. f. An applicant must not offer or hold itself out as offering participation in an investment fund prior to receiving the Authority s decision referred to at paragraph (d) of this Article. Article 7: Right of Appeal The applicant may appeal to the Committee in respect of any decision or action that the Authority takes under this part. Article 8: Certification a. When submitted to the Authority, the terms and conditions and such other fund documentation as described in these Regulations shall be signed by two officers, the chief executive officer of the fund manager or his designee and the compliance officer, and contain a statement to the effect that the terms and conditions and other fund documentation comply with these Regulations and contain full, true and plain disclosures of all material facts relevant to the investment fund. b. In the event that any document referred to in paragraph (a) of this Article does not comply with these Regulations, a written request must be made to the Authority, specifying a request for a waiver and providing detailed reasons why the waiver is necessary. Granting of such a waiver is within the discretion of the Authority. Article 9: The Authority s Consent to Material Changes a. A fund manager shall secure the consent of the Authority prior to making any material change to the terms and conditions of an investment fund. b. A fund manager shall notify the Authority of any material change made to documentation provided in support of the application for the offering of units in an investment fund. 10

12 Article 10: Reporting to the Authority a. The fund manager must submit to the Authority the annual audited financial statements of the investment fund, no later than one ninety (90) calendar days from the end of the financial year of the investment fund. b. The fund manager must submit to the Authority the reviewed interim financial statements of the fund at a minimum on a semi-annual basis within forty five (45) calendar days of the end of the period. 11

13 PART 3: DISCLOSURE Article 11: Investment Fund Documentation a. A fund s terms and conditions should contain the information necessary for investors to make an informed judgment regarding the investment proposed to them and shall comply with the requirements of Annex 1. b. The terms and conditions will form the contract between the fund manager and the unitholder and shall be considered as satisfying the requirements of Article 38 of the Authorized Persons Regulations. Unitholders shall indicate their agreement to the terms and conditions by signing a copy thereof. c. The subscription and redemption form shall comply with the requirements of Annex 2. d. Before accepting an initial subscription to an investment fund, the fund manager must ensure that the unitholder has received and signed a copy of the terms and conditions. e. Identical terms and conditions must apply to all unitholders in an investment fund in the same class of units. f. Subject to Article 9, a fund manager should notify the Authority if a proposed alteration to the terms and conditions or other fund documentation is necessary to make it possible to comply with these Regulations; or is necessary to correct a manifest error. Article 12: Reporting to Unitholders a. A fund manager shall report not less than every three (3) months to unitholders the following information: 1) the net asset value of total fund units; 2) the number of and net value of fund units owned by the unitholder; and 3) a record of transactions specific to the unitholder including payment of dividends subsequent to the last report provided to the unitholders. b. The fund manager shall disseminate at least weekly investment fund information via the Exchange in a format defined from time to time by the Authority. c. Audited financial statements required under Article 36 must be provided by the fund manager to unitholders on request and without charge. They should be made available to the public no later than ninety (90) calendar days from year end in such locations and by such means as specified in the terms and conditions. The interim reports should be prepared and made available to the public within forty five (45) calendar days from the end of the reporting 12

