Investment funds provide a means for investors to aggregate their savings of relatively small sums of money for investment by professional asset managers. In countries with developed financial markets, there are usually hundreds if not thousands of investment funds. This may be the best way for ordinary individuals who are not financial and securities market experts to invest their savings in the capital markets and participate in Mongolia’s economic growth. For intelligent investment in some securities, minimum amounts must be invested which are larger than ordinary individuals could invest or should invest to be able to diversify their investments in different asset classes which is a fundamental principle of investments in securities
Available assets for investment
The key issue for the feasibly of establishment of investment funds in the near term in Mongolia is eligible assets for investment fund investment. The availability of investible assets in the near term is problematic. There are an insufficient number and volume of liquid equity securities listed on the Mongolian Stock Exchange and there is no real market in the few listed corporate bonds. There are government bonds that could be bought by investment funds, but this would have a more limited benefit to the economy than corporate finance.
There are attractive investment opportunities in non-listed companies. However, the interest of such companies in having investments from the new investment funds and the liquidity of such investments are not apparent. Regarding the interest of the companies, investment funds could not bring the indirect business opportunities of many other investors. Regarding liquidity, some unlisted companies by their charter or a shareholders’ agreement require that their shares be held for a number of years or that they may be sold in the first instance only to existing shareholders. If the shareholders are not interested in acquiring more shares when they have intimate knowledge of the company, it would be difficult to find other investors to purchase the shares of that company held by an investment fund or at an attractive price.
There is also much competition by private equity funds with foreign investors for equity investment in and lending to profitable non-listed companies so the opportunities for investment fund investment in such companies would be limited for this reason as well. Investment funds would be permitted to invest some portion of their assets in equity and fixed income securities listed on major foreign stock exchanges but this would have limited benefit for the Mongolian economy.
Regulation and supervision
The Law provides for investment fund sponsors, which are banks or securities brokers, to organize investment funds. Investment fund investment portfolios would be managed by banks or securities brokers that have an assets management capability and are not affiliated with the fund sponsor. Investors would invest in investment fund “units” which are a type of security and would be sold pursuant to the issuance of a prospectus containing comprehensive information about a fund’s administration, governance, risk factors, and how investors may sell their units.
The Law contains general provisions for the regulation and supervision of investment funds. In addition, since investment fund units are securities and at least some funds will have securities brokers as sponsors or investment fund portfolio managers, the administration and management of investment portfolios of investment funds will be supervised under the securities law by the Financial Regulatory Commission (FRC) since securities brokers are licensed under that law. In addition, the central securities depository and sub-custodians of investment fund assets will also be subject to FRC supervision.
The Law is consistent with the IOSCO Principles for Collective Investment Schemes. The IOSCO Principles have three general objectives: the protection of investors; ensuring that markets are fair, efficient and transparent; and the reduction of systemic risk. The Principles for Collective Investment Schemes, which the Law includes as well as many others, include:·
- Segregation of investors’ assets
Legal form of investment fund
With respect to the form of an investment fund, a new legal entity of a fund is recommended as the entity which has the least cost of administration since investors pay for the administration expenses of a fund and such costs reduce the return on their investment. However, Article 33 of the Civil Code provides:
33.1. Profit-making legal persons shall be established in the form of partnership or company.
33.2. Non-profit juristic persons shall be established in the form of association, foundation or cooperative.
These provisions are at variance with international practice and reflect inappropriate central planning. Reportedly in Mongolian “foundation” and “fund” is the same word although the meaning can be quite different since there are many types of funds but foundations usually have a charitable or public benefit connotation. The basic formalities for the administration of limited partnerships or companies are relatively costly and can be very costly if shareholders or partners challenge the administration of these entities. In addition for companies, certain provisions of the Companies Law are unsuited to investment funds or could considerably complicate the business of an investment fund. These are in Articles 5, 15, 17, 30, 62, 87, and 88. Thus, these forms of business for an investment fund should be avoided.
There are three alternative possibilities to consider to overcome the obstacle of Article 33:
· The law could provide that Article 33 of the Civil Code is not applicable to investment funds for which there reportedly is precedent in exemption from certain articles of the Code in other laws. The Civil Code could also be amended to remove the arbitrary provisions of Article 33.
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