This appendix applies to persons who need to know whether a body corporate is an open-ended investment company as defined in section 236 of the Act (Open-ended investment companies). This would mean that it is a collective investment scheme.

The purpose of this guidance is to outline the circumstances in which a body corporate will be an open-ended investment company and, in so doing, to:

1. (1)

   give an overview of the definition (see AUTH App 2.3 (The definition)) and describe its three main elements:

   1. (a)

      an open-ended investment company must be a collective investment scheme (see AUTH App 2.4 (Collective investment scheme (section 235 of the Act)));

   2. (b)

      it must satisfy the 'property' condition in section 236(2) of the Act (see AUTH App 2.5 (The property condition (section 236(2) of the Act))); and

   3. (c)

      it must satisfy the 'investment' condition in section 236(3) of the Act (see AUTH App 2.6 (The investment condition (section 236(3) of the Act): general) to AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act))); and

2. (2)

   outline the implications for a body corporate if it does, or does not, fall within the definition of an open-ended investment company (see AUTH App 2.10 (Significance of being an open-ended investment company)).

This guidance is issued under section 157 of the Act (Guidance). It is designed to throw light on particular aspects of regulatory requirements, not to be an exhaustive description of a person's obligations. If a person acts in line with the guidance in the circumstances it contemplates, the FSA will proceed on the footing that the person has complied with aspects of the requirement to which the guidance relates. Rights conferred on third parties cannot be affected by guidance given by the FSA. This guidance represents the FSA's view, and does not bind the courts. For example, it would not bind the courts in relation to an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Action for damages)), or in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in the United Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of agreements)). A person may need to seek his own legal advice. Anyone reading this guidance should refer to the Act and to the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance.

The only kind of body corporate of an open-ended kind that may currently be formed under the law of the United Kingdom is one that is authorised by the FSA. A person intending to form an open-ended body corporate that has its head office in Great Britain should refer to the Open-ended Investment Companies Regulations 2001 (SI 2001/1228). Bodies corporate formed under these Regulations are referred to in the Handbook as investment companies with variable capital (or 'ICVCs'). COLL 2 (Authorised fund applications) and CIS 16 (Application and notification) contains rules and guidance on forming such bodies corporate. The Northern Ireland Assembly was in September 2002 considering a Bill to enable the establishment of open-ended bodies corporate whose head office is in Northern Ireland.1

Open-ended investment companies constituted in other EEA States which are seeking to exercise rights conferred by the UCITS Directive should refer to COLL 9 (Recognised schemes) and CIS 17 (Recognised Schemes) for guidance on the requirements of section 264 of the Act (Schemes constituted in other EEA States).1

Electronic commerce activities carried on by, or in relation to, any open-ended investment company will be subject to the provisions of the E-Commerce Directive. Guidance on the carrying on of electronic commerce activities is contained in the E-Commerce Directive sourcebook (ECO).

The nature of many bodies corporate means that they will, in most if not all circumstances, come within the definition of collective investment scheme in section 235(1) to (3) of the Act (Collective investment schemes). The property concerned will generally be managed as a whole under the control of the directors of the body corporate or some other person for the purpose of running its business. The idea underlying the investment is that the investors will participate in or receive profits or income arising from the operation of the body corporate's business.

However, there are a number of exclusions that apply to prevent certain arrangements from being a collective investment scheme. These are in the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme). The exclusion in paragraph 21 of the Schedule to that Order is of particular significance for bodies corporate. It excludes from being a collective investment scheme certain specified bodies corporate (such as building societies and friendly societies) as well as any other body corporate except a limited liability partnership or an open-ended investment company. This means that if a body corporate is an open-ended investment company it will not be excluded from the definition in section 235(1) to (3) of the Act. So it will be a collective investment scheme. Of course, it may be that other exclusions in the Schedule to the Order are available but this will depend on the circumstances of a particular body corporate (see AUTH App 2.4.5 G (Collective investment scheme (section 235 of the Act))).