14 period. An international fund or fund of funds shall make its financial statements available within thirty (30) calendar days after the release of the financial statements of the fund(s) in which it invests. d. The fund manger is not required to publish the audited and interim financial statements of the investment fund in newspapers. However, unitholders and prospective unitholders should be advised by way of a notice as to their availability. Article 13: Requirement to Produce Terms and Conditions a. Prospective unitholders and any other person who requests a copy must be supplied with terms and conditions that satisfy the requirements of Annex 1 and is current in accordance with paragraph (d) of this Article. b. Terms and conditions must be available in writing in Arabic, and must be provided free of charge on request. c. Terms and conditions must be approved by the fund board before publication. A copy of an investment fund s original terms and conditions and any subsequent revisions to the terms and conditions must be filed with the Authority within ten (10) days of fund board approval except for revisions that must be filed with the Authority in advance under Article 9 of these Regulations. d. Subject to Article 9 of these Regulations, any material changes to the terms and conditions must be notified to unitholders by sending a summary of those changes to all unitholders at least sixty (60) calendar days in advance of the effective date of the changes. e. The fund manager is responsible for ensuring that the terms and conditions are complete, accurate and not misleading and are kept up-to-date and revised as and when appropriate. In any event, a fund manager must update the terms and conditions annually to show actual fees and expenses and revised performance information and send the revised terms and conditions to all unitholders. Article 14: Investment Fund Advertisements a. An advertisement (as defined in the Authorized Persons Regulations) employed by an authorized person in relation to an investment fund must satisfy the requirements of this Article and the applicable provisions of the Authorized Persons Regulations and the Securities Business Regulations. b. Any prepared securities advertisement (as defined in the Authorized Persons Regulations) relating to an investment fund must include information about how to obtain a copy of the terms and conditions and financial statements to 13

15 unitholders, and a reference to the disclosure in the terms and conditions of the risks of investing in the fund. c. If an advertisement does include performance information for a fund or any representations about the performance of a fund or its manager, the advertisement must comply with the following requirements: 1) Total return information must be shown net of all actual historical expenses of the fund. 2) An advertisement may include the total return of a fund that is gross of fees and expenses if the return is presented in addition to, and with no greater prominence than, returns of the fund that are net of actual expenses. 3) Total return information for a fund must be presented in comparison to the total return for the same period of an appropriate index or other benchmark disclosed in the terms and conditions. If the index or other benchmark does not include all elements of total return, the presentation must disclose what elements of return are not included in the benchmark and how that omission affects the comparison of the fund s total return to the benchmark. 4) The advertisement must disclose that the value of an investment in an investment fund is variable and may increase or decrease. d. If any total return is shown for a fund, the advertisement must show total returns for periods of one (1), three (3), five (5) and ten (10) years (or since inception if the life of the fund is shorter than these periods, but no performance shall be provided for a period of less than one year). e. Total returns shown for a fund in accordance with paragraph (d) of this Article must be current through the end of the most recent calendar quarter (using the same calendar as for the preparation of the fund s financial statements). f. If there is any respect in which performance information may be misleading to potential investors, the advertisement must include relevant explanatory disclosure of the circumstances in which it was achieved. g. An advertisement must include the risk warnings required under the Authorized Persons Regulations (Annex 5.1), as applicable. h. An advertisement may include a list of all of a fund s portfolio holdings or a list of selected holdings. If an advertisement includes only a list of selected holdings, the holdings listed must be selected in an objective, balanced manner, and the advertisement must disclose the basis for selecting the holdings listed. i. An advertisement may not include: 1) A projection or prediction of the total return or other performance of the investment fund or of unitholders of an investment fund (except 14

16 that an advertisement for an investment fund with a guarantee or other principal protection feature may disclose any guaranteed minimum return); or 2) Any form of testimonial, that is, statements about the experience of actual or fictitious unitholders of that fund or other funds with the same manager. 15

17 PART 4: ORGANISATION OF INVESTMENT FUNDS Article 15: Contractual Form of Organization a. An investment fund shall be established and formally organized by the signing of contracts between the fund manager and the unitholders, which contract shall be in the form of terms and conditions, as set out at Annex 1. b. The terms and conditions shall include covenants on the part of the fund manager to perform or to contract for the performance of the following activities or services: 1) the investment management of the portfolio of the fund; 2) the custody of portfolio assets of the fund; 3) dealing in securities or other assets of the fund; and 4) the administration of the fund. The terms and conditions shall also set out the fees, commissions or other remuneration with which the fund manager proposes to compensate itself from investment fund assets or subscriptions for the performance of the activities or services specified in this paragraph. c. A unitholder who has signed terms and conditions compliant with paragraphs (a) and (b) of this Article shall be deemed a customer for the purposes of the Authorized Persons Regulations. Article 16: Foreign Organization A fund manager may not establish an investment fund in a jurisdiction other than the Kingdom without the consent of the Authority and may establish a fund in such other jurisdiction only if the fund manager uses legal and organizational forms and structures permitted by and in accordance with the regulatory requirements of the jurisdiction. An investment fund established in a jurisdiction other than the Kingdom may not be offered within the Kingdom without the consent of the Authority. Consent shall be sought under the application process specified in Article 5 of these Regulations. Article 17: Termination of an Investment Fund a. A fund manager must seek the consent of the Authority to terminate an investment fund. Unitholders should be given at least two months notice of the intention to terminate the investment fund. 16

