I OVERVIEW OF RECENT ACTIVITY
From a public finance point of view, Norway is in an advantageous situation with negligible public deficits and substantial – relatively speaking – financial resources in its ‘Petroleum Fund’ (see Section VI.v, infra). This state of affairs is, at least partly, due to income from oil and gas extraction and the high level of activity related to this sector for several years leading up to 2015. The economic growth spurred by the oil and gas sector has benefited the mainland economy, making Norway an attractive investor market (relative to its size) for both foreign and domestic asset managers. With a combination of an open market and a rather primitive legal framework for Norwegian asset managers, the Norwegian asset management industry has only partially been able to capitalise on a strong domestic market to make forays into other investor markets. The abrupt and relatively large drop in crude prices that started at the end of 2014 has now begun to have effects felt in the Norwegian economy. Oil exploration has been reduced (with a number of fields proving unsustainable under current oil prices) and activity in the oil services industry, where several companies are private equity-owned, is severely reduced. This development has brought with it reduced investment activity by private equity funds with respect to oil and gas. The oil extraction industry – and as a corollary the oil services industry – has also been affected by a controversy surrounding the repartition of stakes between different firms in the Sverdrup oil field, the biggest discovery and largest offshore development in Norway in decades. Waiting for a stabilisation of prices, sellers are generally unwilling to accept prices perceived to be too low, while buyers are unwilling or unable to offer what they perceive to be too-high prices. In other sectors, and notably the retail sector, investment activity seems less affected.
Following 2014, which saw the highest fundraising level since 2001 for private funds with 18 billion kroner raised by Norwegian managers, 2015 showed the lowest level since 2001. The number of Norwegian managers of private funds is relatively low and variations between vintages are large. Apart from Norwegian oil and gas specialist fund adviser HitecVision, which raised its largest fund ever at US$1.9 billion,2 fund raising was also relatively low in 2014. Even so, the low level of fundraising in 2015 (0.9 billion kroner) and the total absence of funds raised in the buyout segment may indicate some market uncertainty. Over 2015 as a whole, both investment activity and divestments by private funds were at the highest levels ever recorded (8.5 billion kroner), exceeding those of 2014 (6.7 billion kroner).
The mutual funds market is dominated by a small number of large managers, such as the major banks and credit institutions (e.g., DNB, KLP and Nordea) and the management company Skagen. Total assets under management by Norwegian mutual fund managers amounted to 904 billion kroner at the end of 2015, compared with 814 billion kroner at the start of that year.3 Both net subscriptions and returns fell, compared to the previous year. Net subscriptions (excluding reinvestments) amounted to only 3.4 billion kroner (compared to 95.5 billion kroner the previous year), following large redemptions from non-Norwegian investors. The funds achieved returns equal to 68 billion kroner (compared to 77.8 billion kroner the previous year). Results were affected negatively, with issuers at Oslo Børs losing market value due to the effects of the reduced oil prices.
No new hedge funds managed by Norwegian managers were established in 2015, after the Incentive Active Value Fund launched in 2014, managed by Incentive AS under the Sector Asset Management umbrella. It remains to be seen whether Norwegian managers may capitalise upon the perceived larger demand for alternative investments by institutional investors, such as pension funds and life insurers.
Unregulated funds make up a significant portion of collective investments in Norway in both the retail and professional markets. This is particularly the case within real estate investments, which is an important asset category in both the institutional and retail investor markets. For such funds, no official or public figures currently exist. With the implementation of the AIFMD4 and reporting requirements for all Norwegian AIFMs, statistics will become available, thereby creating a more transparent fund landscape. At present, the Financial Supervisory Authority of Norway (FSAN) has registered a total of 251 Norwegian alternative investment funds (including regulated mutual funds that are AIFs). A total of 33 managers have been authorised as alternative investment fund managers (including managers of regulated mutual funds that are AIFs), and 67 such managers are registered with the regulator. Although no official statistics exist, the number of real estate funds has been reduced over the past couple of years, due mainly to developments in the credit and real property markets. Among the first Norwegian managers to obtain authorisation to market an alternative investment fund to retail investors was real estate manager NRP Asset Management AS, with its 2015 fund raised at the end of 2014. Longstanding real estate fund manager Union Eiendomskapital also raised its largest fund (Union Real Estate Fund) at the beginning of 2015, reaching 1.5 billion kroner.
II GENERAL INTRODUCTION TO the REGULATORY FRAMEWORK
Norway is a Member State of the European Economic Area (EEA). As such, Norway has implemented most EU legislation concerning asset management and securities trading (see below). The main body of legislation regulating asset management (whether as part collective investment schemes or insurance companies and pension funds) consists of EU legislation implemented in Norwegian law. Since the entry into force of the EEA Agreement, Norway has generally implemented EU legislation with great assiduity, and often chosen stricter regulation where possible. This changed following the establishment of the EU system of financial supervision in 2011.
