The Portfolio Management Company in Turkish Law

PORTFOLIO MANAGEMENT COMPANY: INVESTMENT FUNDS AND PORTFOLIO MANAGEMENT SERVICES

Investing in financial markets can be a complex endeavor, and this is where a portfolio management company comes into play. Typically structured as joint-stock companies, these specialized firms dedicate themselves to creating and managing investment funds on behalf of their clients. They play a critical role in the capital market, helping both individual and institutional investors manage their investments efficiently.

This article provides an overview of some key provisions related to portfolio management companies, including their main activities, legal requirements, and auxiliary service provision processes. These simplified explanations aim to help you better understand how these companies operate under the law.

A portfolio management company is a firm specializing in creating and managing investment funds. Structured as a joint-stock company, these businesses can also manage the portfolios of investment partnerships and individual retirement investment funds. Their foreign counterparts also fall under the primary activity scope of these companies.

The law permits the establishment of companies exclusively for the purpose of setting up and managing foreign collective investment schemes marketed exclusively to persons residing abroad and providing portfolio management services to persons residing abroad, exclusively establishing and managing venture capital investment funds, exclusively establishing and managing real estate investment funds, and establishing and managing real estate and venture capital investment funds.

The company may engage in portfolio management and investment advisory activities but must obtain an authorization certificate from the regulatory board. This certificate may allow one or more investment services and activities. Some activities do not require an authorization certificate but must be reported to the board.

Companies must notify the regulatory board of any auxiliary services they plan to provide when applying for an activity permit. If they wish to provide additional auxiliary services after obtaining the permit, they must also inform the board. The board has 20 business days to respond to these notifications unless additional information or documents are needed, stopping the countdown. If no objection is raised within this period, the company can provide auxiliary services according to board regulations.

The company’s board of directors has the authority to make decisions on behalf of the funds it manages. This authority can be delegated to executive members or external managers. However, significant decisions that may affect fund investors, such as establishing or issuing participation shares, converting, liquidating, increasing management fees, and investment decisions, must be made by the board of directors.

ESTABLISHMENT PERMIT OF A PORTFOLIO MANAGEMENT COMPANY: REGISTERED CAPITAL SYSTEM AND CONDITIONS

For companies’ establishment permit applications to be evaluated by the Board, they must be established as joint-stock companies under the principles regulated in the Turkish Commercial Code (TCC) with a registered capital system. All shares must be registered and issued in cash. The initial capital of the company must be at least 30,000,000 Turkish Lira. Additionally, the company’s articles of association must comply with the provisions of the law and Board regulations.

The company’s founding partners must also meet several conditions, such as not having a bankruptcy history or engaging in any commercial activities that would lead to the cancellation of a firm’s operating license by the Board. They must not have been convicted of offenses specified in the law, including financial crimes and financing of terrorism. They must have no outstanding tax debt and be free from any transaction bans. Additionally, they must maintain the honesty, reputation, and financial strength required to manage the company.

The company’s partnership structure must be transparent and clearly defined. Major shareholders must also meet these stringent conditions. Certain conditions, such as bankruptcy-related sanctions, will not apply if ten years have passed since such a decision was finalized.

For foreign residents or influential shareholders, equivalent documents specified in the law are required. The principles for evaluating these conditions for significant foreign partners are determined by the Board. If a bank is a founding or significantly influential partner, it must send documents proving compliance with the conditions to the Board and obtain approval from the Banking Regulation and Supervision Agency. If a bank is a principal shareholder in the company, the requirements for such institutions will not apply.

TRADE NAME AND BUSINESS NAME GUIDELINES FOR PORTFOLIO MANAGEMENT COMPANIES

Regarding trade and business names, portfolio management companies must follow certain guidelines. The trade name of the company must include the term “portfolio management.” If the company is established specifically to manage venture capital investment funds or real estate investment funds, its trade name must explicitly state “venture capital portfolio management company” or “real estate portfolio management company.” If the company chooses to use a business name, it must obtain approval from the Board and register and announce the name.

