I OVERVIEW OF RECENT ACTIVITY
From a public finance point of view, Norway is in an advantageous situation. The state has substantial net financial assets in its sovereign investment fund, the Petroleum Fund, with a current value of over approximately 8 trillion kroner (see Section VI.v, infra). This is, at least partly, because of income from oil and gas extraction, and the high level of activity related to this sector for several years until 2015. The economic growth spurred by the oil and gas sector benefited the mainland economy as a whole, making Norway (relative to its size) an attractive investor market for both foreign and domestic asset managers. However, with a combination of an open market for foreign actors 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 significant forays into other investor markets.
The abrupt and relatively large drop in crude prices that started at the end of 2014 has had its effects felt in the Norwegian ‘real’ economy. In 2016, for the first time since the inception of the Petroleum Fund, more money was transferred out of the fund (for public spending) than into it (petroleum-derived income). 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. 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.
With respect to private equity funds, the low level of fundraising in 2015 (900 million kroner) and the total absence of funds raised in the buyout segment were followed by record fundraising levels in 2016, totalling 17 billion kroner, over nine funds.2 As Norway is a small market and the number of Norwegian managers of private funds is relatively low, there are generally large variations year on year. 2016 also saw the highest ever recorded investment activity by Norwegian private equity firms with 11.7 billion kroner, compared to 8.5 billion kroner in 2015 and 6.7 billion kroner in 2014.
The Norwegian mutual funds market is dominated by a small number of large managers, such as the major banks and credit institutions present in Norway (e.g., DNB, KLP and Nordea) and the independent management company Skagen. Total assets under management by Norwegian mutual fund managers amounted to 1.046 trillion kroner at the end of 2016, compared with 904 billion kroner at the start of that year.3 Both net subscriptions and returns increased compared to the previous year. Net subscriptions (excluding reinvestments) amounted to 39.2 billion kroner (compared to 11.7 billion kroner the previous year). The funds achieved returns equal to 45 billion kroner (compared to 68 billion kroner the previous year). Results have been affected negatively in recent years, with many issuers at Oslo Børs losing market value because of the effects of the reduced oil prices.
No new hedge funds managed by Norwegian managers have been established since the Incentive Active Value Fund was launched in 2014, managed by Incentive AS under the Sector Asset Management umbrella. This may be related to the international trend of investors reducing their allocation to hedge funds.
It remains to be seen whether Norwegian managers will capitalise upon the perceived larger demand for alternative investments by institutional investors, such as life insurers and pension funds. With respect to the latter it is expected that the Ministry of Finance may propose new solvency requirements based on the Solvency II Directive, which may favour investing in hedge funds, provided they are capable of offering sufficient reporting facilities for the regulated clients to perform a ‘look-through’ to the underlying investments.
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, few official or public figures currently exist. With the implementation of the Alternative Investment Fund Managers Directive (AIFMD)4 and reporting requirements for all Norwegian alternative investment fund managers (AIFMs), statistics have become available, creating a more transparent fund landscape across different segments. At present, the Financial Supervisory Authority of Norway (FSAN) has registered a total of 271 alternative investment funds established in Norway (including regulated mutual funds that are AIFs). A total of 37 managers have been authorised as AIFMs (including managers of regulated mutual funds that are AIFs), and 78 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 funds raised at the end of 2014. NRP Asset Management’s 2016 funds were closed in 2016. Norwegian real estate fund manager Union established its first non-Norwegian feeder fund to its latest real estate fund, Union Real Estate Fund II.