The EU supervisory organisations, the European Banking Authority, the European Securities and Markets Authority, the European Insurance and the Occupational Pensions Authority, hold competencies that are partly supranational. These run afoul of the principle of the EEA Agreement, whereby no sovereignty shall be relinquished by the EEA Member States, and which was an important issue for Norwegian authorities when entering into the EEA Agreement. Consequently, financial legislation passed since this time has not been incorporated into the EEA Agreement. Some such legislation has been implemented in Norwegian law on a ‘look alike’ basis (e.g., Solvency CRD IV/CRR). In terms of these pieces of legislation, it remains somewhat unclear whether Norway is considered to be a non-EU country (third state) or not.
On 14 October 2014, the European Free Trade Association and the EU reached an agreement concerning the incorporation of the EU Regulations establishing the European Supervisory Authorities into the EEA Agreement and integration into the EU system of financial supervision.5 The agreement was approved by the Norwegian parliament in June 2016.
The high level of change in EU financial legislation since the financial crisis in 2008, combined with the unresolved supervisory question, have led to delays in the implementation of several pieces of EU financial legislation in Norway. This concerns the European Market Infrastructure Regulation (EMIR), the Short Selling Regulation, the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD) and the recast capital requirements directive (CRD IV with appurtenant regulations),6 Solvency II,7 as well as the regulations concerning European venture funds and social entrepreneurship funds, the ELTIF regulation for long-term investment funds, the revised market abuse rules, etc.
Following the approval agreement concerning the EU financial supervisory system, outstanding legislation is expected to be incorporated into the EEA-Agreement as soon as possible. More recent pieces of legislation, such as MiFID II and the Insurance Distribution Directive, will likely be implemented within their EU transposition deadlines.
The following is restricted to Norwegian law, and where stated, Norwegian regulation of foreign entities’ activity in Norway on a cross-border basis.
With regard to collective investment schemes, these are both regulated and unregulated under Norwegian law (at the fund level). From a regulatory point of view, a distinction can be made between three types of schemes: mutual funds that are UCITS funds;8 non-UCITS mutual funds; and other collective investment schemes.
UCITS funds and non-UCITS mutual funds fall within the scope of the Norwegian Investment Fund Act (IF Act). Such funds may (if established in Norway) only be organised, managed and marketed according to the rules of the IF Act (and appurtenant regulations). Whether a collective investment scheme is a mutual fund falling within the scope of the IF Act must be assessed on a case-by-case basis. As a general rule, all open-ended funds investing in financial instruments9 and bank deposits fall within the scope of the IF Act. Managers of non-UCITS mutual funds exceeding the threshold values of the AIFMD (€100 million under management) are regulated by the Norwegian Alternative Investment Fund Manager Act (AIF Act), implementing the AIFMD), meaning that such managers must be authorised AIFMs and comply with the AIF Act. Sub threshold managers may ‘opt in’ in order to in the future benefit from the marketing provisions of the AIF Act in other EEA jurisdictions.
Currently, several categories of investment funds (at the fund level) are unregulated in Norway (essentially all types of funds other than mutual funds regulated under the IF Act). Closed-ended funds, and open-ended funds investing in asset classes other than financial instruments and bank deposits (e.g., real property, commodities (directly and not in derivatives), generally fall outside the scope of the IF Act. Such schemes are unregulated in Norway. Following entry into force of the AIF Act on 1 July 2014, the management and marketing of shares in such funds are regulated under the AIF Act.
The AIF Act and the implementation of the AIFMD in Norway are to a large extent based on a copy out approach, with little to no ‘gold-plating’. Norway has implemented the AIFMD thresholds, allowing for light-touch regulation of asset managers of smaller funds that are not mutual funds (in simple terms, less than €500 million for closed-ended funds and less than €100 million for open-ended funds). Managers of below-threshold funds may ‘opt in’ to benefit from the marketing provisions of the AIF Act in the future. Management of Norwegian unregulated funds by managers falling below the threshold values of the AIFMD and established in Norway will remain unregulated (although the manager will have to register with the regulator, the FSAN).
The impact of the AIF Act with its new marketing rules has made itself felt, in particular from 1 January 2015, which signalled the end of grandfathering provisions. The AIF Act introduced common marketing rules for all types of alternative investment funds (both those falling within and outside the scope of the IF Act). Since that date, the FSAN has focused on monitoring marketing carried out by sub threshold managers, as such managers no longer may market to non-professional investors (without opting in).
The marketing rules are dependent upon the jurisdiction of the manager and the fund. The AIF Act implements the ‘private placement’ provisions with respect to funds and managers established outside the EEA (requiring prior authorisation from the FSAN, however, rather than relying on notification). Offshore managers of closed ended funds (private equity funds) and domestic managers of real estate funds, in particular, are faced with a completely new regulatory regime, as such managers previously were unregulated and could market their funds without restriction to all categories of investors in Norway.
