The Asset Management Review: Lebanon
Overview of recent activity
The covid-19 pandemic has profoundly changed and is bound to change further how societies and economies work, not least due to the massive systemic shock it has delivered and its role as an accelerator of existing social and economic fault lines. On top of this, Lebanon had already been in the middle of a deep, multifaceted crisis, the worst since its pre-civil war era, by the time it caught up with the virus. This was followed by the Beirut port explosion, one of the world's biggest non-nuclear explosion, which had a devastating toll on human life and the infrastructure of the capital. The crisis, which has continued to develop into the world's third worse since the mid-19th century according to the World Bank, has overlapping sovereign debt, banking and currency aspects, general economic, social and political aspects, and it occurs within a broader context of heightened geopolitical tensions.
The republic defaulted on its sovereign debt for the first time ever in March 2020, and although this was initially followed by debt restructuring negotiations with the IMF based on a financial recovery plan, the process soon became stalled over discord among the local stakeholders about the extent of banking losses and categories of those who should primarily be called upon to bear them.
A little before that, in October 2019, there was a popular uprising, which deepened an already present distrust at the lack of political and economic reforms and resulted in further distrust regarding the national currency (the Lebanese lira), which has since collapsed with a depreciated value of more than 90 per cent compared to its US dollar-peg days. Meanwhile the banking system has applied strict de facto capital controls throughout the period.
There is an aim to resume negotiations with the IMF for a much-needed US dollar cash injection into the system; however, it is not yet clear how the government that may eventually be formed out of the current deadlock will proceed with the pressing issues of the Lebanese banks' recapitalisation and Central Bank of Lebanon (BDL) recapitalisation.
Amid this monumentally challenging background, the asset management companies in Lebanon (Lebanese asset managers) are faced with existential questions, while being in a state of survival. Answers to questions of this order will determine whether the Lebanese asset managers will assume a constructive role in a process of nurturing society and the economy out of the crisis phase and into a healthy state, even if within a long-term horizon, by being engaged in its capabilities and its people.
The alternative course of action may opt for a role of wealth preservation within the confines of the multifaceted crisis and the scarce opportunities it affords in the short-term horizon; however, in the long run, it may render the Lebanese asset managers' role ineffective in the much-needed recovery process, as the economy starves of investment in essential areas for the social good.
As such, some of the Lebanese asset managers have already been broadening their lens of duty to encompass a broad set of stakeholders rather than merely the shareholders of companies they invest in, so as to include customers, regulators and the wider community within which companies operate and recruit their staff. Given the magnitude of the crisis, efforts to fulfil this broader responsibility focus attention.
Yet another part has been restructuring product portfolios to meet the crisis-driven investor demand for real estate assets amid the inflationary pressures on the LBP and the impact of the pandemic on equity and debt markets, thereby manifesting a more reflexive mode in combatting the crisis.
Furthermore, Lebanese asset managers have continued to streamline their operations by implementing technologically advanced platforms, thus creating digital-based customer experiences to align with the demands of a global digitalised business.
The Lebanese asset managers comprise mainly international participants, mostly of EU domicile, with a number of local asset managers, being foremost the investment arms of the main local financial institutions, offering a broad spectrum of investment funds, while certain participants have a niche strategy of specialising in alternative investment funds.
General introduction to the regulatory framework
i Asset management supervision
The Capital Markets Authority (CMA) is an independent, administrative body, set up by way of Law No. 161 of 17 August 2011 (the Capital Markets Law), which is entrusted with duties to protect savings invested in financial instruments, organise the availability of information to those distributing financial instruments to the public, and ensure the integrity of the financial markets in Lebanon.
With regard to asset management, the CMA is the primary prudential supervisor of Lebanese asset managers as well as the investment funds they manage. The main duties of the CMA include:
- issuing of regulations and decisions for a licensed institution (an 'approved institution') (which encompasses asset managers), including in relation to licensing procedures applicable to a collective investment scheme manager (CIS manager) and investment funds, as well as the rules applicable to the activities of collective investment scheme custodians (CIS custodians);
- licensing of Lebanese asset managers and investment funds, including securitisation funds;
- prudential and ongoing supervision of Lebanese asset managers and investment funds offered to retail clients;
- review, inquiry and investigation of the activities of CIS managers and CIS custodians (including inspections on-site);
- imposition of administrative sanctions on CIS managers, investment funds and CIS custodians in the event of breach of applicable laws and regulations; and
- supervision of the marketing of Lebanese and foreign investment funds (with emphasis on Lebanese investment funds marketed to retail clients).
