Answer ... Alternative investment fund managers (AIFMs) must be established as a joint stock company or limited liability company with its seat in Croatia, in accordance with the Companies Act. The AIF Act prescribes rules specific to AIFMs which must be observed and which prevail over those of the Companies Act, such as rules on capital and members of the management and supervisory boards. An AIFM can also be established as Societas Europaea or as a branch office of an AIFM from an EU or non-EU state.
AIFMs can conduct their activities as external AIFMs managing one or more AIFs or as an internal AIF where the management board of the AIF, with the consent of the supervisory board, decides not to appoint an external AIF.
AIFMs can be further divided into small, medium and large AIFMs, depending on the value of assets under management, with respect to either one or more AIFs. Generally:
- small AIFMs manage cumulative leveraged AIFs with a total value below HRK 75 million;
- medium AIFMs manage cumulative leveraged AIFs with a total value of between HRK 75 million and 750 million, or unleveraged AIFs with a total value of up to HRK 3 billion; and
- large AIFMs manages cumulative leveraged AIFs with a total value of between HRK 750 million and 750 billion, or unleveraged AIFs with a total value of between KRK 3 billion and 3.75 trillion, and where investors cannot redeem their shares or units within five years of the investment start date.
Additionally, AIFMs managing AIFs marketed to retail investors must be established as large AIFMs, irrespective of the value of assets under management.
Answer ... Decisions on the structure will depend on the interests of the founders. Some basic rules of the AIF Act apply to all categories (small, medium and large AIFMs); but as the value of assets under management increases, the AIFM becomes subject to more detailed regulation. Meanwhile, certain options are not available to AIFMs that are smaller in both size and capital worth.
For example, small and medium AIFMs cannot:
- perform auxiliary services, as explained in question 4.10;
- manage or market the shares of AIFs in another EU member state or third country;
- market the shares of non-EU AIFs in the European Union; or
- use leverage or acquire control over unlisted companies.
However, small and medium AIFMs are also more flexible, in that:
- they can appoint only one management board member (instead of the two that are mandatory for large AIFMs);
- they are not subject to a provision requiring them to contribute an additional amount of capital where certain prescribed conditions are fulfilled;
- they need not establish a remuneration policy; and
- small AIFs need not establish a compliance function, internal audit function or risk management system.
As regards capital requirements:
- large AIFMs must contribute capital in a minimum amount of HRK 2.4 million for closed-ended AIFs with internal management or HRK 1 million for external management;
medium AIFMs must contribute capital in a minimum amount of HRK 1.8 million for closed-ended AIFs with internal management or HRK 750 million for external management; and
small AIFMs must contribute capital in a minimum amount of HRK 1.2 million for closed-ended AIFs with internal management or HRK 500 million for external management.
In all cases the shares must be paid up in full in cash before registration with the court registry.
Answer ... AIFMs must be authorised by the Croatian Financial Services Supervisory Agency (HANFA) before they are registered with the competent court registry and thereby established. Authorisation is issued for an indefinite period, cannot be transferred and is not valid for the legal successor of an AIFM. The request for authorisation must be submitted by the founders of the AIFM. The request for authorisation can also be submitted for an existing joint stock company or limited liability company, in which case the request must be submitted by the management board members. As explained in question 3.2, when incorporating a closed-ended AIFs with internal management, HANFA shall issue authorisation for both the AIFM and the AIF in a single procedure, and the request must be supported by all documentation required for the authorisation of both.
Large AIFMs can also provide auxiliary services such as portfolio management, investment consulting and repository and administration with respect to the units or shares of investment funds, in which case authorisation must also be requested for the provision thereof. A separate request is not required for the provision of auxiliary services. An AIFM may widen the scope of its activities after incorporation, but must submit a request for authorisation before such activities are registered with the court registry.
Answer ... HANFA shall issue authorisation if all provisions relating to the following are fulfilled:
- the shares of the AIFM;
- the minimum capital of the AIFM;
- the holders of qualified shares;
- close links;
- management and supervisory board members; and
- organisational requests.
Potential management board members of AIFMs and closed-ended AIFs with internal management and supervisory board members must meet conditions prescribed by the AIF Act and subordinate regulations, and must be authorised by HANFA before being appointed. The management board must have at least two members for large AIFMs, but only one member for medium and small AIFMs, appointed for a maximum period of five consecutive years. Qualified shareholders must also meet certain conditions in order to be entitled to acquire qualified shares of AIFMs, as explained in question 4.8, and must be approved by HANFA. The conditions regarding the shares and capital of AIFMs are set out in questions 4.1. and 4.2. Lastly, AIFMs must implement an organisational structure that is appropriate with respect to the types of AIFs under management and covering issues such as:
- the adoption of decisions;
- administrative and accounting practices;
- supervision and protection measures for information systems; and
- procedures to ensure appropriate investment of assets.
In practice, this means that before the request for authorisation is submitted, all documents relevant for the establishment and conduct of business must be prepared and adopted - where necessary, before a public notary; and all persons that will be effectively conducting the business fulfil all prescribed conditions.
Answer ... HANFA must decide whether to grant authorisation within three months of receipt of a full complete request containing everything prescribed by law. This deadline may be extended for an additional three months where HANFA deems this necessary due to the specific circumstances of the individual case.
