Mr Klaus Henrik Wiese-Hansen
Partner

Klaus Henrik is specialized in insurance and reinsurance, financial markets legislation, pensions and asset management.

He advises domestic and international insurers, insurance intermediaries, asset managers, investment banks, credit institutions, financial enterprises, various types of fintech companies and industry players. His assistance includes establishment of life- and non-life insurance companies and pension funds, regulatory assistance, product development, transactions and restructuring of finance businesses, claims and litigation, in addition to recourse and cost-reduction tuning. He also advises commercial companies and trade unions in matters related to insurance and pensions, including M&As.

He is a trusted advisor to CEOs and top management of many of his clients. He litigates regularly before Norwegian courts and is admitted to the Supreme Court. He has authored a number of books and articles within insurance, pensions, banking and financial regulatory matters, and is ranked among Norway’s leading lawyers within financial regulatory, insurance & reinsurance and pensions.

Ms Ingrid Austjore Valseth
Associate

Ingrid works at Schjødt’s Financial Regulatory department. Ingrid specialises in matters connected to both domestic and international companies, and regularly advises on transactions, customer contracts, product development, the setting up and closing of businesses, Norwegian and EU/EEA regulatory compliance and due diligence, as well as jurisdictional questions. She has broad experience in assisting fintech companies, securities and alternative investment funds and managers, insurance companies and intermediaries with their day-to-day legal issues.

She holds a Master of Laws from the University of Bergen and a Bachelor of Laws from the University of Agder. Prior to joining Schjødt, Ingrid had traineeships both nationally and internationally and provided free legal aid to vulnerable groups in the local community through several non-profit organisations. While writing her master’s thesis, she also worked as a legal advisor in the Norwegian Communications Authority, with responsibilities related to international relations and regulatory affairs, especially environmental sustainability.

Long awaited changes to Norwegian fund legislation in 2024 – But too late?

1. Introduction

During 2024, several changes were made to the Norwegian investment fund legislation in order to make the Norwegian investment fund management market more competitive and up to date, compared with our EU/EEA-neighbours. The changes include new opportunities for fund managers and investors in Norway, as the Norwegian Ministry of Finance now will allow currency hedging within a single share class and provide further flexibility for specialised funds. Furthermore, Norway has finally, three years late, implemented the EU directive and regulation of cross-border distribution of investment funds.

These amendments align Norwegian regulations more closely with international practices, addressing significant disadvantages faced by Norwegian fund managers in the global market. While the amendments are widely regarded as a positive development, they raise a critical question: are these changes too few and too late to reverse the trend of Norwegian-domiciled funds relocating to more favorable and flexible fund jurisdictions?

2. Changes to the Securities Funds Regulation

2.1 Addressing Long-standing Challenges for Norwegian Fund Managers

On 6 November 2024, the Norwegian Ministry of Finance adopted amendments to the Norwegian Securities Funds Regulation, introducing new opportunities for fund managers and investors. These changes, for the first time, allow currency hedging within a single share class (rather than across all share classes) and provide greater flexibility for specialised funds.

Norwegian fund managers overseeing locally established securities funds have long faced limited room for maneuvering in the face of international competition. The nearly unanimous Norwegian fund industry has, for years, called for regulatory changes to enable Norwegian-domiciled funds to operate on an equal footing with their foreign counterparts. Among the most significant competitive disadvantages are Norway-specific rules on bond fund taxation and the inability to implement currency hedging for individual share classes.

These disadvantages have led several major fund managers to move their Norwegian-domiciled funds abroad, as other Scandinavian and EU/EEA jurisdictions offer more competitive regulatory frameworks for locally established securities funds. This trend poses a significant risk of job losses, diminished expertise, and reduced economic value and tax revenues for Norway.

2.2 Currency Hedging in Share Classes

One of the most significant aspects of the new regulations is the ability to offer currency-hedged share classes. This change enables Norwegian fund managers to protect investors from currency risk by offering shares in different currencies with corresponding hedging measures.

For investors trading in currencies other than the fund’s base currency, protection against exchange rate fluctuations can be a crucial factor when selecting a fund. Currency hedging in share classes is particularly relevant for funds with clients from various countries, and is especially important for bond funds, where exchange rate fluctuations can represent a relatively large – and often undesirable – part of the overall exposure.

The fund industry in Norway has for a long time advocated for this flexibility to meet the increasing demand for currency-hedged investment products in the Norwegian market. Offering investors protection against currency fluctuations between their trading currency and the fund’s base currency could make Norwegian-domiciled funds more attractive to both local and international investors.

However, while this change has been eagerly awaited, it’s worth noting that many fund managers have already relocated their funds to jurisdictions with more permissive frameworks, among them Norway’s nearest neighboring countries Sweden and Finland. This move allowed them to provide currency-optimized solutions long before the regulatory amendments in Norway took place.

