1. (1)

   The persons to whom each respective rule and guidance in this chapter applies, are stated either at the beginning of the rule or guidance or at the beginning of the section that contains the rule or guidance.

2. (2)

   However, to assist the understanding of this chapter, CIS 2.1.5 G indicates which provisions in this chapter are relevant for ICVCs and which are relevant for AUTs.

This chapter assists in achieving the regulatory objective of protecting consumers (as envisaged by section 2 and 5 of the Act). In particular, this chapter:

1. (1)

   lays down some requirements about provisions which must be included in the instrument of incorporation of each ICVC and in the trust deed of every AUT resulting in a similar degree of protection for all investors in an ICVC or in an AUT;

2. (2)

   lays down the types to only one of which each authorised fund must belong (see CIS 2.1.4 R); 1

3. (3)

   provides rules which deal with the classes of shares (in ICVCs) and units (in AUTs) which may be issued and sold to investors; those rules will ensure that investors in each class are treated equally and fairly;

4. (4)

   provides rules and guidance on the inclusion of the word "guaranteed" or anything implying a degree of capital security in the name of an authorised fund.

1. (1)

   Schemes within CIS 2.1.4 R (1) are UCITS schemes complying with CIS 5 which sets out the extended investment powers available under UCITS Amending Directive 2001/108/EC.

2. (2)

   Schemes within CIS 2.1.4 R(2), (7), and umbrella schemes consisting of sub-funds equivalent to CIS 2.1.4 R(2), (7) type schemes are also UCITS schemes but they must comply with the investment rules in CIS 5A. Such schemes may convert to the CIS 2.1.4 R (1) type at any time, however, they must so convert within the timescales set out in transitional provision 14.

3. (3)

   Schemes within CIS 2.1.4 R(3) - (6), (8), (9) and type (10) where it is a non-UCITS compliant scheme are non-UCITS schemes. The investment rules in CIS 5A apply and transitional provision 14 has no application to them.1

The instrument of incorporation may provide that, if the holding of any shares by a shareholder is (or is reasonably considered by the directors to be) an infringement of any law or governmental regulation, the shares so held must be redeemed or cancelled; if the instrument of incorporation contains such a provision, it should also provide the procedure for that redemption or cancellation.

1. (1)

   There are a number of provisions in this sourcebook that only apply to the extent that they are provided for in the trust deed. Sub-paragraphs (a) to (n) include some provisions that may be contained in the trust deed for this purpose.

   1. (a)

      Duration of the AUT: if the AUT is to terminate after a particular period expires, a statement to that effect;

   2. (b)

      Manager's preliminary charge: a statement

      1. (i)

         authorising the manager to make a preliminary charge; and

      2. (ii)

         specifying a maximum to that charge, expressed either as a fixed amount in the base currency or as a percentage of the price (or in the case of a dual-priced AUT, the issue price of a unit);

   3. (c)

      Manager's periodic charge: a statement authorising the manager to make a periodic charge payable out of the scheme property; any statement under this paragraph should:

      1. (i)

         provide for the charge to be expressed as an annual percentage (to be specified in the prospectus and taken in accordance with the rules in CIS 8 (Charges and expenses)) of the value of the scheme property (and the statement may provide for the addition to the charge of value added tax, if any, payable on it);

      2. (ii)

         specify the accrual intervals and how the charge is to be paid; and

      3. (iii)

         specify a maximum to that charge, expressed as an annual percentage of the scheme property value;

   4. (d)

      Manager's charge on an exchange of units: for an AUT that is an umbrella scheme, a statement authorising the manager to make a percentage charge or a charge of a fixed amount on the exchange of units in one sub-fund for units in another (other than the first such exchange by a Unitholder in any one annual accounting period) and specifying what the maximum of that percentage or amount may be;

   5. (e)

      Manager's charge on redemption: a statement authorising the manager to deduct a redemption charge out of the proceeds of redemption;

   6. (f)

      Trustee's remuneration: a statement authorising any payments to the trustee by way of remuneration for its services to be paid (in whole or in part) out of the scheme property and specifying the basis on which that remuneration is to be determined and how it should accrue and be paid;

   7. (g)

      Constituents of property, permitted transactions and borrowing powers: a statement of any of:

      1. (i)

         the description of assets which the capital property may consist of;

      2. (ii)

         the proportion of the capital property which may consist of an asset of any description;

      3. (iii)

         the descriptions of transactions which may be effected on behalf of the AUT;

