INTRODUCTION

In general, investments consist of endeavors undertaken with the intention of augmenting capital or wealth. Contrarily, wealth is generated through the management of a portfolio, which, in its most general sense, comprises all the assets that an individual or entity possesses. With regard to capital markets, this asset class primarily comprises precious metals, money, and capital market instruments.

The management of portfolios comprising cash, foreign currency, deposits, capital market instruments, money market instruments and transactions, futures and options, and other assets and transactions deemed appropriate by the Capital Markets Board of Turkey, in accordance with the risk preferences of the investor or portfolio manager, and within the framework of the portfolio management agreement, is considered portfolio management activity within the context of Turkish capital market legislation.

The purpose of this article is to provide an overview of the state of a portfolio management company in Turkey and to detail the two amendments that were declared in 2023.

 

  1. DEFINITION AND LEGAL BASIS OF PMCs IN TURKISH LAW

The Turkish capital markets law defines a portfolio management company ("PMC"), which is a capital market entity constituted as a joint-stock company, in brief, as an organization whose principal function is the establishment and management of funds. Also in order to partake in investment consultancy activities, PMCs are required to obtain a certificate of authorization from the Capital Markets Board of Turkey. Furthermore, PMCs that meet the Capital Markets Board's notification requirements and have sufficient equity capital are authorized to extend loans, provide foreign exchange services, and investment services related to capital market instrument transactions that are limited to investment activities and services. Additionally, they are capable of conducting financial analysis and investigations or offering general counsel concerning capital market instruments. Nevertheless, it is crucial to differentiate between investment consulting and portfolio management activities. The investment consultancy service involves the client soliciting information from authorized companies regarding the most suitable investments for their current funds. The client simply and subsequently receives guidance from those companies. Nonetheless, he or she personally constructs and oversees his investments. On the other hand, a client entrusts a portfolio manager with the investment of his cash and securities in the context of the portfolio management activity.

The definition and regulation of the Portfolio Management Company are outlined in Article 55 of the Capital Markets Law No. 6362 ("Law No.6362"), which was enacted on December 6, 2012. As legislative activities of the Capital Market Board of Turkey, The Communiqué Numbered III-55.1 on Portfolio Management Companies and the Principles Concerning the Activities of Such Companies ("Communiqué III-55.1") and the Communiqué Nmbered III-37.1 on the Principles Concerning Investment Services and Activities and Ancillary Services ("Communiqué III-37.1") also specify the legal framework of PMCs in great detail.

  1. ESTABLISHMENT OF A PORTFOLIO MANAGEMENT COMPANY IN TURKEY

Article 5 of Communiqué III-55.1, as amended by Communiqué III-55.1.d dated 18 February 2023, specifies obligatory conditions that must be fulfilled prior to the Capital Market Board of Turkey granting permission to establish a PMC. To summarize:

a. Company must be established as a joint-stock company that is subjected to a registered capital system, under the Turkish Commercial Code.

b. Each share of the company must be registered.

c. The shares of the company must be issued for cash.

            ç. The company must have the minimum required initial capital of 30,000,000 TL. If size of the managed portfolio does not exceed 1,000,000,000 TL, the company's minimum equity capital must be at least 30,000,000 TL. In the event that the managed portfolio falls within the range of 4,000,000,000 TL to 1,000,000,001 TL, a minimum equity capital of 40,000,000 TL is mandatory. Similarly, if the managed portfolio is calculated to be between 36,000,000,000 and 4,000,000,001 TL, the company must maintain a minimum equity capital of 50,000,000 TL. The equity capital is required to increase by 100,000,000 TL if the managed portfolio exceeds 36,000,000,000 TL.

d. The articles of association must adhere to the stipulations outlined in the Turkish Commercial Code as well as the resolutions of the Capital Market Board of Turkey.

e. Founders of the PMC must not have been bankrupted, must not have been declared concordat, must not have had resolution of delayed bankruptcy.

Founders must not have been involved in organizations that have had one of their operating licenses revoked by the Capital Market Board or must not have been held responsible for the incident that warrants this sanction.

In a similar vein, it is imperative that founders lack any finalized convictions for offenses that are specifically designated in legislation.

As per Decree-Law No. 35 dated 14/1/1982 concerning the Transactions of Bankers in Difficulty of Payment and its appendices, neither the founders nor the organizations in which they are partners must have been subject to a liquidation decision.

Offenses resulting in imprisonment for a minimum of five years for intentionally committing a crime, crimes against the security of the state, crimes against the constitutional order and its operation, embezzlement, extortion, bribery, theft, fraud, forgery, abuse of trust, fraudulent bankruptcy, or bid rigging; offenses such as obstructing or disrupting the information system, tampering with the performance of an act, destroying or altering data, misusing bank or credit cards, concealing criminal assets, smuggling, tax evasion, or unlawful acquisition of property are among the offenses that disqualify an individual from becoming the founder of a PMC. The potential founder must also not have been convicted of crimes specified in the Law on the Prevention of Financing of Terrorism No. 6415 dated 7/2/2013.

