LAW ON COLLECTIVE INVESTMENT UNDERTAKINGS

LAW ON COLLECTIVE INVESTMENT UNDERTAKINGS Official translation REPUBLIC OF LITHUANIA LAW ON COLLECTIVE INVESTMENT UNDERTAKINGS 4 July 2003 No. IX-1709 Vilnius CHAPTER ONE GENERAL PROVISIONS Article 1. Purpose and Scope of the Law 1. This Law regulates management activities of collective investment undertakings and state supervision of the activities. The purpose of the Law is to ensure protection of interests of the unit trust/common fund co-owners and shareholders of investment companies with variable capital. 2. This Law seeks to bring the regulation of collective investment undertakings in line with the legal acts of the European Union specified in the Annex to this Law. 3. The Law shall apply to the services provided by collective investment undertakings, save for those whose units or shares are not the subject of a public issue in the Republic of Lithuania or European Union states or, based on the drawing up of their documents, are to be distributed to the public exclusively outside the European Union states. 4. The Law shall not apply to services provided to the State, the Bank of Lithuania, the ECB, central banks or institutions of the European Union states engaged in state debt management. Article 2. Definitions For the purposes of this Law: 1. "qualifying holdings" shall mean any direct or indirect holding in a management company which represents 1/10 or more of the capital or of the voting rights or which make it possible to exercise a significant influence over the management company. Qualifying holdings shall be calculated with a view to the votes to which the person is entitled under Article 16 of the Law on Securities Market; 2. "subsidiary" shall mean a subsidiary undertaking as defined in the Law on Securities Market; 3. "European Union state" shall mean an EU member state or an EEA country; 4. "close links" shall be used within the meaning defined in the Law on Securities Market; 5. "net assets" shall mean the difference between the value of assets of the unit trust/common fund (or investment company with variable capital) and long-term and short-term liabilities of the unit trust/common fund (or investment company with variable capital); 6. "index" shall mean a statistical indicator providing a representation of the changes in a certain market or its part; 7. "investment company with variable capital" shall mean a company whose shareholders have the right to request at any time that their shares be redeemed/re-purchased and the amount of whose capital varies depending on the issue and redemption/repurchase of shares; 8. "investment instruments" shall mean securities and investment instruments referred to in the Law on Securities Market, Article 3, paragraph 2 (2-6); 9. "unit trust/common fund" shall mean assets held by legal or natural persons by the right of common several ownership, the management whereof is delegated to the management company; 10. "unit" shall mean a security representing the right of the co-owner of the unit trust/common fund to a share in its assets; 11. "investment portfolio" shall mean a collection of investments; 12. "financial derivative instruments" shall mean investment instruments the value whereof is dependent on one or several investment instruments; 13. "collective investment undertaking" shall mean a unit trust/common fund or an investment company with variable capital: 1) the sole object for which it is constituted is collective investment of capital raised from the public (through public distribution of units or shares) in securities and/or other liquid financial assets specified in this Law and which operates on the principle of risk-spreading; 2) the securities (units or shares) of which attest to their holder's right to request at any time their redemption/repurchase. 14. "participants in the collective investment undertaking" shall mean co-owners of the unit trust/common fund or shareholders of an investment company with variable capital; 15. "control" shall mean control as defined in the Law on Securities Market; 16. "good repute" shall mean good repute as defined in the Law on Securities Market; 17. "parent company" shall mean parent company as defined in the Law on Securities Market; 18. "periodic report" shall mean a report addressed to investors and the public containing information on the major events of the reporting period; 19. "money market instruments" shall mean liquid debt instruments usually traded in on the money market, the value of which may be precisely defined at any time; 20. "initial capital" shall mean the minimum amount of own capital that the management company or an investment company with variable capital must accumulate; 21. "prospectus" shall mean a document intended for the investors and the public which presents key information about the securities offered for sale;    22. "collective investment undertaking of limited distribution" shall mean a collective investment undertaking the units or shares of which are offered for sale to the public in the Republic of Lithuania and may not be the subject of public distribution in the European Union states in the manner prescribed by this Law for the European Union states; 23. "instruments of incorporation" shall mean fund rules or articles of association of an investment company with variable capital; 24. "asset management" shall mean: 1) making and implementation of investment-related decisions; 2) accounting services, responding to customer inquiries, valuation of net assets, regulatory compliance internal monitoring, maintenance of unit- or share-holder register, distribution of income, unit or share pricing, their issue and redemption/repurchase, contract settlements, keeping of record of the completed operations; 3) distribution; 4) other activities connected with the activities specified in sub-paragraphs 1-3 above; 25. "foreign supervisory authority" shall mean an institution which in a foreign state performs functions similar to those of the Securities Commission in the sphere of licensing and supervision of management companies and collective investment undertakings; 26. "manager" shall mean the head of the company administration, deputy head of the administration, Board member; 27. "management company" shall mean any company the regular business of which is management of units trusts/common funds or of companies with variable capital; 28. "securities" shall mean: 1) shares of companies, units, depository receipts in respect of shares; 2) debt securities; 3) other transferable securities which carry the right to acquire by subscription or exchange any securities specified in subparagraphs 1-2 above; 29. "public offering of units or shares" shall mean offering of units or shares over the media, in advertisements or when addressing over 100 persons. SECOND CHAPTER LICENSING AND ACTIVITIES OF MANAGEMENT COMPANY AND COMPANY WITH VARIABLE CAPITAL Article 3. Prohibition to Engage without a Licence in the Activities of a Management Company or Company with Variable Capital 1. Only a private or a public company holding a licence for the activities of a management company issued by the Securities Commission shall have the right to engage in the management of unit trusts/common funds or investment companies with variable capital. A company holding such a licence shall be referred to as the management company. Only management companies shall have the right to use in its name and advertisements the words "unit trust/common fund management company", "management company of investment companies with variable capital" or other collocations or derivatives of the words. 