Certain consequences flow according to whether or not a body corporate is an open-ended investment company. Different requirements apply to the marketing of the shares or securities issued by a body corporate which is an open-ended investment company, compared with one that is not (see AUTH App 2.10.1 G to AUTH App 2.10.6 G (Marketing of shares or securities issued by a body corporate)). In addition, the regulated activities that require permission may differ (see AUTH App 2.10.7G to AUTH App 2.10.10G (Implications for regulated activities)).

Guidance on the application of the definition in particular circumstances is in AUTH App 2.11 (Frequently asked questions)).

For a body corporate to be an open-ended investment company, as defined in section 236(1) of the Act:

1. (1)

   it must be a collective investment scheme;

2. (2)

   it must satisfy the property condition in section 236(2); and

3. (3)

   it must satisfy the investment condition in section 236(3).

Each of these aspects of the definition is considered in greater detail in AUTH App 2.4 (Collective investment scheme (section 235 of the Act)) to AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act)). Although the definition has a number of elements, the FSA considers that it requires an overall view to be taken of the body corporate. This is of particular importance in relation to the investment condition (see AUTH App 2.6.3 G and AUTH App 2.6.4 G (The investment condition (section 236(3) of the Act: general))).

An open-ended investment company may be described, in general terms, as a body corporate, most or all of the shares in, or securities of, which can be realised within a reasonable period. Realisation will typically involve the redemption or repurchase of shares in, or securities of, the body corporate. This realisation must be on the basis of the value of the property that the body corporate holds (that is, the net asset value).

In the FSA's view, all of the elements of the definition are clearly objective tests. In applying the definition to any particular case, a person would need to have regard to all the circumstances. This includes any changes in the way that the body corporate operates.

The FSA understands that the aim of the definition in section 236 of the Act is to include any body corporate which, looked at as a whole, functions as an open-ended investment vehicle. The definition operates against a background that there is a wide range of different circumstances in which any particular body corporate can be established and operated. For example, the definition applies to bodies corporate wherever they are formed. So, in the application of the definition to different cases, the law applicable to, and the detailed corporate form of, particular bodies corporate may differ considerably.

For a body corporate formed outside the United Kingdom, there is an additional issue as to how the applicable corporate law and the definition of open-ended investment company in the Act relate to one another. The FSA understands this to operate as follows. The term 'body corporate' is defined in section 417(1) of the Act (Interpretation) as including 'a body corporate constituted under the law of a country or territory outside the United Kingdom'. So, whether or not any particular overseas person is a body corporate will depend on the law applicable in the country or territory in which it is constituted. But if it is a body corporate under that law, the question whether it is an open-ended investment company is determined, as a matter of United Kingdom law, by the definition in section 236 of the Act. This is regardless of whether or not the body corporate would be considered to be open-ended under the laws of the country or territory in which it is constituted.

The first element of the definition is that open-ended investment companies are a corporate form of collective investment scheme. This means that they must have the features in section 235 of the Act.

Section 235(1) states that a collective investment scheme means any arrangements with respect to property of any description. The purpose or effect of the arrangements must be to enable the persons taking part in them to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The participants must not have day-to-day control over the management of the property (section 235(2)) and the arrangements must provide:

1. (1)

   for the contributions of the participants and the profits or income to be pooled (section 235(3)(a)); or

2. (2)

   for the property to be managed as a whole by or on behalf of the operator of the scheme (section 235(3)(b)); or

3. (3)

   for both (1) and (2).

In the FSA's view, it is the very existence of the body corporate that is the collective investment scheme. There are a number of statutory references that support this view. For example, it is clear that paragraph 21 of the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme) is drafted on the basis that it is the body corporate itself that is (or would be) the collective investment scheme. This provision states that 'no body corporate' other than an open-ended investment company, amounts to a 'collective investment scheme'. So, any particular body corporate is either an open-ended investment company or it is not. It cannot be both at the same time, although it may change from one to the other over time (see AUTH App 2.7.5 G (The investment condition: the 'reasonable investor') for further guidance on this point).