Answer ... With respect to operating conditions, an AIFM must establish, implement and maintain policies and procedures that include the following:
- an effective policy on conflicts of interest;
- policies and procedures to ensure that the AIFM is conducting its business in accordance with all mandatory provisions;
- policies and procedures for the management of risks to which the AIFM or AIFs under management are exposed, including assessment of the credit ratings of entities in which the AIFM plans to invest its own assets or the AIFs’ assets;
- the maximum level of leverage which they may employ on behalf of each AIF under management, as well as the extent of the right to reuse collateral or guarantees that could be granted under the leveraging arrangement;
- measures to reduce exposure to securitisation if that is in the best interests of investors and if the securitisation does not fulfil the conditions prescribed by Regulation 2017/2402;
- an appropriate liquidity management system for each AIF under management which is not an unleveraged closed-ended AIF;
- procedures to facilitate the uninterrupted and regular conduct of business;
- remuneration policies which promote and maintain effective risk management; and
- clear and transparent procedures on document management and the archiving of all documents relating to the conduct of business.
The implementation of the measures and procedures listed above will depend on the type, scope and complexity of the activities conducted by the AIFM, as well as the investment strategies and the value of assets under management. Thus, the obligation to implement them and the contents thereof will vary on a case-by-case basis.
Answer ... The shares of closed-ended AIFs with legal personality can be issued and transferred in accordance with the provisions of the Companies Act. In general, the shares of both types of companies are freely transferable, but the articles of association may impose various restrictions on such transfer. New shares may be issued through an increase of capital of AIFs, based on the decision of the shareholders.
In general, the shares of AIFs without legal personality are freely transferable, whether by way of sale or encumbrance. However, shares may be transferred only to eligible investors in AIFs, and any additional rules and conditions on the transfer of shares imposed by the AIF’s rules or prospectus must be fulfilled.
Closed-ended AIFs by their nature restrict the possibilities for the redemption of shares. Shares of open-ended AIFs are redeemable upon the request of the investor, provided that all conditions set out in the AIF’s rules or prospectus are fulfilled. The AIF’s rules may impose certain restrictions on redemption to ensure liquidity, such as side pockets, lock-up periods or gates. An investor may request redemption of shares provided that it is entitled to freely dispose thereof.
Under the AIF Act, the redemption and issuance of shares may be suspended by the AIFM and the depositary if there are justifiable reasons and such suspension is in the interests of investors or potential investors. HANFA may order a suspension for the same reasons. The suspension must be lifted as soon as possible and in any case after 28 days, although this deadline may exceptionally be extended by HANFA.
Answer ... In order to acquire qualified shares in AIFMs, certain conditions must be met. Under the AIF Act, a ‘qualified share’ is any direct or indirect share in an AIFM representing 10% or more of the share capital or voting rights, or a smaller share allowing the holder to exercise significant influence over the management of the AIFM. The AIF Act does not contain provisions regulating such conditions, but refers to the Act on Open-Ended Funds with Public Offerings (Official Gazette 16/2013, 143/2014, 44/2016.). HANFA will authorise the acquisition or transfer of a qualified share in an AIFM if it makes a positive assessment of the appropriateness, suitability and financial stability of the qualified shareholder, taking into account:
- its reputation;
- the reputation and experience of the persons proposed by the qualified shareholder of the qualified shares as management or supervisory board members;
- the financial stability of the qualified shareholder;
- whether it will be possible for the AIFM to continue to comply with mandatory provisions, and especially whether the AIFM has the necessary structure for effective supervision; and
- whether there is a justified suspicion that shareholders or qualified shareholders of the AIFM have committed or attempted to commit criminal offences of money laundering or terrorist financing.
HANFA shall make this assessment based on the documents delivered with the request for authorisation of the AIFM or before registration of the qualified shareholder with the court registry, which is a precondition for the acquisition of a share in an AIFM.
Answer ... An AIFM may delegate its activities to a third party, provided that it has previously informed HANFA accordingly. If the AIFM has AIFs with public offerings under management, asset and risk management and valuation of the AIF’s assets may be delegated only with the prior authorisation of HANFA. Delegation must be based on a written agreement which contains an express provision obliging the third party to enable supervision by HANFA.
Certain conditions must be met for the delegation to be valid - for example:
- the third party must have the necessary expertise and qualifications;
- the delegation may not leave the AIFM as a ‘letterbox’ company;
- activities cannot be delegated to a third party where there is a conflict of interest;
- the delegation cannot jeopardise the interests of investors;
- the AIFM must remain fully liable for the conduct of delegated activities; and
- asset and risk management can be delegated only to entities that hold appropriate authorisation or other permit and are subject to supervision (otherwise, the delegation must be authorised by HANFA).
Moreover, asset and risk management cannot be delegated to the depositary, an entity to which the depositary has delegated part of its activities or another entity whose interests may conflict with those of the AIFM, the AIF or investors, unless such entity separates asset and risk management from the other activities it conducts.
In general, when delegating, the AIFM must act with all necessary expertise and diligence, and in the best interests of investors.
Answer ... Only large AIFM (as defined in question 4.2) may provide auxiliary services such as portfolio management, investment consulting and repository and administration with respect to units or shares of investment funds. From the wording of the relevant provision, it may be concluded that such services may be provided to third parties where this accords with the provision in Directive 2011/61/EU stating that external AIFMs should not be prevented from additionally providing the service of management of investment portfolios under mandates given by investors on a discretionary, client-by-client basis.
When providing such services, the AIFM must observe the provisions regulating the financial markets. The AIFM can also manage undertakings for collective investment in transferable securities (UCITS) funds, provided that it has been authorised by HANFA in accordance with the law regulating the management of UCITS funds; and for investment funds incorporated under special regulations if authorised by HANFA in relation thereto.
An entity that is not authorised to provide services relating to the management of AIFs cannot be authorised under the AIF Act to provide auxiliary services. An AIFM that is not authorised to provide portfolio management services cannot be authorised to provide services relating to investment consulting and repository and administration.