Additionally, all advertisements, promotions, and correspondence in written and visual media must use the trade name alongside the business name. This requirement ensures transparency and easy identification of the company’s activities and specializations.

ESTABLISHMENT APPLICATION PROCEDURE OF A PORTFOLIO MANAGEMENT COMPANY

The process for those wishing to establish a portfolio management company is governed by specific procedures and regulations. Founders are required to submit the establishment application form and draft articles of association to the Board. These documents must comply with the standards determined by the Board. They must also submit a notarized declaration in accordance with the examples in Annex (1) and (2) of the Communiqué on Portfolio Management Companies and Their Activities.

Other required documents include notarized copies of the resolutions of the authorized bodies of the founding legal entities confirming their intention to participate in the company. Founders must also prove that they meet the conditions outlined above regarding the qualifications required of the founders.

However, if the legal entity founders submit independently audited financial statements to the Board, they are exempt from the declaration obligation.

The same requirements apply to foreign residents, and the Board may require the documents to be translated by a sworn translator. In some cases, the Board may require special independent audits of the legal entity founders during the establishment application process. This provision also applies to activity permit applications and changes in the partnership structure.

After submitting all required documents, the Board reviews the applications within six months and notifies the applicants of its decision. If approved, the company contacts the Ministry of Customs and Trade to complete the remaining establishment procedures.

OPERATION AND OPERATING CONDITIONS OF A PORTFOLIO MANAGEMENT COMPANY

The operation of a portfolio management company is governed by a specific set of conditions that the company must comply with. After obtaining the establishment permit from the Board, an activity permit and authorization certificate application must be made within three months. Failure to do so will result in the cancellation of the establishment permit. In special cases, this period can be extended by three months.

Various conditions must be met to obtain an operating license. These include maintaining initial establishment conditions, complying with capital adequacy obligations, blocking required guarantees at Takasbank, and signing an agreement with a portfolio custody institution for portfolio custody services. Additionally, managers and personnel must meet special criteria, and the company must employ a sufficient number of portfolio managers to engage in portfolio management activities.

The company must also establish an accounting, record, information, and document system and create a research unit and organizational structure to ensure a regular workflow and communication. This includes appointing a general manager and implementing an organizational structure that complies with regulatory requirements, including establishing internal control and risk management systems.

The job descriptions and workflows of specialized staff must be recorded in writing and approved by the company’s board of directors. These should include procedures ensuring that all personnel perform their duties according to written procedures and report practices contrary to professional principles or company policies.

The company has the option to manage its funds or contract with another portfolio management company for this service. If a foreign company is contracted, a document proving that the institution is authorized to engage in portfolio management activities in that country must be sent to the Board at least 15 business days before the contract’s effective date.

There are restrictions on who can serve as managers or authorized representatives of the portfolio custody institution and investment institutions providing asset trading services for the fund portfolio, as well as who can hold positions within the company.

Finally, before issuing the authorization certificate, the fee must be paid, and the payment document must be submitted to the Board. The company is obliged to meet all operating conditions throughout its operational period. Any loss of condition must be reported to the Board within three business days.

PORTFOLIO MANAGEMENT COMPANIES WITH LIMITED ACTIVITIES: SPECIAL PRINCIPLES AND OPERATION

Portfolio management companies with limited activities operate within specific principles. These companies are established with specific functions such as setting up and managing foreign collective investment schemes marketed to persons residing abroad and providing portfolio management services to persons residing abroad, establishing and managing only venture capital investment funds, real estate investment funds, or a combination of both.

Special principles apply to these companies, provided they do not contradict the general rules explained above. For these companies, the initial capital requirement is 15,000,000 TL, and the minimum equity and capital requirements specified in Article 28 of the Communiqué apply at half the rate. Certain provisions, such as those in Article 8, paragraph two, subparagraph (e) and Articles 20 and 28, do not apply to these companies.

Companies must prepare and submit tables showing their capital adequacy and the number and size of managed portfolios monthly. This information must be submitted to the Board within five business days following the relevant period. The Board has the authority to change the calculation and submission schedule if necessary.

