In the past few years, there has been an increasing demand from small and medium size investors in Saudi Arabia for mutual and investment funds investing in the domestic and the international markets. With encouragement from the Saudi Arabian Monetary Agency, Saudi banks compete with regional and international financial institutions by developing and offering many open-ended and closed-ended funds to the investors.

In light of these developments H.E. The Minister of Finance in his decision No. 3/2052 dated 24 Rajab 1413H has approved the Regulations for Investment Funds and Collective Investment Schemes that are offered by Saudi banks. These Regulations address a number of issues related to the establishment, operation and marketing of open-ended and closed-ended mutual funds. The objectives of the Minister of Finance and the Agency in issuing these Regulations are as follows:

1.  To protect all investors.

2.  To ensure that only well managed and reputable institutions with adequate capital offer these services.

3.  To ensure that the quality of services and the efficiency of the market is enhanced and its credibility strengthened.

4.  To promote the development of supervisory standards in the GCC region.

These regulations are comprehensive and self-explanatory. However, they are to be read and applied in conjunction with the policies outlined in this memorandum.

1. Role of Saudi Banks :

The Agency's policy is to permit only Saudi Banks to offer such products and services to the public in Saudi Arabia. The Agency requires Saudi Banks to play the role of a Fund Manager. The Banks may also act as custodians, administrators and marketeers or they may delegate some of these functions to other financial institutions. Nevertheless, they must take full responsibility for the management of their Investment Funds and remain accountable to the public and the authorities in the Kingdom at all times.

2. Considerations for Granting Permission :

A. Organisational Capability:

In granting a Saudi Bank permission to establish and market such funds the Agency makes an assessment of its organizational capability and the managerial expertise at its disposal. Banks planning to offer these product must have the organization structure, the operational and accounting systems, and the decision making and control procedures that are essential for providing an efficient, cost effective and profitable service. The Banks must also have appropriate managerial talent and expertise for this area.

B. Capital Adequacy

Saudi Banks wishing to offer these services must be well capitalized and meet all regulatory and legal capital requirements. While such services are of a fiduciary nature and do not require an allocation of capital for credit risk, in practice a strong capital base provides comfort to investors and the regulatory authorities for any losses that may arise from management negligence or fraud.

C. Management Capability

An important factor in granting permission to a Saudi Bank is the competence and integrity of its management which is assessed against the following criteria :

• Persons acting as managers should possess adequate qualifications to carryout their responsibilities including appropriate technical knowledge and skills.

• Managers must have appropriate professional experience.

• Such person must have probity and soundness of judgement commensurate with their positions.

• Such Persons are expected to fulfill their responsibilities with diligence and to protect investors.

Further-more it is expected that a person managing such funds :

1.  Has not committed an offence involving fraud or dishonesty.

2.  Has not contravened or broken any laws or provisions in any jurisdictions that were aimed at protecting investors and depositors.

3.  Has not engaged in any business practices that appears to the Agency as deceitful, oppressive or which reflect discredit on his methods of conducting business.

3. Funds to be domiciled in Foreign Jurisdictions :

From time to time for operational and other reasons, a Saudi Bank may wish to establish an investment fund outside of Saudi Arabia. In some instances this may be in the form of a separate legal entity. In such cases, the Saudi Bank is required to obtain the Agency’s approval prior to the establishment of such a fund. The bank should also ensure that it complies with the laws and regulations of Saudi Arabia and those of the relevant foreign jurisdiction.

4. Borrowings by the Fund :

In general the borrowings by a fund shall be limited to a percentage of its net assets value as agreed with the Agency at the time of establishment of the fund. These borrowings from the bank or from any other source shall be at the best available market rate. Funds derived from Repos activity shall be considered as borrowings. In determining the permissible borrowing level, Saudi Central Bank will consider the nature of the fund i.e open-ended or close-ended; the nature of underlying assets; and whether leveraging would be an important element of the investment vehicle. Loan for establishing the fund (the period of such loans shall not exceed twelve months from the date of the establishment) and short term borrowing to meet temporary shortages in liquidity shall be permitted.

5. Restriction on Investment Powers :

As indicated in Section 6 of the Regulations, the Agency shall issue guidelines to the Banks on the following restrictions on their investment powers. These shall be updated periodically to reflect the changes in the market conditions. Currently, these shall be as follows:

These regulations and restrictions are to apply immediately from the date of this circular. Any existing investment and mutual fund that may be in non-compliance of these rule should identify any violations and discuss these immediately with the appropriate staff in the Banking Control Department of the Agency.

