The Financial Supervisory Commission: “…there is no possibility of recognizing a family foundation as a professional client…”

At the end of October 2024, we inquired on behalf of our client to the Financial Supervision Commission with an important question – “…whether a family foundation can be recognized as a professional client within the meaning of Article 2.13a(m) of the Law on investment funds and management of alternative investment funds (hereinafter “UFI”)?”

In the inquiry, we also presented our position, in which we assumed, taking into account the provisions of the UFI and the Family Foundation Law, that professional client status can be granted to a family foundation, arguing as follows:

1. Compliance with the definition of professional client

According to Article 2(13a)(m) of the UFI, a professional client may be “another institutional investor whose primary business is investing in financial instruments, including an entity engaged in securitization of assets or entering into other types of financial transactions.”

It should be noted that the UFI does not require that the investment activity be the only activity of the entity – it is sufficient that it be its primary business. In the case of a family foundation, according to Article 2 of the Law on Family Foundations Family Foundation Act (hereinafter “UFR”), the purpose of the foundation is to accumulate property, manage it in the interests of its beneficiaries, and to fulfill its benefits to them, which falls within the scope of investment activities as provided for in the Law on Investment Funds.

1. Possibility of investment activities by a family foundation

The provision of Article 5(1)(3) of the UFR unambiguously indicates that a family foundation may conduct business activities, among other things, in the scope of “joining and participating in commercial companies, investment funds, cooperatives and entities of a similar nature having their seat in the country or abroad.” This provision opens up the possibility for a family foundation to actively participate in investment markets, including investment funds, which is one of the key prerequisites for a family foundation to be considered an institutional investor.

III.      Interpretation of the function of the family foundation

It should be noted that a family foundation, as an entity that collects and manages property

for the benefit of its beneficiaries, can act in a manner reminiscent of entities engaged in engaged in investing, just like other investment institutions. There is also the possibility, for a family foundation to perform financial operations, such as securitization of assets, which may include, among other things, investment in funds. Given the above, a family foundation meets the conditions provided for in Article 2(13a)(m) of the UFI.

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The Office of the Financial Supervisory Commission responded to our inquiry on January 23, 2025, in which, unfortunately, it did not agree with our interpretation of the regulations, arguing its position as follows:

“In the opinion of the Office of the Financial Supervisory Commission, one of the most significant features that characterizes the entities listed in Article 2(13a)(m) of the UFI is their special status as public trust institutions, which is guaranteed both legally and institutionally – particularly to the extent that they carry out regulated financial market activities on a permanent and organized basis. Both the establishment and subsequent operation of these entities involve the implementation of a number of requirements, which may include, among others, strict conditions for obtaining a license to conduct a given activity, requirements for legal form, capital requirements, requirements for the warranties and qualifications of the people employed, or restrictions on the exclusive object of the activity. In addition, in addition to the professionalism required to conduct a given type of activity – an important factor is the scale of operations carried out by institutional investors within the financial market, which remains significantly higher than for other investors. The above requirements mean that the participation of these entities, for example, in a given alternative investment company significantly increases the level of security for other investors. Institutional investors, among others, due to their knowledge, experience, technical and organizational resources, should ensure the operation of the alternative investment company in accordance with the applicable standards and laws, as they simultaneously exercise effective supervision over the investment activities carried out. The emanation of such an assumption was the introduction of Article 70k(7) to the Law, according to which, the newly introduced requirements for clients of an alternative investment company (the provisions of Article 70k(3)-(6) of the Law) will not apply if at least 50% of the participation rights of the alternative investment company are held by professional clients referred to in Article 2(13a)(a-m) of the Law.

According to Article 2(1) of the Law on Family Foundation of January 26, 2023 (Journal of Laws item 326, as amended, hereinafter: the “Foundation Law”), “a family foundation is a legal entity established for the purpose of accumulating property, managing it in the interest of beneficiaries and fulfilling benefits for beneficiaries. The founder shall specify in the statute the specific purpose of the family foundation.” According to Article 5 (1) of the Family Foundation Law, a family foundation may carry out business activities within the meaning of Article 3 of the Law of March 6, 2018. – Entrepreneurs’ Law (Journal of Laws of 2023, item 221) only to the extent of:

1) disposal of property, provided that the property was not acquired solely for the purpose of further disposal;

2) leasing, renting or providing property for use on any other basis;

3) joining and participating in commercial companies, investment funds, cooperatives and entities of a similar nature that are domiciled either in the country or abroad;

4) purchase and sale of securities, derivatives and rights of a similar nature.

(…)

According to Article 5(3) of the Law on Foundations, the provision of paragraph (1)(1) does not apply to the rights arising from joining and participating in the entities referred to in paragraph (1)(3), and the assets referred to in paragraph (1)(4). According to the view of the literature:

“A family foundation, although it may not directly engage in business activities, beyond the limits indicated in the Law, has the ability to join and participate in commercial companies, investment funds, cooperatives and entities of a similar nature based in the country or abroad. A family foundation can therefore be a passive entrepreneur.