2. Only a company holding a licence for the activities of an investment company with variable capital issued by the Securities Commission may engage in the activities of investment company with variable capital. Only investment companies with variable capital may use in their name the words "investicinė kintamojo kapitalo bendrovė" or the acronym IKKB. The words "akcinė bendrovė" or the acronym AB are optional in the name of an investment company with variable capital. Article 4. Activities of Management Companies 1. A management company shall have the right to engage in the principal activities - management of unit trusts/common funds and companies with variable capital prescribed by this Law and to provide the following additional services if they are provided for in the licence issued to it and if it engages in the following principal activities: 1) management of other persons' investment portfolios; 2) management of investment portfolios of pension funds provided the company complies with the requirements laid down in the Law on Supplementary Voluntary Accumulation of Pensions and the Law on Accumulation of Pensions; 3) management of collective investment undertakings of limited distribution; 4) advising on issues relating to investment in investment instruments; 5) safe-keeping and management of units of unit trusts/common funds or shares of investment companies with variable capital. 2. The management company shall have no right to provide additional services specified in paragraph 1 (4, 5) above, unless it is entitled to provide the services indicated in paragraph 1 (1, 2) above. 3. An investment company with variable capital shall have no right to manage the assets of other persons or to engage in the activities not provided for under this Law. Article 5. Procedure for Granting Licences for the Activities of Management Company or Investment Company with Variable Capital 1. A company or a private company wishing to engage in the management company activities or a company wishing to operate as an investment company with variable capital shall file an application with the Securities Commission. The application shall be accompanied by the information about the company, its shareholders, members of management bodies, company’s programme of activities and activities development, initial capital and other documents, information and explanations specified in the licensing regulations approved by the Securities Commission. 2. The Securities Commission shall refuse to grant a licence if: 1) the application does not conform to the established requirements, the documents and information presented are incomplete or do not correspond to reality or the company’s programme of activities is not fully substantiated; 2) the initial capital of the management company or investment company with variable capital which has no management company is below the minimum amount set by the Securities Commission or other management company capital adequacy requirements are not complied with; 3) the holders of the qualifying holding in the company do not satisfy the requirements set by this Law or fail to provide information about its members, activities and financial position; 4) at least one of the company employees is an employee of the stock exchange, Securities Commission or the Central Securities Depository of Lithuania; 5) the company board members, the head of the administration or his deputies are not persons of good repute, do not possess the qualification or work experience specified by the Securities Commission; 6) members of the board of the company depository, the head of the administration or his deputies are not persons of good repute, do not possess the qualification or work experience prescribed by the Securities Commission; 7) the company's registered office is outside the Republic of Lithuania; 8) a close link exists between the company and another person which may interfere with the Securities Commission carrying out effective supervision; 9) a close link exists between the company and a person from such a non-European Union state whose legal acts regulating the person's activities or difficulties in ensuring compliance with the above acts may interfere with the performance of effective supervision; 10) as indicated in the company's instruments of incorporation, the shares or units of the collective investment undertakings shall not be marketed in the Republic of Lithuania. 3. The Securities Commission shall notify the applicant of its consent or refusal to grant a licence within 6 months from the filing of all documents, information and explanations. The time limit for the consideration of the application shall be calculated from the date of filing of the last documents or information. Refusal to grant a licence shall be motivated in writing. 4. A licence may be granted only upon asking for the opinion of the foreign supervisory authority if: 1) the applicant is a subsidiary of the management company, intermediary of public trading in securities, credit institution or insurance company licensed in a European Union state; 2) the applicant is a subsidiary of the parent company controlling the management company, intermediary of public trading in securities, credit institution or insurance company licensed in a European Union state; 3) the applicant is controlled by the same persons who control the management company, intermediary of public trading in securities, credit institution or insurance company licensed in a European Union state. 5. The Securities Commission shall notify the administrator of the register of legal persons of the granting or withdrawal of a licence and publish a notice to the effect in the supplement "Informaciniai praneðimai" to the publication "Valstybės žinios". 6. The instruments of incorporation of the management company or investment company with variable capital that are being established shall become invalid if they are not submitted to the register of legal persons within 9 months from the drawing up of the instruments of incorporation. Article 6. Management of Management Companies and Investment Companies with Variable Capital 1. A board and administration shall be formed in the management company and in the investment company with variable capital, the management of whose assets has not been delegated to a management company. 2. Management bodies shall not be formed in the investment company with variable capital the management of whose assets has been delegated to a management company. The management company which has been delegated management of an investment company with variable capital shall be responsible for the performance of the functions specified in the Civil Code of the Republic of Lithuania, Article 2.82, paragraph 3.  3. The general meeting of shareholders of the investment company with variable capital may pass resolutions irrespective of the voting rights carried by the shares held by the participating shareholders.  