      4. (iv)

         the borrowing powers exercisable in relation to the AUT;

      where they are narrower than those permitted for the type of authorised fund to which the AUT belongs under CIS 5 or CIS 5A (Investment and borrowing powers);1

   8. (h)

      Restricted economic or geographic objectives: a statement of any restrictions on the geographic areas or economic sectors in which the capital property of the AUT may be invested;

   9. (i)

      Classes of units: a statement specifying which of the following classes of unit may be issued:

      1. (i)

         income units;

      2. (ii)

         accumulation units;

      3. (iii)

         limited issue units that are also income units;

      4. (iv)

         limited issue units that are also accumulation units.1

   10. (j)

       Limited categories of Unitholder: a provision that holders of units in the AUT apart from the manager must be persons who hold units such that any gain accruing upon the disposal of the units at any time will be wholly exempt from capital gains tax and corporation tax in the United Kingdom other than by reason of residence;

   11. (k)

       Certificates

       1. (i)

          a provision authorising the issue of bearer certificates, accompanied by a statement of how the holders of bearer certificates are to identify themselves;

       2. (ii)

          a provision authorising the trustee to charge a fee for issuing any document recording, or for amending, an entry on the register, other than on the issue or sale of units;

   12. (l)

       Income equalisation: a provision for income equalisation including a statement of how income equalisation is to be calculated, paid and accounted for;

   13. (m)

       Relevant pension schemes: for a scheme formed with the intention of it being a relevant pension scheme, additional provisions included with a view to the scheme's satisfying the requirements of the Board of Inland Revenue 3HM Revenue and Customs 3(Pension Schemes Office and National Insurance Contributions Office), or those of any agency which may regulate a relevant pension scheme from time to time;

   14. (n)

       Relevant charitable schemes: for an AUT formed with the intention of it being a relevant charitable scheme, additional provisions included with a view to the AUT qualifying as a relevant charitable scheme and to the maintenance of its tax status after it has qualified.

2. (2)

   The trust deed of an AUT may also include any provision:

   1. (a)

      dealing with a matter not referred to in CIS 2.2.6 R (Matters that must be included in the trust deed) or this guidance (CIS 2.2.7 G) the inclusion of which serves to enable the AUT, the manager or the trustee to obtain any privilege or power conferred by the rules in this sourcebook; or

   2. (b)

      which is expressly contemplated in this sourcebook.

1. (1)

   A UCITS scheme may exercise the investment powers in CIS 5, which reflect those available under the UCITS Amending Directive 2001/108/EC.1

2. (2)

   Transitional provision 14 permits a UCITS scheme to exercise the narrower range of investments and investment powers in CIS 5A for a specified duration.1

3. (3)

   A securities scheme or a warrant scheme or an umbrella scheme consisting of sub-funds which if separately authorised would be a securities scheme or a warrant scheme will be a UCITS scheme. Transitional provision 14 specifies the period after which such schemes must comply with certain rules including those in CIS 5.1

1. (1)

   Section VII of the UCITS directive provides the framework by which a UCITS scheme may undertake marketing in another EEA State. Article 44 has the effect of requiring the UCITS scheme to comply with the marketing and advertising rules in the relevant Host State. Article 45 requires the UCITS scheme to maintain certain facilities in the Host State and paragraph 25 of CIS 3.5.2 R(contents of the prospectus) requires these to be set out in the scheme'sprospectus.

2. (2)

   Article 46 sets out the documentation requirements that need to be provided to the competent authority in the relevant EEA State. The documents have to be provided in a compliant manner at the same time as notification of the proposal to market there. The UCITS scheme may begin marketing two months following notification.

3. (3)

   Article 47 requires the relevant information and documents distributed in the Host State to be the same as those that the UCITS scheme provides in its Home State. The documents must be published in at least one of the official languages of the Host State. CIS 3 (prospectus) and CIS 10 (report and accounts) will be applicable in this case.

4. (4)

   If the UCITS scheme is being marketed in another EEA State, Article 34 requires the publication of prices in the Host State. CIS 4.4.8 R (4) and CIS 15.4.14 R (4) will be applicable in this case.

1. (1)

   The OEIC regulations (schedule 2, paragraph (4)(1)(e)) require the instrument of incorporation of an ICVC to state what classes of shares may be issued, and, in the case of an ICVC that is an umbrella scheme, require the instrument of incorporation to state the classes that may be issued in respect of each sub-fund.