For the purposes of fulfilling its duties the CMA coordinates and cooperates with its counterparts, as well as the BDL and any other concerned authority or institution in Lebanon or abroad.
ii Legal framework for asset management activities
The laws applicable with respect to asset management activities consist of the following:
- the Capital Markets Law, which governs, inter alia, the issuance, purchase, sale and marketing of financial instruments for public offer and the financial markets in general;
- the Asset Securitisation Law, which defines the legal framework governing asset securitisation in Lebanon by way of establishing and managing asset securitisation mutual funds;
- Law No. 706 of 9 December 2005 (Law 706), which governs collective investment schemes in securities and other financial instruments;
- Law No. 163 of 14 May 2020 (Law 163), which governs the establishment, management and control of private investment companies in Lebanon exclusively investing in issued financial products by private entities that have not as yet been traded on the market;
- Law No. 160 of 17 August 2011 (Law 160), which sets out the prohibition of insider trading made on the basis of material non-public information; and
- Law No. 234 of 10 June 2000 (Law 234), which regulates the financial intermediation profession.
A number of new regulations have been recently enacted by the CMA governing generally the financial markets in Lebanon, with the result of focusing on the issues of enhanced investor protection and transparency in an effort to align with international standards. In particular, with respect to asset management, the relevant regulations are:
- Collective Investment Schemes Regulation – Series 8000, dated 24 January 2019 (the CIS Regulation), which covers the establishment, approval, offering and management of collective investment schemes (including Islamic schemes) and associated activities in Lebanon (but excludes the use of collective investment schemes for asset securitisation purposes under the Asset Securitisation Law and for the establishment of private investment companies under the Law 163) and establishes requirements governing CIS managers, CIS custodians and approved institutions;
- Regulation on Offers of Securities – Series 6000, dated 7 August 2017 (the Offers of Securities Regulation), which sets out the main rules regarding offering of financial instruments in Lebanon, including all types of investment funds, as well as the requirements for offering such funds to retail clients and professional clients;
- Business Conduct Regulation – Series 3000, dated 10 November 2016 (the Business Conduct Regulation), which establishes the rules of conduct for approved institutions, including asset managers, when carrying out securities business and dealing with clients;
- Market Conduct Regulation – Series 4000, dated 10 November 2016 (the Market Conduct Regulation), which details the prohibitions of insider trading and market manipulation; and
- Licensing and Registration Regulation – Series 2000, dated 19 January 2017 (the Licensing and Registration Regulation), which sets out the licensing and operational requirements for approved institutions, including Lebanese asset managers.
The CIS Regulation requires collective investment schemes offered to the public to be subject to enhanced investor protection rules that align with international standards. On the other hand, 'exempt offer schemes', which allow for greater risks to be taken in both investments and leverage, are only permitted to be offered to professional clients, who by definition have a sufficient level of expertise to understand the risks involved and sustain them. This distinction among the varying levels of investor protection applies regardless of whether the public offer is made in connection with Lebanese collective investment schemes or foreign ones. The international standards with which the CIS Regulation aligns are primarily those of the International Organization of Securities Commissions (IOSCO) and the European Union's Undertakings for Collective Investments in Transferable Securities Directive (the UCITS Directive) governing publicly offered open-ended collective investment schemes, and secondarily, the regional standards of Saudi Arabia (qualified usage applying due to the regulatory framework being under revision there) and Dubai.
iii Regulation of asset managers
CIS managers are entities that establish, offer and manage one or several collective investment schemes in Lebanon (Lebanese or foreign), including any alternative investment funds (AIFs), such as real estate and private equity funds subject to the CIS Regulation.
Accordingly, in order for a company to offer and manage any type of Lebanese collective investment scheme, it must first be licensed by the CMA as a CIS manager.
The licensing provided by the CMA to the CIS manager is distinct from the licensing provided in connection with managing a portfolio of assets on a discretionary basis, as well as with distributing foreign investment funds.
