Capital markets and structured investments

Yes.

Establishing a fund or the fund management and marketing of units in funds towards the public, among other things, are regulated activities under the Securities Fund Act of 2011 or the Alternative Investment Fund Managers Act of 2014 and therefore subject to supervision by the Norwegian Financial Supervision Authority.

Common forms of funds include:

• Securities Funds (open-ended and closed-ended funds as well as fund-in-fund structures);
• National Funds (Norwegian fund structure according to chapter 6 in the Securities Fund Act of 2011);
• Special Funds (Norwegian fund structure according to chapter 7 in the Securities Fund Act of 2011);
• Undertakings for Collective Investments In Transferrable Securities (UCITS);
• Hedge funds, private equity funds, investment companies and real estate funds (Alternative Investment Funds (AIFs)); and
• Exchange-Traded Funds listed on the Oslo Stock Exchange.

Retail funds

Retail funds, including Undertakings for Collective Investments in Transferrable Securities (UCITS), are subject to a strict regulatory regime, including obligations with regard to the fund management and the investments of the securities fund's assets (ie allocation and investment limits and requirements as to liquidity of the investments). Special investor protection rules apply and it is required to provide key investor information and meet language requirements.

The retail funds are offered to non-professional investors and are subject to strict investor protection rules. Note that certain categories of funds cannot be offered to non-professional investors. A non-professional investor means any investor not considered as a professional investor, or one who may upon request be treated as such.

Institutional/professional funds

Professional funds are offered to professional investors and a professional client who meets two of the following three criteria: a total balance sheet of €20 million, turnover of €40 million or own capital of €2 million. In practice, in Norway, this often refers to non-UCITS funds, being hedge funds, private equity funds, investment companies and real estate funds, which fall into the category of Alternative Investment Funds (AIFs) and are therefore subject to the Alternative Investment Funds Managers Act of 2014. The regulatory framework is better suited for professional investors and does not set the same restrictions on the investments made by the fund.

Establishing funds

In general, the legal framework for establishing fund structures is complex and there are many risks to be taken into account.

A new entrant to the fund market will need to obtain the necessary license(s) from the regulator and set up an organization (incl. control bodies) which fulfils various suitability requirements. It will also have to manage the fund in compliance with the applicable regulations. The marketing and distribution of fund products to the public are subject to particular rules (for more information, see Establishing and investing in debt and hedge funds – establishment). It is also important for the fund incorporator to select the optimal fund structure to fit the fund product(s) intended for sale and the targeted fund investors.

For investors there are a lot of risk factors to take into consideration and an investment fund can generally reduce the risk of being exposed to a single security as it allows them to invest in a portfolio of securities, meaning a drop in the value of a single investment will not necessarily cause the value of the whole investment to collapse. That being said, all investments carry a varying degree of risk and investing in funds involves many of the same risks as any other investment. The value of an investment may rise or fall and the previous performance of a fund is not a guarantee of its future performance. Further, return and risk almost always go hand in hand; generally, an investor must take a greater risk to achieve greater returns. The risks that apply will often be determined by the classes of assets that the fund invests in and the selection of investments that the manager makes. Other risk factors that may impact on the performance of a fund include market risk, regulatory, economic and political risks (especially if the fund invests in non-EU markets, emerging markets etc), counterparty risk (if a counterparty defaults, that may impact on the fund's position), currency risk and gearing risks (if the fund borrows or utilizes derivatives to increase potential returns), diversification risk and liquidity risk. Liquidity risk is the risk that positions cannot be realized at a particular point in time both in relation to the manager's ability to buy and sell positions for the fund and the investor's ability to buy or sell units in the fund. The fund investor should carefully consider the fund's risk profile and the policies employed by the fund. Note that all risk indicators are usually based on historical data or assumptions.

Yes.

The units of a fund can be marketed by investment firms, licensed alternative investment fund managers or securities funds as well as banks to a certain extent. Other regulated entities may also be entitled to market units in a fund in cooperation with the manager.

The Securities Fund Act of 2011 and the Alternative Investment Fund Managers Act of 2014 set out the marketing regimes applicable for funds. They also provide exemptions for some of these marketing requirements where marketing is aimed at professional investors. In addition, the laws differentiate between securities' funds and alternative investment funds (AIF). AIFs are more suited for professional investors, therefore there are restrictions in relation to the marketing of such funds to non-professional investors. Where the AIF fund is marketed to professionals and it is below certain set fund thresholds, then a marketing permit from the Norwegian Financial Supervisory Authority is not needed. Where marketing is done towards non-professional investors, then the management is required to apply for a special marketing license.

The Undertakings for Collective Investments in Transferrable Securities (UCITS) directive has been incorporated into Norwegian legislation. This enables fund promoters to create a single product for marketing in all EU member states and on the completion of the appropriate notification procedure, a UCITS established in one member state can be sold in any other. A UCITS intending to market in another member state must complete and submit to its home regulator a notification which must include certain specified information, including copies of key investor documents. The home regulator then completes a notification file which is sent in a regulator-to-regulator transmission, following which the UCITS can be sold in the other member state.

The Securities Funds Act of 2011 and its related regulations set several requirements in relation to management of funds. The Norwegian Financial Supervisory Authority oversees and provides licensing for all securities fund management companies. To receive such authorization, certain statutory requirements must be met, and various restrictions arise on manager structuring, investment limits, organization of the activity, risk management etc. This Act also incorporates specific regulations regarding UCITS, incorporating the UCITS directive. Alternative Investment Fund Managers (AIFMs) are also subject to regulation under the Alternative Investment Fund Managers Directive (as implemented in Norway).

Yes.

Investment services provided on a professional basis must be provided by undertakings authorized to do so by the Ministry of Finance. The authorization shall indicate which investment services and ancillary services the investment firm may provide. An investment firm shall apply to the Norwegian Financial Supervisory Authority for approval before it offers ancillary services beyond those indicated by the authorization. However, the following entities are exempted from the authorization requirement:

• the Central Bank of Norway;
• the National Insurance Scheme Fund;
• public authorities that manage public debt;
• management companies for securities funds;
• insurance companies;
• pension funds;
• depositories of securities funds, pension funds and alternative investment funds;
• undertakings authorized to operate as an options clearing house, clearing house or regulated market; and
• managers of alternative investment funds.

Common types of derivatives include options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivative instruments, financial indices or financial measures which may be settled physically or in cash, commodity derivatives, credit derivatives and financial contracts for differences.

In order to ensure close out netting, the derivatives agreements must be in writing and provide for valuations at market prices. In addition the derivatives must be of the kind described in the Norwegian Securities Trading Act 2007.