COBS 4.12 Restrictions on the promotion of non-mainstream pooled investments6
Restrictions on the promotion of non-mainstream pooled investments
- (1)
3A firm must not communicate or approve an invitation or inducement to participate in, acquire, or underwrite a non-mainstream pooled investment where that invitation or inducement is addressed to or disseminated in such a way that it is likely to be received by a retail client.
- (2)
The restriction in (1) is subject to COBS 4.12.4 R and does not apply to units in unregulated collective investment schemes, which are subject to a statutory restriction on promotion in section 238 of the Act.
- (3)
13References to a firm in this section include a TP firm to the extent that this section does not already apply to those TP firms as a result of GEN 2.2.26R.
- (4)
13References to a firm in this section include a Gibraltar-based firm (having the same meaning as in the Gibraltar Order) to the extent that the rule does not already apply to such a Gibraltar-based firm as a result of GEN 2.3.1R.
Exemptions from the restrictions on the promotion of non-mainstream pooled investments
- (1)
3The restriction in COBS 4.12.3 R does not apply if the promotion falls within an exemption in the table in (5) below in accordance with (3)13.
- (2)
A firm13 may communicate an invitation or inducement to participate in an unregulated collective investment scheme without breaching the restriction on promotion in section 238 of the Act if the promotion falls within an exemption in the table in (5) below in accordance with (3)13.
- (3)
A promotion falls within an exemption in the table in (5) below if13:
- (a)
it is made to or directed at only those recipients whom the firm has taken reasonable steps to establish are persons in the middle column of the table; and13
- (b)
where the third column of the table refers to the need for a preliminary assessment of suitability, that assessment is undertaken before the promotion is made to or directed at the recipient13.
- (a)
- (4)
A firm may rely on more than one exemption in relation to the same invitation or inducement.
- (5)
Title of Exemption
Promotion to:
Promotion of a non-mainstream pooled investment which is:
1. Replacement products and rights issues
A person who already participates in, owns, holds rights to or interests in, a non-mainstream pooled investment that is being liquidated or wound down or which is undergoing a rights issue. [See Note 1.]
1. A non-mainstream pooled investment which is intended by the operator or manager to absorb or take over the assets of that non-mainstream pooled investment, or which is being offered by the operator or manager of that non-mainstream pooled investment as an alternative to cash on its liquidation;
or
2. Securities offered by the existing non-mainstream pooled investment as part of a rights issue.
2. Certified high net worth investors
An individual6 who meets the requirements set out in COBS 4.12.6 R, or a person (or persons) legally empowered to make investment decisions on behalf of such individual6.
Any non-mainstream pooled investment the firm considers is likely to be suitable for that individual6, based on a preliminary assessment of the client's profile and objectives.
[See COBS 4.12.5G (2).]
3. Enterprise and charitable funds
A person who is eligible to participate or invest in an arrangement constituted under:
(1) the Church Funds Investment Measure 1958;
(2) section 96 5or 100 of the Charities Act 2011;
(3) section 25 of the Charities Act (Northern Ireland) 1964;
(4) the Regulation on European Venture Capital Funds (‘EuVECAs’) or the RVECA Regulation (‘RVECAs’)1112; or
(5) the Regulation on European Social Entrepreneurship Funds (‘EuSEFs’) or the SEF Regulation (‘SEFs’)1112.
Any non-mainstream pooled investment which is such an arrangement.
4. Eligible employees
An eligible employee, that is, a person who is:
(1) an officer;
(2) an employee;
(3) a former officer or employee; or
(4) a member of the immediate family of any of (1) - (3), of an employer which is (or is in the same group as) the firm, or which has accepted responsibility for the activities of the firm in carrying out the designated investment business in question.
1. A non-mainstream pooled investment, the instrument constituting which:
A. restricts the property of the non-mainstream pooled investment, apart from cash and near cash, to:
(1) (where the employer is a company) shares in and debentures of the company or any other connected company; [See Note 2.]
(2) (in any case), any property, provided that the non-mainstream pooled investment takes the form of:
(i) a limited partnership, under the terms of which the employer (or connected company) will be the unlimited partner and the eligible employees will be some or all of the limited partners; or
(ii) a trust which the firm reasonably believes not to contain any risk that any eligible employee may be liable to make any further payments (other than charges) for investment transactions earlier entered into, which the eligible employee was not aware of at the time he entered into them; and
B. (in a case falling within A(1) above) restricts participation in the non-mainstream pooled investment to eligible employees, the employer and any connected company.