The CIS manager may routinely be authorised to perform certain other investment services (such as investment advisory and execution dealing that is provided, for example, to other CIS managers licensed to manage niche AIFs).
The licensing procedure consists of submitting an application (file) to the CMA, where the CMA may conduct a review or inquiry as it deems appropriate prior to granting a licence. There is no time limit for the CMA to provide its licence.
Before licensing a company as a CIS manager, the CMA must be satisfied that the following requirements have been met with respect to the company:
- it is established in Lebanon as (1) a bank, financial institution or financial intermediation company registered with the BDL or CMA respectively; or (2) a branch of a foreign financial entity whose parent company is engaged in securities business and is licensed by a competent authority in a recognised jurisdiction;
- it is engaged solely in securities business, or in the case of a company licensed by BDL, solely in business covered by that licence;
- its head office is in Lebanon;
- it has sufficient initial capital (the minimum share capital for managing collective investment schemes is 3 billion Lebanese pounds, but higher limits may apply if the licence includes other securities business activities);
- its management, personnel and agents possess the necessary integrity, skills, qualifications and experience to carry out the related activities;
- it has obtained the prior authorisation of the CMA in the event its equity holdings are acquired by (1) any person by more than 10 per cent or (2) a board member regardless of size;
- if it is an associate of another person, that such person has the necessary integrity, regulatory status, business record and financial soundness; and
- it contributes to the financial institution professional indemnity (FIPI) that includes insurance coverage for risks associated with incomplete transactions and criminal and tort liabilities.
Importantly, the CIS manager must satisfy the 'fit and proper' test, which in turn focuses on the sound management of its business and must also employ such systems, policies and procedures that are sufficient to cover the particular obligations of corporate governance, finance, risk management, compliance, and operations and controls associated with its asset management business. It must also employ people with skills, experience and integrity and have sufficient financial and technological resources to serve such purposes.
Once licensed, CIS managers are subject to prudential supervision by the CMA throughout their management of investment funds. They are also subject to the rules of the Business Conduct Regulation, as well as the specific conduct rules included in the CIS Regulation and Market Conduct Regulation on an ongoing basis. In particular, the rules require CIS managers to comply with:
- client classification;
- best-execution policy;
- prevention of conflicts of interest;
- organisational and operational requirements (bookkeeping, registration records of unitholders, audited reports and accounts, delegation of activities, remuneration policy and compliance);
- valuation of assets;
- liquidity management;
- insider dealing and market manipulation prohibitions; and
- fighting money laundering and terrorist financing (pursuant to Law No. 44 of 24 November 2015).
Importantly, following an initial offer period, CIS managers are obliged to make investment decisions that provide a prudent spread of risk in addition to aligning with the investment objectives and policies of the funds they manage.
In addition, any payment of fees, charges or any other payment in cash or in kind may be made to the CIS manager on the condition that the nature, amount and method of applying such fee, charge or payment as well as the description of how these are levied are disclosed in a clear manner in the offering document of the investment fund and are within the limits stated therein.
Powers of the CMA
In the event of breach of applicable laws and regulations by the CIS manager, the CMA has the power to, in addition to imposing a number of administrative sanctions that apply to all approved institutions, remove the CIS manager and appoint a replacement CIS manager in respect of managing a particular fund as well as taking any other steps as necessary.
The CMA can also revoke the licence of a CIS manager for persistent failure of one or more schemes under its management to comply with the CIS Regulation. The licensing procedure and requirements applying to CIS managers apply mutatis mutandis to the approved distribution agents.
Approved distribution agents
For a company to market the giving or offer of advice with regard to investing in a collective investment scheme in Lebanon (whether Lebanese or foreign) or deal in subscriptions and redemptions of the scheme, it must be licensed as an approved distribution agent for the scheme in accordance with the Licensing and Registration Regulation.
The licensing procedure and requirements applying to CIS managers apply mutatis mutandis to the approved distribution agents.
Regulation of investment funds
Lebanese investment funds
Lebanese investment funds consist of:
- regulated funds, which are: (1) collective investment schemes, including certain types of AIFs such as real estate collective investment schemes; (2) Lebanese private equity investment vehicles; and (3) asset securitisation funds, all of which are supervised by the CMA; and
- non-regulated funds, which are not supervised.