Analysing a typical corporate structure in terms of the definition of a collective investment scheme, money will be paid to the body corporate in exchange for shares or securities issued by it. The body corporate becomes the beneficial owner of that money in exchange for rights against the legal entity that is the body corporate. The body corporate then has its own duties and rights that are distinct from those of the holders of its shares or securities. Such arrangements will, in the FSA's view, qualify as arrangements of the kind described in AUTH App 2.4.2 G. The holders of the shares or securities in the body corporate do not have day-to-day control over the management of the property (as specified in section 235(2) of the Act) and the property is managed as a whole by or on behalf of the body corporate (as specified in section 235(3) of the Act).

Where a body corporate does come within the definition of a collective investment scheme in section 235(1) to (3), the only relevant issue is to determine whether or not it is excluded. As AUTH App 2.2.2 G (Introduction) explains, the exclusions are in the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme). If a body corporate satisfies any of the exclusions in paragraphs 1 to 20 of the Schedule to the Order it will not be a collective investment scheme. This means that it will not then be necessary to consider whether or not it is an open-ended investment company. In any other case, it will be necessary to consider whether the body corporate is an open-ended investment company to see whether the exclusion in paragraph 21 of the Schedule to the Order (Bodies corporate) for bodies corporate other than open-ended investment companies and limited liability partnerships applies.

In the FSA's view, the question of what constitutes a single scheme in line with section 235(4) of the Act does not arise in relation to a body corporate. This is simply because the body corporate is itself a collective investment scheme (and so is a single scheme). Section 235(4) contemplates a 'separate' pooling of parts of the property that is subject to the arrangements referred to in section 235(1). But to analyse a body corporate in this way requires looking through its corporate personality and ignoring the legal entity that exists separately from the holders of shares or securities and their rights. As a corporate entity, it cannot be broken up into component parts in this way. This is so even though a body corporate may issue shares or securities of deferred classes or of classes carrying different rights.

If a particular body corporate ('BC') comes within the definition of a collective investment scheme, the second element in the definition is whether the property to which the scheme relates meets the property condition. This condition is that the property must belong beneficially to, and be managed by or on behalf of, BC. In addition, BC must have as its purpose the investment of its funds to:

1. (1)

   spread investment risk; and

2. (2)

   give its members the benefit of the results of the management of those funds by or on behalf of BC.

The property belonging to BC may be property of any description, including money. For example, the arrangements may relate to real estate, works of art or a particular enterprise or rural activity. It must, of course, be possible to value the property if the requirements of the investment condition concerned with the link to net asset value are to be met (see AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act))).

The property of the collective investment scheme must belong beneficially to BC, although the legal title to it may be held by a third party. However, the holders of shares or securities issued by BC may not have a beneficial interest in that property. In exchange for their contributions, they will only have rights against BC.

The purpose of BC will need to be determined bearing in mind its constitutional instruments and any other relevant material: for example, material in a prospectus or offer document or other promotional material. The prevailing law may also be relevant.

In the FSA's view, the question of whether funds are invested by BC with the aim of spreading investment risk is not affected by the levels of risk involved in particular investments. What matters for these purposes is that the aim is to spread the risk, whatever it may be. For example, the value of each of BC's investments, if taken separately, might be subject to a high level of risk. However, this would not itself result in BC failing to satisfy the property condition as long as it could be said that the range of different investments demonstrated that the aim was to spread investment risk.

If BC comes within the definition of a collective investment scheme, the third element in determining whether it is an open-ended investment company is whether the 'investment condition' is satisfied. This condition is that, in relation to BC, a reasonable investor would, if he were to participate in the scheme:

1. (1)

   expect that he would be able to realise his investment in the scheme, within a period appearing to him to be reasonable; his investment would be represented, at any given time, by the value of the shares in, or securities of, BC held by him as a participant in the scheme; and

2. (2)

   be satisfied that his investment would be realised on a basis calculated wholly or mainly by reference to the value of the property for which the scheme makes arrangements.

