Public Offering of Foreign Mutual Funds in Israel

Dear friends and colleagues,

In our previous memoranda we described draft legislation, which will eventually enable the public offering of foreign mutual fund units, including exchange traded funds (“Units“), in Israel. In July 2014 an amendment to the Joint Investment Trust Law, 1994 was published after being approved by the Israeli parliament (Knesset). This amendment allows the Minister of Finance to determine conditions, as well as impose obligations, under which the Israel Securities Authority (“ISA”) may permit a public offering of Units, provided that the offering guarantees the interests of Israeli investors and that Units are offered in accordance with the approval of regulatory agencies in the state of origin.

This amendment, that will come into effect with the proposed regulations (if approved), enables a foreign fund manager (the “Manager“), upon receipt of approval from the ISA, to publicly offer Units to retail clients in Israel, relying on reports issued by such Manager in its country of origin. Such offering can be made through local or foreign investment advisors and/or through the Tel Aviv Stock Exchange.

The ISA has published a second draft of the proposed regulations (the “Proposed Regulations“) after receiving comments from Israeli and foreign institutions. The Proposed Regulations are subject to approval of the Knesset Finance Committee, which is not expected to be assembled until after the upcoming elections to the Knesset, in mid-March 2015.   According to the Proposed Regulations, in order to be granted approval by the ISA to publicly offer the Units of a foreign fund (the “Fund“) in Israel, certain criteria must be met, including:

  1. the Manager must manage no less than five funds that have been publicly traded for at least five years, with each such fund having assets with a total value of at least US$500 million during the preceding two years;
  2. the total value of the assets and client portfolios under management of the Manager, any person controlling the Manager and any entity controlled by such controlling person, must be at least US$20 billion;
  3. the value of the Fund’s net assets must be at least US$50 million;
  4. the Units can be purchased in Europe or the United States for at least the preceding 6 months;
  5. the Fund must operate under the U.S. Investment Company Act or the European directive UCITS;
  6. the Fund prices are published on an ongoing basis and are freely available online;
  7.   the Fund cannot specialize in investments in Israel;
  8.  the Manager must deposit a bank guaranty, issued by an Israeli bank, for at least ILS 1 million (~US$256,000) (the “Guaranty Amount“) in favor of the ISA, or deposit the Guaranty Amount or securities with the value of the Guaranty Amount in an Israeli bank deposit;
  9. the Manager must also deposit in an Israeli bank a cash deposit in a sum between ILS 250,000 (~US$64,000) and ILS 12,000,000 (~US$3,075,000) or securities with such value, with the actual amount based on the value of Units held by Israeli distributers;
  10. the Manager must appoint a representative in Israel to serve as a liaison between the Manager and the ISA and the Units holders in Israel.

The Proposed Regulations, if approved, may very wells revolutionize the Israeli mutual fund market, particularly with respect to funds that invest in securities outside of Israel.

This publication provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances.

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