The French Financial Markets Authority (AMF) issued earlier this year an updated position, stating under which conditions collective investment schemes (CIS(s)) may use criteria other than financial ones when choosing the securities in which they invest.
In such cases, the AMF examines the applications of CISs which have filed for approval on the basis of rules that it has so far applied – in a conventional manner – both to CISs using strategies based on extra-financial criteria, such as socially responsible investing or sustainable development, and to so-called shared-return funds, which distribute as a gift a portion of their income to entities other than investors.
These same assessment factors also apply when approving funds that declare themselves to be compliant with Islamic law, otherwise known as Islamic funds.
Conditions for using extra-financial criteria:
When extra-financial criteria are used to select the securities in which the CIS invests, they are generally part of a broader stock-picking process that also involves standard financial criteria, such as the value of the security, the analysis of its upside potential and of the issuer’s fundamentals. Accordingly, no specific difficulties arise provided that the extra-financial criteria do not infringe regulatory principles. In this respect, the AMF pays particular attention to the following:
- preserving the autonomy of the asset management company (in accordance with Art. L.214-9 of the Monetary and Financial Code);
- the involvement of a third party does not relieve the asset management company of its duty to put in place the resources needed to carry on its business (in accordance with Art. 313-54 of the AMF General Regulation);
- the selected extra-financial criteria must comply with all prevailing regulatory and statutory requirements;
- lastly, when the CIS uses a strategy described as an index-linked or index strategy and applies the risk-spreading rules applicable to this type of scheme, the considered index must satisfy the requirements of Article R. 214-22 I of the Monetary and Financial Code regarding diversification, representativeness and security.
Moreover, it should be noted that when a Shari’ah-compliant CIS commits to paying directly or indirectly one or several predetermined entities according to the procedures set forth in its regulatory documents, as it is often the case, the applicable criteria are those stated in the 2012-15 AMF position on the criteria applicable to shared-return funds.