Funds for public offer
With respect to regulated funds to be offered to the public, the CMA generally grants its approval to the investment fund within four weeks of the submission of the application, which must include all the required information and documents. The CMA has wide discretionary powers in respect of the approval application and can carry out any investigation, inquiry or on-site inspection to the CIS manager as appropriate, whereby the period for approval extends accordingly.
Licensing of additional sub-funds to an umbrella investment fund can generally be granted if the CMA raises no objection within 30 days following notice of such addition by the CIS manager.
In order to safeguard fair treatment among investors, the statute and offering documents of approved investment funds for public offer that are open-ended or interval must apply enhanced disclosure requirements, such as the following:
- specifying if different classes of units are issued, whereby the principle is that it is not permissible to include a unit class that results in disadvantaging the investors in other unit classes of the same sub-fund or scheme, or when the unit class has a structure risk that cannot be clearly explained to the public, or when it contravenes the purpose of the CIS Regulation (such as, for example, when a unit class is intended to be offered by misleading the public as to the risks they would be exposed to);
- specifying if different subscription charges, annual management charges or redemption charges apply as well as accounting in detail for such differences; and
- specifying if different currency classes apply.
In addition, there are strict borrowing limits and leverage limits applicable to investment funds for public offer.
With regard to an open-ended scheme, interval scheme or sub-fund, the CIS manager can only borrow up to a maximum of 10 per cent of the fund's total asset value for a maximum of 80 days by way of overdraft. Moreover, such borrowing is not permitted to be either rolled over, or used to meet redemptions, or for investment, or financing payment of investment returns to the investors.
With regard to a closed-ended scheme or sub-fund of a scheme, the CIS manager can borrow up to 20 per cent of the fund's total asset value, whereby the nature and duration of such borrowing must be clearly disclosed in the CIS prospectus of the scheme or sub-fund. Importantly, responsibility for monitoring compliance of an investment fund for public offer with the investment, borrowing and leverage limits lies with the CIS custodian in accordance with Law 706 and the CIS Regulation.
Funds for exempt offer
Regulated funds to be offered by way of an exempt offer must be offered exclusively to professional clients and have a minimum subscription amount of US$50,000 per investor or their equivalent in another currency.
The CIS managers of such investment funds are only required to notify the CMA of their intention to create such funds and offer them to institutional investors. If the CMA does not object within 15 days of receipt of such notice, the CIS manager may proceed to create the scheme. Further, the CMA may, at the request of the CIS manager, issue a certificate of registration and enter the name of the scheme on its official register of schemes. Following approval, the CMA notably does not supervise such institutionally offered investment funds; however, it can cancel its approval in the event of breach of the regulations by the CIS manager or breach of the exempt offer requirements.
Critically, there are significant disclosure requirements that apply even to the institutionally offered investment funds, and while the ability of an exempt offer scheme to borrow or apply leverage is unlimited, important details such as maximum amount, duration and type of borrowing, means of achieving leverage as well as implications analysis are required to be stated in the scheme's constituting and offering documents.
Funds for public offer
Public offer of foreign funds in Lebanon is permitted only with respect to collective investment schemes that have been approved in their home jurisdiction for public offer and are further approved by the CMA as offering equivalent investor protection to Lebanon. Notification to the CMA of the public offer of the foreign fund is made by an approved institution and the CMA generally grants its approval within 30 days of the submission of the application.
Funds for exempt offer
The requirements for offering foreign funds by way of an exempt offer are similar as with regard to the Lebanese exempt offered funds.