2.3 Greater Flexibility for Specialised Funds

In addition to allowing currency hedging in share classes, the new regulatory amendments provide exemptions from the provision in Section 7-2 of the Securities Funds Regulation, which limits the use of repurchase agreements to 50% of a specialised fund’s assets. Going forward, 100% of a specialised fund’s assets can be allocated to such agreements, in line with what is allowed in the rest of the EU/EEA. The change will provide greater flexibility for specialised funds, which are intended to provide more freedom when choosing investment strategies compared to other securities funds.

This change grants fund managers in Norway more choices when managing specialised funds’ assets in line with their investment strategies, and to better adapt to varying market conditions. It is another long-requested adjustment by the industry and is expected to boost the competitiveness of Norwegian-domiciled specialized funds, making them more attractive to investors with specific needs.

2.4 A Welcome, Yet Incomplete, Reform

The new regulations took effect immediately, which offered increased flexibility and opportunities to create tailored solutions for Norwegian-domiciled securities funds and specialised funds. However, the key question is whether the new rules can halt or slow the redomiciliation of existing funds to foreign jurisdictions and the establishment of new funds outside Norway. Whether the adjustments can reverse the trend for fund managers already established abroad, remains uncertain.

A broader review of the Securities Funds Act could have signaled the ministry’s commitment to a more competitive framework. Without such signals, there are concerns that the trend of funds relocating out of Norway may continue.

3. New Rules for Cross-border Fund Distribution Imple­mented in Norway

3.1 Implementation in Norway

On 1 October 2024, changes to the Norwegian Alternative Investment Fund Managers Act and the Norwegian Securities Funds Act came into force, implementing Directive (EU) 2019/1160 (the Directive) and Regulation (EU) 2019/1156 (the Regulation) on the cross-border distribution of investment funds. The implementation of these EU-rules has been delayed, as they have been in force in the EU from 2021, which has caused issues for Norwegian managers of alternative investment funds wishing to pre-market in the EU.

The most important element of the new rules is the introduction of a notification procedure for cross-border pre-marketing of alternative investment funds (AIFs). The rules also include a process to de-notify marketing of an AIF or a UCITS in a host Member State, and other elements pertaining to cross-border marketing.

3.2 Pre-marketing of Alternative Investment Funds

When the Alternative Investment Fund Managers Directive (AIFMD) was introduced, it regulated “marketing”, but not any of the activities that typically happen before the marketing phase. Consequently, this was left to the discretion of each jurisdiction. Most EU/EEA jurisdictions have accepted some form of “pre-marketing”, but practice has varied.

Member States are required to allow managers of alternative investment funds to pre-market in the EU/EEA area. The rules define pre-marketing as the “… provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors…”, and includes a formal notification process for pre-marketing.

In essence, the most important element of pre-marketing is that it should not be possible to commit or invest in the product based on the information or documentation provided during the pre-marketing phase. The manager must ensure that investors are only accepted once the marketing notification procedure has been completed.

Any subscription by investors within 18 months following the start of pre-marketing, shall be considered to be the result of actual “marketing”, and completion of the marketing notification process for the relevant AIF is required before any such investors may be accepted, effectively excluding the ability to accept investors based on reversed solicitation during that same period.

3.3 Non-EU/EEA Managers

The Directive and the Regulation do not regulate the rights of non-EU/EEA managers and non-EU AIFs, leaving it up to each member state to decide whether to allow fund managers to use the pre-marketing regime or not.

Unfortunately, the new Norwegian rules on pre-marketing exclude non-EU/EEA managers, regardless of where the AIF is established. The same applies to Norwegian feeder funds to master funds established or planned to be established in non-EU/EEA countries.

Since the definition of what constitutes “pre-marketing” is so wide, there is limited room for any “pre-pre-marketing” (i.e. the stage “before” pre-marketing), but this remains to be seen in practice.

3.4 Non-Professional Investors and Sub-Threshold Managers

The Directive and the Regulation leave the option of pre-marketing and marketing to non-professional investors to the discretion of each Member State. Initially, the draft from the Norwegian Financial Supervisory Authority did not allow for EU/EEA managers to pre-market to non-professional investors. However, following a public hearing request from Schjødt (us), the rules now permit this, provided the fund and its strategy can obtain subsequent marketing authorisation for non-professional investors in Norway. The rules for pre-marketing to non-professional investors align with those for professionals, but are subject to stricter conditions.

Furthermore, the EU-rules on pre-marketing are only relevant for managers authorised under local law implementing the AIFMD. In addition, the EuVECA and EuSEF regulations contain rules on cross-border pre-marketing, and these funds may be managed by sub-threshold managers. EuVECA and EuSEF funds may also, subject to certain conditions, be pre-marketed and subsequently potentially marketed to certain categories of non-professional investors.

