Investment Funds ( Mutual Funds )

Legal Structure of Investment Funds in Turkey

Mutual funds are established in the form of open-end investment companies in Turkey. They do not have any legal entity. They are operated in terms of the rules stated in the internal statute of the fund, which includes general terms about management of the fund, custody of the assets, valuation principles and conditions of investing in the fund.

Basic Types of Funds

There are two different types of mutual funds in Turkey, Type A and Type B. Type A mutual funds are required to invest at least 25% of their assets in equities that are issued by Turkish companies. Mutual funds that have no such obligations are classified as Type B mutual funds.

Other Specifications ( Styles ) of Funds

A and B Types of Funds can be formed also in different styles according to their investment criteria. In this category, mutual funds are classified according to their asset allocations such as Variable, Balanced/Mixed, Affiliate Companies, Sector, Equity, Private, Index, Notes and Bonds, Liquid and Foreign Securities Funds.

Founders

Mutual fund founders are restricted to banks, insurance companies, non-bank intermediaries, unemployment funds and pension funds in Turkey.

Portfolio Restrictions

In order to make sure that mutual funds' portfolios are sufficiently liquid and well diversified, law and regulations enforce some limitations on their portfolios. Some of the portfolio restrictions of the mutual funds are as follows;

· To sustain the fair price in the transactions of the fund, which is the lowest price when buying and the highest price when selling an asset.

· Not to invest in non-listed securities, with a limited exception for the securities, the founder or the portfolio manager of the fund underwrites.

· Not to invest in the securities of a single issuer more than 10% of its net asset value.

· Not to purchase more than 9% of one issuer's shares.

· Not to invest in the securities of the founder or the portfolio manager.

· Not to be represented in the management of the companies whose shares it has purchased.

Custody

The founder is responsible for the protection and safekeeping of the fund's assets. Moreover, the fund's assets are separate from those of the founder. Mutual funds are required to protect securities in their portfolio by depositing them in a depository institution (The ISE Settlement and Custodian Bank, Inc.). The Board requires depositor to segregate mutual fund portfolio securities from other assets.

Valuation

The assets of the mutual funds are subject to valuation on a daily basis. They are valued at weighted average prices or rates of the market in cases where such a price or rate exists. In cases where such prices or rates are not available, the valuation is based on the last existing market price for stocks and the internal rate of return for fixed income securities. After valuation is done for each of the assets, they are summed up to find the portfolio value. Finally, by including the credits and excluding the debts and other costs of the fund, the net asset value of the fund is determined.

Participation certificates

Participation certificates represent the rights and the amount of the units the investors have on the fund. Investors invest in the fund by buying and selling these certificates. The price of a certificate - the unit price for a fund - is calculated every workday, by dividing the net asset value of the fund to the outstanding number of certificates. Thus, it daily reflects the income that is generated in the fund. That means an investor of a fund receives the profit that corresponds to his units during the period he has invested in the fund when he sells his certificates back to the fund and no other dividend is paid

Disclosure

After being approved by the CMB, internal statute of mutual funds are announced in the Turkish Commercial Registry Journal. According to that; the mutual funds have to prepare prospectus in case of issuance and public offering of the units. Besides, they have to report their share (unit) prices daily and prepare monthly and annual reports including their performance, net asset value and portfolio structure. Finally their annual and semiannual financial statements have to be audited by a certified external auditor.

Protection of Investors

Apart from the disclosure liabilities stated above, the founder is responsible for the protection and safekeeping of the fund's assets. The assets of the fund, which are separate from those of the founder and deposited in a central depository institution, may not be pledged or stated as a guarantee and the fund may not be seized by third persons. In the case of bankruptcy or liquidation of the founder or manager of the fund, the Board is empowered to take the necessary measures. Since the assets of the fund are separate from those of the founder, this provides a safety mechanism when the founder or fund manager goes bankrupt.

Taxation

As an incentive, Mutual Funds are exempted from corporate tax permanently and income tax until 2002 according to the Tax Code.

Milestones

· 1981 - Capital Markets Law.

· 1986 - First Communiqué regulating mutual funds.

· 1986 - Establishment of the first mutual fund in Turkey.

· 1992 - Regulation on types of mutual funds and tax incentives for A types.

· 1996 - Coming into force of a new comprehensive Communiqué that brought many innovations to the regulation of mutual funds in Turkey, which are also currently in use.