As the AIFMD has not been incorporated into the EEA agreement, and the AIF Act does not implement the AIFMD provisions concerning ESMA, other EU Member States may deny passporting marketing rights for Norwegian authorised AIFMs. The AIF Act, however, provides access for (authorised) EU AIFMs to market their funds in Norway following the AIFMD notification procedure.
If the interests issued by unregulated investment funds are financial instruments (shares), then services related to such shares (such as arrangement services or second-hand share sales) constitute investment services that fall within the scope of the Securities Trading Act (ST Act). The ST Act, with appurtenant regulations, implements EEA rules corresponding to MiFID. In addition, the offer of such shares may trigger a requirement to publish a prospectus under the public offering rules of the ST Act, unless an appropriate exemption is available. Shares in limited partnerships are not viewed as financial instruments (transferable securities) under Norwegian law, meaning that prospectus requirements do not apply to offerings of interests in such funds.
Provision of investment services on a professional basis (i.e., not in an incidental manner) related to limited partnership interests requires a corresponding licence under the ST Act (alternatively for foreign firms, a passport for providing such services in Norway). A licence is not required when services are provided in relation to interests with a minimum commitment of 5 million kroner (or the equivalent in another currency), or the client is a professional client as defined in MiFID Annex II Section I (per se professional clients and not elective professional clients). The purpose of this requirement was to regulate retail sales of closed-ended funds after what has been perceived as mis-selling of shares in such funds to retail clients, especially real property funds, feeder funds of private equity funds or fund of funds in such categories. After the entry in effect of the AIF Act, this is largely regulated by the marketing rules of that act (with respect to the primary market).
Individual portfolio management is an investment service under the ST Act, and subject to the rules and appurtenant regulations of the ST Act. Only investment firms and credit institutions authorised under the ST Act, management companies for mutual funds or AIFMs authorised to provide portfolio management (as an ancillary service) may provide portfolio management services.
Activity falling within the scope of the IF Act, the AIF Act and the ST Act is under the supervision of the FSAN.
Asset management carried out by insurance companies and pension funds is regulated through the insurance company legislation and under the supervision of the FSAN. Norway has implemented the Solvency II capital adequacy rules for insurance companies with effect from 1 January 2016 (on a ‘look alike’ basis, see above). The main rule applicable to their asset management is that it shall be prudent. This requirement concerns both the investment process and the placements themselves. Pension funds are not subject to Solvency II, and are still subject to Solvency I-based rules. This means that pension funds are subject to detailed rules on placements of capital covering technical reserves (see Section VI.i, infra). The Ministry of Finance is currently assessing whether pension funds shall be subject to simplified Solvency II capital requirements, in order to establish more risk sensitive capital requirements. Whether or not this leads to similar liberalisation of investment rules remains to be seen.
III COMMON ASSET MANAGEMENT STRUCTURES
As mentioned in Section II, supra, collective investment schemes established in Norway fall within the IF Act, or outside specific regulation (at the fund level).
Funds that are regulated under the IF Act are required to be organised as contractual (rather than corporate) mutual funds under that Act. This is a specific form of organisation that, as a general observation, implies close links between the management company and the funds managed by such company. For example, shareholders in the funds are entitled to elect a number of members of the board of the management company (and the management company obliged to appoint such board members). The fund has a legal personality, but all dispositions shall be taken by the management company.
Norwegian company law is generally not adapted to organise open-ended fund structures, as Norwegian limited company law does not recognise limited companies with variable capital. Unregulated (closed-ended) funds are almost without exception organised as corporate structures (private limited companies), partnerships or silent limited partnerships.
Before June 2010, Norwegian legislation did not allow for the establishment of hedge funds in Norway. Pursuant to an amendment of the IF Act enacted in 2010, such funds may be established and marketed under the IF Act. Because of this legislation having entered into effect relatively recently, many Norwegian promoters of hedge funds have traditionally chosen to establish funds in other fund jurisdictions, such as Ireland, Luxembourg or Malta. Such funds have been and continue to be managed by Norwegian teams under delegation arrangements with self-managed corporate fund structures (plc or SICAV). Such managers have previously been subject to the ST Act, and required to be authorised as an investment firm providing the investment service of portfolio management. Following the entry into effect of the AIF Act, such managers will typically (depending on the organisation of the relevant fund structure) be required to be authorised under the AIFMD.
No changes have been made to the IF Act with the implementation of the AIFMD (except certain changes to the marketing rules). Nor has any new fund legislation been proposed or passed. Norway therefore lacks appropriate legislation (or infrastructure) to be an attractive jurisdiction for fund establishment. The Ministry of Finance is currently in the process of implementing the regulations underpinning European Venture Capital Funds (EuVECAs), European Social Entrepreneurship Funds (EuSEFs) and European Long Term Investment Funds (ELTIFs). These EU regulations will represent wholly new types of regulated investment vehicles in Norwegian law.
Authorised AIFMs are required to appoint a depository to their funds. This includes unregulated funds not previously subject to such a requirement. There are a limited number of available service providers in this segment, and this may prove a bottleneck for the establishment of new funds for at least a certain period of time.