Translation

Ministerial Decision No. 2052 Dated 24/7/1413 H

H.E. The Minister of Finance and National Economy pursuant to the powers delegated to him and in accordance with Article 16 of the Banking Control Law, issued under Royal Decree No. M/5 dated 22/2/1386H (which reads - The Monetary Agency may, with the approval of the Minister of Finance and National Economy, issue general rules regarding the following matters...3. Fixing the terms and conditions which the banks should take into consideration when carrying out certain types of activities for their customers);

• and due to the noticeable activities of the banks in introducing new channels for investment other than the deposits, to meet the trends and the interest of the various investors; and to match the investment innovations at the international level, by establishing investment funds to be managed by them as new investment vehicles.

• and due to the increasing interest of the public and to enable local banks to attract the nation's savings and to provide opportunities to establish various investments vehicles and with reference to the letter of H.E. Governor of Saudi Central Bank, and for the public interest we decide the following :

Approving the rules for organizing the Investment Funds established by the local Banks contained hereunder;

1. Definition :

2. Supervisory And Organizational Framework :

2.1 Supervision :

Saudi Central Bank shall supervise all the activities of the domestic banks in the Kingdom - including their investment funds activities. Therefore, all the domestic banks that have investment funds should adhere to these rules precisely and should amend the terms and conditions of existing funds to meet the requirements within a period not to exceed one month from the issuance of these rules.

2.2 Organizational Structure

a. A bank shall establish an Investment Department to be responsible for managing the clients' investment funds on a fiduciary basis. This Department shall be independent of other departments of the bank that are responsible for managing its own funds.

b. The main activities of the Investment Department shall be organizing and executing operations concerning subscription and redemption of units and evaluation of the net assets of the investment funds. Also this Department shall be responsible for allocating the investors monies between various types of assets and for managing the assets for the benefit of the investors.

2.3 Administrative Structure

Saudi Central Bank should be formally advised of the officials responsible for the management of the Fund. These officials shall possess requisite qualifications and proven integrity.

3. Types of Funds And Subscription in Them

3.1 Types of Funds :

3.2 Participants in the Funds :

3.3.The Agency Approval for Establishment of New Funds

1. A copy of the draft terms and conditions that will form the basis of a contract between the fund manager and the investors.

2. The Fund Manager must identify the target market segment for the fund. An amount must be specified as the minimum entry requirement.

3. The brochure and the advertisement issued by the bank and the custody contract and any other contracts which Saudi Central Bank may inspect. It must be clear to the bank that they must have the written approval of Saudi Central Bank if they wish to change the rules and regulations or any other agreement already approved.

4. The planned "go live" date must be stated. If a minimum amount is to be raised by the "go live" date, it must be clearly specified. Commitment should be made to return any amounts raised by a specified date in case of any aborted fund.

5. The nature of the fund, the type of assets and trading concepts must be detailed.

6. As far as possible, the risks to investors must be highlighted.

7. Details of the investment policies of the fund.

8. Details relating to the fund manager, sub-manager, custodian, auditors etc. must be provided. Saudi Central Bank must be advised of any subsequent changes.

9. Details of all fees paid to the Manager and the method of its calculation for managing the fund.

Terms And Conditions :

These must form the basis of an agreement between a fund manager and the investors. It must, as a minimum, include the following :

1. Describe the nature of the fund and its characteristics including whether it is an open or a closed fund.

2. Details of the sponsors, managers and custodians.

3. Investment objectives of the fund including types and mix of assets and instruments and limits or restrictions if any.

4. Risks associated with the investments in the fund must be clearly specified.

5. A statement specifying that the Bank does not guarantee the principal amount invested or any return on it.

6. The minimum entry level for an investor to participate should be clearly stated. Minimum amounts for redemptions and any other restrictions should be clearly specified.

7. Valuation date and the subscription/redemption days must be clearly stated. The date when an investor’s funds start earning income (loss) and when he can collect redemption funds must be stated.

8. Nature and frequency of reporting to customers must be specified. Reports must be sent to the customer as desired by them.

9. All fees, charges and expenses to be paid to the fund manager must be specified in quantifiable terms. All other expenses to be deducted from net assets of the fund-legal, audit, custody, brokerage, sub-management etc. - must be identified.

10. Liquidation conditions and procedures if any should be specified.

11. Agreement must be subject to the Saudi laws and jurisdiction.

4. Operational Requirements And Restrictions

4.1 Custody of Fund’s Assets

1. The promoting bank shall be responsible for maintaining a fund's assets in the name of the fund and is allowed to nominate another institution to carry out this function as a custodian.

2. For mutual funds it must be understood that the assets of the portfolio belong to the investors and the manager is managing the portfolio without any claim to the title of the assets. Therefore, it should be held by a party approved by Saudi Central Bank.

3. If the manager himself is the custodian it must legally separate the fund's assets from its other assets in case of any claim against the manager. The custodian or the manager must ensure that they cannot use the assets of the fund as a collateral for their own operations.