Regulation of CIS custodians
In accordance with the CIS Regulation, the assets of investment funds (including those of AIFs that fall within the scope of the CIS Regulation) must be held by independent custodians, appointed by the CIS manager, which must be either an approved institution that the CMA has licensed to provide custody services in Lebanon or Midclear (being the national custodian and settlement agent of Lebanon). The duties of the CIS custodians are critically twofold – safekeeping as well as supervisory – with regard to the investment fund and mainly consist of the following:
- exercising custody over the assets of the investment fund; in particular in respect of securities and real estate titles this must be done by holding these beneficially on behalf of the investors and in respect of cash and deposits, by either holding these beneficially on behalf of the investors or by exercising control over them. Importantly, the CIS custodian has to keep the assets of the investment fund segregated from those of the CIS manager, the CIS custodian and the CIS custodian's other clients;
- monitoring compliance with the investment fund's investments, borrowing and leverage requirements in accordance with Law 706 and the CIS Regulation;
- monitoring compliance of the cash flows of the investment fund; in particular this would involve receiving full payment of subscription cash or any income due to the investment fund, making full payment of redemption cash, as well as holding all cash received in accounts in the name of the investment fund;
- monitoring compliance of the instructions of the CIS manager with the applicable laws and regulations and constituting documents of the fund, with the obligation to immediately notify the CMA in the event of non-compliance of the CIS manager concerning the property of the fund; and
- keeping updated records of the transactions of the fund and reconciling those with the records of the CIS manager at least once a month.
The CIS custodian may delegate the holding of the fund's assets, in whole or in part, to any sub-custodian outside of Lebanon, provided the latter is licensed to exercise custody in their home jurisdiction by a regulator considered as having equivalent standards by the CMA. In delegating, the CIS custodian must ensure that the beneficial ownership of the assets of the fund by the investors is clearly established and the assets are, therefore, not commingled with those of the foreign sub-custodian, CIS custodian or CIS manager.
Notwithstanding any delegation, the CIS custodian remains liable in relation to the investors for any losses that may be sustained by the fund through error or omission, and as this is a liability imposed by regulation, the parties cannot limit it by contract.
Regulation of marketing of investment funds
There is an elaborate and strict set of rules regulating the marketing of investments funds in Lebanon, by way of both the generic securities advertisements requirements under the Licensing and Registration Regulation as well as the specific securities advertisement requirements under the CIS Regulation.
Accordingly, any form of verbal, electronic, broadcast or written communication made for the purpose of inviting or inducing potential unitholders in Lebanon into investing in an approved fund would qualify as a securities advertisement and would have to be clearly identified as such and made by the CIS manager or approved distribution agent for the relevant fund.
Further, depending on whether the fund that is being marketed is an approved fund for public offer or exempt offer, different requirements will apply as to the content of promotional materials.
Funds for public offer
In particular, with respect to a publicly offered Lebanese fund, any security advertisement must be consistent with the CIS prospectus of the fund and include information on how to obtain a copy of the fund's CIS prospectus and key information document if available, as well as a copy of the most recent annual report and accounts of the fund, and a statement that the value of units and the income derived from them can fall as well as rise and that investors may not get back the money they invested.
Importantly, it is prohibited for the CIS manager to include in the security advertisement any projection or prediction of future total return or performance of a fund, or any endorsement or testimonial whatsoever.
The CIS manager is also required to maintain records of all the marketing it performs via any media and provide a copy of any particular record of such marketing upon request by the CMA.
Critically, any reference in the media to total return for the fund should be stated net of subscription charges, redemption charges and annual expenses paid out of the fund, while there is an obligation to state prominently these charges and operational expense ratio as a percentage of the net asset value of the fund unit.
Similarly, total return must be presented compared with the relevant benchmark or index that the fund utilises and must state whether costs are included in such benchmark or index. If the index or benchmark does not include all elements of total return, the advertisement must disclose what elements of return are not included and how that omission affects the comparison of the scheme's total return with the benchmark or index.
Funds for exempt offer
With regard to Lebanese exempt offer funds any advertisement or use of promotional materials must: (1) be directed only to professional clients; (2) comply with the Licensing and Registration Regulation provisions, mainly in that they have to be fair, accurate and not misleading; and (3) be distributed only following the expiry of a period of 14 days starting from notification to the CMA, where the CMA did not object to the offer.
Foreign exempt funds
Any advertisement or use of promotional materials in Lebanon with regard to foreign exempt funds requires the appointment of a local distribution agent that must be an approved institution. Further such advertisement or promotional material is subject to the same requirements as applicable for Lebanese exempt funds but for the notification period (without objection) to the CMA, which is 15 days.
