Sale of investment funds

Buying/Selling an Investment Fund in Ukraine: How the Procedure Really Works for a CIF (Corporate Investment Fund) and a Mutual Fund (Unit Investment Fund)

The most common mistake when it comes to investment funds in Ukraine is to talk about “buying a fund” as if CIFs and UIFs are sold the same way. In fact, these are different legal structures. A corporate investment fund is a legal entity in the form of a joint-stock company, while a mutual investment fund is not a legal entity, it is created by an asset management company, and its assets are registered in the name of the AMC with the mandatory indication of the fund’s details. In addition, a CIF can be created only by founding, and its merger, division, separation, accession or transformation are prohibited.

That is why in Ukrainian practice, “buying/selling a fund” can mean two different operations. The first is the purchase or sale of fund securities by an investor: CIF shares or investment certificates of a mutual fund. The second is the acquisition of control over the fund as a ready-made investment structure. For a CIF, this is usually done through a transaction with shares of a corporate fund. For a mutual fund, this is not the sale of a separate legal entity, but, as a practical conclusion from its legal nature, either the circulation of investment certificates, or the change of the AMC / servicing infrastructure and the re-registration of the relevant documents, because the participant of the mutual fund is only the owner of the certificate and does not manage the AMC.

1. If it is a question of a regular purchase or sale of the fund’s securities

Both CIF shares and UIF investment certificates are equity securities. Registered issue securities exist only in book-entry form, and the transfer of rights to them takes place according to the rules of the depository system of Ukraine with mandatory identification of the owner by the depository institution. That is, from a practical point of view, the investor does not “buy a paper document”, but acquires rights that are recorded in the system of accounting for rights to securities.

The price of entry and exit from the fund is also not determined arbitrarily. The law establishes that the estimated value of one CII security is determined by dividing the value of net assets by the number of securities in circulation. Acquisition, as a rule, takes place at the price determined on the day of receipt of funds to the fund’s account, and redemption — based on the estimated value on the day of crediting the securities to the issuer’s account. The prospectus may provide for a premium upon sale and a discount upon redemption.

Further, everything depends on the type of fund. For an open-ended corporate fund, the redemption of shares is carried out every business day, and for an interval fund – within the terms specified in the prospectus. For an open-ended mutual fund, the redemption of investment certificates is also carried out every business day, and for an interval fund – within the terms specified in the prospectus. Securities of closed-ended CIIs are freely traded on the securities market; for a closed-ended fund, early redemption is possible only if the regulations allow it and if, after the redemption, the assets do not fall below the minimum threshold. The settlement period for such early redemption cannot exceed 15 business days, and the discount cannot be more than 25% of the calculated value.

For mutual funds, there is another important limit at the start. Until the Commission confirms the fund’s compliance with the requirements for the minimum volume of assets, the AMC only accepts applications for the purchase of certificates, and their circulation is prohibited. After that, for open-ended funds, the AMC must regularly disclose the net asset value and placement/redemption prices on its website. If the prospectus allows it, the purchase application and the contract itself can be executed in electronic form with the CEP.

2. What does buying or selling a ready-made CIF look like

If the goal is not just to buy a few securities, but to purchase a ready-made CIF as an investment shell, the procedure begins not with a contract, but with due diligence. You need to check: state registration of the fund as a legal entity; entry in the CIF Register; current charter; registered regulations; certificate of registration of the share issue; prospectus; agreements with the AMC, custodian, depositary, auditor; certificates of related parties; as well as information that the AMC is obliged to disclose on the website regarding the license, NAV, servicers and fund documents.

Legally, the subject of the transaction here is usually shares of a corporate fund, because it is the CIF share that certifies property rights, the right to manage the fund and the right to part of the property upon liquidation. The transfer of rights to such securities occurs through the depository system. If the transaction is concluded on a stock exchange, it is considered concluded from the moment the exchange records the fact of its conclusion. The price of a controlling stake in an M&A deal is determined by agreement of the parties, but NAV, asset composition, debts, encumbrances and the quality of servicing agreements become the main basis for assessment – this is a practical, not a literal regulatory conclusion.

After the approval of commercial terms, a second block of work often arises – corporate and regulatory. If the new owner changes the AMC, custodian, prospectus, regulations or fund charter, these changes must be drawn up separately. The law directly requires that the CIF regulations contain the conditions and procedure for replacing the AMC and custodian. Changes to the charter after state registration must be notified to the Commission within five business days. Changes to the regulations are submitted to the NSSMC within 7 business days from the date of their approval, and changes to the prospectus are registered through a separate administrative procedure with the submission of an application, protocol, changes, comparative table, payment document and, in the case of replacement, a new agreement with the AMC and/or custodian.