2. (2)

   Classes of shares may include:

   1. (a)

      income shares;

   2. (b)

      net accumulation shares;

   3. (c)

      gross accumulation shares;

   4. (d)

      currency class income shares, which are currency class shares in respect of which income is allocated periodically to shareholders under CIS 9.2.5 R (Annual distribution to holders of income shares or income units);

   5. (e)

      currency class net accumulation shares, which are currency class shares in respect of which income (net of any tax deducted or accounted for by the ICVC) is credited periodically to capital under CIS 9.2.4 R (Annual distribution to accumulation shares or accumulation units); 1

   6. (f)

      currency class gross accumulation shares, which are currency class shares in respect of which income is credited periodically to capital under CIS 9.2.4 R, but, in accordance with relevant tax law, without deduction by the ICVC of any income tax; and1

   7. (g)

      limited issue shares which will also be shares of another class.1

1. (1)

   An instrument of incorporation may provide for classes of shares different from those listed in CIS 2.4.2 G(2). The guidance in this paragraph relates only to those classes of shares (and in this paragraph they are referred to as "new share classes").

2. (2)

   Subject to this guidance (CIS 2.4.3 G) and the restriction in CIS 2.4.6 R(2) (Rights of share classes), no special conditions are laid down in this chapter as to the nature or operational features of new share classes.

3. (3)

   CIS 2.2.2 R(1) does not permit a provision in an instrument of incorporation which is unfairly prejudicial to the interests of shareholders generally or to the holders of any class of shares. In order to be satisfied that CIS 2.2.2 R(1) is complied with, the FSA will take into account the principles in (a) to (c) when considering any proposals for new share classes. Those principles, which are not in any particular order of importance, are:

   1. (a)

      the new share class should not provide advantages for that class if that would result in prejudice to shareholders of any other class;

   2. (b)

      the nature, operation and effect of the new share class should be capable of being explained clearly to prospective investors in the prospectus; and

   3. (c)

      the effect of the new share class should not appear to be contrary to the purpose of any part of this sourcebook.

4. (4)

   The FSA would encourage firms with proposals for new share classes to raise them informally with it so it can determine whether the following steps are necessary:

   1. (a)

      submitting the proposal to the FSA, in draft, considerably in advance of any application for authorisation of an ICVC or proposal to change the instrument of incorporation; and

   2. (b)

      accompanying the proposal in (a) with a detailed explanation of the purpose of the new share class and its intended operation and effect. In particular, the FSA would wish to receive:

      1. (i)

         the provisions for inclusion in the instrument of incorporation for that new share class, which should describe clearly the nature of that new share class and deal comprehensively with the rights of shareholders of that new share class;

      2. (ii)

         a separate and detailed explanation of how the new share class will operate in practice, which should describe the circumstances in which the rights and obligations of shareholders of that new share class depart from the rights and obligations of other shareholders;

      3. (iii)

         an explanation of the operational features of administrative and accounting systems supporting the new share class.

A currency class share differs from other shares mainly in that its price, having been calculated initially in the base currency, will be quoted, and normally paid for, in the currency of the designation of the class. Income distributions will also be paid in the currency of designation of the class.

1. (1)

   Limited issue shares are a class of share that may only be issued if permitted by the instrument of incorporation. Sales by the ACD will also need to be restricted by the instrument of incorporation, although there need be no restriction on the ACD's sale of shares held in its "box" (see CIS 4.1.4 G (3)) as a result of a previous redemption or an issue to the ACD when shares were available for issue. The issue and sale of limited issue shares may be confined to the occasion or occasions or up to the amount or value provided for by the prospectus.

2. (2)

   ICVCs that are umbrella schemes are reminded of the requirements under section 235(4) of the Act when setting up sub-funds with limited issue shares. Accordingly, when an umbrella scheme is considering setting up one or more sub-funds to issue limited issue shares then it will also need to have in addition two or more sub-funds issuing shares which are not limited issue shares to enable holders to exchange rights between the latter sub-funds. It is, therefore, not possible for an umbrella scheme to consist of only two sub-funds in circumstances where, one or more of those sub-funds issues limited issue shares. However, it is possible for an umbrella scheme, but only for the limited period specified in CIS 12.5.5 R (An ICVC with only one sub-fund), to consist of one sub-fund and for this sole sub-fund to issue limited issue shares. These requirements should be provided for in the instrument of incorporation of the ICVC.1

Although fractions of a share are not possible, regulation 45 of the OEIC regulations (Shares) provides that the rights attached to a share of any class may be expressed in two denominations, in which case the "smaller" denomination must be such proportion of the "larger" denomination (that is, a standard share) as is fixed by the ICVC's instrument of incorporation. This will enable holdings to consist of more or less than a complete number of larger denomination shares. If an ICVC wishes to take advantage of this provision, the relevant proportion must be stated in its instrument of incorporation. A single document of title, tax certificate or cheque may cover a single holding of both larger denomination shares and smaller denomination shares of any class.