Provision of investment services
Any dealing in, advising and managing of assets (including discretionary mandates and managing of collective investment schemes) qualifies as a regulated securities business activity and is therefore permitted to be provided only by investment services providers in Lebanon duly licensed for such activities. In respect of collective investment schemes, such entities will be licensed as a CIS manager or in the case of distributing foreign collective investment schemes, an approved distribution agent.
An exemption to these licensing requirements arises in the occurrence of reverse solicitation, pursuant to the Licensing and Registration Regulation.
However, since reverse solicitation is an exemption from the licensing requirements, the scope of what is allowed to be provided in this way will be limited. With regard to investment funds, the potential investor approaching any locally non-licensed asset manager will have to be very specific in their request for information in respect of the particular type of fund they wish to enquire about (and will have to identify this by certain investment features of the fund and not by seeking more generic information about what types of funds are available out there for their investment needs), as otherwise it would effectively lead the asset manager into marketing, which is prohibited.
Further, the activity of an asset manager organising local training seminars and other training events in Lebanon, which cover general topics related to asset management, is also permitted under the laws and regulations of Lebanon, provided there is no marketing of any specific product or sale and purchase of any fund units whatsoever.
Common asset management structures
The main structures currently used for collective investment schemes in Lebanon are:
- mutual funds that are (1) open-ended schemes, (2) closed-ended schemes, (3) interval funds, which are a hybrid form of the former two introduced by the CIS Regulation, or (4) Islamic schemes; and
- companies, the use of which is obligatory under the CIS Regulation with regard to real estate funds.
Publicly offered open-ended funds are not permitted to invest in alternative investments (in line with the requirement under the UCITS Directive, which represents the international standard for such funds) but closed-ended funds can invest in real estate. Foreign funds offered in Lebanon may be subject to different structures such as investment companies or trusts.
The pandemic and the deep, ever worsening multifaceted crisis currently facing Lebanon, have created unprecedented challenges for the Lebanese asset managers.
i Existential questions
Lebanese asset managers are faced with challenges that are existential in nature and do not shy away from forcing a reconsideration of essentially what asset management is for. The way this question is to be answered is not known yet.
If asset management is seen as existing in order to be part of the rebirth process for the societies and economies where Lebanese asset managers have a reach and as these are seeking to come out of the crises, Lebanese asset managers will focus efforts on delivering investment that enriches all the stakeholders in the companies they invest in, importantly by also serving the interests and well-being of the wider community within which these companies operate and recruit their staff. They will also consider the environmental and economic consequences of the strategic choices they make, and they will build their way into the future by resisting the use of past blueprints of asset management tools.
On the other hand, Lebanese asset managers continue with their adoption of operating models fit for the future, by implementing technologically advanced platforms and new processes in an effort to achieve resilience, scale, reach and security, particularly prized qualities shown by the experience of the pandemic.
These operating models may focus on durability and purpose to protect both the people and invested technology against future disruption and the risk from the financial markets' evolution.
Conversation with stakeholders and wider community
In this unprecedented context, some of the Lebanese asset managers are in conversations with the wider communities they operate in about how they can fund companies, including small and medium-sized enterprises (SMEs) and start-ups, help create jobs and help develop the economy in a sustainable manner by delivering in sectors for the social good, such as healthcare services, education, knowledge, sustainable energy and environment.
ii EU restrictive regulatory framework
All the while, pre-existing challenges, such as those stemming from the EU's tightening regulatory framework, remain.
There is a distinct indirect impact from the Directive on Markets in Financial Instruments repealing Directive 2004/39/EC's (MIFID II) heightened investor protection requirements on Lebanese asset managers with regard to the product governance rules, which affect how the Lebanese asset managers offer their products or services to EU-based clients via EU placement agents. Lebanese asset managers are required to provide specific information on the proposed target market for a product or fund, as well as on the distribution strategy, in order for the EU placement agents to establish both the appropriateness for such a target market and ensure that marketing is directed to the relevant investor group. Moreover, as the 'target market analysis' requires consideration of the client's objectives and experience as well as the identification of a negative target market, the use of a blanket 'not for retail' legend has become redundant.