The Main Properties of the Individual Retirement System

· The system will be supplemantary to the existing state pension plans.

· The system will be voluntary and will be based on defined contribution plans.

· The contributions collected from the individuals will be transmitted to pension funds which will be established in the structure of a mutual fund.

· Anybody who is able to use his civil rights can enter the system.

· Only retirement companies (which have been introduced to the financial markets with this new law) will establish the pension funds. Retirement companies will be established with permission of Underscreteriat of Treasury. Retirement companies need an initial capital of 20 Trillion TL ( Approximately 14.285.714 USD) for establishment. Half of this amount should be paid in cash when the company begins to operate.

· At least 3 different funds with different portfolio structures must be established. (In this way individuals will be able to choose a fund according to their personal risk and yield expectations) .

· Although not stated in the law clearly, both employees and employers, if any, as well as individuals can make contributions to the pension funds.

· The rights of the investors are portable and accumulations can be transferred into another retirement company .

· At retirement, the investors can take their accumulations as lump sum or they can withdraw the accumulations partially. They will have an option in either buying an annuity from an insurance company or leaving the money in the funds to be invested. Retirement age is 56 providing that, people make contributions to the fund for at least 10 years.

· The fund will be managed by portfolio management companies according to the Law, which will be authorized by Capital Markets Board.

· The assets of the fund will be deposited in a custodian bank which will be approved by the Board. The custodian that is selected by the pension company and approved by the Board, will be a bank which operates in accordance with the Law on Banking.

· The system will be coordinated by Advisory Board. The regulations will be made by relevant institutions, Undersecreteriat of Treasury and Capital Markets Board.

The Regulations of Undersecreteriat of Treasury

In general, the following issues will be regulated by the Undersecretariat of Treasury. Undersecretariat of Treasury shall lay down principles and procedures relating to the following subjects.

* The standards of legal documents related with the retirement company such as; pension contracts ... etc. ,

* Procedures regarding transfer of accumulations,

* Entrance to the system and retiring from the system,

* The fees; entrance fees for individuals, operating fees for the retirement companies ...etc. ,

* The establishment and operations of the retirement companies,

* Internal audit of the retirement companies,

* The qualification requirements for the staff of the retirement companies.

* Independent audit of retirement companies.

The Undersecreteriat of Treasury is at the moment working on the communiques regarding these issues.

The Regulations of Capital Markets Board

In general, the following issues will be regulated by the Capital Markets Board. The Board shall lay down principles and procedures relating to the following subjects:

* The standards of legal documents related with the pension fund such as; fund prospectuses, internal statute, application forms ... etc,

* The establishment and operation procedures of the pension funds,

* The registration and sale of the fund shares,

* Internal audit of the fund,

* The organization structure of the fund,

* Public disclosure,

* Portfolio restricitions of the funds, the minimum and maximum percentages of the assets that will be invested in each asset class having different risk and yield structure,

* Evaluation of the fund assets,

* Licensing portfolio management companies,

* Mergers of the funds,

* Independent audit of the funds,

* Setting up performance standards.

Definition

Foregin mutual funds (FMFs) are the mutual funds established abroad. Sale of FMFs in Turkey is subject to Capital Market Regulations.

Prerequisites for FMS's to be sold in Turkey

FMFs whose units will be sold in Turkey should comply with the following rules:

· FMFs' units should be traded in Turkish Lira or foreign currencies whose daily exchange rates are announced by the Central Bank of Republic of Turkey.

· FMFs should be at least three years old.

· In the issuer's country, there should not be any limitation related to sale in Turkey and relevant transactions and payments made in Turkey regarding the financial rights granted by FMFs.

· FMFs' units should have been offered to public in the country of establishment and the total current value of the units in circulation should be at least USD 1.000.000

· At least 80% of FMFs' portfolio should be invested in the assets other than the capital market instruments issued by the issuers resident in Turkey and the Turkish public debt instruments.

· If portfolio management service is provided by another institution, this institution should have the authorisation for portfolio management in the country of establishment.

· More than 10% of the portfolio value should not be invested in securities of a single corporation (Capital market instruments issued by the countries are excluded).

· FMFs should not have more than 9% of the voting rights or capital in any corporation.

· The principles related to FMFs' lending of assets and borrowing should be consistent with the legislation the mutual funds in Turkey are subject to.