Assets under management by Norwegian investment firms offering (individual) portfolio management was 102 billion kroner at the end of June 2016, 88 billion less than the year before and 768 billion less than three years earlier. This extreme reduction is primarily caused by regulatory changes, as the largest Norwegian investment firms providing portfolio management have been consolidated into asset management companies and regulated as either undertakings for collective investment in transferable securities (UCITS) management companies or AIFMs providing individual portfolio management as an ancillary service.5
II GENERAL INTRODUCTION TO the REGULATORY FRAMEWORK
Norway is a Member State of the European Economic Area (EEA). As such, 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 in 1994, Norway has generally implemented EU legislation with great assiduity, and often chosen stricter regulation where possible. This has changed significantly 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 (after EU membership was rejected by referendum in 1994, for the second time).
The European Free Trade Association and the EU did not reach 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 before 14 October 2014.6 The agreement was approved by the Norwegian parliament in June 2016, and EU financial regulation passed during this time was (and remains) delayed in being incorporated into the EEA agreement (see Section V, infra).
The following is restricted to Norwegian law, and where stated, Norwegian regulation of foreign entities’ activity in Norway on a cross-border basis.
Collective investment schemes 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 collective investment schemes: mutual funds that are UCITS funds;7 non-UCITS mutual funds; and other collective investment schemes. Norwegian law will reflect the additional EU fund types as European Venture Capital Funds (EuVECAs), European Social Entrepreneurship Funds (EuSEFs), European Long Term Investment Funds (ELTIFs) and money market fund regulations are implemented in Norwegian law.
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 (or rather an alternative investment fund) must be assessed on a case-by-case basis. As a general rule, all open-ended funds investing in financial instruments8 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’ to benefit, in the future, 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 sub-threshold funds may ‘opt in’ to benefit from the marketing provisions of the AIF Act. 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 AIF Act and its marketing rules has had a substantial impact in the Norwegian market. While marketing of unregulated funds previously could be made without specific restrictions (other than prospectus rules, rules concerning investment services and general marketing law), 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). 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), and in particular reliance upon reverse solicitation practices.
The marketing rules are dependent upon the jurisdiction of the manager and the fund. Norway has implemented the ‘private placement’ provisions of the AIFMD with respect to funds and managers established outside the EEA. On this point, however, the rules are somewhat stricter than under the AIFMD, as they require prior authorisation from the FSAN to market, rather than relying on notification. In addition, for fund managers established outside the EEA, there is a requirement that they are registered with a competent authority and subject to prudential supervision in its home state for the purposes of asset management. 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 the Markets in Financial Instruments Directive (MiFID). A proposal for the implementation of MiFID II has been the subject of a public consultation, and a formal proposal for law is expected during autumn 2017 or early 2018. 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. It is unclear whether this will be changed by the implementation of MiFID II; the working group has held that no change is necessary.
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 with respect to closed-ended 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 ‘lookalike’ 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, but are still subject to rules based on Solvency I. 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. In recent years, some fintech actors have begun structuring crowdfunding vehicles as cooperatives, as shares in cooperatives may be marketed and sold without restriction under prospectus rules or the ST Act.
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 were previously 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 as an alternative investment fund manager.
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 EuVECAs, EuSEFs and 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. Although there is a limited number of available service providers in this segment, this has not proven to be a bottleneck for the establishment of new funds.
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 if and when they are proposed as part of the Capital Markets Union initiative.
Individual portfolio management is mainly restricted to institutional clients (pension funds) and high-net-worth investors through private banking offerings. Structuring of investments will typically be bespoke and adapted to the client at hand.
In the retail segment of asset management, significant amounts are invested through unit-linked insurance policies. Several Norwegian insurance companies offer unit-linked life insurance, which offers policyholders the opportunity to invest in a number of assets (although mainly mutual funds and listed instruments) as underlying in a unit-linked insurance contract. Current tax rules make holding investments through a unit-linked insurance policy 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 proposed changes to the applicable tax rules in order to avoid different tax treatment of what – in substance – are similar-type investment products. It is currently unclear when new rules may enter into force, and what the specific content of such rules will be. In this context, the Ministry of Finance has also adopted rules for an ‘equities savings account’. This will be a ‘wrapper’ product available to private individuals that will provide more favourable tax treatment for investments in equities and equity-related instruments than direct investment. The investments are made directly, in the name of the investors (as is the case for individual portfolio management)and may be offered by credit institutions, investment firms and management companies for mutual funds.