18 b. The consent of the Authority is not required in the case of an investment fund with a defined term set out in the terms and conditions, and provided that term has been completed. c. The consent of the Authority is not required in the case of an investment fund the terms and conditions of which provide that the fund will terminate upon the occurrence of specified events, provided that those events have occurred. A fund manager is responsible for notifying the Authority and unitholders as soon as possible of the occurrence of those events and the termination of the fund. 17

19 PART 5: FUND MANAGER Article 18: Fund Manager a. A fund manager is required to act for the benefit of unitholders in accordance with the terms and conditions and these Regulations. b. The fund manager's fiduciary responsibility to unitholders includes a duty of loyalty and a duty to exercise reasonable care. c. Investment actions should be carried out for the sole benefit of the unitholders and in a manner that the fund manager reasonably believes to be in the best interest of the unitholders, given the facts and circumstances known to the fund manager or that ought reasonably to have been known to the fund manager. Article 19: Conflicts of Interest A fund manager or fund sub-manager may not engage in any action that involves: a. a material conflict between the interests of the fund manager or fund submanager and the interests of any investment fund it manages; or b. a conflict between the interests of any investment fund it manages and another such investment fund or another customer account; without prior disclosure of the conflict (when possible) or immediate disclosure (when prior disclosure of a conflict of interest is not possible) to the fund board of each applicable investment fund and fund board approval of that action. Such disclosure and approval are in addition to the relevant provisions under Article 41 of the Authorized Persons Regulations. Article 20: Administrative, Custodial and Other Service Fees Any fees, commissions or charges made for the provision of administrative, custodial or other services by an appropriately authorized fund manager or affiliate must be no higher than charges payable for the provision of similar services in similar circumstances by persons dealing at arm s length. Article 21: Provision of Third Party Services a. A fund manager may appoint one or more third parties or affiliates, which must be appropriately authorized (as specified in paragraph (b) of this Article), as fund sub-manager or to provide advisory services pursuant to a contract in writing. The remuneration and expenses of the fund sub-manager, or fees in 18

20 relation to advisory services shall form part of the fund management fee paid to the fund manager. b. Any fund sub-manager operating within the Kingdom must be an authorized person under the Authorized Persons Regulations that is authorized to manage investment funds. Any fund sub-manager operating in a jurisdiction other than the Kingdom must be established, authorized and supervised in a jurisdiction that employs regulatory standards and requirements at least equivalent to those of the Authority. c. A fund manager may appoint one or more third parties or affiliates, which must be authorized under the Authorized Persons Regulations, to provide custody services pursuant to a contract in writing in relation to part or all of the assets of an investment fund. Any overseas custodian must be established, authorized and supervised in a jurisdiction that employs regulatory standards and requirements at least equivalent to those of the Authority. The remuneration and expenses of the custodian may be charged to the investment fund but must not exceed those stated in the terms and conditions. d. Notwithstanding the appointment of one or more third parties or affiliates, the fund manager shall remain responsible for investment management, administration and custody of the fund's assets, and the fund register shall be maintained within the Kingdom. Article 22: Appointment of a Liquidator or Replacement Fund Manager a. The Authority shall have the power to appoint a replacement fund manager or a liquidator or to take any other measures it deems necessary, as appropriate, in the event of: 1) A fund manager ceasing to carry on securities business without notification to the Authority under the Authorized Persons Regulations; 2) A request by a fund manager to the Authority to cancel its authorization as a fund manager under the Authorized Persons Regulations; 3) The death or incapacity of a portfolio manager, if no other registered person employed by the fund manager can manage the investment fund and if a suitable replacement cannot be found sufficiently promptly. 4) The determination by the Authority of a significant violation or violations of these Regulations, the Capital Markets Law or its Implementing Regulations by the fund manager or the investment fund significant enough in number and/or seriousness as to pose a real threat to the fund manager s ability to continue to perform its duties to investors; or 19