Since the entry into force of a new Act on Financial Undertakings and Financial Groups on 1 January 2016, Norwegian law no longer allows for the establishment of securitisation vehicles. It is expected that Norway will implement any EU securitisation rules as part of the Capital Markets Union initiative.
One relatively recent development in the retail segment of asset management is an increase of assets held through unit link insurance policies. Several Norwegian insurance companies offer unit link life insurance, which offers policy holders the opportunity to invest in a number of assets (although mainly mutual funds and listed instruments) as underlying in a unit link insurance contract. Increased popularity may, in part, be ascribed to the tax rules that make holding investments through a unit link insurance more favourable (for private individuals) compared to holding directly or through mutual funds. Insurers generally provide web-based tools for investors to monitor and make changes to their portfolio, without triggering taxation. The government has announced the possibility of changes to general tax rules in order to avoid different tax treatment of what – in substance – are similar-type investment products.
IV MAIN SOURCES OF INVESTMENT
The market turmoil of 2008 and its effect on the sovereign debt market in Europe brought changes in the market for both mutual funds and private equity in Norway, concerning both the size and makeup of investors.
One key trend, only recently reversed, has been a decline in funds stemming (directly) from retail investors. Indirect investments from such clients through life insurance companies and pension funds have, however, continued to grow. In addition, the government – through various investment companies – constitutes a sizeable investor in the Norwegian financial markets in listed securities, private equity and the venture and seed segment (see Section VI.v, infra). One notable absence is the lack of investment in infrastructure through market-based vehicles. The latter may change with the implementation of the ELTIF regulation, which allows for marketing to non-professional investors.
With regard to private equity funds, fund raising levels in 2015 were at the lowest level since 2001, with no new funds being raised in the buyout segment, and only smaller funds within the seed and venture segments.
It is worth noting that the government is a heavy investor in Norwegian private equity funds (e.g., through the government-owned investment company Argentum Fondsinvesteringer AS and its affiliates). The government has established a seed fund initiative through Innovasjon Norge (a government-funded initiative for development of Norwegian businesses). Alliance Venture Spring and ProVenture Management have been appointed as the managers for the new seed funds. Each fund will have commitments equal to approximately 500 million kroner, of which 50 per cent will be taken up by the government. As mentioned above, Norway has not implemented the venture fund regulations. As a consequence, the seed funds will only to a limited degree be able to market interests outside Norway and attract foreign investors.
With regard to Norwegian mutual funds, the majority of assets under management stem from Norwegian institutional clients (representing 515 billion kroner at the end of 2015).10 Norwegian retail investors hold 287 billion kroner (including holdings through pension savings schemes where the client elects underlying), while foreign investors (all categories) hold 103 billion kroner of assets under management in Norwegian mutual funds, foreign investors representing a net minus with redemptions amounting to 24 billion kroner. Note that these figures do not include mutual funds established in other states and managed by a Norwegian manager (see also Section VI.iii, infra).
V KEY TRENDS
i Intensified competition
In general, the Norwegian economy weathered the effects of the global financial crisis without experiencing significant difficulties. This is at least partly because of Norway’s income from petroleum and gas extraction, providing the state with significant and steady tax income. The market turmoil of 2008 led to a shrinking market and increased competition among asset managers and managers of mutual funds for the remaining market share. In turn, this led to pressure on fees and heightened demand for returns. On the regulatory side, the FSAN has forced both DNB Asset Management (the asset management arm of Norway’s largest bank) and Nordea to take fee cuts on some of their mutual fund offerings boasting ‘active management’. The FSAN found the funds to be ‘closet index funds’, where the fees imposed on investors did not provide the investors with any realistic chance for higher returns. The consumer organisation Forbrukerrådet has since spearheaded a class action law suit against DNB claiming damages on behalf of 150,000 investors.
This is likely to strengthen the commoditisation of index funds, exemplified by the ‘Superfondet’ fund, launched as a promotional measure by the retail internet bank and investment platform Nordnet, charging no fees whatsoever. We are now seeing signs that some new market equilibrium has been reached. The fall in oil prices has been a negative factor for issuers listed on the Oslo Stock Exchange, and losses typically lead to mutual funds falling out of favour with retail investors in the short term. The total number of funds was reduced from 441 in 2014 to 404 at the end of 2015, illustrating a consolidation.11
Total assets under management by individual portfolio managers (investment firms) in Norway amounted to 109 billion kroner at the end of 2015, compared to 541 billion at the end of 2014. The main reason for this severe decrease is a reclassification from (individual) portfolio management under the ST Act to collective portfolio management under the AIF Act, where such mandates have been given by entities that are alternative investment funds.