2. Any non-mainstream pooled investment, provided that the participation of eligible employees is to facilitate their co-investment:
(i) with one or more companies in the same group as their employer (which may include the employer); or
5. Members of the Society of Lloyd’s
A person admitted to membership of the Society of Lloyd's or any person by law entitled or bound to administer his affairs.
A scheme in the form of a limited partnership which is established for the sole purpose of underwriting insurance business at Lloyd's.
6. Exempt persons
An exempt person (other than a person exempted only by section 39 of the Act (Exemption of appointed representatives)) if the financial promotion relates to a regulated activity in respect of which the person is exempt from the general prohibition.
7. Non-retail clients
An eligible counterparty or a professional client.
Any non-mainstream pooled investment in relation to which the client is categorised as a professional client or eligible counterparty.
[See Note 4.]
8. Certified sophisticated investors
An individual6 who meets the requirements set out in COBS 4.12.7 R, including an individual who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm's client6.
9. Self-certified sophisticated investors
An individual6 who meets the requirements set out in COBS 4.12.8 R, including an individual who is legally empowered (solely or jointly with others) to make investment decisions on behalf of another person who is the firm's client6.
Any non-mainstream pooled investment the firm considers is likely to be suitable for that client, based on a preliminary assessment of the client's profile and objectives.
[See COBS 4.12.5G (2)]
10. Solicited advice
Any person.
Any non-mainstream pooled investment, provided the communication meets all of the following requirements:
(a) the communication only amounts to a financial promotion because it is a personal recommendation on a non-mainstream pooled investment;
(b) the personal recommendation is made following a specific request by that client for advice on the merits of investing in the non-mainstream pooled investment; and
(c) the client has not previously received a financial promotion or any other communication from the firm (or from a person connected to the firm) which is intended to influence the client in relation to that non-mainstream pooled investment. [See Note 3.]
11. Excluded communications
Any person.
Any non-mainstream pooled investment, provided the financial promotion is an excluded communication.
[See COBS 4.12.12 G and COBS 4.12.13 G.]
12. [deleted]11
13. US persons
A person who is classified as a United States person for tax purposes under United States legislation or who owns a US qualified retirement plan.
Any investment company registered and operated in the United States under the Investment Company Act 1940.
The following Notes explain certain words and phrases used in the table above.
Note 1
Promotion of non-mainstream pooled investments to a category of person includes any nominee company acting for such a person.
Note 2
A company is 'connected' with another company if:
- they are both in the same group; or
- one company is entitled, either alone or with another company in the same group, to exercise or control the exercise of a majority of the voting rights attributable to the share capital, which are exercisable in all circumstances at any general meeting of the other company or of its holding company.
Note 3
A person is connected with a firm if it acts as an introducer or appointed representative for that firm or if it is any other person, regardless of authorisation status, who has a relevant business relationship with the firm.
Note 4
In deciding whether a promotion is permitted under the rules of this section or under section 238 of the Act, firms may use the client categorisation regime that applies to business other than MiFID or equivalent third country business. (This is the case even if the firm will be carrying on a MiFID activity at the same time as or following the promotion.)
Advice and preliminary assessment of suitability
- (1)
3Where a firm communicates any promotion of a non-mainstream pooled investment in the context of advice, it should have regard to and comply with its obligations under COBS 9 or 9A (as applicable)10. Firms should also be mindful of the appropriateness requirements in COBS 10 and 10A10 which apply to a wide range of non-advised services.
- (2)
- (a)
The effect of COBS 4.12.4R(3)(b) is that where a13 firm 13 wishes to rely on exemptions 2 (certified high net worth investors) or11 9 (self-certified sophisticated investors)11, as provided by COBS 4.12.4R (5), the13 preliminary assessment of suitability must be undertaken13 before promotion of the non-mainstream pooled investment is made to or directed at13 clients (in addition to other requirements).
- (b)
There is no duty to communicate the preliminary assessment of suitability to the client. If the firm does so, it must not do so in a way that amounts to making a personal recommendation unless it complies with the rules in COBS 9 or 9A (as applicable)10 on suitability.
- (c)
The requirement for a preliminary assessment of suitability does not extend to a full suitability assessment, unless advice is being offered in relation to the non-mainstream pooled investment being promoted, in which case the requirements in COBS 9 or 9A10 apply (as applicable)10. However, it requires that the firm takes10 reasonable steps to acquaint itself with the client's profile and objectives in order to ascertain whether the non-mainstream pooled investment under contemplation is likely to be suitable for that client. The firm should not promote the non-mainstream pooled investment to the client if it does not consider it likely to be suitable for that client following such preliminary assessment.