21 5) Any other event determined by the Authority on reasonable grounds to be of sufficient significance. b. Notice of an event described in paragraph (a) (3) of this Article must be given by the fund manager to the Authority within 48 hours of its occurrence. c. Any liquidator so appointed shall have the power, subject to the approval of the Authority and the fund board, to; 1) Appoint a new fund manager; and/or 2) Take such other steps as it considers necessary to conserve and manage the assets of the investment fund in the best interests of unitholders. d. The charges of the liquidator and any costs incurred by it on behalf of the investment fund shall be paid from the assets of the investment fund. Such charges and costs must be reasonable. e. A liquidator shall not be liable for any losses or diminution of the value of the assets of an investment fund either to a fund manager or to unitholders, except to the extent that the loss or diminution in value is caused by the liquidator s gross negligence or willful default. Article 23: Fund Manager s Investment in Investment Funds A fund manager may invest in and subscribe for units in the investment fund for its own account at the time of and in connection with the establishment of an investment fund, or at any time after the inception of the fund. The intention of the fund manager to invest in the investment fund must be disclosed in the terms and conditions. Article 24: Restrictions on the Fund Manager A fund manager may not: a. Invest the assets of an investment fund in securities issued by the fund manager establishing the investment fund or its affiliates unless the ability to invest is clearly stated in the terms and conditions, and the investment takes place in accordance with the stated investment objectives and restrictions of the fund; b. Deposit client money awaiting investment with the fund manager establishing the investment fund or an affiliate other than on terms and conditions equivalent to terms applicable to transactions in similar circumstances entered into by persons dealing at arm s length. 20

22 Article 25: Limitations on Participations in Offerings of Securities a. In the course of an initial public offering underwritten by a fund manager or its affiliates, an investment fund managed by that fund manager may not purchase securities in that offering from the fund manager or its affiliates. b. An investment fund may purchase securities issued in the course of an initial public offering from sources other than its fund manager or its fund manager s affiliates if: 1) The securities are being issued in an offering that is registered or otherwise authorized according to the law and regulations of the jurisdiction in which the offering is being made and that such a jurisdiction subjects those issuing and underwriting public issues of securities to a regulatory system which is at least equivalent to that applied to issuers in the Kingdom; 2) The securities are purchased by the investment fund at a price that is no more than the stated offering price; 3) The amount purchased by an investment fund and all other investment funds with the same fund manager does not exceed ten (10) per cent of the total offering by value; and 4) Before making the purchase, the fund manager obtains the approval of the fund board. c. An investment fund may not purchase securities offered by way of a private placement or exempt offer. d. The Authority may waive this limitation on reasonable grounds and on an application by a fund manager setting out the reason or reasons why this Article should be set aside. Article 26: Principal Transactions a. A fund manager, its affiliates and any fund sub-manager appointed may not act as principal for their own account or accounts when dealing with investment funds managed by them other than money market funds, provided that the exposure of the money market fund to the fund manager, its affiliates and any fund sub-manager do not exceed 50% of the value of all of its assets. b. A fund manager or fund sub-manager may not knowingly cause an investment fund (other than a money market fund in accordance with paragraph (a)) to deal as principal with its fund manager or fund sub-manager, with any other investment fund with the same fund manager or fund sub-manager, or with any unitholder whose investment in the investment fund exceeds five (5) per cent of the net value of that investment fund. 21