Norwegian private equity promoters have, for a number of years, been successful in raising new capital for investment. 2015, however, saw the lowest level of fundraising since 2001. This is partly due to effects of vintage, but may also indicate changes in the investor market.
ii Regulatory development
As a member of the EEA, Norway is required to implement EU financial legislation. In this context, Norwegian authorities are currently working on the implementation of the backlog of EU financial legislation, both for pieces of legislation having been implemented on a look alike basis (such as CRD IV, Solvency II and the AIFMD), and legislation that has not yet been implemented in any way.
CRD IV has affected the investment activity of banks. Norwegian authorities chose to accelerate the implementation of the higher capital requirements under CRD IV, as well as the requirement for higher quality capital. This is related to the ongoing attention being paid to the residential real estate markets in Norway, which have experienced unabated growth since the 1990s and which, according to the authorities, may represent a systemic risk for banks as lenders. The fall in oil prices has led to reduced real estate prices in regions most affected (such as Stavanger and its hinterlands), but for the country as a whole, housing prices are still on the increase, seemingly unaffected by the effects of the lower oil price, activity level and lay-offs in the oil-related industries.
The AIF Act has already led to significant regulatory changes for Norwegian asset managers, as large areas of the industry were previously unregulated. Managers of private equity funds and real estate funds, in particular, have become regulated, and face higher costs and supervisory scrutiny.
iii Strain on regulator and legislator resources
The development of EU financial sector legislation since 2008, such as the amendments to the capital adequacy rules, the AIFMD, CRD IV and the Solvency II Directive, has led to an observable strain on the resources of the FSAN and the Ministry of Finance. The upcoming implementation of extensive EU legislation, following the resolution of the question concerning the EU system of financial supervision, will likely put a strain on the resources of the FSAN and the Ministry of Finance.
VI SECTORAL REGULATION
i Insurance and pensions
Norwegian insurance companies and pension funds are regulated under the Act on Insurance Activity No. 44 of 10 June 2005 with appurtenant regulations. The ‘institutional’ rules and capital requirements are, as of 1 January 2016, regulated under the newly adopted Act on Financial Undertakings and Financial Groups, etc. As at that date, Norwegian insurance companies are subject to rules implementing Solvency II, including with respect to investment freedom and qualitative investment rules (the ‘prudent person principle’).
Previously, for both life and non-life companies, a maximum of 10 per cent of their total technical reserves could be invested in miscellaneous assets. This category consisted of non-listed equity and fixed income investments, including loans and various collective investment vehicles that fell outside UCITS. Hence, investments in, inter alia, private equity funds, offshore funds, European or offshore domiciled hedge funds (including special funds: see below) fell into this category of investments. The new rules have not yet produced any significant changes to the asset allocation of insurers, but this may change over time.
Pension funds are still subject to the Solvency I-based legislation and provisions, requiring that assets covering technical reserves are invested prudently, duly taking into account security (risk), diversification, liquidity and potential return. Further regulations have been adopted under this provision12 containing specific investment restrictions for assets covering technical reserves. In brief, pension funds may only invest assets covering the technical reserves in equity and fixed-income instruments, loans, real property and infrastructure (directly).
ii Real property
There is no specific regulation of real property funds established in Norway (see Section II, supra). Such funds typically fall outside current investment fund regulation (as they normally are closed-ended). There are two main models of organisation of real property funds in Norway: what may be termed a fund model, and an investment company model. It should be added that the number of real property funds established in Norway is generally low, and that few funds have been established since the market turmoil of 2008, which led to a fall in property prices and higher financing costs giving weaker returns in such funds.
The fund model mirrors the typical private equity fund organisation consisting of a fund and a manager or adviser. The fund will normally be organised as a silent limited partnership. Such a model may be structured in such a way that it falls outside any current regulation at the fund level, including the duty to publish a prospectus. As mentioned in Section II, supra, certain services related to partnership interests are regulated as investment services under the ST Act.
The investment company model consists of an internally managed real property investment company. The investment company will typically be a private or public limited company, and may be listed.13 The sale of shares in such companies will be subject to public offering rules, and services related to such shares (e.g., brokerage services) are investment services subject to the ST Act.
The management and marketing of real property funds, whether they are organised according to the fund model or the investment company model, are regulated by the AIF Act. Additional requirements concerning marketing to non-professional investors, requiring that the manager is authorised under the AIFMD, has led to changes in governance for funds directed at such investor categories. Specifically, management is now typically undertaken by an external and authorised manager.
iii Hedge funds
Prior to July 2010, the establishment and marketing of mutual funds that employed investment strategies similar to those used by funds regularly referred to as hedge funds were not allowed in (or into) Norway. As of 1 July 2010, amended legislation was enacted that allowed the establishment and marketing of such funds to investors qualifying as professional clients under the ST Act (both per se and elective professional clients). These rules essentially widened the scope of the IF Act to include mutual funds with investment strategies typical of hedge funds. The IF Act refers to this category of funds as special funds, and both the management and marketing of shares in such funds are regulated under the IF Act. This means that special funds are subject to regulation based on the UCITS rules, but with wide exemptions concerning investment strategies.