Consequently, the additional costs of enhanced technology and operational infrastructure that Lebanese asset managers may have to bring into their business models in order to meet the MIFID II heightened investor protection obligations (such as those of best execution reporting, monitoring and controlling, or thorough investor intentions analysis and recording) may adversely affect business flow and product pricing and thus inevitably restrict the investor base to which they may be able to make an offering.
As such, the part of the Lebanese asset managers with an EU nexus currently seeks to withstand the pressure by integrating competitive technologically advanced platforms and enhancing the targeting of larger investors.
Further, there is an ongoing re-evaluation and adjustment in the corporate strategy of Lebanese asset managers due to the impact of the Alternative Investment Fund Managers Directive, 2011/61/EU (AIFMD). Being non-EU based asset managers that manage non-EU AIFs, Lebanese asset managers are deprived from benefiting from passporting when targeting institutional clients within the EU. This means they have to obtain authorisation from each EU Member State in accordance with the latter's individual private placement regime. In addition, should passporting be extended to non-EU AIFMs in the future, satisfaction of the AIFMD requirements when marketing non-EU AIFs is likely to prove problematic.
As a result, Lebanese asset managers are considering changes to their corporate strategy, whether it be by establishing branches within the EU or entering into strategic alliances by way of mergers and acquisitions with EU-AIFMs so that they are able to offer EU-based funds and retain a competitive foothold with EU clients.
iii CMA electronic trading platform
In 2019, the CMA had announced the creation of an electronic trading platform (ETP) that was to be supervised by the CMA and operated by a consortium of a large local bank, Audi Bank, and the Athens Stock Exchange. The aim was to list a variety of investment products among which, importantly, would be shares of Lebanese SMEs and start-ups, with the broader goal of energising the economy. Although the initiative would have allowed Lebanese asset managers to assume a constructive role by investing in the shares of the SMEs and start-ups or by directly pouring private equity funds into them or consulting them, the current crisis has hindered progress of the ETP project, until wider transformation re-establishing trust and transparency has taken place.
i Other sections
In an effort to facilitate and strengthen international and local investments, the Lebanese government enacted on 14 May 2020, Law No. 163, which introduced a new flexible investment vehicle, the private investment company (PIC).
The PIC is a limited partnership company with certain exceptional arrangements such as that of a limited partner's potential participation in the management without entailing the liability of a general partner.
The PIC's purpose is limited to: (1) investing in financial instruments issued by private companies and entities, which are not traded in organised financial markets on the date of investment; (2) management of such private companies and entities; (3) lending to such private companies and entities provided that the PIC participates or contributes to them by no less than ten percent and provides guarantees to third parties on their behalf; and (4) acquiring movable or immovable assets, exclusively allocated to the needs of its business and according to the legal limitations of foreign ownership of real estate in Lebanon.
The PIC is explicitly exempted from the scope of the collective investment schemes laws and regulations and it benefits from an attractive tax regime.
There are no limitations on subscribing as general partners to the PIC; however, limited partners' shares subscriptions can only be made by way of an exempt offering, de facto outside the scope of regulation for public subscription, to professional clients, counterparties, the general partners, the managers (including an investment management company assuming such role) or investors with at least a 150 million Lebanese pounds initial subscription or its equivalent in foreign currencies.
Crucially, to promote efficiency and performance, the PIC may delegate the managing of its investment funds to one or more asset managers duly licensed by the CMA or any foreign authority of a jurisdiction with equivalent regulatory standards to Lebanon's.
Importantly, aligning with the best fund governance practices, ownership of the assets of the PIC is entrusted to a CMA-licensed custodian, which records them outside its balance sheet and which is independent, by way of not being part of the same economic group, both from the management of the PIC and the investment management company that may be managing the latter's assets. The custodian safeguards the interests of the PIC and performs an oversight of its activities, while bearing full liability of these obligations even if part of assets have been transferred to a third party.
To enhance investment interest, the PIC can issue different classes of shares with a variety of features. By way of risk limitation strategy, the PIC can also hold portfolios of assets on a segregated basis, whereby only creditors related with a particular portfolio can have recourse against it, thus allowing the PIC to preserve successful portfolios even at the lack of a positive performance at an overall level.
