Court of Appeal copyright dispute ‘might never have arisen’ if parties had sought legal advice
Out-Law Guide | 23 Feb 2017 | 9:58 am | 8 min. read
Authorised funds operate within a highly regulated environment, and not all investment strategies are suitable for this environment. The fund structures that may be used are:
Regardless of the vehicle used, each scheme must have an operator and a depositary in order to be authorised. The operator, also known as the authorised fund manager (AFM), is responsible for the overall management of the scheme while the depositary acts as custodian of the scheme's assets.
The operator and the depositary have specific responsibilities and duties which are set out in a range of legislation and rules. The AFM may delegate some of its duties to other parties such as investment managers, investment advisers or administrators, but it cannot delegate its responsibilities under the regulatory system. The depositary's duties also include oversight of some of the AFM's activities. The AFM and the depositary must be independent of each other.
FCA rules governing the operation of authorised funds are set out in the Collective Investment Scheme Sourcebook (COLL), which is part of the FCA's Handbook of Rules and Guidance.
An OEIC is a corporate vehicle established by a constitutional document known as the instrument of incorporation. Although they share many characteristics of companies and are subject to some parts of the 2006 Companies Act, OEICs are subject to a special set of statutory requirements set out in the 2001 Open-Ended Investment Company Regulations (OEIC Regulations).
An OEIC can appoint any number of directors but must appoint at least one that is an authorised corporate director (ACD), who is responsible for carrying out the management function of the OEIC and is authorised by the FCA to act as the operator of the fund. The ACD can act as the sole director of the OEIC, and it is in fact usual for OEICs to appoint only an ACD.
An OEIC must also appoint an independent depositary to act as custodian of the OEIC's assets, although it is common for custody to be delegated to one or more sub-custodians.
An AUT is a collective investment scheme under which the property is held on trust for the participants. It is established by trust deed entered into by the AFM and a trustee, which acts as the authorised depositary of the scheme.
In an AUT, investors have a beneficial interest in the assets of the fund, represented by units which are broadly treated in the same way as shares for the purposes of the FCA's rules. This means that a holder of units in an AUT will, for example, have the right to redeem their units, attend and vote at meetings of unit holders and receive income dividends from the units. Statutory requirements applying to AUTs are set out in part 17 of the Financial Services and Markets Act (FSMA).
The ACS is a relatively new, tax transparent, authorised scheme vehicle. It was introduced in June 2013 to enable the establishment of 'master-feeder' arrangements where, for example, a master fund could be established in one EEA state with feeder funds in others.
The structure of the ACS is similar to the common contractual fund available in Ireland, and the fond commun de placement (FCP) available in jurisdictions such as Luxembourg.
Although OEICs and AUTs can be marketed to the general public subject to certain conditions, only certain types of large or experienced investors are permitted to invest directly in an ACS.
ACSs are established under the 2013 Collective Investment in Transferable Securities (Contractual Scheme) Regulations (ACS Regulations) and will be either:
A co-ownership scheme is established by deed between the AFM and a depositary. Investors subscribe for units in the scheme rather than by entering into the deed, much like with an AUT. The scheme itself has no legal personality: the scheme's property is beneficially owned by its unitholders while the depositary holds legal title.
Authorised limited partnerships are formed by a limited partnership deed entered into a by a general partner, who will be the AFM, and a nominated partner, which will be the only limited partner of but not a participant in the scheme on its formation. The investors in the scheme will be limited partners and legal title will be held by the depositary, as in a co-ownership scheme.
The form of a limited partnership ACS follows closely that of a limited partnership made under the 1907 Limited Partnership Act, with some amendments in the ACS Regulations:
Each of the vehicles described above may be set up as single schemes or, except for ACSs that are limited partnerships, umbrella schemes with a number of sub-funds, of which there must be at least two.
The few ACSs that have been established to date are structured as co-ownership schemes.
Under the COLL rules there are three regulatory categories of authorised fund:
The category will determined the high level investment rules for the fund.
