It seems that the mutual fund market will finally undergo a thorough makeover, after prolonged discussions and bureaucratic delays. Minister of Finance Ronnie Bar-On has signed a comprehensive amendment to regulations of the Mutual Funds Law. New kinds of funds will become available, while other changes will affect the classification of bonds, their structure, and prospectuses. This is the the most far-reaching legislative change in the past decade in the mutual funds industry.
Bar-On said, “This new reform will improve the level of competition, transparency and sophistication in the Israeli capital market to the benefit of investors. This is another important step in the process of integrating the Israeli economy into the global village.”
The Israel Securities Authority , which initiated the reform, has welcomed the legislation. Securities Authority chairman Moshe Tery said, “Today, we’ve taken another important step towards achieving our goal - a sophisticated and efficient capital market.”
The amendment will now go to the Knesset Finance Committee for approval, which should be forthcoming within the next two week, after which the reform will come into effect.
The main change in the mutual fund sector will be the introduction of new types of funds, expanding the range of mutual funds beyond the current bonds, stocks, and flexible funds. The first kind of new mutual fund will be money market funds, which will basically function as an alternative to bank deposits. Money market mutual funds will only invest in short-term Israeli or foreign bonds with a duration of up to one year. The minimum rating for these securities will be AA.
Funds of funds will also be introduced - mutual funds that only invest in other mutual funds. Funds of funds will not charge management fees, since these will be charged by the mutual funds in which they invest. This will also give the general public access to hedge funds, which are currently only available to wealthy investors.
The reform also introduces leveraged mutual funds. These funds will have 40% leverage, double the maximum level of leverage on the assets of regular mutual funds. The new leverage funds will be able to carry out short selling, obtain credit, use futures contracts, and make repo deals. Israel’s repo market is still in its infancy, and mutual funds can currently participate in Bank of Israel tenders. In future, the repo market is slated for development, with trading on the Tel Aviv Stock Exchange (TASE) among institutional investors.
There will be a new classification of mutual funds. At present, mutual funds are heterogeneous and cannot be compared with each other. For example, the yield of a fund that invests in the US is included in the same group as a fund that invests in emerging markets. The new classification will create homogeneous groups of mutual funds.
Each mutual fund will have a maximum exposure profile to stocks and foreign currencies (the riskiest assets) on the basis of a sliding scale (rated 0 to 6 for foreign currency, and A to F for stocks). This will enable investors to simply and easily understand a mutual fund's risk level.
The reform in prospectuses will create a new and user-friendly structure for prospectuses. They will include key information about the mutual fund and biographies of its managers.
In addition to the reforms mentioned above, the Securities Authority is planning more changes. It also wants to pass Amendment 13 to the Mutual Funds Law. The most noteworthy of the proposed changes included in this amendment will allow international financial institutions to market their mutual funds in Israel. Amendment 13 also allows the collection of different management fees from investors in mutual funds on the basis of the length of time of the investment and its amount.
However, Amendment 13 will probably not come into effect for a long time, because it involves a change in the law that the Knesset plenum must approve. The amendments signed by Bar-On affect only regulations under the law, and only the Knesset Finance Committee has to approve them for them to come into effect.
Published by Globes [online], Israel business news - www.globes.co.il - on October 11, 2007
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