It Took 20 Years… But The Norwegian Mass Market Is Finally Open To European Hedge Fund Managers

Investment funds for sale to the general public – in other words, open-ended collective investment structures of which shares may be redeemed on a regular basis and of which investment objectives are financial instruments – have traditionally been strictly regulated in Norway.  A provisional act from 1970 provided the first regulatory requirements for marketing of Norwegian investment funds to the general public.  The main reason for the act, which made the establishment of investment funds subject to authorisation requirements, was to protect the public against an increasing number of foreign investment companies operating in Norway in the late 1960s and the early 70s.  The provisional act did not, however, establish a regulatory regime for the corporate body of investment funds or management companies, and was replaced by the Investment Fund Act 1981 (the “IFA”).  The IFA partly built on OECD’s Resolution (72)28 Relating to investment funds, and introduced the tripartite functional solution between the investment fund, the management company and the depositary, which is also a key feature of the later UCITS Directive of 20 December 1985.
 
Marketing of investment funds in Norway was restricted to locally established investment funds until the UCITS Directive was implemented in Norway in 1993, as part of the EEA agreement.  From 1 January 1994, foreign UCITS could be marketed in Norway, following a simplified notification procedure with the Norwegian regulator, the Financial Supervisory Authority of Norway (the “FSAN”).  At the time, marketing of non-UCITS such as, e.g., hedge funds, fell outside the scope of the IFA.  The IFA was amended in June 2001 to legislate against what was considered regulatory inconsistency, as marketing of Norwegian domiciled investment funds and foreign UCITS’ was strictly regulated, while marketing of foreign non-UCITS’ fell outside the IFA and was unregulated.  With effect from August 2001, the IFA was amended to the effect that non-UCITS’ could only be marketed in Norway provided the marketing of the fund had been pre-approved by the FSAN.  Approval to market a foreign non-UCITS required a number of conditions to be met, most notably that the fund manager had to be authorised to carry out fund management and subject to satisfactory supervision in the manager’s home state, that a satisfactory co-operation agreement on supervision was in place between the FSAN and the fund manager’s home state regulator, and further that the home state legislation of the fund manager and the non-UCITS (if established in another jurisdiction than the fund manager) gave investor protection equal to that of the IFA.  The latter requirement proved to be an effective barrier against marketing of hedge funds in Norway, as the FSAN interpreted the requirement to imply that a foreign non-UCITS could not be marketed in Norway unless the fund could have been established within the framework of the IFA.  In effect, this was a closed circle, as the FSAN did not allow Norwegian investment fund managers to establish hedge funds in Norway.  Due to these restrictive regulatory requirements, with the addition of a rather long-only focused investor community, very few hedge funds are to this day being managed out of Norway. 
 
As the IFA neither allowed for general marketing, nor permitted private placements of shares or units in non-UCITS’, the Norwegian market was – on paper - effectively closed for managers of open-ended hedge funds from August 2001.  Closed-ended funds were considered to fall outside the scope of the IFA, however, and could be marketed and offered in Norway, provided a few other requirements were met. 
 
From a market perspective, the first part of the decade saw a significant increase in the marketing and sale of hedge funds in Norway from foreign fund managers and other players.  While the direct marketing to Norwegian investors remained prohibited, there was a significant increase in indirect marketing through domestic portfolio managers (managed accounts), and also one-on-one marketing directed against regulated and institutional clients, despite the general prohibition.  In 2003, the Ministry of Finance requested the FSAN to consider if the establishment of hedge funds should be permitted in Norway and if so, if a marketing prohibition should be limited to non-professional investors.  The FSAN reverted with a white paper in 2004, where they suggested that hedge funds could be established in Norway and marketed to professional investors, and to non-professional investors as well, subject in the latter case of a minimum subscription requirement per investor of NOK 5 million (EUR 625,000 at EURNOK 8.0) and a “net wealth requirement” per non-professional investor of NOK 5 million.  It took another 3 ½ years before the Ministry of Finance at the absolute peak before the financial crisis suggested new rules in March 2008 – albeit somewhat different from the FSAN’s original proposal - to allow for the establishment, marketing and sale of hedge funds in Norway.  The decade however ended without these rules coming into force, mostly due to the financial crisis and the political climate certainly not being in favor of opening up for “speculative” hedge funds and the likes of them.  It took almost another 2 ¼ year before the new rules came in force, in 2010.  From 1 July 2010, open-ended hedge funds could be established in Norway, and both locally established and foreign open-ended hedge funds could be marketed to professional investors in Norway, provided a number of requirements were met, most notably that the foreign fund provided equal investor protection to that of a locally established hedge fund (this criterion caused a number of difficulties between fund managers and the FSAN), and that a “satisfactory” co-operation agreement on supervision was in place between the FSAN and the home state regulator of the fund manager, and between the FSAN and the home state regulator of the fund, if the fund was established in another jurisdiction than the fund manager.  It took almost six months before the FSAN actually approved foreign (European) hedge funds for marketing in Norway, and another 2 ½ years before the first offshore funds were approved by the Ministry of Finance for marketing to professional investors in Norway, the latter against the FSAN’s will, having first rejected such applications. 
 
The mass market remained closed for managers of hedge funds, though, until the AIFMD was implemented in Norway on 1 July 2014.  From that of, hedge funds and other non-UCITS being managed by European fund managers can be marketed and sold to non-professional investors in Norway, provided that the fund manager in question is authorised as an AIFM under the AIFMD.  A few other requirements apply as well, the main ones being that the investor must pass a MiFID suitability test, that the fund manager must publish a key investor information document, and that the FSAN shall pre-approve the marketing of the fund (AIF) in question.  Marketing in Norway of hedge funds (now defined as “AIFs”) to non-professional investors remains prohibited for non-European hedge fund managers (non-EEA AIFMs), and for European hedge fund managers (EEA AIFMs) who are not authorised, but only registered, under the AIFMD. 
 
From UCITS to non-UCITS in Norway - it took 20 years.