Proposal for Expanding the ERA’s Financial Benchmarking System and Implementing Performance Agreements

Investment funds are defined as retail funds or public funds, similar to those covered by the EU directive on Undertakings for Collective Investment in Transferable Securities (UCITS). These funds are subject to legal requirements for governance, qualifications of fund administrators, diversification of fund assets, regulation, and supervision, with the primary goal of protecting retail investors. The law requires that investment funds invest at least 90 percent of their assets in exchange-traded securities, which is similar to the model used in the EU Directive on UCITS. This is intended to ensure that investors can sell their investments without suffering losses due to volatile price movements or the lack of an active market. In contrast, alternative investments, such as private equity, venture capital, hedge funds, and REITs, are only eligible for institutional investors, such as pension funds, insurance companies, foundation endowments, and very wealthy individuals, due to their higher risk and the minimum investment requirements, often exceeding USD 5 million. The law distinguishes between investment funds and alternative investments, which are considered to be totally different with respect to eligible investors, eligible assets for investment, and requirements for governance, diversification of assets, reporting, and regulation. The law does not provide for a separate law for alternative investments, citing concerns about regulatory costs to taxpayers and regulators, as well as the limited capacity of the Financial Regulatory Commission (FRC) to register or supervise alternative investments. To promote investment funds, the tax law should provide that investment funds are "transparent" or "pass through" for tax purposes, meaning that either investment funds are not subject to income tax, but investors in the fund are subject to tax on income and capital gains from investment funds, or, if funds are subject to tax on their income and capital gains, investors in the fund should be able to claim a credit or deduction for taxes paid by the fund. The law on investment funds is designed to provide a framework for the establishment and operation of investment funds in Mongolia, with the primary goal of protecting retail investors. The law requires that investment funds invest at least 90 percent of their assets in exchange-traded securities and distinguishes between investment funds and alternative investments, which are considered to be totally different with respect to eligible investors, eligible assets for investment, and requirements for governance, diversification of assets, reporting, and regulation. The law on investment funds is divided into six sections: General Provisions, Investment Fund Organization, Management, and Governance, Investment Fund Operations, Prohibitions on Practices with Respect to Investment Funds, Enforcement Regarding Violations of Law, and Miscellaneous Provisions. The law provides for the establishment of investment funds, the requirements for fund governance, the qualifications of fund administrators, the diversification of fund assets, regulation, and supervision. The law also provides for the prohibition of certain practices with respect to investment funds, including misuse of information, fraud, insider trading, material misstatements, and falsification of accounting, financial records, and filings. The law provides for the enforcement of violations of the law, including investigations, remedial measures, and penalties for civil infractions, as well as criminal offenses. The law on investment funds is an important step in promoting investment funds in Mongolia and providing a framework for the establishment and operation of investment funds. The law is designed to protect retail investors and provide a means for them to invest in the capital markets.