23 Article 27: Directorships of Portfolio Companies a. Personnel and/or officers of a fund manager may not serve as directors or take up any other office in a company or other entity the securities of which form part of the assets of an investment fund managed by the fund manager. Independent directors for an investment fund may not serve as directors or take up any other office in a company or other entity the securities of which form part of the assets of the investment fund. b. If a director or an officer of a company or other entity described in paragraph (a) of this Article is employed by a fund manager or is appointed as an independent member of a fund board, that person must resign from such entity. Article 28: Special Commission Arrangements a. Paragraphs (b) and (c) of this Article are subject to Article 28 of the Authorized Persons Regulations. Any special commission arrangement entered into by a fund manager must be disclosed in the terms and conditions. b. A fund manager may enter into special commission arrangements. c. Goods and services received by a fund manager under a special commission arrangement must be restricted to those that are related to the execution of transactions on behalf of the fund manager s customers, or comprise the provision of research. d. Other goods and services unrelated to the execution of transactions or the provision of research may not be the subject of special commission arrangements entered into by a fund manager. In particular, fund managers are prohibited from receiving direct money payments under special commission or other arrangements. 22

24 PART 6: FUND GOVERNANCE Article 29: Oversight of Investment Funds and Fund Managers a. Each investment fund shall be governed by a fund board appointed by the fund manager. The appointment of a fund board is subject to the approval of the Authority. The business and administration of meetings of a fund board shall be conducted in accordance with rules to be issued by the Authority. b. When more than one investment fund is managed by the same fund manager, those investment funds may be governed by a single fund board unless the number of investment funds is too high to be supervised effectively by a single fund board. Annually, the fund board and fund manager must review the number of investment funds supervised by that board and assess whether the number is such that effective supervision is compromised and a different board should be appointed for one or more of those investment funds. The Authority reserves the right to require a fund board to reduce the number of investment funds it supervises. c. At least one third of each fund board must be made up of independent fund directors, and each fund board must have at least two independent fund directors. d. Fund Directors shall be remunerated for their services. e. The fund manager must obtain the Authority s approval for any change to the fund board and must inform Unitholders by notice of such change. Article 30: Fund Directors Responsibilities a. The fund directors responsibilities shall include the following: 1) The approval of all material contracts involving the investment fund, including, but not limited to, contracts for the provision of fund management services, contracts for the provision of custody services, and any contracts entered into with any authorized person to market units in the investment fund to prospective investors or advise prospective investors on the merits of buying units; 2) Overseeing and, where appropriate, ratifying any conflicts of interest the fund manager has identified in accordance with Article 19; 3) Meeting at least twice annually with the fund manager s compliance officer and/or compliance committee and MLRO, and overseeing the fund manager s compliance with all applicable laws and regulations, including (without limitation) those requirements set out at Article 39 of these Regulations; 23

25 4) The approval of any recommendations made by a liquidator appointed according to Article 22 of these Regulations, relating to the winding-up or the continuation of the business of an investment fund or fund manager, provided that those recommendations do not relate to any allegations by the liquidator of misconduct or negligence on the part of the fund directors themselves; and 5) Notwithstanding Article 13 (e) of these Regulations, the responsibility to confirm the completeness and accuracy, and compliance with these Regulations, of the terms and conditions, and for any other document, contractual or otherwise, that includes disclosures relating to the investment fund and/or the fund manager and its conduct of the investment fund. 6) Ensuring that the fund manager carries on his obligation in the best interest of the unit holders, in accordance with the terms and conditions of the fund and with these Regulations. 7) To act for the benefit of the investment fund and its unitholders. A fund director s fiduciary responsibility to unitholders includes a duty of loyalty and a duty to exercise reasonable care. b. A fund manager must provide the fund board with all necessary information, relating to the fund, to enable the fund directors to perform their responsibilities competently. 24