IV MAIN SOURCES OF INVESTMENT
Sources of investment into managed investment products may be divided in several categories, but the main fault line is between retail investors and professional and institutional investors. High-net-worth individuals and family offices will often be a residual category, where the size of its portfolio will be the main differentiator. One key trend, only recently reversed, has been a decline in funds stemming (directly) from retail investors. Indirect investments from such clients have, however, continued to grow as defined contribution pension schemes have become the norm for all employees.
The Norwegian government is – through various investment companies and schemes – a sizeable investor in the Norwegian financial markets in listed securities, private equity and the venture and seed segment (see Section VI.v, infra).
It is worth noting that the government also 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 subscribed by the government.
With regard to Norwegian mutual funds, the majority of assets under management stem from Norwegian institutional clients (representing 564 billion kroner at the end of 2016).9 Norwegian retail investors hold 316 billion kroner (including holdings through pension savings schemes where the client elects underlying), while foreign investors (all categories) hold 102 billion kroner of assets under management in Norwegian mutual funds, which is a decrease of 1 billion kroner compared to the year before. These figures do not include mutual funds established in other states and managed by a Norwegian manager (see Section VI.iii, 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. The Ministry of Finance has started a public consultation concerning a rule prohibiting insurance companies from owning more than 15 per cent of an issuer conducting business other than insurance activities. This rule has effectively prohibited life insurance companies from making appropriate investments into infrastructure, both directly and through collective investment undertakings. It is expected that the rule will be repealed, and this may allow for increased allocations within infrastructure from Norwegian life insurance companies.
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. With respect to the asset management industry, 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. This was compounded by the effect of the fall in oil prices since 2014.
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.10 This has since increased to 413 in 2017.
Combined with generally low returns in fixed income markets, the value reductions have led to investors across all categories to be more aware of the level of fees. In the retail market, the Norwegian Consumer Council has focussed on a long time practice among Norwegian managers of mutual funds to levy success fees without implementing a high water mark, meaning that volatility will benefit the manager and be to the detriment of investors. This practice has not been present in the institutional market, but larger investors are increasingly pushing for lower management fees for all fund types.
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 lawsuit against DNB claiming damages on behalf of 150,000 investors. On 2 June 2017, the appellate court upheld the decision by the city court to approve the class action lawsuit (which is the first class action lawsuit in Norway) sponsored by the Norwegian Consumer Council. It remains to be seen whether the regulator will take any further initiatives concerning costs and fees in collective investment schemes as has been done in other jurisdictions. Notwithstanding, the advent of the requirement to produce a key information document under the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation from 2018 (albeit in the retail market) will provide additional transparency and may favour investment in low-cost index funds.
ii Regulatory delay
As a member of the EEA, Norway is required to implement EU financial sector legislation. Norwegian authorities are currently working on the implementation of the backlog of EU financial legislation, which has been delayed by the EU financial supervisory system (see Section II, supra). This concerns both legislation that has been implemented on a ‘lookalike’ basis (such as the Capital Requirements Directive (CRD IV), the European Market Infrastructure Regulation (EMIR) and the AIFMD), and legislation that has not yet been implemented in any way.
Legislation of particular interest to the legislator has been implemented in Norwegian law on a ‘lookalike’ basis (e.g., Solvency II, CRD IV and the Capital Requirements Regulation). In such cases, until the relevant EU acts have been incorporated into the EEA Agreement, it remains somewhat unclear whether Norway is considered to be a non-EU country (third state).
