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This is a summary of essential provisions of Circular X/2005 issued by the Spanish regulator, the CNMV, on 3 November 2005. (NOTE: this summary for AIMA members is based on information kindly provided by AIMA members, the law firm of Cuatrecasas, and an English translation of the Circular provided by another law firm.)

The Spanish regulations create a specific status for hedge funds for qualified investors – "Free Investment Funds" (HFs). Very briefly, key characteristics include:

• maximum leverage up to 5x NAV; apparently, no limits on exposure in derivatives
• minimum investment of €50,000 and only marketable actively to qualified investors (ref the Prospectus Directive)
• quarterly / 6-monthly NAV and liquidity provisions: max 3 months' notice for redemption and max 2 years to effect redemption, with possibility of lock-ups
• ability to create single HFs and FOHFs and no specified restrictions on concentration / investments, although master-feeder structures may not be possible
• foreign open-ended funds may be marketed (if expressly authorised), provided they: (a) comply with criteria applying to Spanish funds and (b) essentially, if they are managed by an OECD–domiciled entity and supervised accordingly but note that this may be denied in the interests of protection of the local industry. Closed-ended funds would follow the provisions of the Prospectus Directive.
  

For retail investors, there are "Funds of Free Investment Funds" (FOHFs) which can be freely marketed. Note the section dealing with limits on such FOHFs (in Regulation 19); this was one of the issues of concern in the final regulations and the Circular now provides:

1. minimum investment of 60% in other eligible funds;
2. as to eligible assets for FOHFs – these may be funds domiciled in an OECD country, where the management company or investment adviser is subject to supervision (registration is enough) and domiciled in an OECD country, although such investment will not be allowed where a FOHF invests more than 10% in entities with the same characteristics or in other funds (paragraph 3 of Reg. 19);
3. that investment in managed accounts is permitted – allowing investment in entities, vehicles or structures domiciled in an OECD country – or managed or advised by an entity domiciled in an OECD country, with investment objectives similar to a Spanish HF;
4. this can be through use of derivatives, the underlying assets of which are as in (b) or (c) HF indices (Reg 19.2); and
5. the maximum exposure to one fund (10%) may be temporarily exceeded (Reg 19.5).

FOHFs must provide 15 days' max notice for redemptions and 15 days max for the payment of redemptions.

Umbrella funds / different classes or series of shares will be allowed.

Managers – for both HFs and FOHFs – will be subject to stricter requirements and controls than other asset managers (ie as to human resources, equity requirements, risk control, organisational, policy and procedural resources, risk measurement and control systems). Managers intending to manage HFs must be expressly authorised by the CNMV, which will check compliance with the requirements.

Although certain tax issues are now either addressed or should be soon, the treatment of tax for investors in non-Spanish non-UCITS funds remains unfavourable so that marketing via FOHFs or establishing a Spanish fund appear the only viable alternatives.

For further details as to the regulations (expected to be approved by the end of 2005), members should consider the Circular itself.

24 November 2005