Jurisdiction - Mongolia
Reports and Analysis
Mongolia – An Overview Of The Law On Investment Funds.

4 September, 2014


Legal News & Analysis – Asia Pacific – Mongolia


The Parliament of Mongolia approved the Law of Mongolia on Investment Funds on 3 October 2013 (“Investment Funds Law“) and the law entered into force on 1 January 2014. 


The Investment Funds Law is the first comprehensive law aimed at regulating the licensing, operation, management and supervision of investment funds in Mongolia and follows the adoption of the Law of Mongolia on Securities Market Law enacted on 24 May 2013 (“Revised Securities Market Law“), which sets out the principal general framework within which investment funds are allowed to operate in Mongolia. 


Although the previous securities market law enacted in 2002 did provide for investment funds, and the Financial Regulatory Commission (“FRC“) issued Regulations on the Operation of Investment Funds in May 2003, investment funds have not been a feature the Mongolian capital market and no licences have been issued for investments funds in Mongolia. 

Whilst the Investment Funds Law aims to provide comprehensive regulations covering a range of issues relating to investment funds such as their establishment, operation, management, supervision and liquidation, detailed regulations on a range of matters have yet to be adopted by the FRC. The FRC issued the Regulations on Licensing and Operation of Investment Management Companies on 15 January 2014 (“Investment Management Companies Regulations“). These enable the establishment and operation of investment management companies, paving the way for the implementation of the Investment Funds Law. 


We set out below a brief summary of the Investment Funds Law. 


Scope Of The Law

The Investment Funds Law regulates matters relating to the issue of licences to investment funds, management of fund assets, the activities of investment funds, safe-keeping and registration of fund assets, the disclosure of information to investors, and the operations of regulated entities that provide services to investment funds.


The Investment Funds Law does not apply to special-purpose funds that have been established or are regulated by separate laws, nor to the investment activities (by way of using their own funds) undertaken by banks, non-banking financial institutions, insurance and professional insurance intermediary companies, and regulated securities market participants other than investment funds and investment management companies. Further, investment activities to be undertaken by banks with savings raised by public subscription will not be regulated by the Investment Funds Law.

Establishment Of Investment Funds

Investment funds may be established as private or mutual funds for a period of up to 10 years. Private funds are defined as “investment funds authorised to raise funds based on contractual arrangements by way of offering unit rights to those who carry out professional investment activities (such as investment banks, pension funds, banks, non-banking financial institutions, insurance companies, underwriters or dealers)”. Mutual funds are defined as “investment funds authorised to raise funds by way of offering unit rights through public offer (to more than 50 persons) in accordance with the Revised Securities Market Law”. Thus, it appears that private funds may offer their unit rights only to a circle of qualified investors that are regarded as entities engaged in professional investment activities under the Revised Securities Market Law or by the FRC. The circle of qualified investors is currently relatively small in Mongolia and this may limit the operation of private funds.

Private investment funds are not subject to licensing requirements under the Revised Securities Market Law and may be closed-ended only. In contrast, the establishment of a mutual fund requires a licence from the FRC and may be either closed or open-ended.
Only licensed investment management companies may establish investment funds and manage their assets on the basis of asset management contracts. The Investment Management Companies Regulations set out detailed regulations on the licensing and operations of investment management companies. An investment management company must have a minimum share capital of MNT 100m (approximately USD 54k) and must be managed by persons who meet the prescribed requirements. A licence to carry out investment management services will be issued for a period of 10 years.

A licensed investment management company must first register with the FRC to establish a mutual or private fund. In the case of a mutual fund, the FRC issues a licence to operate a mutual fund following the successful raising of funds. In contrast, private funds may operate simply on the basis of registration with the FRC and the Legal Entities Registration Office.

Investment funds may be organised as special-purpose companies under the Law of Mongolia on Companies enacted on 6 October 2011 (“Company Law“) and will have separate legal personality. Further, investment funds will be regarded as legal entities conducting professional investment activities under the Revised Securities Market Law, which status will enable them to trade in derivative instruments. There is no minimum requirement for private funds in terms of funds to be raised, but the FRC will issue a minimum requirement for mutual funds.

The Investment Funds Law provides detailed regulations on the establishment of investment funds and the application procedure for a licence to operate mutual funds. The FRC will issue specific regulations on the establishment of mutual funds and the monitoring of their activities.

Operations And Management Of Investment Funds


The highest governing body of an investment fund is a meeting of the investors or members holding unit rights. Detailed regulations on members’ meetings will be set out in the charter of an investment fund and must comply with Mongolian company law requirements. Further, the FRC will issue detailed regulations on calling and holding of members’ meetings and the delivery of notices to members.