The high level of change in EU financial legislation since the financial crisis in 2008, combined with the long-time unresolved supervisory question, have led to long delays in the implementation of several pieces of EU financial legislation in Norway. This concerns EMIR, the Short Selling Regulation, the AIFMD, CRD IV (with appurtenant regulations)11 and Solvency II,12 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 agreement concerning the EU financial supervisory system, outstanding legislation is expected to be incorporated into the EEA Agreement as soon as possible. However, it is currently unclear whether Norway will be able to implement MiFID II and the Markets in Financial Instruments Regulation, the Insurance Distribution Directive or the PRIIPs Regulation within the same deadlines as in the EU. The upcoming implementation of more 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. Together, this negatively affects the asset management industry and the Norwegian financial industry as a whole.
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 and the Act on Financial Undertakings and Financial Groups, which contains the ‘institutional’ rules and capital requirements. Together, these acts implement Solvency II, including the rules concerning investment freedom and qualitative investment rules (the ‘prudent person principle’).
Before Solvency II, 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 provision13 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). The FSAN has proposed to introduce new capital requirements for pension funds, based on a simplified version of Solvency II. It is currently unclear when these may be introduced and in what form; pensions and their costs has become an increasingly important subject in public debate, in particular following the insolvency of Norwegian pension insurance company Silver Pensjonsforsikring AS, as most clients will face a haircut on their current and future pension secured through that firm.
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).
Norwegian real property funds are typically unlisted private limited companies, but public companies also exist.14 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, unless the fund in question is established as a limited partnership.
Management and marketing of real property funds 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 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 what has been described above, there is no other general regulation of asset management activity in Norway, with the exception of individual portfolio management, which is an investment service subject to the ST Act. 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 Pension Fund Global (the Petroleum Fund)
The Petroleum Fund is a sovereign wealth fund established on the basis of a special act.15 As such, it 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, it 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. For several years this has been set to 4 per cent of the value of the fund, but was lowered to 3 per cent in 2017 as returns have been lower than 4 per cent. The object of the action rule is to avoid macroeconomic stress and inflation in Norway as a result of excess public spending. 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.
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.16 The Fund is managed by a separate department of the Central Bank called Norges Bank Investment Management (NBIM). On 23 June 2017, a working group headed by a former chairman of the central bank delivered its report assessing the Central Bank Act and the organisation of the management of the Petroleum Fund. The working group has proposed to spin off NBIM into a separate company (to be wholly owned by the government) in order to separate the central bank from the management of the Petroleum Fund. The proposed model is essentially similar to that of the Government Pension Fund Norway (see below). The report will be subject of a public inquiry, but changes may be implemented during 2018.
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 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 Petroleum Fund is prohibited from investing in Norway.
The Government Pension Fund Norway
The Government Pension Fund Norway constitutes part of the Government Pension Fund, and is based on the same act as the Petroleum Fund.17 As such, it is not a fund in the traditional sense, but a body of assets owned by the government that 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 2016, the Government Pension Fund Norway owned 5.2 per cent of market value of the Norwegian stock market and 10.1 per cent of the main index 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 value of its investment portfolio at the end of 2016 was 6.1 billion kroner, a reduction of 123.5 million kroner over the year following unrealised losses.
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 4.15 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 0.72 per cent for corporate investors and 29.76 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 24 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 0.72 per cent. The same 0.72 per cent tax rate also applies to distributions from a private equity fund to corporate investors.
Norwegian asset managers (and other financial sector undertakings) are now subject to a ‘financial sector tax’, effective as of 2017, originally as a result of the long-standing discussion of introducing VAT on financial services. 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.