26 PART 7: FUND MANAGEMENT Article 31: Segregation a. A fund manager shall establish a separate local bank account in the name of each investment fund established by it and into which it shall deposit all monies belonging to the fund and from which it will debit payments for investments and expenses incurred in the operation and administration of the fund as permitted by the terms and conditions and these Regulations. b. A fund manager shall segregate and separately identify by registration in the investment fund s name the securities and other assets of each investment fund, and shall maintain records and otherwise support the performance of its contractual responsibilities by the maintenance of all necessary records. c. The net assets of an investment fund shall be owned collectively by the unitholders in such fund. A fund manager, fund-submanager or custodian shall not have any interest in or claims against such assets, other than when the fund manager is a unitholder, and for claims permitted under these regulations and disclosed in the terms and conditions; and creditors of such authorized persons do not have any claim or entitled to money or assets of the investment fund. Article 32: Title to Units a. A fund manager shall establish and maintain a register of unitholders. b. A fund manager may engage a third party or parties pursuant to a contract in writing to establish and maintain a register of unitholders. c. Notwithstanding the appointment of a third party, the fund manager shall remain responsible for the discharge of all its duties in relation to the register under these Regulations. d. The register shall be conclusive evidence as to the persons entitled to units entered on the register. e. The fund manager must maintain the following information in the register: 1) The name and address of each unitholder; 2) The national civil identification number, Iqama number, passport number or company registration number of the unitholder; 3) The nationality of the unitholder; 4) The number of units (including fractions of a unit) held by each unitholder; and 5) The date on which the unitholder was registered in the register. 25

27 Article 33: Record of Units The fund manager shall maintain a record of the balance of outstanding units and a record of units created and cancelled. Article 34: Permitted Fees and Charges a. The fund manager may transfer from the cash assets of the investment fund account, or receive payment in the form of units in the investment fund in respect to: 1) the costs of dealing in the assets of the investment fund, including brokerage fees; 2) commission on borrowings related to the investment fund; 3) investment management fees, including any performance or incentive element if applicable; 4) any charges reasonably incurred by the investment fund in depositing any part of the assets of the investment fund with the custodian; 5) the fees and expenses of the auditor of the investment fund; 6) the fees of Shariah Committee, if any; 7) the costs incurred in publishing annual reports; 8) fees and expenses of the fund directors; and 9) any other charges or expenses payable to persons dealing at arm's length with the investment fund and incurred in connection with the operation and administration of the fund. b. A fund manager may make a charge to a unitholder electing to exchange units in one sub-fund for another, but these charges may not exceed the total aggregate sum of any subscription and redemption fees usually charged by the fund manager. c. A fund manager may not increase any fees or charges above the maximum permitted level, as expressed in the terms and conditions, without giving at least sixty (60) calendar days prior notice to unitholders. d. The fund manager must pay all initial costs of the organization and offering of units in any investment fund out of its own resources, such initial costs to include the preparation of the investment fund s terms and conditions and other materials required for submission to the Authority under Article 5 of these Regulations. 26

28 e. Any costs that are not considered costs relating to promotion or distribution according to paragraph (a) of Article 35 and that are incurred after the inception of the investment fund and the provision of all necessary Authority approvals may be met out of the assets of the investment fund. f. A fund manager is financially responsible for losses in the investment fund resulting from errors caused by the fund manager s negligence or deliberate misconduct. g. The fee paid to a fund manager or fund sub-manager may be based on a measure of the performance of an investment fund other than a simple percentage of the net asset value of the fund (a performance fee ) only if: 1) the fund manager or fund sub-manager has managed the investment fund for at least twelve calendar months and begins charging a performance fee only after the completion of that twelve-month period; 2) the performance fee consists of a base fee and a performance adjustment; 3) the performance adjustment consists of a symmetrical increase or decrease of the base fee in proportion to the extent by which the fund's performance over a reference period is greater or less than an appropriate benchmark; 4) the reference period is the period of at least twelve consecutive calendar months immediately before the period in which the performance fee is charged; and 5) the performance adjustment is re-computed quarterly and is applied beginning on the first day of the new quarter. h. Disclosures relating to fees and expenses, including a worked example based on a hypothetical unitholder s investment, must be included in the terms and conditions according to Annex 1. Article 35: Distribution Costs a. No payments may be made out of the assets of an investment fund for the purpose of and for services rendered in relation to the distribution and promotion of units, including, but not limited to, the costs of preparing, copying and sending of the terms and conditions. b. Any distribution costs charged directly to unitholders shall be disclosed in the terms and conditions. c. The Authority reserves the right to impose a maximum figure for any distribution costs or fees charged by fund managers to unitholders. 27