Under the investment condition, the reasonable investor is looking to satisfy two criteria. Both of these are fundamental to his decision to invest. But the thresholds referred to in AUTH App 2.6.1 G (1) and AUTH App 2.6.1 G (2) are different. In the FSA's view, a person expects something where he regards it as likely to happen or anticipates that events will turn out in a particular way. A person is satisfied of something where he has made up his mind or is persuaded that it is the case. The first of these criteria is referred to in this guidance as the 'expectation test' and the second as the 'satisfaction test'.

Section 236(3) of the Act states clearly that the investment condition must be met 'in relation to BC'. In the FSA's view, this means that the investment condition should not be applied rigidly in relation to specific events such as particular issues of shares or securities or in relation to particular points in time. The requirements of the investment condition must be satisfied in relation to the overall impression of the body corporate itself, having regard to all the circumstances.

In the FSA's view, and within limits, the investment condition allows for the possibility that a body corporate that is an open-ended investment company may issue shares or securities with different characteristics. Some shares or securities may clearly satisfy the condition whereas others may not. The FSA considers that a reasonable investor contemplating investment in such a body corporate may still take the view, looking at the body corporate overall, that the investment condition is satisfied. In the FSA's view, a body corporate issuing a number of different classes of shares or securities on different terms might be expected to satisfy the investment condition where the overall balance between those that do and those that do not is strongly in favour of those that do satisfy the investment condition. The FSA considers that, in any case where there is a genuine and reasonable doubt as to where the balance between the different classes lies, it is very likely that the body corporate would not be an open-ended investment company. AUTH App 2.8.8 G (Some relevant factors in applying the 'expectation test') comments further on this aspect of the investment condition in the specific context of the 'expectation test'.

Certain matters are to be disregarded in determining whether the investment condition is satisfied. Section 236(4) of the Act states that, for these purposes, no account is to be taken of any actual or potential redemption or repurchase of shares or securities under:

1. (1)

   Chapter VII of Part V of the Companies Act 1985; or

2. (2)

   Chapter VII of Part VI of the Companies (Northern Ireland) Order 1986; or

3. (3)

   corresponding provisions in force in another EEA State; or

4. (4)

   provisions in force in a country or territory other than an EEA State which the Treasury has, by order, designated as corresponding provisions (no orders have yet been made).

The FSA considers that the reference in AUTH App 2.6.5 G (3) to corresponding provisions in force in another EEA State will include provisions that derive from the maintenance of capital requirements of the Second Council Directive on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies (77/91/EEC).

The FSA's views on the following three elements of the investment condition are explained separately:

1. (1)

   the 'reasonable investor' (see AUTH App 2.7 (The investment condition: the 'reasonable investor'));

2. (2)

   the 'expectation' test (see AUTH App 2.8 (The investment condition: the 'expectation test' (section 236(3)(a) of the Act))); and

3. (3)

   the 'satisfaction' test (see AUTH App 2.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act)).

The investor is specifically a reasonable investor and not just a reasonable person. This simply means that the objective standard to be applied is that of the reasonable investor. In all other respects the test is the same as any other objective test applying the standards of the reasonable person.

The characteristics that a reasonable investor can be expected to have will inform the use of judgment required by the 'expectation test' and the 'satisfaction test'. These tests relate to the investor's ability to realise an investment within a reasonable period and to do so on the basis of the net value of its assets. In the FSA's view, the characteristics of the reasonable investor include:

1. (1)

   sound judgment based on good sense;

2. (2)

   some knowledge of, and possibly experience in, the field of investment in property of the same kind as that in which the body corporate is to invest; and

3. (3)

   some knowledge of the characteristic features of collective investment.

Where investment in a particular body corporate is clearly targeted at investors with certain characteristics, the reasonable investor can be assumed to have those characteristics.