i Regulatory waiting game
The Norwegian asset management industry – and indirectly the investors, both Norwegian and foreign – has been affected by the delay in implementing EU asset management and securities legislation. Tellingly, EMIR entered into force in Norway on 1 July 2017, several years later than in the EU. Neither the revised EU Transparency Directive nor the updated market abuse rules of the EU Market Abuse Regulation have been implemented or incorporated into the EEA Agreement. As the regulations concerning EuVECA, EuSEF and ELTIF funds have not yet been implemented, Norwegian fund managers have not been able to pursue these opportunities yet. As providing loans is a regulated activity in Norway, these new fund types may have a particular use under Norwegian law, providing managers with greater flexibility in their investment activity in the unlisted markets. For managers of open-ended funds investing essentially in listed markets, there is uncertainty as to the real impact of MiFID II in terms of costs and benefits. The new rules on inducements under MiFID II may also affect asset managers in terms of how they distribute funds in a cost-effective manner. There is a risk that the implementation of MiFID II is delayed in Norway compared to the EU, which would be undesirable for Norwegian investment firms and credit institutions.
For asset managers active in the retail markets the impact of the PRIIPs Regulation may introduce increased competition and cost transparency. It remains to be seen whether the increased transparency will also affect the marketability of different segment (and higher cost) funds in the retail markets, and whether this transparency will also affect the approach of institutional investors, especially smaller institutional investors that are not large enough to directly influence costs of management.
New government initiatives in the retail segment may lead to increased inflows into mutual funds: the government has adopted rules concerning an ‘equities savings account’ for private individuals (see Section III, supra) as well as rules for a new personal pension plan for private individuals with tax incentives. Increased focus on pension savings is likely to contribute to a growth in these sectors. The regulator has also alluded to adopting rules for a mandatory key information document for pension products.
There are several underlying trends of increased use of delegation and possible offshoring among Norwegian asset management and financial services providers; necessary software solutions are increasingly migrating to ‘cloud services’ and may present a better value proposition for firms. The financial sector tax will increase costs for each Norwegian employee. This may be compounded by the expected strain – and necessarily reduced responsiveness – of the Norwegian regulatory authorities who will be required to implement a quite large backlog of EU legislation into Norwegian law. It is uncertain how the future exit of the United Kingdom from the EU will affect the Norwegian asset management industry. The traditional close relationship and extensive trade between Norway and the UK lead us to believe that Norwegian authorities will strive to achieve a solution securing free trade to the greatest extent possible.
ii Nascent comparative advantages
Recent developments may provide Norway, as an asset management jurisdiction, with some advantages compared to neighbouring jurisdictions. These developments span from the general legislative landscape, to tax law and regulator scrutiny.
The authorities have for some time endeavoured to simplify company law and the administrative burden for private companies. These measures are beginning to show results with more flexible capital rules for limited liability companies and better online tools for establishing the legal entities necessary for an asset management structure. In recent months, several Norwegian asset managers have established Norwegian structures for co-investments that foreign and foreign institutional investors have accepted. Broader investor acceptance for Norwegian structures will likely provide for easier transitioning to such structures going forward.
Norwegian courts have concluded that carried interest shall not be taxed as personal income, and that such amounts shall also be within the scope of the tax exemption method, provided the beneficiary is sufficiently exposed to financial risk through his or her investment.
Provided the Norwegian legislature is able to keep pace with the EU in terms of transposition of EU law and ensuring passporting rights for Norwegian actors, Norway will be advantageous from a regulatory perspective as it relies solely on EU law and avoids gold-plating or other more stringent rules.
1 Peter Hammerich is a partner and Markus Heistad is an attorney at Advokatfirmaet BA-HR DA.
2 Norwegian Venture Capital Association.
3 Statistics Norway.
4 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
7 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 UCITS.
8 As defined in Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on Markets in Financial Instruments, implemented in the Norwegian Securities Trading Act.
9 Norwegian Fund and Asset Management Association annual statistics for 2016. Institutional clients are defined as all non-retail clients.
11 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.
12 Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance.
13 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.
14 See, for example, Norwegian Property ASA, listed on the Oslo Stock Exchange.
15 Act No. 123 of 21 December 2005 on the Government Pension Fund.
16 Regulation No. 1414 of 8 November 2010.
17 Op cit 12.
18 Regulation No. 1790 of 21 December 2010.