Article 7. Articles of Association of the Investment Company with Variable Capital 1. In addition to the requirements established to the company's articles of association under the Law on Companies, the articles of association of the investment company with variable capital shall specify: 1) the procedure of sale, redemption/repurchase of and payment for shares; 2) investment strategy; 3) grounds for and procedure of suspension of share redemption/repurchase; 4) distribution of income procedure; 5) procedure of payment of dividends to the shareholders (periodicity of payments, the share of profit appropriated for dividends); 6) rules for net assets valuation and share pricing; 7) the structure of expenditure and principles of coverage thereof, the amount of the depository fee as well as the company's highest possible expenses; 8) conditions and procedure for changing the management company and the depository; 2. The amount of the authorised capital and the number of shares need not be indicated in the articles of association. The maximum sum for which shares may be issued may be indicated therein. Nominal share value shall be indicated only provided the shares have nominal value. 3. The procedure of election and removal of the company administration head and management bodies shall be specified only provided that management is not delegated to a management company. 4. Amendments and supplements to the articles of association of the investment company with variable capital shall be registered in the register of legal persons following the approval thereof by the Securities Commission. Article 8. Redeemable Shares of the Investment Company with Variable Capital 1. All shares of an investment company with variable capital must be only ordinary registered shares. 2. An investment company with variable capital shall be prohibited from issuing preference shares, irredeemable bonds or shares. 3. An investment company with variable capital shall be prohibited from holding its own shares. Article 9. Requirements Applicable to Activities and Prudential Requirements 1. A management company or an investment company with variable capital the management of assets whereof has not been delegated to a management company shall: 1) act honestly and fairly in the best interests of the participants in the collective investment undertaking and the integrity of the market; 2) act with due skill, care and diligence; 3) have and employ the resources and procedures that are necessary for its activities; 4) seek to obtain from the client information about his financial position, investment experience and objectives he is pursuing by making use of the services provided by the company and also take into account whether or not the client is a professional investor; 5) disclose to the client sufficient information relating to him and necessary for him; 6) try to avoid conflicts of interests and, when they cannot be avoided, ensure that the participants in the collective investment undertaking are treated fairly; 7) ensure that it has sound administrative and accounting procedures and that each transaction may be reconstructed according to the parties to it, its nature and the time and place at which it was effected and that the assets are invested according to the terms and conditions laid down in the instruments of incorporation and the legal provisions in force; 8) carry out internal control, control transactions in securities by its managers and employees; 9) keep documents of the effected operations for at least 5 years from the date of completion of the operations, unless other legal acts provide for a longer time period of safe-keeping; 10) be structured and organised in such a way as to avoid conflict of interests between the managing company or investment company with variable capital and its clients, between one of its clients and another, between the participants in the collective investment undertaking and its clients or a conflict of interests between the participants in the collective investment undertaking; 11) ensure that the persons making decisions relating to asset management have the qualification and experience prescribed by the Securities Commission and are of good repute. 2. A management company entitled to provide services provided for in Article 4, paragraph 1(1,2) may invest their client's funds into the unit trusts/common funds or investment companies with variable capital managed by them only upon receiving the client's prior consent. 3. The liabilities to the investors of the management company entitled to provide a service provided for in Article 4, paragraph 1(1) shall be insured according to the procedure laid don in the Law on Insurance and Liabilities to Investors. Article 10. Right of Securities Commission to Establish the Procedure for Discharging the Duties of a Management Company or an Investment Company with Variable Capital The Securities Commission shall establish: 1) the procedure for safe-keeping confidential information; 2) the procedure for effecting internal control; 3) the contents and procedure of publication of periodical reports, other reports, prospectuses, communications to the public and Securities Commission; 4) contents and procedure of presentation of reports on the liquidation of the investment company with variable capital and division of the unit trust/common fund; 5) requirements applied to the amount of net assets and management company's capital adequacy; 6) the amount of initial capital and own funds (which may not be less than the amount prescribed by the European Union legislation), composition and payment procedure, the procedure and principles of initial capital and net assets calculation; 7) the procedure for measuring the risk to which a party to the transaction is exposed when checking compliance with diversification requirements; 8) the procedure for granting authorisations and licences specified in this Law. Article 11. Right of the Management Company or Investment Company with Variable Capital to Delegate Part of its Functions to another Company 1. Seeking more efficient management, the management company or the investment company with variable capital the assets of which are not managed by a management company shall have the right to delegate part of its management functions to a company authorised to provide certain services and shall promptly notify the Securities Commission thereof. 2. Performance of a part of the management functions may be delegated only provided that : 1) this will not prevent the competent authorities from supervising the management company or investment company with variable capital and also that this will not harm the investors' interests; 2) the Securities Commission has concluded an agreement for the exchange of information with an appropriate supervisory authority of the non-European Union state in which a licensed management company is delegated a certain part of functions; 3) the managers of the management company or the investment company with variable capital may at any time monitor the activities of the mandated party; 4) the management company or the investment company with variable capital may at any time, where it is in the interests of the participants in the collective investment undertaking, give further instructions to the mandated party or withdraw the mandate; 5) the mandated party shall have the qualifications established by the Securities Commission and may perform the delegated functions; 6) the prospectus of the management company or the investment company with variable capital shall list the functions which they have been authorised to delegate. 