The reasonable investor is a hypothetical investor. The implications of this are that the test does not relate to actual investment by a particular person at a particular time or in relation to a particular issue of any class of shares or securities. In the FSA's view, what underlies the test is what a reasonable investor would think he was getting into if he were contemplating investment in a particular body corporate. In addition, because the investor is hypothetical, the investment condition is capable of operating on a rolling basis over time.

In practice, the assessment of the nature of a particular body corporate will have to be made by applying the definition whenever an authorised person proposes to communicate an invitation or inducement to others for them to participate in the body corporate by buying shares or securities issued by it.

After an initial assessment, however, the FSA's view is that subsequent applications of the investment condition could produce a different result, but only if there is a change to the constitution or practice of the body corporate which is significant and sustained. For example, this may happen if there is a change in the body corporate's published intentions or regular practices. As the Economic Secretary to the Treasury said in parliamentary debate when commenting on the definition, "It is a test that can be applied from time to time to allow for the possibility that a closed-ended company can become open-ended and vice versa, on account of significant changes to the way in which the operation of the company and its constitution are structured and which push the company over the boundary between the two types". (Hansard HC, 5 June 2000 Col 123).

Section 236(3) uses the words "the investor would, if he were to participate in the scheme". This is consistent with the fact that the reasonable investor is hypothetical. But applying the test at this early stage makes it clear that there must be objectively justifiable grounds on which the reasonable investor could base the expectation in section 236(3)(a). And on which he could be satisfied on the matters in section 236(3)(b). In the FSA's view, this requires, for example, that there must be something in the nature of the body corporate or the law applicable to it to give rise to the required expectation or on which to satisfy the investor. The established practice of the body corporate may also provide the necessary grounds.

The test in section 236(3)(a) of the Act is whether the reasonable investor would expect that, were he to invest, he would be in a position to realise his investment within a period appearing to him to be reasonable. In the FSA's view, this is an objective test with the appropriate objective judgment to be applied being that of the hypothetical reasonable investor with qualities such as those mentioned in AUTH App 2.7.2 G (The investment condition: the 'reasonable investor').

In the FSA's view, the 'realisation' of an investment means converting an asset into cash or money. The FSA does not consider that 'in specie' redemptions (in the sense of exchanging shares or securities of BC with other shares or securities) will generally count as realisation. Section 236(3)(a) refers to the realisation of an investment, the investment being represented by the 'value' of shares or securities held in BC. In the FSA's view, there is no realisation of value where shares or securities are simply replaced by other shares or securities. However, an 'in specie' redemption might, in limited circumstances, satisfy the expectation test. This is where shares or securities are exchanged for other shares or securities in the same body corporate and those replacement shares or securities can be converted into cash or money within a period which, for both transactions taken together, can be said to be 'reasonable'. This involves looking through the series of transactions and considering whether their overall effect would satisfy the expectation test.

The most typical means of realising BC's shares or securities will be by their being redeemed or repurchased, whether by BC or otherwise. There are, of course, other ways in which a realisation may occur. However, the FSA considers that these will often not satisfy all the elements of the definition of an open-ended investment company considered together. For example, the mere fact that shares or securities may be realised on a market will not meet the requirements of the 'satisfaction test' for the reasons given in AUTH App 2.9.4 G to AUTH App 2.9.6 G (Effect of realisation on a market).

An investor in a body corporate may be able to realise part, but not all, of his investment. The FSA considers that the fact that partial realisations may take place at different times does not prevent the body corporate coming within the definition of an open-ended investment company. But, in any particular case, the 'expectation test' will only be met if the overall period for realising the whole of the investment can be considered to be reasonable. Apart from this, the simple fact that an investor has the opportunity to realise part of his investment at pre-determined times would not itself make a body corporate open-ended.

