February 9, 2016
On February 9, 2016, the Finance Committee of the Knesset (the Israeli parliament) approved the regulations by virtue of the Joint Investments Trust Law which, for the first time, will allow the distribution of foreign mutual funds in Israel. The regulations were initiated and promoted by the Israel Securities Authority, in the belief that there is a need to improve competition in the mutual fund market in Israel and that opening the market to foreign mutual funds will lead to greater competition and the expansion of investment opportunities, whether passive or active, available to the Israeli investor in the capital market.
The regulations specify the conditions that a foreign mutual fund must meet in order to offer its units to the Israeli public. These conditions reflect a measured approach that balances between improving competition, as mentioned, and the creation of a certain amount of protection for the investors.
One of the main conditions specified in the regulations is that the management of the foreign fund whose units are to be offered in Israel will be in accordance with the regulation of its country of origin, rather than the regulation applying in Israel. In this way, the foreign fund or the fund management company will not be supervised by the Israeli Securities Authority, however, the management company of the foreign fund will receive a permit from the Israel Securities Authority to offer the units of the foreign fund in Israel based on its compliance with the foreign regulations that apply on it and after it has proven that it has met all of the conditions specified in those regulations.
Accordingly, only funds that specialize in investments outside of Israel, which have a very large scope of investment and which are among the leading international investment houses, will be allowed to operate in Israel. Essentially, the funds that will be able to be distributed in Israel are only those that are permitted to be offered to the public in the capital markets of Europe (UCITS funds that operate under the UCITS directive in their country of origin) and the US (funds that operate under the Investment Company act of 1940) and which meet the accepted standards of regulators there. The criteria specified in the regulations ensure that the large management entities that will distribute the foreign funds in Israel will have a particularly large quantity of assets (more than $20 billion of assets under management), that the foreign fund management company will have at least five foreign funds whose units have been offered to the public for at least the last five years and that the value of the assets under management in each one of them is not less than $500 million. In addition, the funds that can be offered to the public in Israel are funds that are already offered to the public in other countries and their value is not less than $50 million.
The regulations also provide additional mechanisms for the protection of the investors in Israel, including that the foreign fund management company will be required to appoint a local representative, which will serve as its address in Israel and will serve as liaison between the foreign fund management company and the Israel Securities Authority and between the foreign fund management company and the investors in Israel. The foreign fund management company will be required to make available to the public in Israel the reports it submits abroad. Moreover, the foreign fund management company will be required to provide a bank guarantee in an amount not less than NIS 1 million in order to ensure that it meets the regulatory conditions, in addition to a financial deposit to the benefit of the unit holders in an amount that depends on the value of units held by Israeli distributors.
The regulations also place emphasis on the maintenance of fair competition between foreign fund management companies and management companies of local funds. For example, similar rules for advertising will apply to the foreign fund management company and there are identical requirements with respect to the distribution of the foreign funds and the compensation of distributors (primarily banks) in Israel.
The regulations will come into effect six months after their publication in the Reshumot (Official Gazette).