Special funds established in Norway may only be managed by management companies authorised under the IF Act, or foreign management companies authorised under equivalent rules in their home state. In practice, only management companies established in another EEA Member State will be eligible. Managers exceeding the threshold values of the AIF Act (€100 million or €500 million under management) must be authorised in accordance with the AIF Act (or local legislation implementing the AIFMD).
Marketing of shares in hedge funds to professional investors are (for above threshold managers) subject to the provisions of the AIF Act. It may be noted that the FSAN has held that the marketing rules of the IF Act apply to marketing of such funds. The rules are, however, substantively similar. Different marketing rules apply depending on the jurisdiction of establishment of the fund and the manager (AIFM).
Sub threshold managers may market shares in hedge funds pursuant to the rules of the IF Act. This requires prior authorisation from the FSAN, and such authorisation may only be granted if, inter alia, an agreement on supervision has been entered into between Norway and the home state of the manager of the foreign special fund, and the foreign special fund and its manager are subject to home state regulation that grants investors in Norway protection at least on par with that offered by the IF Act. In practice, authorisation may only be obtained if the manager is subject to AIFM-level regulation.
iv Private equity
There is no specific regulation of private equity funds in Norway (see Section II, supra). Such funds typically fall outside the current fund regulation (as they normally are closed-ended). However, the management and marketing of such funds is now regulated in the AIF Act.
Norwegian private equity funds have traditionally been organised according to the typical private equity fund organisation, consisting of a fund and an adviser. The fund will then be organised as a Norwegian partnership, silent limited partnership or similar foreign entity (e.g., Guernsey or Jersey limited partnerships). The AIF Act, implementing the AIFMD, relies on a different system, whereby the fund is expected to have one single manager responsible for both risk management and portfolio management, the latter including taking investment decisions on behalf of the fund. This has required some adaptations for Norwegian sponsors in order to comply with the AIF Act, while still offering investors a model they are used to. Certain advisers have chosen to offshore their operations in order to avoid changes.
v Other sectors
Other than described above, there is no other general regulation of asset management activity in Norway. With the implementation of the AIFMD, one relatively common investment product has received added regulatory scrutiny, namely project finance or syndicated projects. Project finance has been a traditional product in the Norwegian investment market, attracting investors to invest in special purpose vehicles holding one or more capital-intensive assets, often called single asset funds. Management and marketing of funds not falling within the IF Act had been unregulated in Norway prior to the advent of the AIF Act. Consequently, there have been few regulatory concerns. The AIF Act imposes several regulatory constraints, and it is therefore important to the sector to ascertain whether such project finance vehicles are ‘alternative investment funds’ in the sense of the AIF Act. This would, for example, mean that the special purpose vehicle must have a manager that is either registered or authorised. Further, marketing of shares in the vehicle will be subject to the marketing rules of the AIF Act. Under the AIF Act, marketing of alternative investment funds to non-professional investors may only be done with prior authorisation from the FSAN, and the manager will have to be authorised (and not merely registered).
The government has established two pension funds: the Government Pension Fund Global (better known as the Petroleum Fund) and the Government Pension Fund Norway.
The Petroleum Fund
The Petroleum Fund is established on the basis of a special act.14 As such, the Petroleum Fund is not a fund in the traditional sense, but a body of assets owned by the government and deposited in an account with the Central Bank of Norway.
Further, the Petroleum Fund is not a pension fund in the traditional sense: it is not liable to earmarked payments, but is rather a tool for government savings and value preservation. There is broad political consensus concerning an ‘action rule’ on the use of the state’s income from oil extraction. This action rule sets out that the annual use of funds from such income shall not exceed an estimated return on the investment of the fund of 4 per cent. The object of the action rule is to avoid macroeconomic stress and inflation in Norway due to excess public spending. As a consequence, the Petroleum Fund is less exposed to liquidity stress than a typical investment fund. Although a political majority may choose to reorganise or liquidate the Petroleum Fund in part or in whole, the curbed spending of income from oil and the current organisational model of placing the state’s income from oil extraction in the Fund are subject to broad political consensus. We may note that the limit of 4 per cent exceeds the recent returns of the Petroleum Fund.
The management of the Fund is delegated to the Ministry of Finance, which has in turn delegated its duties to the Central Bank via a regulation.15 The Fund is managed by a separate department of the Central Bank called Norges Bank Investment Management. The Petroleum Fund is prohibited from investing in Norway.
The Ministry of Finance has appointed a strategy council to advise on the investment strategy of the Fund. Further, the Ministry has adopted ethical guidelines for the Fund, and an ethics council has been appointed. The role of the ethics council is to assess whether any current investments of the fund violate the fund’s ethical guidelines, as well as providing blacklists over issuers that would not comply with them. The purpose of the ethical guidelines – to obtain long-term financial returns while upholding human rights – has been sought through blacklisting of, or exits from, issuers, or through dialogue with such companies. The ethics council’s role is advisory only, and decisions on blacklisting are made by the Ministry. Notwithstanding, the recommendations made by the ethics council have normally been complied with in the management of the Fund, leading to some publicised exits (e.g., Wal-Mart).