The use of an expectation test ensures that the definition of an open-ended investment company is not limited to a situation where a holder of shares in, or securities of, a body corporate has an entitlement or an option to realise his investment. It is enough if, on the facts of any particular case, the reasonable investor would expect that he would be able to realise the investment. The following are examples of circumstances in which the FSA considers that a reasonable investor may have such an expectation:

1. (1)

   where a body corporate, in practice, regularly redeems or repurchases its shares or securities;

2. (2)

   where a body corporate has a declared policy of redeeming or repurchasing its shares or securities; even if it is possible for the body corporate to change its policy, the FSA takes the view that the body corporate is open-ended unless and until it does so. In such cases it would, however, be necessary for the change of policy to be documented and for there to be a public statement or other public evidence of the change;

3. (3)

   where a body corporate makes a public announcement that it will redeem or repurchase its shares or securities on a number of pre-arranged occasions that are identified at the time of the announcement. The issue here is whether there is a demonstrable intention to redeem or repurchase the whole of a person's investment. If there is, then a body corporate may be an open-ended investment company even before it has carried out any actual redemption or repurchase. This is provided that the redemption or repurchase can take place within a reasonable period. In contrast, a body corporate that simply offers the possibility that it may, at some stage, decide to offer redemption, or partial redemption, at certain specified times would not, in the FSA's view, give rise to the expectation required by section 236(3)(a).

However, a reasonable investor's expectation of being able to realise his investment is not displaced simply because, in certain circumstances, no active steps need to be taken to realise the investment. This might happen where a redemption or repurchase of shares or securities may become compulsory as a result of some aspect of the applicable law.

In the FSA's view, the fact that a person may invest in the period shortly before a redemption date would not cause a body corporate, that would not otherwise be regarded as such, to be open-ended. This is because the investment condition must be applied in relation to BC as a whole (see AUTH App 2.6.3 G (The investment condition (section 236(3) of the Act): general).

Similarly, if BC issues shares or securities on different terms as to the period within which they are to be redeemed or repurchased (see AUTH App 2.6.4 G (The investment condition (section 236(3) of the Act): general), BC must be considered as a whole. Whether or not the expectation test is satisfied in relation to a particular body corporate is bound to involve taking account of the terms on which its shares or securities, or classes of shares or securities, are issued. But this is only one of a number of factors to be taken into account. It is subject to any indications there may be in the other relevant factors (such as those in AUTH App 2.8.9 G).

As indicated in AUTH App 2.3.5 G(G) (The definition), the potential for variation in the form and operation of a body corporate is considerable. So, it is only possible in general guidance to give examples of the factors that the FSA considers may affect any particular judgment. These should be read bearing in mind any specific points considered elsewhere in the guidance. Such factors include:

1. (1)

   the terms of the body corporate's constitution;

2. (2)

   the applicable law;

3. (3)

   any public representations that have been made by or on behalf of the body corporate;

4. (4)

   the actual behaviour of the body corporate or of a person acting on its behalf in relation to investors seeking to realise their investment in it;

5. (5)

   whether investors in the body corporate are in a position to take advantage of fluctuations in property value in the particular market in which the body corporate invests;

6. (6)

   the existence of a guarantee, which may mean that a longer period may appear reasonable than would be the case without the guarantee;

7. (7)

   where the underlying property in which the body corporate invests is relatively illiquid; in this case, the period within which realisation of an investment may be regarded as reasonable may be longer than it would be for property which has greater liquidity;

8. (8)

   the levels of disclosure of the terms on which investment is made;

9. (9)

   the nature of the investment objectives or policy of the body corporate; and

10. (10)

    the appropriateness of the name of the body corporate.

The test in section 236(3)(b) of the Act is whether the reasonable investor would, before he makes a decision to invest, be satisfied that the value of his investment would be realised on a basis calculated wholly or mainly by reference to the value of the property belonging to BC.

In the FSA's view, this means that the reasonable investor must be satisfied that what he will get when he realises his investment is his proportionate share in the value of BC's underlying assets, less any dealing costs. In other words, that he is satisfied he will get net asset value. The investment condition focuses on the way the body corporate operates over time, and not by reference to particular issues of shares or securities (see AUTH App 2.6.3 G (The investment condition (section 236(3) of the Act): general)). This means that this part of the investment condition looks to the general method used to calculate the value of the investment.