3. The management company or the investment company with variable capital provided for in paragraph 1 above shall have no right to delegate its functions to third parties to the extent that it becomes a letter box entity. Delegation of part of the functions to the depository who has been entrusted for safe-keeping the assets of unit trusts/common funds or investment companies with variable capital that are managed by the said management company or to other parties whose interests may conflict with those of the management company, the investment company with variable capital or investors shall be prohibited. 4. In no case shall the liability of the management company or the investment company with variable capital be affected by the fact that part of their functions have been delegated to third parties. Article 12. Acquisition of the Qualifying Holding in the Management Company 1. A person, wishing to acquire the qualifying holding in the management company or to increase the amount of shares held by him so that following that acquisition the proportion of voting rights or the proportion of the authorised capital held by him reaches the thresholds of 1/5, 1/3 or 1/2 or is sufficient for the company to become its subsidiary, must receive prior consent of the Securities Commission. Votes held by a person shall be calculated according to the procedure laid down in Article 16 of the Law on Securities Market. 2. The person referred to in paragraph 1 above shall file with the Securities Commission an application of the contents specified by the Securities Commission and the Securities Commission shall within 3 months from the receipt of the application notify the said person of its consent or refusal to grant authorisation for acquisition of the qualifying holding. 3. The Securities Commission shall refuse to authorise the acquisition of the qualifying holding if: 1) the natural person (in case of a legal person - managers and controlling persons) is not of sufficiently good repute; 2) the natural person is an employee of the stock exchange, Securities Commission or the depository which has been entrusted for safe-keeping the assets of the unit trusts/common funds, managed by the management company or assets of investment companies with variable capital; 3) the legal person has not provided information about its participants, activities or financial position; 4) the granting of authorisation would result in the emergence of a close link which would be grounds for refusing to issue the management company's licence. 4. Refusal to authorise acquisition of the qualifying holding must be substantiated in writing and shall be subject to appeal before the court. If the Securities Commission makes no objections to the acquisition of the qualifying holding, it shall set the deadline for implementing the intention. 5. The person shall also notify the Securities Commission before disposing of the shares held by it/him so that the proportion of voting rights or the proportion of the capital held by it/him falls bellow the thresholds of 1/5, 1/3 or 1/2 or to the extent that the management company is no longer its/his subsidiary. 6. Upon finding out about the acquisition or disposal of the qualifying holding which is above the thresholds set in this Article the company shall forthwith notify the Securities Commission thereof. Annual information about persons who own qualifying holdings and the amounts of such holdings shall be communicated to the Securities Commission according to the procedure established by it. 7. The shares acquired by a person without the consent of the Securities Commission, where such consent is requisite, shall have no voting right attaching to them at the General Meeting pending the granting of such consent. Article 13. Duty to Obtain Authorisation of the Securities Commission 1. Prior authorisation of the Securities Commission shall be required: 1) for certifying, amending or supplementing the instruments of incorporation; 2) for choosing or replacing the depository or management company; 3) for transferring assets constituting the unit trust/common fund to another management company; 4) for concluding or revising the contract with the depository; 5) for revising or supplementing the simplified or full prospectus. 2. The Securities Commission may refuse authorisation only where this would be contrary to legal acts or prejudice the interests of the participants in the collective investment undertaking. 3. If the Securities Commission, upon the receipt of a relevant application, fails to present a reasoned objection within 15 days, the authorisation shall be deemed granted. Article 14. Audit of the Management Company or Investment Company with Variable Capital The requirements set in the Law on Audit and the Law on Financial Institutions shall be applicable with respect to the management company or the investment company with variable capital. Article 15. Prohibition to Transfer the Assets Constituting the Unit Trust/Investment Fund or Owned by the Investment Company with Variable Capital 1. The assets of the unit trust/common fund or of investment company with variable capital may not be transferred to the management company which manages the assets, the manager of such company, members of the board, supervisory board or company employees (their spouses included). The unit trust/common fund or the investment company with variable capital shall also be prohibited from acquiring assets of the persons provided for hereinabove. 2. The prohibitions provided for in paragraph 1 above for the investment company with variable capital shall also apply to its manager, members of the board, supervisory board or employees. 3. The assets of the unit trust/common fund or the investment company with variable capital may not be lent, pledged or given as guarantee or surety to secure other persons liabilities. The above shall not prohibit acquisition of not fully-paid securities, money market instruments, or other financial instruments referred to in Article 36, paragraph 1, subparagraphs 5, 7 or 8. 4. Transactions for the sale of securities, money market instruments or other investment instruments which the unit trust/common fund or investment company with variable capital does not hold may not be concluded on their accounts. 5. An investment company with variable capital or the management company which manages the assets of a unit trust/common fund may not borrow except for loans with a duration of 3 months in the amount of up to 10% of its net assets taken for maintaining the liquidity. This does not signify prohibition to acquire foreign currency by means of a "back-to-back" loans for purchasing securities or money market instruments where the lender has the right to offset claims against the pledged collateral by being made an equivalent loan in foreign currency. Article 16. Asset Management Agreement 1. An asset management agreement concluded by the investment company with the investment company with variable capital shall provide for the following: 1) objectives and forms of investment activities; 2) methodology for calculating management company fees and the procedure of payment thereof; 3) functions of the board which the management company undertakes to fulfil; 4) powers of the management company in its relations with the depository and other institutions; 5) information which the management company will furnish to the investment company with variable capital; 6) composition, market value of the investment portfolio the management of which is delegated; 7) liability for non-fulfilment of obligations; 8) conditions and procedure for the termination of the agreement.  