The Securities and Exchange Commission of Pakistan (SECP) has rationalised regulatory requirements of Private Fund Regulations to facilitate investment advisors in developing better understanding of the investment objectives of their clients keeping in view their specific needs and preferences.
Sources told Business Recorder here on Tuesday that the proposed Private Fund Regulations 2015 have been issued by the commission. One of the reasons for lacking of any growth in the sector was stringent regulatory requirements. These regulatory requirements have been rationalised to achieve further growth in the sector. Firstly, the limit for minimum investment by eligible investor has been reduced from Rs 10 million to Rs 3 million. Secondly, the minimum fund size requirement of Rs 250 million has been significantly reduced. Thirdly, the cap on maximum holding by a single party has been removed. The requirement of minimum number of investors has been removed. Fourthly, the Alternative Fund to be established in open end structure have been allowed to invest in listed securities whereas the Private Equity and Venture Capital Funds established in closed end structure are allowed to invest in securities of unlisted company or for turning around a listed company and in securities of Small-Sized or Medium-Sized company engaged in developing a new product or process or desiring expansion of its business.
It is learnt that requirements were not considered beneficial or in the interest of investor. Now the proposed Private Fund Regulations 2015 would facilitate the investment advisors in developing better understanding of the investment objectives of their clients keeping in view their specific needs and preferences.
The commission has approved Private Fund Regulations 2015 with a view to extend perimeter of existing regulations and encourage the issuance of additional investment advisory licenses which will foster great competition and enable such funds to operate within the ambit of law.
As per the prevalent framework only Private Equity and Venture Capital Funds can be launched whereas now other type of funds such as hedge fund, alternative funds and debt fund etc; can also be launched under a the name of Alternative Funds. In the current regime the Investment Advisor can manage discretionary and non-discretionary Separately Managed Accounts (SMAs) of high net worth individuals. However, the new regulatory framework will facilitate the launch of Private Fund in which the Investment Advisor can pool the funds according to their investment objective and risk appetite.
They said that the Private Fund Regulations are a step in the right direction as they bring transparency around the issue of regulation of private pools of capital that are raised locally for deployment by various types of investment funds. It will help in monitoring the unregulated funds; encourage formation of new capital and investor protection. It will enable several varieties of funds that were not possible in the past like infrastructure funds, hedge funds, debt funds etc. Private Fund Regulations possess several features like investment strategy, disclosure of periodic information to investors, valuation procedure, audit of fund etc. These comprehensive Regulations would surely bring greater clarity to the market and the investors and its comprehensive nature will bring several investment entities under the watchdogs that were hitherto unregulated by SECP.
Moreover, the commission has also approved various amendments, in accordance with best international practices, in the Non-Banking Finance Companies Rules, 2003 and the Non-Banking Finance Companies and Notified Entities Regulations, 2008. These amendments are aimed at encouraging sustainable growth of the mutual funds by taking measures for improving access by retail investors coupled with strengthened governance of the asset management companies for better investor protection.
Furthermore, the revised framework permits a broader scope of investment management services to be undertaken by the asset management companies, which earlier was restricted to mutual funds management, pension fund management and investment advisory. The new investment management services which AMCs will be able to offer upon promulgation of the revised regulations are Real Estate Investment Management services and private fund management services.
In order to enhance the limited retail investor base, lack of penetration of mutual fund products and to increase the ' feet-on-street' in distribution network the Commission has made it mandatory for the Asset Management Companies to have certain minimum number of branches across the country. However, considering the substantial capital outlay required for increasing distribution network versus small capital base of the AMCs, SECP has allowed charging of certain expenses, such as marketing/selling expenses to be used exclusively by AMCs for increasing their distribution network. In addition to that Asset Management Companies are allowed to charge cost directly associated with investment management, such as net asset value (NAV) calculation and Shariah advisor, etc. To accord flexibility and bring cost effectiveness in the mutual fund expense, concept of expense ratio has been introduced with an overall cap on expenses.
For protection of investors' interest, conduct requirements for fund managers have been specified covering the fiduciary responsibilities, corporate governance responsibilities, proxy voting and employee's trading. Moreover, for strengthening the internal control of Asset Management Companies, detailed risk management requirements have also been introduced. It is expected that the proposed regulatory framework for mutual fund industry would play an effective role while underpinning the financial markets and vibrant resource mobilisation channel, they added.
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