29 Article 36: Financial Statements a. The fund manager must prepare financial statements for an investment fund at least twice annually and cause the annual financial statements to be audited. Financial statements must be prepared and audited in accordance with the standards issued by the Saudi Organization of Certified Public Accountants (SOCPA). b. The fund manager shall name an auditor upon the establishment of a fund. If an investment fund was established more than nine (9) months from the fund s year-end, then an audit must be conducted. Otherwise the audit can be conducted as at the following year-end, giving a first audit period of greater than twelve (12) months. c. The appointment of any auditor must be approved by the fund board. The fund board may reject the appointment of an auditor if: 1) There are outstanding and significant allegations of professional misconduct in relation to audit functions by the auditor; 2) There are close links between the auditor and the fund, its fund manager, its fund sub-manager or an affiliate such that the fund board determines that the auditor s independence is reasonably likely to be compromised; or 3) The fund board determines that the auditor does not have sufficient qualifications and experience to perform a satisfactory audit. d. The auditor shall be licensed in the Kingdom and shall be independent of the fund manager and any of its affiliates. e. The audit fees of the auditor shall be determined by the fund manager with the approval of the compliance officer and/or compliance committee. Article 37: Voting Rights a. The fund board shall consult with the compliance officer and/or compliance committee and approve overall policies regarding voting rights attributed to an investment fund because of securities included in its portfolio of assets. b. Any voting rights attributed to an investment fund because of securities included in its portfolio of assets shall be exercised or not exercised by the fund manager after consultation with the compliance officer and/or the compliance committee and in accordance with the overall policies referred to in (a) above. 28

30 Article 38: Investment Policies and Practices a. A fund manager shall undertake the activity of fund management with the aim of achieving the fund's investment objectives as set out in the terms and conditions, and for no other purpose or objective. b. The investment decisions of the fund manager shall conform to good and prudent investment practice in relation to the investment objectives of the fund as set out in the terms and conditions, including using its best efforts to ensure: 1) The fund is sufficiently liquid in order to meet reasonably anticipated redemption requests; 2) The fund does not unduly concentrate investments in a security or securities, in a country, geographic area or industry or sector except to the extent any such concentration is disclosed in the terms and conditions; and 3) The fund does not undertake undue investment risk in relation to its investment objectives c. The fund manager of an investment fund that is stated to be operating in accordance with principles of Shariah must periodically ensure the compliance of all fund investments with the criteria that, according to the terms and conditions, are used by scholars who provide advice on the investments of the investment fund to determine the eligibility of investments for the investment fund. The fund manager must report any material lack of compliance to the fund board at the fund board s next regularly scheduled meeting. Article 39: Investment Limitations a. Unless an investment fund is established and approved by the Authority as a specialized investment fund (as defined in Article 42) or a specific waiver has been obtained from the Authority, the following investment restrictions shall apply. b. An investment fund may not acquire units of another investment fund if the total units of the acquired investment fund owned by the acquiring investment fund would exceed ten (10) per cent of the acquiring investment fund s net asset value or ten (10) per cent of the net asset value of the acquired investment fund at the time of such acquisition. c. An investment fund shall not hold in excess of five (5) per cent of the issued securities of any issuer. d. The exposure of an investment fund to a single issuer shall not exceed fifteen (15) per cent of its net asset value. e. (i) An investment fund may not hold more than ten (10) per cent of its net asset value in any class of security issued by any single issuer, with the 29