A mutual fund must have and appoint a board of directors as provided in its charter. Private funds may operate without a board of directors.


An investment fund will be represented by an investment management company whose authority will be determined in the asset management agreement entered into with the same.

The Investment Funds Law limits the operations of investment funds to the raising of funds based on unit rights, the sale and purchase of investment instruments, management of fund assets, and the entry into of such agreements necessary to conduct the same. The carrying out of activities that are not included in its investment documents, conducting savings services or employing of staff is prohibited. 


According to the Investment Funds Law, investment funds may only invest in the following investment instruments:


(i) Mongolian national government bonds; 
(ii) Mongolian local government bonds;
(iii) shares in listed companies;
(iv) corporate bonds that are listed and being traded on a regulated market; 
(v) asset-backed securities; 
(vi) shares in closed joint stock companies and limited liability companies;
(vii) corporate bonds that are not traded on a regulated market;
(viii) bonds issued by foreign governments;
(ix) derivative financial instruments;
(x) foreign and national currencies;
(xi) gold and other tradable mineral products; and
(xii) immovable property, and possession rights relating thereto.


Mutual funds may only invest in items (i) to (v) above. Private funds may invest in all the items listed above. It is possible to restrict the scope of permissible investment instruments in the investment policy documents and/or charters of investment funds.

The Investment Funds Law sets out detailed regulations on the management of fund assets and net asset ratio requirements for investment funds, with a special focus on mutual funds. It is possible to distribute dividends prior to the expiry of an investment fund’s term if its charter so provides.

Investment funds must engage licensed custodians for the purpose of safe-keeping their assets and records and enter into custodial agreements. For mutual funds, the costs for engaging investment management companies and custodians may not exceed 3 per cent of the average annual net asset value of the relevant mutual fund. In the case of private funds, in addition to service costs, investment management companies may also levy a performance bonus depending on the investment results, the annual rate of which should not exceed 30 per cent of the total net profit of the fund.

Liquidations Of Investment Funds

Investment funds may be liquidated by a resolution of members’ meeting or on a court order.

Specifically, an investment fund may be liquidated (i) upon the expiry of its term; (ii) upon dissolution by a resolution of members’ meeting on a voluntary basis or on the occurrence of certain events; (iv) upon the entry into force of a court decision for the involuntary liquidation of an investment fund following the occurrence of an emergency event ; (v) insolvency; or (vi) such other circumstances as maybe provided by law.

The Investment Funds Law provides detailed regulations on the liquidation procedure and ranking of claims. Investors are entitled to receive the residual assets on a pro rata basis following the satisfaction of prior relevant claims.

Supervision By The FRC


The FRC will have the authority to regulate and supervise investment funds in Mongolia. The FRC’s authority includes licensing, approving implementing regulations and exercising ongoing state supervision over a fund’s operations.

The supervisory authority of the FRC includes exercising regular supervision over investment funds, giving instructions to investment funds if deemed necessary, taking action in emergency events, and appointing receivers when required.

The Investment Funds Law authorises the FRC to issue a range of regulations on matters relating to the operations of investment funds, specifically those relating to mutual funds.

Tax Environment

As a supporting amendment to the Investment Funds Law, the Law of Mongolia on Business Entities Income Tax, enacted on 29 June 2006, as amended (“Corporate Income Tax Law“) has been further amended so as to exempt the income of investment funds from Mongolian corporate income tax.

Otherwise, the tax treatment of investment funds will be as same as that of other corporate entities in Mongolia. For example, in the absence of specific regulations, it appears that dividends and profits to be distributed by investment funds to their corporate investors would be taxed in accordance with the general framework within the Corporate Income Tax Law or the Law of Mongolia on Personal Income Tax, enacted on 16 June 2006, as amended, if profits are distributed to individual investors.


The enactment of the Investment Funds Law is a positive development in increasing the liquidity of Mongolian capital markets, the funding opportunities for Mongolian companies and for providing alternative investment avenues for investors. However, it is yet to be seen as to whether the existing institutional framework, as well as market conditions, will be conducive to the establishment and operation of investment funds in Mongolia. Further, the effective implementation of the Investment Funds Law is subject to the issue of further enabling regulations by the FRC. The establishment and operation of mutual funds will be subject to close scrutiny by the FRC and additional requirements imposed by the Investment Funds Law. Further, the successful operation of private funds will require the presence of qualified investors in the Mongolian market.


Hogan Lovells


For further information, please contact:


Chris Melville, Partner, Hogan Lovells
[email protected]

Michael Aldrich, Partner, Hogan Lovells
[email protected]


Anthony Woolley, Hogan Lovells

[email protected]


Solongoo Bayarsaikhan, Hogan Lovells

[email protected]

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