After closing the deal, it is necessary to synchronize the “post-sale” block: depository accounting of rights, corporate documents, servicing agreements, disclosures and, if necessary, registered amendments to the prospectus and regulations. This is important because the law obliges the AMC and the investment firm to provide participants with free access to the prospectus, regulations and amendments to them, and the AMC website must contain up-to-date data about the fund and the persons servicing it.

3. What does buying or selling a mutual fund look like

With a mutual fund, the logic is different. A mutual fund is created by an AMC, is not a legal entity, and the issuer of its investment certificates is the AMC itself. The assets of the mutual fund are registered in the name of the AMC with the fund’s details, and a participant in the mutual fund is a person who owns an investment certificate. The law specifically emphasizes that participants in the mutual fund do not have the right to influence the activities of the AMC. That is why “selling a mutual fund as a business” never looks the same as selling an LLC or joint-stock company.

If we are talking about the entry or exit of an investor, you should first read the regulations and prospectus. It is in these documents that the procedure for determining the NAV, placement and redemption prices, certificate redemption terms, investment declaration, AMC remuneration and other key conditions should be prescribed. For an open-end mutual fund, redemption occurs daily after confirmation of the minimum volume of assets; for an interval one – at intervals established by the prospectus; for closed-end funds, securities are mainly sold on the secondary market, and early redemption is possible only if there is a special rule in the regulations.

If the goal is to buy a “ready-made mutual fund”, then in practice, they do not analyze the sale of a separate legal entity, but one of two routes. The first is the secondary acquisition of a significant package of investment certificates, if this provides the desired economic effect. The second is an agreement around the AMC or the replacement of the AMC/service persons with simultaneous re-registration of the fund documents. For changes to the mutual fund regulations, the AMC submits an application, a protocol of the authorized body, the text of the changes, a comparative table and a payment document; for changes to the prospectus, a separate package of documents according to the NSSMC procedure. Submission for such services is currently carried out through the CIS of the NSSMC.

4. Sale through liquidation: when the fund is not transferred, but “closed”

Both CIFs and mutual funds are terminated exclusively through liquidation. For CIFs, voluntary liquidation is carried out by decision of the general meeting of participants, and the procedure itself includes the distribution of assets, drawing up a liquidation balance sheet, submitting documents to the National Securities and Markets Commission for the cancellation of the registration of the issue of shares and the prospectus, and then submitting documents to remove information about the fund from the Register. For mutual funds, the decision on liquidation is made by the AMC in cases specified by law, after which the liquidation commission submits to the Commission documents for the cancellation of the registration of the issue of investment certificates and a report on the results of the liquidation.

From a practical point of view, this is important because sometimes, instead of a complex sale of a “problem” fund, the parties choose the scenario of exit through liquidation and the subsequent creation of a new structure. But we must remember: this is not a quick workaround, but a full-fledged regulatory procedure. To cancel the registration of a CII securities issue, the NSSMC checks the correctness of settlements with participants and the compliance of documents with legislation. And the exclusion of information about the CII from the Register is a separate free administrative service with a term of 15 working days after receipt of the application and a complete package of documents.

5. What should be included in the agreement before signing

In the agreement on the purchase of a ready-made CIF or in the documents on the restructuring of a mutual fund, it is worth separately recording: what exactly is the subject of the transfer – CIF shares, investment certificates, corporate rights of the AMC or a change in the service infrastructure; who and within what time frame submits documents to the NSSMC; who bears the risk of refusal to register changes; how the costs of administrative services are distributed; who is responsible for hidden debts, asset encumbrances, sanction risks, related parties and litigation. For changes to the regulations and prospectus, the NSSMC currently provides for electronic submission through the CIS, a fee of UAH 7,000 for each of these services and a review period of 30 business days.

Conclusion

Therefore, the purchase or sale of an investment fund in Ukraine always begins with the correct qualification of the object. CIFs are sold mainly through shares of a corporate fund with the subsequent registration of all regulatory changes. A mutual fund as a separate legal entity is not sold, so either the purchase/repurchase of investment certificates takes place, or the fund management circuit is restructured through the AMC and registration of changes with the National Securities and Markets Commission. If the parties do not want to transfer the fund, the alternative remains liquidation, but this is also a formalized and regulated procedure.