For the 'satisfaction test' to be met, there must be objectively justifiable grounds on which the reasonable investor could form a view. He must be satisfied that the value of BC's property will be the basis of a calculation used for the whole, or substantially the whole, of his investment. The FSA considers that the circumstances, or combination of circumstances, in which a reasonable investor would be in a position to form this view include:

1. (1)

   where the basis of net asset valuation is stated in constitutional documents of BC;

2. (2)

   where there is a separate agreement or arrangement made outside BC's constitution under which a person other than BC undertakes:

   1. (a)

      to redeem or repurchase any shares or securities issued by BC; or

   2. (b)

      to take steps to ensure that the market value of the shares or securities reflects the value of BC' s property (see AUTH App 2.9.4 G (Effect of realisation on a market)); and

3. (3)

   where an undertaking to intervene in the market to support the price of the shares or securities at net asset value has been made publicly known by BC or by another person (see AUTH App 2.9.4 G (Effect of realisation on a market)).

AUTH App 2.9.3 G (2) and AUTH App 2.9.3 G (3) refer to circumstances where the reasonable investor may be satisfied that he can realise his investment at net asset value because of arrangements made to ensure that the shares or securities trade at net asset value on a market. There may, for example, be cases of market dealing where the price of shares or securities will not depend on the market. An example is where BC or a third party undertakes to ensure that the market value reflects the value of BC's property. This includes taking steps such as intervening in the market. In this case, it seems to the FSA that such an undertaking will constitute the necessary objective grounds on which an investor can be satisfied as to the basis on which the value of his investment will be realised. Unless arrangements of this kind exist, the FSA considers that the satisfaction test will not be met if the primary means for realising any investment in BC is on a market.

However, where there is a market, the FSA does not consider that the test in section 236(3)(b) would be met if the price the investor receives for his investment is wholly dependent on the market rather than specifically on net asset value. In the FSA's view, typical market pricing mechanisms introduce too many uncertainties to be able to form a basis for calculating the value of an investment (linked to net asset value) of the kind contemplated by the satisfaction test. As a result, the FSA takes the view that, subject to AUTH App 2.9.4 G, market dealings or facilities relating to the shares in, or securities of, BC will generally not be relevant in assessing whether or not BC comes within the definition of an open-ended investment company.

The fact that the definition must be applied to BC as a whole (see AUTH App 2.6.3 G (The investment condition (section 236(3) of the Act): general)) is also relevant here. So, for example, in a take-over situation the fact that a bidder may be willing to provide an exit route for an investment at net asset value will be irrelevant within the context of the definition. This is so even if an investor invests in particular shares or securities in the knowledge or expectation or in anticipation of such an offer being made. In the FSA's opinion, this is not a typical situation and does not affect the nature of BC as a whole or the manner in which it functions characteristically.

The expression 'wholly or mainly' in section 236(3)(b) determines the extent of the permissible departure from the link between the price of BC's shares or securities and the value of its net assets. The word 'mainly' introduces some flexibility to the process to allow for limited account to be taken of factors other than the value of BC's assets that may result in the sum realised failing to reflect the true net asset value. Such factors may include:

1. (1)

   the payment by the investor of charges; or

2. (2)

   the payment by the investor of an early redemption penalty; or

3. (3)

   a discount on a repayment or repurchase of the shares or securities to reflect the payment by or on behalf of BC of the charges required to fund payment from a source other than BC's assets; for example, this might be a loan that is to be repaid from BC's assets once they are available.

A number of controls apply under the Act to the promotion of shares or securities that are issued by any body corporate. These controls differ according to whether the person making the promotion is an unauthorised person (see AUTH App 2.10.2 G) or an authorised person (see AUTH App 2.10.3 G to AUTH App 2.10.6 G). In addition, where a body corporate is not an open-ended investment company:

1. (1)

   the requirements of the Public Offers of Securities Regulations 1995 will apply if its securities are offered to the public in the United Kingdom; and

2. (2)

   the listing requirements under Part VI of the Act (Official listing) will apply if its securities are to be listed.