By way of a very high-level summary, Lebanese retail funds currently exist only in the form of mutual funds, which do not have a legal personality and are generally exempted from tax. Rather, any income they earn is taxed as and when this income is distributed to the investors, who from a tax perspective are considered as having earned the income directly regardless of its source type (ie, capital gains, dividends, interest, etc) in the tax jurisdiction where this was generated (whether in Lebanon or overseas).
Income distributed to non-resident investors is subject to the relevant Lebanese withholding tax, depending on the type of income and the relevant tax jurisdiction of the income (including Lebanon), unless there is a bilateral tax treaty that applies.
Tax on interest due to the fund is taxable at 5 per cent. Capital gains earned by resident investors are generally taxable in Lebanon (as personal or corporate tax, according to the specific tax laws).
Any funds that would be listed in the Beirut Stock Exchange have their distributed profits subjected to income tax reduced by 5 per cent, in line with the income tax treatment of distributed profits of listed companies.
Lebanese non-retail funds that are CMA-authorised, whether in the form of mutual funds or a company, are subject to the same tax treatment as Lebanese retail funds.
Non-retail unregulated funds established under Law 163 are structured as limited partnerships, which are exempt from Lebanese direct taxes on profits, the latter being rather considered as part of the partners' financial assets.
In turn, then, the partners are exempt from income tax on most sources of the company's profits, except for any income that derives from movable assets that is: dividends of the investee Lebanese companies, interest on short term loans granted to the investee Lebanese companies or income sourced in Lebanon.
The pandemic has delivered a massive systemic shock to societies and economies and has found Lebanon amidst the unfolding of its worst ever crisis, which is multifaceted and complex. The crisis mandates, among others, a transformation and reorientation of the very levers of economy, a recapitalisation of the Central Bank and the banking system and a restructuring and reprioritising of the sovereign's borrowings and public investments.
As other countries and regions, such as the United States, United Kingdom and European Union, have largely employed the monetary and fiscal firepower of their central banks and treasuries to mitigate the impact of the pandemic, Lebanon has not been able to make use of decisive monetary and fiscal actions amidst a stall on reforms.
Granted, both Lebanon's future and the global future is abundantly uncertain, and the challenges are monumental.
In this context, Lebanese asset managers have existential questions to answer.
Without doubting the importance and precedence of general reforms as a prerequisite to social prosperity and restoration of trust, Lebanese asset managers that have started to broaden their lens of duty towards a broad set of stakeholders, importantly including the wider community of the companies they invest in, and they are set to be an organic part of the societies and sustainable economies of the future, resilient and less vulnerable to pandemic shocks.
However, there is no downplaying of the business pressures stemming from the crisis in Lebanon, the pandemic, the restrictive international regulatory framework and the global digitalised competition.
However, the alternative to the forward-looking strategy, consisting of attempts to use past blueprints of asset management with the aim of wealth preservation, disconnected from the social well-being and environmental sustainability, may render the role of Lebanese asset managers ineffective in the recovery of the economy and, moreover, draw their businesses in turn into the latter's downward spiral.
Further on the horizon, there are incoming EU initiatives that focus on environmental, social and governance standards and purport to promote the engagement of finance in building the sustainable economies of the future, respectful of the environment and useful for the community. To this end, with effect from 10 March 2021, asset managers and investment advisers in the EU have to consider the relevance of their investment policies to sustainability factors (such as environmental, social, employee, human rights and anti-corruption and anti-bribery matters), integrate such sustainability risks into their investment decision-making processes and make sustainability-related disclosures to their investors. They also have to integrate such sustainability factors into their organisational models, operational controls and risk management processes.
The role of the EU regulators in delivering effective supervision of this effort and ensuring meaningful implementation cannot be overstated. On the other hand, implementation is expected to have an indirect yet sizeable positive impact in the Lebanese asset management space and beyond.
Further on the global horizon, impactful developments to be watched for are the International Financial Reporting Standards Foundation's initiative for setting up a new international sustainability standards board to harmonise international sustainability reporting standards and climate reporting, as well as industry calls for pricing environmental impacts into company operations and integrating them into the latter's income statements that affect company earnings.
Both of the above, if materialised, are expected to impact global asset management in ways that engage it more acutely with broader sustainability, societal and planetary efforts.
1 Rita Papadopoulou is a partner at Abou Jaoude & Associates Law Firm.