At the same time, qualifying participation titles in companies, funds, cooperatives as conducting business does not seem to be a systemically consistent solution. It is, after all, a long-established position, which does not provoke either doctrinal or jurisprudential disputes, and which is also present in other legal systems, that joining and investment participation in companies and other legal entities do not constitute economic activity, and do not make an investor an entrepreneur.

A family foundation can either operate with shares, stocks, units contributed to it by the founder, or be a capital donor for the business of another entrepreneur. A family foundation’s participation in capital companies carries only the risk for that foundation’s assets contributed in kind to the company. A family foundation can be a consortium member in a business venture with another entrepreneur. A family foundation should not step out of its role as a passive consortium partner. It should be recognized that a family foundation can make contributions to increase the share capital of companies in which it holds shares. It can make additional contributions to limited liability companies. A commercial law company in which a family foundation has shares may create other companies by making contributions in kind to them either by division or by spin-off; it may participate in entity transformations involving division, transformation, merger of companies, etc.”[1]

Referring directly to the thesis presented in the Company’s inquiry, i.e., “It should be noted that the UFI does not require that the investment activity be the only activity of the entity – it is sufficient that it be its core business. In the case of a family foundation, according to Article 2 of the Law on Family Foundations (hereinafter the “UFR”), the purpose of the foundation is to accumulate property, manage it in the interests of the beneficiaries and fulfill benefits for them, which falls within the within the scope of investment activities provided for by the Law on Investment Funds,” the Commission points out that for the purpose of determining the basic function for which the institution of a family foundation was established in the Polish legal order, it is necessary to refer to the rationale of the Law on Foundations. The fundamental purpose of the Foundation Law was to comprehensively strengthen the legal tools for carrying out succession processes by adding to the legal system an institution for accumulating family wealth, allowing capital to be retained in the country for many generations and increasing the potential for domestic investment. According to the ratio legis of the Foundation Law, the family foundation is supposed to minimize the risk of unsuccessful succession and guarantee the continuation of business activities. As is clear from the justification, the Law on Foundations was also a response to the demands made by the family business community regarding the introduction into the Polish legal system of a new institution to facilitate multi-generational succession and to reconcile business and private interests. The above does not allow us to conclude that the primary purpose or object of the family foundation’s activity (expressed both explicitly in the Law on Family Foundations and underlying its establishment) is the activity of investing in financial instruments or engaging in securitization of assets or entering into other types of financial transactions, as indicated in the Inquiry. In the opinion of the UKNF, the fact that a family foundation should not qualify as an institutional investor is also supported by the fact that a family foundation does not have the characteristics of a public trust institution, and its establishment and subsequent activities are not subject to restrictions, nor (in principle) does it reach the scale that the UKNF pointed out earlier in this letter. Consequently, the family foundation will not be able to guarantee the security of other investors, which is the ratio legis of Article 70k(7) of the Law and according to which it is possible to exclude the application of the requirements of Article 70k(3)-(6) of the Law to ASI clients.

The Commission also notes that applying the interpretation adopted in the inquiry, i.e., “In the case of a family foundation in accordance with Article 2 of the Law on Family Foundations (hereinafter ‘UFR’), the purpose of the foundation is to accumulate property, manage it in the interests of beneficiaries and fulfill benefits for them, which falls within the scope of investment activities provided for in the Law on Investment Funds.” would lead to a state of affairs that would be in blatant contradiction with the intent of the law – i.e., among other things, in which, for example, any commercial company should be considered a professional (institutional) investor.

Regarding the second argument presented in the inquiry, i.e., “The provision of Article 5(1)(3) of the UFR unambiguously indicates that a family foundation may conduct business activities, among other things, in terms of ”joining and participating in commercial companies, investment funds, cooperatives and entities of a similar nature, established either domestically or abroad.” This provision opens up the possibility for a family foundation to actively participate in investment markets, including investment funds, which is one of the key prerequisites for a family foundation to be considered an institutional investor.”, UKNF considers the above thesis to be incorrect and notes that while it should be agreed that the cited provision opens the possibility for a family foundation to actively join other entities including investment funds, contrary to what the Company assumed, this circumstance cannot be considered one of the key prerequisites for recognizing a family foundation as an institutional investor – among other reasons, because this is not a prerequisite that exclusively characterizes institutional investors as professional investors, or that prejudices the granting of such status. The ability to join and participate in companies and other entities, having a passive nature do not constitute the conduct of business, and from this fact alone from the family foundation do not make an entrepreneur, including an institutional investor – professional, as referred to in the Law.

In view of the above, UKNF’s position is that, based on the current legislation, there is no possibility of considering a family foundation as a professional client within the meaning of Article 2(13a)(m) of the Act.

UKNF indicates that the above does not prevent a family foundation from being recognized as a professional client under Article 70k of the Act in conjunction with Article 2(13a)(n) of the Act in the event that the persons representing it (the management board) meet the requirements of Article 70k(1) of the Act, which is subject to verification by the ASI manager.

In conclusion, the UKNF for the time being does not allow a family foundation to be treated as a professional client, however, any changes in the factual and legal situation may result in the obsolescence and change of the above-cited position.

[1]   Family Foundations. Commentary, Prof. Dr. Rafal Adamus, Dr. Piotr Stec, Legalis 2023, CH Beck Publishing (Commentary to Article 5 of the Law on Foundations);