These companies may outsource information systems services, research services, risk management system services, and fund services. These services can be obtained from investment institutions or other specialized institutions, provided they are controlled and monitored by the company’s board of directors. Companies in certain categories based on the size of the managed portfolio may also outsource internal control and inspection services.

Additionally, these companies can only provide services to the venture capital investment funds and/or real estate investment funds they manage. If established within their own structure, they are limited to the duties of the fund services unit. The duties of the internal control personnel

can be performed by an inspector, provided they have the relevant experience. Finally, a full-time accounting officer must be employed within the company to fulfill the duties specified in Article 8, paragraph two, subparagraph (g) of this Communiqué.

1. Real Estate Investment Funds and Venture Investment Funds

The accounting personnel of a real estate/venture portfolio management company can perform the duties specified in the first paragraph of Article 14 of the Communiqué without the need to establish a fund services unit. These companies cannot engage in individual portfolio management, investment advisory activities, marketing, and distribution activities concerning investment funds they do not establish and manage. They also cannot provide ancillary services specified in the legislation.

At least one member of the company’s board of directors must have at least five years of experience in real estate investments/venture capital investments, excluding real estate trading. The general manager must have a Capital Market Activities Level 3 License or at least five years of experience in real estate investments/venture capital investments, excluding real estate trading.

According to the licensing regulation of the Board, the company must establish an investment committee consisting of at least three people. This committee includes a valuation expert with a real estate valuation license/four-year higher education graduate with at least five years of experience in venture capital investments, the aforementioned board member, and the general manager.

The general manager can take an executive role in the companies in the venture capital investment funds portfolio established and/or managed by the company to carry out the activities specified in the Board’s venture capital regulations.

The company must employ at least one portfolio manager to manage the portion of the portfolio consisting of money and capital market instruments or obtain investment advisory and/or portfolio management services by contract from other companies. However, this obligation does not apply if the company’s investments in money and capital market instruments are solely for liquidity purposes.

The real estate and venture capital portfolio management company must comply with personnel and organizational structure conditions in addition to the other prescribed conditions.

2. Establishing and Managing Foreign Collective Investment Schemes Marketed Exclusively to Persons Residing Abroad and Providing Portfolio Management Services to Persons Residing Abroad

A company established to set up and manage a foreign collective investment scheme marketed exclusively to individuals residing abroad can provide investment advisory, portfolio management, and ancillary services to individuals residing abroad. This company can also engage in marketing and distribution activities related to participation shares of funds it does not establish or manage.

If the collective investment scheme established and/or managed by the company has an equivalent institution established to fulfill the duties and responsibilities of the fund services unit in a foreign country, and the information and documents proving this are submitted to the Board, the requirement to establish a fund services unit is not required for these customers only.

At least one member of the company’s board of directors and the general manager must have at least five years of experience in the financial markets sector. The company must also employ at least one portfolio manager to manage the portion of the portfolio consisting of money and capital market instruments.

PORTFOLIO MANAGEMENT COMPANIES COMPLYING WITH ETHICAL AND TRANSPARENT OPERATING PRINCIPLES

Prevention of Conflicts of Interest

These principles are designed to guide companies in managing their operations and relationships ethically and transparently. Companies are expected to conduct their activities fairly and honestly, always considering their clients’ interests and the integrity of the financial market. To avoid conflicts of interest, companies should design their organizational structures and decision-making processes to minimize these potential conflicts.

Companies must also identify potential conflicts that may arise among their employees, between employees and clients, and even among different clients. To this end, they need to create a written policy outlining these conflicts, the steps to prevent them, and the procedures to follow when they cannot be avoided.

In cases where conflicts of interest are inevitable, companies are expected to treat their clients fairly, ensure that their practices do not deviate significantly from market norms, and inform their clients about these issues. They must also have transparent and effective procedures to record and address client complaints.

Additionally, companies should consider their size, the size of the portfolios they manage, their organizational structures, and the nature of their services when developing their conflict of interest policies. If the company is part of a larger group, the conflict of interest policy should also reflect the structure and activities of this larger group.