Other sub-threshold managers will not be able to pre-market on a cross-border basis in the EU/EEA area, unless the local regime in the relevant jurisdiction allows for this. Norwegian sub-threshold managers may continue to pre-market to Norwegian professional investors, but if the relevant manager is not an EuVECA or EuSEF manager, the right to pre-market and potentially subsequently market in other EU/EEA countries will ultimately depend on the local regime in the relevant jurisdiction.

Norway consequently does not allow for EU/EEA sub-threshold managers that are not EuVECA or EuSEF managers to pre-market and potentially subsequently market their funds to Norwegian investors. This approach applies regardless of whether the investor is professional or non-professional.

3.5 Other Relevant Issues

The new rules on cross-border distribution introduce uniform rules for certain notifications for both AIFs and UCITS, including for de-notification of marketing. This has previously been up to each jurisdiction to decide, and different countries have established different regimes.

Since the AIFMD at the outset does not regulate marketing of AIFs to non-professional investors, it is also of interest to note that the new rules now include requirements for facilities available to retail investors. However, there is no requirement to have a physical presence or to appoint a third party locally. In Norway, these rules will apply to all AIFMs authorised to market to Norwegian non-professional investors, regardless of whether such marketing is carried out on a cross-border basis or not.

3.6 What Are the Effects of the Delayed Implementation?

The delayed implementation of EU legislation in Norway is problematic for the Norwegian asset management industry, because it results in an uneven playing field and regulatory uncertainty.

Furthermore, when Norway has the discretion under EU legislation to choose how to regulate the asset management industry, we note that in some instances the result is unnecessarily restrictive. As an example, the exclusion of non-EU/EEA funds and funds managed by non- EU/EEA managers from the pre-marketing regime has been proposed and adopted without anyone providing a good reason to do so. The result of the exclusion is that these managers could – and we have seen this happening in practice – decide not to include Norway in their marketing plans, which again would result in that Norwegian investors have fewer products to choose from than what is the situation for investors in other EU/EEA countries.

As previously mentioned, we are seeing a trend of Norwegian fund managers migrating their funds and activities abroad in a bid for a more stable and favorable environment for their management activities. The issues mentioned above regarding the delayed implementation of the cross-border distribution rules will most likely not have caused this on an isolated basis, but it certainly does not help the Norwegian asset management industry reaching its full potential, which is unfortunate for the Norwegian asset management industry and for Norwegian investors.

4. The Effect of Norwegian Fund-Taxation Rules

Norwegian tax regulations also contribute to creating significant obstacles to establishing domestic investment funds, especially for those pursuing strategies outside the participation exemption method, such as debt funds.

Unlike other EU/EEA countries, Norway lacks tailored tax rules for funds (except from mutual funds) and does not offer regulatory advantages like umbrella fund structures or funds with variable capital. These gaps make Norwegian fund structures less competitive and flexible compared to those in other EU/EEA-jurisdictions.

As a result, many Norwegian asset managers are compelled to establish and manage funds abroad, where they can avoid these disadvantages. This migration of capital and expertise contributes to weakening Norway’s ability to develop a robust and more competitive domestic asset management industry.

Furthermore, exit tax rules and the general lack of regulatory predictability create additional barriers, discouraging both local and international players from viewing Norway as an attractive location for mutual and hedge funds.

Addressing these issues through regulatory and tax reforms is essential to reversing the trend, retaining capital, and fostering a thriving asset management ecosystem in Norway. Without changes, Norway risks falling further behind its peers in the global financial market.

5. Summary

Recent regulatory changes in Norway, such as allowing currency hedging within share classes and greater flexibility for specialised funds, are positive steps for the Norwegian asset management industry. However, critical challenges remain:

– Delays in implementing EU legislation create regulatory uncertainty and hinder competitiveness;

– Norway’s overly restrictive interpretations of EU rules, like excluding non-EU/EEA funds from pre-marketing regimes, limit investment options for Norwegian investors and deter international managers from entering the Norwegian market; and

– Norwegian taxation rules still contribute to an unnecessarily hostile fund-taxation environment, creating substantial obstacles for the Norwegian asset management industry.

These issues contribute to the ongoing trend of Norwegian fund managers relocating funds and activities abroad in search of more favorable conditions. While the new rules described above address some of the market players’ concerns, they do little to reverse the perception that Norway’s financial market is undervalued by policymakers.

A broader reform of the Securities Funds Act and fund taxation rules, as well as stronger government commitment to competitiveness in the financial market in general, are needed to retain funds and attract new investments. Without such measures, Norway risks further erosion of its asset management industry, affecting both market players and investors alike.