The investment mandate of the Petroleum Fund has been under continuous development. In December 2014, a committee appointed by the Ministry of Finance delivered a report concerning exclusion of oil and coal extraction from the investment universe of the Fund as a tool to combat climate change. This has also been linked to the more prosaic concern of delinking the Fund from exposure to the oil extraction industry, towards which the Norwegian economy is already broadly exposed. In April 2016, the Ministry slightly changed the allocation of the fund to increase the maximum exposure to real estate (to 7 per cent). At the same time, the Ministry concluded that the investment universe should not be expanded to investments in infrastructure.
The Government Pension Fund Norway
The Government Pension Fund Norway constitutes a part of the Government Pension Fund, and is based on the same act as the Petroleum Fund.16 As such, the Government Pension Fund Norway is not a fund in the traditional sense, but a body of assets owned by the government and placed as a capital contribution with Folketrygdfondet (a state-owned corporation; a specific act provides Folketrygdfondet with this mandate17), which manages the capital in its own name.
The mandate of the fund is specified in a regulation.18 The capital can be placed in equity instruments taken up to trade in regulated marketplaces in Norway, Denmark, Finland and Sweden, and in interest-bearing instruments where the issuer is resident in Norway, Denmark, Finland and Sweden or has equity capital taken up to trade in regulated market places in those countries. At the end of 2014, the Government Pension Fund owned 5.1 per cent of market value of the instruments listed on the Oslo Stock Exchange.
Argentum Fondsinvesteringer and Investinor
Argentum Fondsinvesteringer AS, an important government-owned private equity investor, has developed into a private equity actor in its own right by expanding from primary investments to co-investments with funds in which Argentum is an investor, and due to its relatively high investment activity in the secondary market. Argentum has also established investment programmes whereby other investors are invited to invest alongside Argentum. The company received 1.9 billion kroner in realised returns on its fund investments during 2014, on a portfolio amounting to 7.68 billion kroner.
Investinor AS was established by the government as an investment fund to invest directly in Norwegian businesses with essentially a venture fund investment strategy, investing in the early growth and expansion stage of such businesses. Investinor is the largest investor in the Norwegian venture and expansion market, managing approximately 4.2 billion kroner.
VII TAX LAW
Taxation under Norwegian tax law of collective investment schemes will depend on whether the scheme is regarded as transparent for tax purposes. Mutual funds are not tax transparent, while private equity funds normally are organised as tax-transparent entities (silent partnerships or similar). Tax transparency implies that the fund is not a separate taxpayer, and that the investors are taxed directly on the profits of the fund.
Non-Norwegian investors in Norwegian mutual funds are only taxable in Norway on the distribution of dividends from the fund (Norway does currently not impose withholding tax on capital gains and interest income). The domestic rate is 25 per cent, but is reduced to 15 per cent (or lower) in most tax treaties. In addition, corporate investors resident in the EU or EEA may be exempt from dividend withholding tax under specific rules.
The rules concerning taxation of mutual funds were changed with effect from the tax year 2016. The previous rules resulted in non-Norwegian ‘combination funds’ (funds investing both in equities and fixed income instruments) being a tax-favourable alternative for Norwegian investors. The new rules aim at neutralising the favourable tax treatment of foreign combination funds. Under the new rules, all funds shall be treated equally for Norwegian tax purposes. All types of mutual funds shall be subject to the tax exemption method, but the taxation of the investors will depend on the actual allocation of the fund’s portfolio of equity investments and fixed income investments. The rules imply that investors will not be subject to taxation on a running basis, but only upon distribution or realisation, or both, as under the previous rules.
With respect to taxation of Norwegian investors, the rules imply that distributions from mutual funds with an equities portion higher than 80 per cent are taxed as share distributions in full (at a rate of 0.75 per cent for corporate investors and 28.75 per cent on distributions that exceed a tax free allowance for individual investors). Distributions from mutual funds with equities portion lower than 20 per cent are taxed fully as interest income (at a flat rate of 25 per cent for both corporate and individual investors). Distributions from mutual funds with an equities portion between 20 and 80 per cent are divided into one part that is taxed as share distribution and one part that is taxed as interest, calculated proportionally based on the value of the fund’s equities portion compared with the total value of the fund at 1 January the relevant income year (where cash is excluded from the fund’s total value). The simplified rule for determining the fund’s equities portion applies correspondingly for the taxation of any gain upon realisation, however, so that only the equities portion in the year of purchase and year of realisation is relevant.
The proportion of equity investments of a fund must be reported to the Norwegian tax authorities. Foreign funds will not have an automatic reporting obligation, but can report voluntarily. If not, the reporting obligation lies with the investors. Failing to provide sufficient documentation implies that distributions and gains will be fully taxed as interest income.