2. A copy of the agreement shall be filed with the Securities Commission and the Depository. Article 17. Approval of the Agreement with the Management Company and the Depository 1. The agreement on the management of assets of the investment company with variable capital and the agreement with the depository shall be subject to approval by the general meeting of the investment company with variable capital. The meeting may make such a decision by an at least 2/3 majority of those present at the meeting. The company’s articles of association may require a larger majority for making such a decision. 2. The general meeting may delegate the right to make the decision provided for in paragraph 1 above to the Supervisory Board but for not longer than a 3-year period if the maximum fee payable to the management company and the depository is specified in the company's articles of association. Article 18. Measures Involving Penalties Applicable to Management Companies or Investment Companies with Variable Capital The Securities Commission shall have the right to take the following measures against the management companies or the investment companies with variable capital: 1) warning about shortcomings and violations of their activities and setting a deadline for their elimination; 2) imposing administrative penalties on the managers or employees or fines prescribed by this Law; 3) withdrawal of the licence; 4) suspension of distribution or redemption/repurchase of units/shares; 5) prohibition of purchasing of securities or money market instruments for a not longer than 3- month period; 6) appointment of a temporary representative of the Securities Commission for supervision of the activities. Article 19. Reasons for the Application of Measures Involving Penalties 1. Measures prescribed by this Law may be applied where any of the following violations has been committed: 1) the management company or the investment company with variable capital has submitted incorrect information to the Securities Commission; 2) the Securities Commission has not been provided with the information or the documents necessary for supervision; 3) the management company or the company with variable capital no longer meets the requirements based whereon the licence has been granted; 4) the laws or other legal acts of the Republic of Lithuania have been grossly or systematically violated; 5) the management company or the investment company with variable capital fails to meet its obligations or there is evidence that it will not be able to do that in the future. 2. The choice of a measure shall depend on the character of the violation for which it is applied, the impact of the violation and the application of the measure on the company and security of the financial system. The issue of application of a measure shall be considered following prior notification of the management company or the investment company with variable capital thereof and provided that it has been given a possibility to present explanations. Failure of a representative to attend the hearing or to present explanations shall not prevent adoption of a decision concerning the application of measures involving penalties. 3. A decision to apply measures involving penalties may be taken provided that no more than 2 years have passed from the date when the violation was committed, while in cases of a continuing violation – no more than 2 years have passed from the date of the commission of the final acts. 4. The supervisory authorities of the state in which the management company or the investment company with variable capital is distributing units or shares shall be notified of the application of measures involving penalties to the management company or the investment company with variable capital. Article 20. Temporary Representative for Supervision of Activities 1. In cases of urgency, where there is evidence of violations of legal acts, in order to protect the investors' assets from depreciation or any other loss, the Securities Commission shall have the right to appoint its temporary representative for the supervision of the activities of the management company or the investment company with variable capital in question. An employee of the Securities Commission may be appointed temporary representative. 2. The managers of the management company or the investment company with variable capital must obtain consent of the temporary representative for the supervision of the activities for each decision relating to the company activities. The actions of the temporary representative may be subject to appeal according to the procedure laid down in the Law on Administrative Proceedings. 3. The temporary representative shall be recalled when: 1) it is determined that the company can function effectively; 2) bankruptcy proceedings have been instituted against the company; 3) the licence of the management company or the investment company with variable capital has been withdrawn. Article 21. Withdrawal of a Licence 1. The Securities Commission shall have the right to withdraw the licence of the management company or the investment company with variable capital where: 1) such a measure is applied to the company in accordance with the procedure established in this Law; 2) the holder of the licence has himself applied in writing for the withdrawal of the licence; 3) the holder of the licence fails, within 12 months from the date of granting of the licence, to commence the activities under licence or suspends such activities for a period over 6 months. 2. A management company or an investment company with variable capital may not be reorganised into a collective investment undertaking of limited distribution, to which this Law is not applicable. Article 22. Specifics of Bankruptcy Process of the Management Company or the  Investment Company with Variable Capital 1. Bankruptcy process of the management company or the investment company with variable capital may only be conducted in court. 2. The Securities Commission shall have the right to file with the court a petition for the institution of bankruptcy proceedings against the management company or the investment company with variable capital. 3. Having received from the Securities Commission a petition for the institution of bankruptcy proceedings the court shall on the same day freeze the bank accounts of the management company and the investment company with variable capital and prohibit them from disposing of securities. 4. The court shall within 15 days from the receipt of the petition make a ruling to institute bankruptcy proceedings or to refuse to do so. Article 23. Liquidation of an Investment Company with Variable Capital 1. The sale and redemption/repurchase of shares of the investment company with variable capital shall be terminated as from the moment of making of the decision to liquidate the company. 