Undertakings for collective investment in transferable securities (UCITS) are regulated at EU level under the 2014 UCITS Directive, referred to as UCITS V. UCITS originally came into force in December 1985 to facilitate the cross-border marketing of retail funds that complied with its provisions. These provisions set the types and limits on investments that can be made by such funds, enforcing the spread of risk and enabling them to be marketed to the public with a consistent set of requirements.
The UCITS Directive has been through a number of updates and revisions since the original was implemented. These have extended the range of permitted investments and the activities that an AFM is permitted to carry on.
UCITS may invest in 'transferable securities', which are defined as:
They may also invest in other liquid financial assets, which include:
UCITS must be at least 90% invested in listed assets.
Article 1(5) of the UCITS Directive provides that member states shall prohibit a UCITS from transforming itself into a collective investment scheme which is not covered by the directive. In the UK, the practical effect of this is that although an authorised fund constituted as a NURS can convert to a UCITS, a UCITS cannot convert to a NURS. If a UCITS wishes to become a NURS, the fund will have to transfer its assets to a different entity established as a NURS. Such a transfer will require a special resolution of unitholders.
NURSs, as their name suggests, are authorised schemes that can be marketed to the public but that do not comply with the UCITS Directive. NURSs are within the scope of the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD governs funds that are not UCITS funds, and provides an EU-wide regulatory framework for the supervision of fund managers or operators that includes reporting requirements and notifications.
The range of permitted investments for a NURS is largely the same as that for a UCITS but the COLL rules permit investment in real estate and gold. The investment spread requirements are also less strict than those applied to UCITS.
A QIS may only be marketed to experienced investors who meet certain qualifying criteria. As such, they are permitted to invest in a broader range of assets and are subject to less prescriptive rules on borrowing and investment powers.
QISs are also within the scope of AIFMD.
There are a range of rules governing the provision and timing of information to investors and the FCA.
Documents that must be filed with the FCA, firstly upon application for authorisation and then whenever changes are made to either the scheme or the documents, include:
An up to date copy of the full prospectus must be filed with the FCA. Any significant changes that result in a change to the prospectus will need FCA approval; for example a change to the investment policy or increase in fees payable to the AFM. Any change that results in a change to the instrument constituting the scheme will always require FCA approval in accordance with regulation 21 of the OEIC Regulations, section 251 FSMA for AUTs or section 261Q FSMA for ACSs. Some changes may also require unitholder approval.
The purpose of the KIID is to be a short, meaningful explanation of the risks, costs and expected outcomes associated with investments in a UCITS in a form understandable by retail investors. It replaced the simplified prospectus, which is still used by some NURS, although a NURS is permitted to opt to prepare a KIID.
The KIID is set to be replaced by a new investor disclosure document introduced by the EU regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs). The KID will be a new pan-European pre-contractual disclosure document that all retail investors should receive when they are considering purchasing certain types of investment products including investment funds, retail structured products and certain types of insurance contracts used for investment purposes. The PRIIPs Regulation is currently expected to apply from January 2018.
Authorised funds must be audited, and annual and half-yearly reports and accounts must be prepared and made available to investors.
Some schemes can and do hold AGMs, but are empowered to dispense with the holding of these meetings. Many schemes now only hold extraordinary general meetings of investors to approve fundamental changes to the scheme.
The COLL rules set out a hierarchy of changes that may need FCA, and sometimes investor, approval before they can be implemented.
A fundamental change requires both FCA and investor approval. Fundamental changes may give investors cause to rethink their investment in the fund, and therefore require their approval. Examples of fundamental changes include:
It is worth noting that, for this reason, many authorised funds have very broad investment objectives.
Significant changes require FCA approval, but not investor approval. Significant changes may include:
Notifiable changes are insignificant changes that do not require either FCA or investor approval, but must be notified to investors. These include minor changes that must be made as a result of changes in regulation. Depending on the nature of the change, the notification can be made pre- or post-event.
Court of Appeal copyright dispute ‘might never have arisen’ if parties had sought legal advice