Non-Norwegian investors in Norwegian private equity funds organised as tax-transparent entities may have tax liability in Norway for the fund’s income (irrespective of whether the income of the fund is distributed to the investors or not) due to participation in a business being managed from Norway. However, for corporate investors, capital gains on shares are as a main rule tax exempt, while dividends are as a main rule taxed at an effective rate of 0.75 per cent. The same 0.75 per cent tax rate also applies to distributions from a private equity fund to corporate investors.
Norwegian asset managers (and other financial sector undertakings) will likely be facing an increased tax burden going forward. The government has announced that it will introduce a ‘financial sector tax’, originally as a result of the long-standing discussion of introducing VAT on financial services. The proposal for such tax rules are expected to be presented this October, and there are indications that the tax will be based on a Danish model that is not VAT-based, but a pure tax on net income, or alternatively on headcount. It is expected that this tax will affect the mode of organisation of Norwegian firms, likely in the form of more offshoring or outsourcing of functions.
As a Member State of the EEA, Norway is obligated to implement the majority of EU legislation in the financial area (tax rules are a significant exception). As a consequence, changes to the regulatory requirements relevant to asset management are largely or almost exclusively EU-initiated. The question concerning participation in the EU financial supervisory system has produced a significant ‘queue’ of EU legislation in the financial sector that remains un-implemented.
The AIFMD implementing legislation entered into force on 1 July 2014, with grandfathering rules expiring on 1 January 2015. The AIF Act has introduced legislation regulating managers of all types of collective investment schemes that are not UCITS funds. This includes managers of private equity funds, hedge funds, real property funds and other types of funds. Institutions for occupational retirement provision are not affected directly by the AIFMD. Although very few managers in Norway actually exceed the thresholds for value of assets under management, full-scope AIFMD authorisation will be necessary to market funds to non-professional investors. Further, AIFMD authorisation will be necessary for market access in other EEA countries. Many managers of private equity funds, real property funds and other closed-ended funds will have to submit to the full AIFMD regime, including the capital, organisational and operational requirements, and the requirement to appoint a depositary, to maintain the level of market access they have previously had.
With the resolution of the relationship to the EU system of financial supervision and implementation of the EuVECA, EuSEF and ELTIF regulations, expected in the short term, Norwegian asset managers may find new opportunities to offer products both inside and outside Norway.
With regard to insurance companies, the implementation of the new European solvency rules in the Solvency II Directive has introduced significant changes to current solvency and investment restriction rules for insurance companies. The new rules entered into effect on 1 January 2016, immediately replacing the current highly restrictive quantitative investment restrictions for insurance companies. So far, the new rules have not produced any significant changes to investment practices of Norwegian insurance companies. However, as the low interest rate climate is pushing institutional investors towards ‘alternatives’ to obtain sufficient returns, and the solvency requirements for life insurers will increase, we expect to see changes going forward.
The Ministry of Finance is currently considering introducing Solvency II ‘light’ capital requirements rules for pension funds. This will add to the already increasing capital charge of pension funds, faced with lower mortality rates and loss of income as employers are steadily shutting down defined benefit schemes.
As Norway has now accepted the agreement on participation in the EU financial supervisory system, the outstanding financial legislation will likely be implemented in short order. It remains to be seen how market actors and regulators will cope with such a large amount of new rules entering into effect in a short period of time.
The result of the recent referendum in the United Kingdom to exit the European Union has made its way to the political agenda in Norway, as an accession to the EEA agreement has been presented as one alternative affiliation between the UK and the EU. Norwegian politicians have voiced concerns that this may ‘dilute’ Norway’s current position (as Norway is currently the largest Member State by far). Ultimately, the traditional close relationship between Norway and the UK leads us to believe that Norway would not oppose British membership.
1 Peter Hammerich is a partner and Markus Heistad is a senior associate at Advokatfirmaet BA-HR DA.
2 Source: Norwegian Venture Capital and Private Equity Association.
3 Source: Norwegian Fund and Asset Management Association.
4 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
6 Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms.
7 Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance.
8 Mutual funds complying with Norwegian rules implementing EEA rules corresponding to Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).
9 As defined in Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on Markets in Financial Instruments (MiFID), implemented in the Norwegian Securities Trading Act.
10 Source: Norwegian Fund and Asset Management Association annual statistics for 2015. Institutional clients are defined as all non-retail clients.
11 Source: FSAN.
12 Regulation No. 1457 of 17 December 2007 on the asset management of life insurance companies and pension funds, and Regulation No. 1456 of 17 December 2007 on the asset management of non-life insurance companies.
13 See, for example, Norwegian Property ASA, listed on the Oslo Stock Exchange.
14 Act No. 123 of 21 December 2005 on the Government Pension Fund.
15 Regulation No. 1414 of 8 November 2010.
16 Op cit 12.
17 Act No. 44 of 29 June 2007.
18 Regulation No. 1790 of 21 December 2010.