2. The assets of the company in liquidation shall be sold following the procedure laid down by the Securities Commission and the settlement with shareholders shall be made in cash. 3. The liquidator shall furnish to the Securities Commission information about the progress of liquidation following the procedure laid down by the Commission. CHAPTER THREE UNIT TRUST/COMMON FUND Article 24. Constituting a Unit Trust/Common Fund 1. The fund rules shall be approved by the decision of the management company. The management company may start collecting investors' funds into the unit trust/common fund only after the Securities Commission approves the fund rules and the simplified and full prospectuses. 2. The board's decision regarding the constitution of the unit trust/common fund shall indicate: 1) the name of the unit trust/common fund; 2) the name and registered office of the depository; 3) the initial amount allocated for the constitution of the unit trust/common fund. 3. The assets of every unit trust/common fund shall be entered into the accounts separately and shall be segregated from the assets of the management company. Article 25. Fund Rules The fund rules shall determine the relations between the management company and the participants in the unit trust/common fund. The rules shall indicate the following: 1) the name of the unit trust/common fund; 2) the names and the registered office of the management company and the depository; 3) investment strategy of the unit trust/common fund, investment restrictions and specialisation in the geographical area or industry branch; 4) rights and duties of participants; 5) rights and duties of a management company in the management of the unit trust/common fund, transactions that the management company may enter into and carry out for the account and in the interests of the unit trust/common fund; 6) the methodology for assessing the fee payable to the management company, the depository and the distributor as well as the amount of the fee and the procedure of its payment; 7) finite list and methods for calculating other expenses covered with the unit trust/common fund resources; 8) conditions and procedure for replacing the management company and the depository; 9) conditions and procedure of unit sale and redemption/repurchase; 10) reasons and procedure of suspension of unit sale and redemption/repurchase; 11) asset assessment, unit value calculation and publication; 12) the procedure for establishing the redemption/repurchase and selling price; 13) procedure for publishing information about the unit trust/common fund; 14) the regularity and methods of distribution of unit trust/common fund income; 15) reasons and procedure for the partitioning of the unit trust /common fund; 16) procedure for revising the fund rules. Article 26. Rights of a Unit Trust/Common Fund Members A unit trust/common fund member shall have the following rights: 1) to request at any time that the management company redeem/repurchase the units held by him; 2) to receive a portion of income of the unit trust/common fund according to the procedure prescribed by this Law and the fund rules; 3) to receive the remaining portion of the unit trust/common fund which is being distributed; 4) to receive information about the fund as prescribed by law; 5) other rights established by this Law and the fund rules. Article 27. Fee and other Expenses to be Paid out of the Unit Trust's/Common Fund's Assets 1. The fees to the management company for the management of the unit trust/common fund, the depository for the depository's services and other expenses relating to the unit trust/common fund shall be paid out of the unit trust's/common fund's assets. 2. Only the expenses relating to the management of the unit trust/common fund which are provided for in the fund rules may be paid out of the unit trust/common fund assets. The total amount of the expenses may not be above the maximum level of the unit trust's/common fund's expenses provided for the fund's rules. All other expenses that are not provided for in the fund's rules or that are above the established maximum level of expenses shall be paid out the management company's assets. Article 28. Distribution of Profit of a Unit Trust/Common Fund 1. The members of a unit trust/common fund shall be paid dividends (payments in cash) only if this is provided for in the fund rules. The fund rules shall also provide for the periodicity of the above payments, the share of profit that will be allocated for the payments and the payment procedure. 2. The profit of a unit trust/common fund shall be distributed through the depository of the unit trust/common fund. Article 29. Expiry of the Management Company' Right to Manage a Unit Trust/Common Fund The management company's right to manage the unit trust/common fund shall expire: 1) after management has been transferred to another management company; 2) upon the withdrawal of the management company's licence; 3) upon the commencement of compulsory management company's liquidation procedure; 4) upon the institution of bankruptcy proceedings against the management company ion court; 5) in other cases established by legal acts or fund rules. Article 30. Distribution of the Unit Trust/Common Fund 1. A unit trust/common fund shall be distributed in the cases established in its rules. 2. Upon the passing of a decision regarding the said distribution, redemption/repurchase and trading of units shall be terminated. 3. Should it transpire in the course of the distribution that the unit trust/common fund is not sufficient to meet the obligations assumed for its account, the unfulfilled obligations shall be met by the management company. 4. After the creditors' claims have been met, the money received from the sale of assets constituting the unit trust/common fund shall be distributed among the co-owners of the unit trust/common fund in proportion to their shares. 5. With court actions pending for obligations due to be paid for the account of the unit trust/common fund, the fund may be distributed only after the decisions in such cases become effective. CHAPTER FOUR DEPOSITORY Article 31. Duty to Transfer Assets to the Depository 1. The assets of the collective investment undertaking shall be entrusted to a depository for safekeeping. The depository shall be a commercial bank which has a registered office or a branch in the Republic of Lithuania and which is entitled to provide investment services, the Central Securities Depository of Lithuania or central securities depositories of the European Union states, provided they are entitled to engage in safekeeping of monetary resources. 2. The depository shall be entitled to delegate its functions or part thereof to other depositories, this, however, shall not affects its liability. Article 32. Duties of the Depository 1. The depository shall act for the benefit of the members of the collective investment undertaking and: 1) ensure that the sale, issue, repurchase, redemption, and cancellation of units and shares is carried out in accordance with the requirements of legal acts and instruments of incorporation; 2) ensure that the value of units or shares is calculated in accordance with the requirements of legal acts and instruments of incorporation; 3) carry out the instructions of the management company or the investment company with variable capital, unless they conflict with legal acts and instruments of incorporation; 4) ensure that in transactions involving a unit trust's/common fund's assets any consideration is remitted to the fund's account or to the investment company with variable capital within the usual time limits; 5) to ensure that a unit trust's/common fund's income is applied in accordance with the requirements of legal acts or instruments of incorporation. 