1. (1)

   Limited issue units are a class of unit that is permitted in an AUT. Limited issue units may only be issued if permitted by the trust deed. Sales by the manager will also need to be restricted by the trust deed, although there need be no restriction on the manager'ssale of units held in its "box" (see CIS 4.1.4 G (3)) as a result of a previous redemption or an issue to the manager when units were available for issue. The issue and sale of limited issue units may be confined to the occasion or occasions or up to the amount or value provided for by the prospectus.

2. (2)

   AUTs that are umbrella schemes are reminded of the requirements under section 235(4) of the Act when setting up sub-funds with limited issue units. Accordingly, when an umbrella scheme is considering setting up one or more sub-funds to issue limited issue units then it will also need to have in addition two or more sub-funds issuing units which are not limited issue units to enable holders to exchange rights between the latter sub-funds. It is, therefore, not possible for an umbrella scheme to consist of only two sub-funds in circumstances where, one or more of those sub-funds issues limited issue units. These requirements should be provided for in the trust deed of the AUT.1

1. (1)

   Under section 243 of the Act and regulation 15 of the OEIC Regulations:

   1. (a)

      the name of an authorised fund must not be undesirable or misleading; and

   2. (b)

      in the case of an ICVC, its aims must be reasonably capable of being achieved and, in the case of an AUT, its purpose must be reasonably capable of being successfully carried into effect.

2. (2)

   In order to be satisfied that section 243 of the Act and regulation 15 of the OEIC Regulations are complied with, the FSA will, when considering an application for authorisation of an ICVC or AUT, or considering an alteration to an authorised fund under section 251 of the Act or Regulation 21 of the OEIC Regulations, take into account the principles in (3) and (4).

3. (3)

   The name of an authorised fund should not include the word "guaranteed" unless:

   1. (a)

      the guarantee is given by an authorised person or a person authorised by a Home State regulator or a person subject to prudential supervision by a regulatory body in accordance with provisions equivalent to the Capital Adequacy Directive or the Insurance Directives other than the authorised fund manager or the depositary;

   2. (b)

      the authorised fund manager can demonstrate that the guarantor has the authority and resources to honour the terms of the guarantee;

   3. (c)

      the guarantee covers all holders within the authorised fund and the guarantee is legally enforceable by each holder who is intended to benefit from it or by a person acting on that holder's behalf;

   4. (d)

      the guarantee relates to the total amount paid for a unit which for these purposes includes any preliminary charge or redemption charge or any other costs of buying or selling units in the authorised fund;

   5. (e)

      the guarantee provides for payment at a specified date or dates and is unconditional although reasonable commercial exclusions such as force majeure may be included; and

   6. (f)

      where the guarantee applies to different classes of unit, the guarantee is identical in its application to all classes except for the differences attributable to income already received or charges already suffered by the different classes of unit.

4. (4)

   The name of an authorised fund may indicate a guaranteed capital return or income return or both but only if the total amount paid for a unit is guaranteed in accordance with (3).

5. (5)

   The name of an authorised fund should not include words implying a degree of capital security (such as "capital protected" or anything with a similar meaning) unless the degree of capital security is apparent from the name and clearly stated in the prospectus and (a) or (b) below is satisfied:

   1. (a)

      the principles in (3) are satisfied except that for the purposes of (3)(d) the guarantee may relate to an amount not materially less than the total amount paid for a unit; or

   2. (b)

      the investment objective and investment policy for the authorised fund are such as to show a clear intention to provide a material degree of security in respect of the total amount paid for a unit.

6. (6)

   When determining whether (5) is complied with, the FSA will take into account whether the degree of capital security implied by the name fairly reflect the nature of the arrangements for providing that security. This assessment will take place on a case by case basis.1

When deciding whether CIS 2.7.3 R is complied with the FSA will take into account the principles in CIS 2.7.2 G(3), (4) and (5) as if they related to the name of a sub-fund or shareclass as well as to the name of an authorised fund. However, it should be noted that CIS 2.7.3 R applies generally and not just to the names that include the words "guaranteed" or "capital protected".1