Finally, it is worth noting that the principles outlined should not be misused to justify any actions or transactions that violate existing laws. The aim of these principles is to support companies in maintaining ethical and lawful operations.

Internal Control System

A robust internal control system within a company is needed to ensure the integrity and reliability of all commercial activities, including accounting, data management, and records. This system, operating in accordance with company policies, strategies, and legal requirements, serves as a safeguard against fraud, errors, and irregularities. It ensures that portfolio management activities comply with legal regulations and documentation, transactions are executed accurately, and an effective accounting system is established. The system is designed to identify and mitigate potential risks, check whether employee transactions conflict with managed portfolios, and verify that expenses from managed portfolios align with market values. The internal control system is also responsible for overseeing the valuation of managed portfolios and ensuring that principles related to related party transactions are defined and followed.

These internal control policies and procedures, along with any changes undergoing the same process, must be documented and approved by the company’s board of directors. For effective control, the system must be integrated into daily operations and allow for continuous monitoring of identified risks. To facilitate this, everyone’s duties and responsibilities must be clearly defined and communicated. All levels of personnel should effectively participate in the internal control system, with monthly reports submitted to the board of directors.

A non-executive board member is appointed as the “Board Member Responsible for Internal Control,” responsible for overseeing the internal control system, managing risks, and communicating with the board. At least one staff member is assigned to internal control activities, meeting specific experience and qualification criteria. In companies with large portfolios, an inspector meeting the experience requirement may fulfill these duties and responsibilities.

Risk Management System

Establishing a comprehensive risk management system is crucial for maintaining the integrity and stability of the company and the portfolios under its management. This system must be formally documented and approved by the company’s board of directors, ensuring transparency of the system’s rules and awareness among all relevant parties. This also applies to any changes in the system, which must undergo the same comprehensive review and approval process.

The risk management system should be designed to identify the major risks the managed portfolio may face. These risk definitions must be regularly reviewed and updated as significant developments occur to remain relevant and effective. The system must also include a reliable risk measurement mechanism to ensure consistent assessment, identification, measurement, and control of encountered risks.

The risk management system should be designed in accordance with the investment strategy of the managed portfolio, considering the structure and risk level of the invested assets. The system should also integrate seamlessly with the company’s internal control system, providing an all-encompassing safety net for the company’s operations.

It is essential to maintain the independence of the risk management unit from the portfolio management unit. This ensures impartiality and prevents potential conflicts of interest. Personnel in the risk management unit must have the necessary knowledge, experience, and licenses to effectively carry out risk control operations.

The risk management unit is tasked with several key responsibilities. These include identifying potential risks, determining and implementing risk measurement methods and models, monitoring compliance with risk limits, and reporting risk limit breaches. They are also responsible for daily risk monitoring, weekly written reporting to the board of directors, and promptly reporting extraordinary situations that pose significant financial risks to the company.

Companies establishing or managing venture capital investment funds and real estate investment funds must design their risk management systems to include principles related to financing and liquidity risks associated with these investments. This, in addition to the provisions detailed above, provides a comprehensive and effective approach to risk management across all areas of company operations.

PROHIBITED ACTIVITIES OF PORTFOLIO MANAGEMENT COMPANIES

Although the company is authorized to perform various transactions within its scope, certain activities are explicitly prohibited to maintain regulatory compliance and risk management.

Firstly, the company is prohibited from engaging in brokerage activities. This ensures that it remains focused on its primary operations and maintains clarity in its role.

Secondly, the company is not allowed to issue documents involving its own financial commitments related to or separate from capital market instruments. Additionally, they cannot engage in lending transactions or borrow money, except to meet short-term cash needs. However, loans taken for transactions under the delivery versus payment principle as defined in the Board’s regulations on the safekeeping of capital market instruments are not considered within this prohibition.

Thirdly, the company is not permitted to engage in commercial, industrial, or agricultural activities unrelated to the permitted activities specified in this Communiqué. Acquiring real estate beyond what is necessary for commercial activities is also prohibited.
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