2. The depository must notify the Securities Commission and the supervisory board or board of the management company or the investment company with variable capital of all the violations of legal acts or instruments of incorporation that come to its notice. 3. The depositor's fee shall not be bigger than that set in the instruments of incorporation. 4. The depository shall be liable for the damage caused to the members of the collective investment undertaking or the management company due to its failure to fulfil its duties or for inadequate performance of duties. Article 33. Delegation of Management Functions to the Depository If the right of a management company to manage a collective undertaking expires and the management functions have not been delegated to another management company, they shall temporarily be taken over by the depository of the collective investment undertaking. The management company shall notify the depository of the expiry of the right to manage the assets. In such a case the depository shall have all the rights and duties of the management company unless otherwise provided for under the law or instruments of incorporation. The depository shall delegate management functions to another management company within 3 months from the taking over of the management functions. The collective investment undertaking that has not been transferred to another management company within a 3-month period shall be liquidated (distributed). Article 34. Separation of a Management Company or an Investment Company with Variable Capital from the Depository 1. A depository may not at the same time engage in the activities of both the management company and the investment company with variable capital, except in the case established in Article 33 of this Law. 2. The head of administration of the management company or the investment company with variable capital, a board member or its staff member may not be the manager, board member or staff member of the board of the depository which has in its safekeeping the assets of the unit trust/common fund (investment company with variable capital) managed by the said company, if the functions of manager, board member or member of the board staff are directly linked to the activities of the depository. 3. The manager, board members, supervisory board members or staff, whose functions are directly linked to the activities of the depository may constitute not more than 1/4 of the supervisory board members of the management company (investment company with variable capital) which manages the unit trust/common fund.  Article 35. Replacement of the Depository 1. The depository may be replaced by the management company or the investment company with variable capital only subject to the approval by the Securities Commission. 2. In case of the depository's non-compliance with the requirements of the law, non-fulfilment of its obligations or improper fulfilment thereof, the Securities Commission, seeking to ensure the rights of the participants in the collective investment undertaking, shall have the right to instruct the management company or the investment company with variable capital to terminate the contract and replace the depository. CHAPTER FIVE INVESTMENT RULES Article 36. Objects of Investment 1. The assets of a collective investment undertaking may be comprised only of: 1) securities or money market instruments that are traded in on the markets considered as regulated markets and operating in the Republic of Lithuania or a European Union state; 2) securities or money market instruments that are traded in on another regulated market situated in the Republic of Lithuania or a European Union state which operates under the prescribed rules, has been recognised and is accessible to the public; 3) securities or money market instruments that are listed on the stock exchange of another state (except for European Union states) or which are traded in on the regulated market situated there, which is operating under the prescribed rules, has been recognised and is accessible to the public, provided that the stock exchange or the market is indicated in the instruments of incorporation;  4) issued new securities where the conditions of issue provide for a commitment to admit the securities to the official listing of the stock market or the trading list of the regulated market and if the said securities will be listed within a year's period from the date of issue (if the stock exchange or market is situated in the country specified in paragraph 3 above, it must be indicated in the instruments of incorporation); 5) units or shares of the collective investment undertaking specified in Article 40(1) of this Law; 6) fixed-term deposits with credit institutions maturing in no more than 12 months which may be withdrawn on demand provided that the credit institution has its registered office in the Republic of Lithuania, a European Union state or any other state where it is subject to prudential rules equivalent to those laid down in the EU; 7) financial derivative instruments referred to in Article 41(1); 8) money market instruments specified in paragraph 2 of this Article. 2. Investment in money market instruments that are not dealt in on regulated markets shall be authorised only provided that the issue or issuer of such instruments is itself regulated for the purpose of protecting investors and savings and provided that these instruments: 1) are issued or guaranteed by a central, regional or local authority or central bank of a European Union state, the European Central Bank, the European Union or the European Investment Bank, a non-European Union State or, in the case of a federal state, by one of the members making up the federation, or by a public international body to which one or more European Union states belong; 2) are issued by an undertaking any securities of which are dealt in on regulated markets referred to in subparagraphs 1-3 of paragraph 1 of this Article; 3) are issued or guaranteed by an undertaking subject to prudential supervision, in accordance with criteria defined by the European Union law or according to prudential rules which are as stringent as those, laid down in the European Union; 4) are issued by a company belonging to the category approved by the Securities Commission, whose capital and reserves amount to at least EUR 10 million and which publishes and presents its annual consolidated accounts and is dedicated to the financing of the group of companies which includes at least one listed company or is an entity financing securitisation vehicles which benefit from a banking liquidity line, whereas the level of protection for investors is equivalent to that referred to in subparagraphs 1-3. 3. An investment company with variable capital may acquire movable and immovable property which is essential for the direct pursuit of its business. 4. No more than 10% of net assets may be invested in securities and money market instruments that are not referred to in paragraph 1 above. 