· The financial statements of FMFs prepared within the framework of international accounting standards should be subject to independent auditing at least once a year.

· Guarantee (in writing) should be given to the Capital Markets Board by the authorized organ of FMFs;

- to provide the documents and information regarding public disclosure and other documents and information requested by the Board,

- to provide auditing of FMFs by the persons or institutions assigned by the Board and cover the expenses of such an action.

Representation

It is mandatory that FMFs have a representative in Turkey with respect to a written agreement. The representative of FMFs in Turkey should be a bank or a brokerage firm. The representative institution is responsible :

· For timely publishing of information to be disclosed to public, notifications made to the Board, and the accuracy of the documents.

· For the redemption of the units sold in the name of FMFs in accordance with the rules determined by FMFs.

· For paying the investors in cash for the redemption of the units, in case FMFs are unable for any reason to make this payment.

· If FMFs' units are tied to notes, for replacing them in Turkey in case of theft, loss or physical damage of the notes.

· For making sure that the investors in Turkey have equal rights with the foreign investors and the payments regarding the units are made in Turkey.

· For the accuracy of the records on the identity of the investors and the transactions made.

Custody

The assets of FMFs should be kept under the responsibility of an institution having paid-in capital of minimum USD 1.000.000 in the country where FMFs are established or an authorized custodian in Turkey.

Disclosure

It is obligatory that the prospectus and circular of FMFs are prepared in Turkish, clear and detailed in order to provide the necessary information required by the related legislation on FMFs and the issuance. FMFs are obliged to provide the financial statements prepared in accordance with the legislation of the country of residence and international accounting standards, reports, independent auditing reports and other periodic reports to the Board and announce the financial statements within the framework of the regulations that the mutual funds are subject to in Turkey.

Furthermore the represantative has to send a monthly report to the Capital Markets Board.

Definition

Investment trusts are closed-end investment companies managing portfolios composed of capital market instruments, gold and other precious metals.

Legal Structure

Investment trusts are established in the form of joint-stock corporations and they have a legal entity. Their capital is registered and they issue shares. Their shares have to be issued in return for cash and quoted, traded and priced at Istanbul Stock Exchange.

Types

As in the case of mutual funds, there are two different types of investment trusts in Turkey, Type A and Type B. Type A investment trusts are required to invest at least 25% of their assets in equities that are issued by Turkish companies. Investment trusts that have no such obligations are classified as Type B. In practice, all of the 21 investment trusts established in Turkey are Type A.

Founders

There is no restriction on the founders except for certifying that they have not been subject to any legal prosecution due to bankruptcy or another disgraceful offence. Legal persons as well as real persons can be founders of an investment trust.

Portfolio Management

Investment trusts are authorized to manage their own portfolios and may employ portfolio managers. They can also get portfolio management or investment advisory service from authorized investment advisers.

Portfolio Restrictions

Portfolio restrictions for investment trusts are similar to those of the mutual funds.

Custody

The assets of investment trusts have to be deposited in a depository institution (The ISE Settlement and Custodian Bank, Inc.).

Valuation

The valuation of the assets of the investment trusts is similar to that of the mutual funds. Their portfolio value, net asset value and the net asset value per share is calculated daily.

Shares

Investors buy shares of an investment trust in the stock exchange. In return they are paid dividends at the end of the year. They may also sell their shares in the exchange and receive capital gains anytime they want.

Disclosure

After being approved by the CMB the article of incorporation of the investment trust is announced in the Turkish Commercial Registry Journal. According to that; they have to prepare prospectus in case of issuance and public offering of the shares. Besides, important developments about the investment trusts and their weekly portfolio tables including their assets and net asset value per share are announced to the investors in the bulletin of the stock exchange. Finally their annual and semiannual financial statements have to be audited by a certified external auditor and announced in the bulletin of the stock exchange.

Protection of Investors

Apart from the disclosure liabilities stated above, they are deposited in a central depository institution for the purpose of safekeeping of the assets of the trust. On the other hand listing requirement of the trusts' shares in the stock exchange enables the investors to leave the trust anytime they want. The investors have to know that the investment trusts are closed end investment companies and they can sell their shares only to other investors, but not back to the trust.

Taxation

Investment trusts enjoy the same taxation incentives provided to the mutual funds.