4. The manager shall reconcile the valuation provided by the custodian against his and/or other managers valuations, but shall use the custodian’s valuation for calculation of unit prices.

5. The net assets value must be fixed per unit of the fund by deducting the aggregate obligations of the fund from the aggregate assets and the remaining to be distributed on the units of the fund.

6. The manager, after the approval of Saudi Central Bank, may delay the time for fixing the value of the net assets of the fund in any of the following cases :

7. All investors have a claim to net assets of the fund and its title on a collective basis. In case of liquidation the liquidator after deducting relevant charges, shall distribute the assets on a pro-rata basis to the investors.

4.2 Marketing :

The bank shall choose a reasonable method for marketing a fund established by it. Potential customers must be furnished with a brochure or prospectus containing complete and up-to-date information about the fund.

4.3 Liquidity Requirements :

The establishing bank must maintain an adequate level of liquidity at all times to meet the redemption requirements.

4.4 Currency of The fund :

The currency to be used by the fund shall be defined for evaluating the assets and for subscription and redemption operations. For funds with assets denominated in currencies other than Saudi Riyal, the currency risk must be highlighted in the offering prospectus and the terms and conditions.

4.5 Fees And Other Charges :

The establishing bank may fix appropriate fees pertaining to the establishment and management of a fund within the limits accepted by Saudi Central Bank. However, the bank should disclose - in the customer agreement - the method of calculating all commissions, fees, costs and charges which are to be paid by the customers and are to be deducted from the assets of the fund before determining the net value of the assets. These should be stated, as far as possible, in quantifiable terms. If there are variable and unquantifiable costs, provision for their disclosure must be made. All stated fees should be the maximum, and the banks should not charge any expenses and fees beyond those mentioned in the agreement.

4.6 Pricing of Units

Pricing of units shall be fixed by dividing the net value of the assets by the number of units of the fund. For all public announcements, disclosure and general advertisements, the following rules will apply when unit prices and associated data is to be presented :

1. All unit prices must be net of all charges. If bid and offer prices are quoted they must be shown separately. Bid and offer prices should be clearly marked as such.

2. Comparative analysis of unit prices must be such that bid is matched against bid and offer against offer.

3. At least 2 decimal places must be used for all unit price calculations and analysis.

4. If percentage change of a unit price is to be shown then the latest unit price must be compared against the unit price that was the most recent before the current unit price. Date of most recent price should be indicated.

5. If any variation to the above is used then the accompanying notes must explain clearly the basis used.

6. All funds must publish unit prices at least once a quarter after coordination with Saudi Central Bank.

7. The unit prices published must be the actual prices that are applicable to the general public.

8. Advertising and announcements relating to a fund’s performance must be done on a consistent basis using a calendar year.

4.7 Date of Valuation of The Units

The bank shall specify the day for the valuation of the fund’s units and the days on which investors can subscribe for or redeem units. The redemption should be based on the net value of the assets of the fund on a date subsequent to the date when applications for redemption of the units are received.

4.8 Sponsor's Money

A sponsor may be required to provide the seed money for an open-ended mutual fund. Such amounts must be disclosed and treated in the same manner as other investors’ money. It is expected that after an initial phase, the duration of which will be approved by the Agency, the seed capital will be withdrawn by the sponsor. Subsequently, no further investments by the sponsor will be permitted. Subscriptions and redemptions of seed capital are to be made on the same terms and conditions and prices as those applicable to any other investor.

4.9 The Legal Framework

A fund established in Saudi Arabia shall not be considered an independent legal entity but only as a contractual agreement between the investment department of the bank and the customers for the management of funds collectively subscribed.

4.10 Self-Dealing And Related Party Transactions

Each fund manager offering mutual funds to the public should develop policies and procedures for guiding its staff to prevent insider trading, self-dealing, dealings with related and affiliated parties and other situations of conflict of interest. These should be documented in a code of conduct for employees and should be the basis for assessing compliance.

4.11 The Fund Manager Must Apply The Following Rules :

1. A fund manager may provide brokerage and other intermediary services to a fund. These services should be priced on a competitive basis and must be at the market rates.

2. Investments in the fund : Except for the investment of funds as seed capital no other investments are permitted.

3. Investment in shares of Fund Manager: An investment fund is not permitted to acquire any securities - equities or debt - issued by its sponsoring fund manager.

4. Transactions with Related and Affiliated parties : Any transactions with related and affiliated parties of the Fund Manager should be at market rates and should be disclosed. The fund managers and custodians are responsible to the investors for safeguarding their interests. All transactions carried out by a fund manager must reflect the interest of the investors and due diligence.

5. Accounting, Auditing And Other Supervisory Matters:

6. Miscellaneous Rules

Signature of Minister of Finance and National Economy

M. A. Aba Al-Kheel