Trading should not have been prohibited for founders.

The proprietors must not have any delinquent tax debts.

It is essential that founders possess the integrity and reputation that are necessary for the position.

And it is essential that founders possess the requisite financial fortitude.

f. The structure of the partnership of the company ought to be open and transparent.

 

  1. CONDITIONS FOR THE ACTIVITIES OF A PORTFOLIO MANAGEMENT COMPANY

According to Article 8 of the Communiqué III-55.1, certain legal requirements must be met prior to a company filing an application for an operating permit. Compliance with the legislatively mandated obligations pertaining to blocking transactions concerning guarantees and establishment requirements; adherence to the conditions outlined in the Communiqué III-55.1 concerning capital adequacy obligations; contracting with a portfolio custodian to obtain services for portfolio custody; employing personnel and company managers who meet the requirements of the legislation; employment of an adequate number of portfolio managers; having successfully assembled a research unit comprising an adequate number of specialized researchers, having implemented a suitable organizational framework to facilitate consistent workflow and communication with the accounting, recording, information, and document systems, having engaged personnel solely for this responsibility, and having procured technical equipment, including infrastructure for information technology, the appointment of the general manager, and establishing the organizational structure in accordance with the aforementioned objectives are mandatory.

In order to ensure the integrity of a PMC's work, those organizations are additionally obligated to hire personnel who possess the qualifications imposed by the Capital Market Board of Turkey. This requirement was the primary focus of the most recent amendment (The Communiqué III-55.1.e), which modified Article 20 of The Communiqué III-55.1. As per the mentioned amendment dated 28 November 2023, if the organization forms a fund service unit and portfolio managers, the fund manager is appointed on a full-time contract exclusively for the execution of these obligations. Without prejudice to the circumstances specified in Communiqué III-55.1, other specialized personnel working in the divisions required to be established within the PMC pursuant to the provisions of this Communiqué must be employed full-time and exclusively for the relevant task. Following the licensure regulations set forth by the Capital Market Board of Turkey, individuals employed in the capacity of assistants to the portfolio manager are obligated to possess a Capital Market Activities Level 1 License. The utmost tenure for an assistant portfolio manager is three years. This period may be extended by an additional five years upon obtaining the portfolio management licenses mandated by the Capital Market Board of Turkey's regulations.

Further, Article 16 of the Communiqué clarifies the activities that PMCs are prohibited from performing. In addition, through the amendments to Communique III-55.1.d, a definition of sub-portfolio management has been added to the Communique.

  1. THE LEGAL NATURE OF THE PORTFOLIO MANAGEMENT AGREEMENT

It is precise to demonstrate that the portfolio investment contract is a fiduciary transaction under Turkish law. The investor places confidence in the portfolio management company that performs the management on the basis of the portfolio management agreement and mandates arising from the legislation. The investor declares and undertakes this confidence in the contract. Such fiduciary transaction, encompassing portfolio management, involves the following parties: the portfolio customer or investor, who delegates authority to the portfolio management company to dispose of its assets, and the portfolio management company itself, which is believed in. By establishing a special trust, the client or investor grants the competent personnel of the Capital Markets Board-approved portfolio management firm the authority to manage his or her assets.

A written agreement stipulating the commitment to manage the client's assets with care and loyalty, in accordance with the principles and conditions outlined in the contract and the Communiqué, constitutes a portfolio management contract. The cash and capital market instruments purchased and sold on the customer's behalf or for the customer's benefit, in exchange for a fee, constitute the subject matter of the portfolio management contract. In accordance with Article 368 of the Code of Obligations No. 6098 and subsequent provisions, this agreement will be recognized as a contract of mandate.

  1. RESPONSIBILITY FROM THE ACTIVITIES OF A PORTFOLIO MANAGEMENT COMPANY

As stipulated in Article 21 of the Communiqué III-55.1, the personnel and leadership of a PMC are obligated to conduct their affairs and make decisions with the requisite professional care and diligence. In a similar vein, as outlined in Article 55/6 of Law No. 6362, PMCs are obligated to safeguard the interests of the funds entrusted to their care, participation shareholders, and other clients during the course of their operations. When the relevant legislation and fund internal regulations do not contain a provision concerning the relationship between PMCs and participation shareholders, an analogous application is made to the provisions on the contract of mandate in the Turkish Code of Obligations No. 6098.

CONCLUSION

This article presents a comprehensive overview of PMCs in Turkey, drawing information from the official website of the Capital Market Board of Turkey and an in-person examination of the pertinent legislation. Under the strict regulation of the law and the supervision and control of the Capital Market Board of Turkey, portfolio management companies operate. In Turkey, however, the number of PMCs and the portfolios of such companies have increased over the past few years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.