5. The assets of the collective investment undertaking may not be invested in precious metals or certificates representing them but may be invested in money. Article 37. Investment Portfolio Diversification 1. No more than 5% of net assets of a collective investment undertaking may be invested in securities or money market instruments issued by the same body, except in cases indicated in paragraphs 2, 5 and 6 of this Article. 2. The total value of securities of money market instruments held by a collective investment undertaking in the same issuing body may be more than 5% but no more than 10% of its net assets provided that the total value of such investments does not exceed 40% of the value of its net assets (this limitation does not apply to financial derivative instruments dealt in over-the-counter, provided the issuer of such instruments is subject to supervision by the supervisory authority). 3. Investments made by a collective investment undertaking in deposits with a single credit institution may not be in excess of 20% of its net assets. 4. Investments in securities or money market instruments issued by the same body or in deposits or liabilities arising from transactions with derivative instruments undertaken with the same body shall under no circumstances exceed 20 % of net assets of the collective investment undertaking. 5. Investments in securities or money market instruments of a central or local authority of the Republic of Lithuania, a European Union state, other states or public or international bodies to which one or more European Union states belong, issued or guaranteed by a single body, shall not exceed in total 35% of net assets of the collective investment undertaking. The Securities Commission may authorise investment of a larger share of net assets in the securities or money market instruments referred to hereabove, provided that the interests of the investors are adequately protected, investments are made in securities or money market instruments of no less than 6 issues, whereas investment in securities or money market instruments of a single issue does not exceed 30% of net assets. 6. Investments in bonds issued by a credit institution which has its registered office in a European Union state and is subject by law to special public supervision designated to protect bond-holders, while sums deriving from the issue of these bonds must be invested in assets which, during the whole period of validity of these bonds, are capable of covering claims attaching to the bonds and which, in the event of failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest may not exceed 25% of the net assets of the collective investment undertaking. When more than 5% of net assets is invested in the bonds issued by one issuer, the total value of these investments may not exceed 80% of the value of net assets. 7. The securities and money market instruments referred to in paragraphs 5 and 6 of this Article shall not be taken into account for the purpose of applying the limit of 40 % referred to in paragraph 2 above. The limits provided for in paragraphs 1 -6 above may not be combined, and thus investments in securities and money market instruments issued by the same body or in deposits or derivative instruments made with this body shall under no circumstances exceed in total 35% of the net assets of the collective investment undertaking. 8. Cumulative investment in the securities and money market instruments issued by the companies which are included in the group for the purposes of consolidated accounts shall not exceed the limit of 20% of the net assets. Article 36. Prohibition to Acquire Significant Influence over the Issuing Body 1. Shares held by the management company or the investment company with variable capital in an issuing body together with the shares in the issuing body held by the managed collective investment undertakings may not carry over 1/10 of the voting rights at the issuer's general meeting. 2. A collective investment undertaking may acquire no more than 1) 10% of the non-voting shares of an issuing body; 2) 10% of the debt securities of an issuing body; 3) 25% of the units or shares of another collective investment undertaking; 4) 10% of the money market instruments of a single issuing body. 3. The prohibitions laid down in subparagraphs 2, 3 and 4 of paragraph 2 above may be disregarded if at the time of acquisition the gross amount of the debt securities and money market instruments cannot be calculated. 4. Application of subparagraphs 2 and 4 of paragraph 2 above may be waived as regards securities or money market instruments issued or guaranteed by the state or its local authorities. Article 39. Peculiarities of an Index Fund or an Index Investment Company with Variable Capital 1. An index fund or an index investment company with variable capital shall be a unit trust/common fund or an investment company with variable capital, whose instruments of incorporation provide for an investment strategy the aim of which is to replicate the composition of a certain stock or debt securities index recognised by the Securities Commission. The Securities Commission shall have the right to recognise the indexes only on the following basis: 1) the composition of the securities portfolio replicating the index is sufficiently diversified; 2) the index represents an adequate benchmark of the market to which it refers; 3) the index and its calculation method is published in an appropriate manner. 2. A maximum of 20% of net assets of an index fund or an investment company with variable capital may be invested in shares or debt securities issued by the same body. With the consent of the Securities Commission, where that proves to be justified by exceptional market conditions in regulated markets where a single issuer is dominant, the limit laid down above for investment in its shares or debt instruments may be raised to a maximum of 35% of net assets. Article 40. Investment in other Collective Investment Undertakings 1. Investment in the units or shares of collective investment undertakings shall be allowed only provided that the undertakings comply with the following requirements: 1) the undertakings have been licensed in the Republic of Lithuania or in any other state where they are subject to supervision equivalent to that prescribed in the European Union, whereas the Securities Commission is co-operating with an appropriate foreign supervisory authority; 2) the level of protection for the rights of the members of the collective investment undertakings, including the rules on asset segregation,  borrowing, lending and gratuitous transfer of assets is equivalent to that laid down under this Law; 3) the business of the collective investment undertakings is reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period; 4) no more than 10% of the collective investment undertakings' net assets may be invested in units or assets of other collective investment undertakings. 2. No more than 10 % of the collective investment undertakings' net assets may be invested in each of the undertakings referred to in paragraph 1 above. No more than 30% of net assets may be invested in aggregate in units of limited distribution of collective investment undertakings and other collective investment undertakings that are not regulated under this Law. 3. A close link shall be deemed to exist between collective investment undertakings if they are managed by the same management company or such management companies in which more than a half of management b …