The controls under the Act that apply to promotions of shares or securities by unauthorised persons are in section 21 of the Act (Restrictions on financial promotion). These controls apply where an unauthorised person makes a financial promotion in, or from, the United Kingdom that relates to the shares in or securities of any body corporate. The same controls apply regardless of whether the shares or securities being promoted are issued by a body corporate that is an open-ended investment company or one that is not. There are a number of exemptions from the restriction in section 21 of the Act. These are explained in AUTH App 1 (Financial promotion and related activities).

Promotions made by authorised persons in the United Kingdom are generally subject to the controls in COB 3 (Financial Promotion). However, in the case of shares in, or securities of, a body corporate which is an open-ended investment company, additional controls are imposed by Chapter II of Part XVII of the Act (Restrictions on promotion of collective investment schemes) (see AUTH App 1.20). Section 238 of the Act (Restrictions on promotion) prevents an authorised person communicating any invitation or inducement to buy shares or securities issued by an open-ended investment company. Section 240 of the Act (Restriction on approval of promotion) prevents an authorised person approving a financial promotion to be communicated by an unauthorised person. This is if the authorised person would not be able to promote the share or security himself.

The restrictions mentioned in AUTH App 2.10.3 G are subject to a number of exemptions. For example, the controls in sections 238 and 240 do not apply to financial promotions about certain kinds of collective investment scheme. These are:

1. (1)

   open-ended investment companies formed in Great Britain and authorised by the FSA under the Open-ended Investment Companies Regulations 2001;

2. (2)

   authorised unit trust schemes; and

3. (3)

   collective investment schemes that are recognised schemes (see COLL 9 (Recognised schemes) and CIS 17 (Recognised schemes)).

The position with respect to the promotion by authorised persons of open-ended investment companies formed in Northern Ireland will be considered as part of the implementing process for the relevant Northern Ireland legislation (see AUTH App 2.1.4 G (Other guidance that may be relevant)).1

There are a number of other exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060). In general terms, these exemptions are equivalent to the exemptions from section 21 of the Act that apply to units. There is guidance on those exemptions in AUTH App 1.20.3 G (Additional restriction on the promotion of collective investment schemes).

The FSA has also made rules under section 238(5) which allow authorised persons to communicate or approve a financial promotion for an open-ended investment company that is an unregulated collective investment scheme (that is, one that does not fall within AUTH App 2.10.4 G). The circumstances in which such a communication or approval is allowed are explained in COB 3 Annex 5 (which is introduced by COB 3.11).

In the Regulated Activities Order, shares in or securities of an open-ended investment company are treated differently from shares in other bodies corporate. They are treated as units in a collective investment scheme under article 81 of the Regulated Activities Order (Units in a collective investment scheme) rather than shares under article 76 (Shares etc).

A person who carries on in the United Kingdom the business of engaging in any regulated activity that relates to units or shares will need to be an authorised person (see AUTH 2.7 and AUTH 2.8 (Authorisation and regulated activities).

In order to be authorised, a person must have permission to carry on the regulated activities in question. What the permission needs to cover may differ according to whether the regulated activity being carried on relates to units or shares. So, for example, a body corporate that is an open-ended investment company will need permission if it carries on the regulated activity of dealing as principal or agent, arranging (bringing about) or making arrangements with a view to transactions in its own shares or securities in the United Kingdom. This applies also to a body corporate that is not an open-ended investment company except that it will not need permission to issue or arrange for the issue of its own shares or securities.

A person carrying on the regulated activity of establishing, operating or winding up a collective investment scheme that is constituted by an open-ended investment company will need permission for those activities. In line with section 237(2) of the Act (Other definitions), the operator of a collective investment scheme that is an open-ended investment company is the company itself. But where the open-ended investment company is incorporated outside the United Kingdom, it will only require permission if its operation takes place in the United Kingdom.