- (a)
Definition of sophisticated and high net worth investors
3A certified high net worth investor is an individual who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:
“HIGH NET WORTH INVESTOR STATEMENT
I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of non-mainstream pooled investments. The exemption relates to certified high net worth investors and I declare that I qualify as such because at least one of the following applies to me:
- I had, throughout the financial year immediately preceding the date below, an annual income to the value of £100,000 or more. Annual income for these purposes does not include money withdrawn from my pension savings (except where the withdrawals are used directly for income in retirement).8
- I held, throughout the financial year immediately preceding the date below, net assets to the value of £250,000 or more. Net assets for these purposes do not include:
- (a)
the property which is my primary residence or any money raised through a loan secured on that property; or9
- (b)
any rights of mine under a qualifying contract of insurance; or89
- (c)
any benefits (in the form of pensions or otherwise) which are payable on the termination of my service or on my death or retirement and to which I am (or my dependants are), or may be, entitled; or89
- (d)
any withdrawals from my pension savings (except where the withdrawals are used directly for income in retirement).89
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on non-mainstream pooled investments.
Signature:
Date: ”
A certified sophisticated investor is an individual:
- (1)
who has a written certificate signed within the last 36 months by a firm confirming he has been assessed by that firm as sufficiently knowledgeable to understand the risks associated with engaging in investment activity in non-mainstream pooled investments; and
- (2)
who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:
“SOPHISTICATED INVESTOR STATEMENT
I make this statement so that I can receive promotional communications which are exempt from the restriction on promotion of non-mainstream pooled investments. The exemption relates to certified sophisticated investors and I declare that I qualify as such.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me to seek advice from an authorised person who specialises in advising on non-mainstream pooled investments.
Signature:
Date: ”
3A self-certified sophisticated investor is an individual who has signed, within the period of twelve months ending with the day on which the communication is made, a statement in the following terms:
“SELF-CERTIFIED SOPHISTICATED INVESTOR STATEMENT
I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of non-mainstream pooled investments. I understand that this means:
- (i)
I can receive promotional communications made by a person who is authorised by the Financial Conduct Authority which relate to investment activity in non-mainstream pooled investments;
- (ii)
the investments to which the promotions will relate may expose me to a significant risk of losing all of the property invested.
I am a self-certified sophisticated investor because at least one of the following applies:
- (a)
I am a member of a network or syndicate of business angels and have been so for at least the last six months prior to the date below;
- (b)
I have made more than one investment in an unlisted company in the two years prior to the date below;
- (c)
I am working, or have worked in the two years prior to the date below, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises;
- (d)
I am currently, or have been in the two years prior to the date below, a director of a company with an annual turnover of at least £1 million.
I accept that the investments to which the promotions will relate may expose me to a significant risk of losing all of the money or other property invested. I am aware that it is open to me seek advice from someone who specialises in advising on non-mainstream pooled investments.
Signature:
Date: ”
Sophisticated and high net worth investors: guidance on certification by authorised person and reliance on self-certification
- (1)
3A firm which wishes to rely on any of the certified high net worth investor exemptions (see Part I of the Schedule to the Promotion of Collective Investment Schemes Order, Part I of Schedule 5 to the Financial Promotions Order and COBS 4.12.6 R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should take reasonable steps to ascertain that the retail client does, in fact, meet the income and net assets criteria set out in the relevant statement for certified high net worth investors.
- (2)
In addition, the firm should consider whether the promotion of the non-mainstream pooled investment is in the interests of the retail client and whether it is fair to make the promotion to that client on the basis that the client is a certified high net worth investor, having regard to the generally complex nature of non-mainstream pooled investments. A retail client who meets the criteria for a certified high net worth investor but not for a certified sophisticated investor may be unable to properly understand and evaluate the risks of the non-mainstream pooled investment in question.
- (1)
3A firm which is asked to or proposes to assess and certify a retail client as a certified sophisticated investor (see article 23 of the Promotion of Collective Investment Schemes Order, article 50 of the Financial Promotions Order and COBS 4.12.7 R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should carry out that assessment with due skill, care and diligence, having regard to the generally complex nature of non-mainstream pooled investments and the level of experience, knowledge and expertise the retail client being assessed must possess in order to be fairly and reasonably assessed and certified as a sophisticated investor.
- (2)
- (a)
For example, a retail client whose investment experience is limited to mainstream investments such as securities issued by listed companies, life policies or units in regulated collective investment schemes (other than qualified investor schemes) is generally unlikely to possess the requisite knowledge to adequately understand the risks associated with investing in non-mainstream pooled investments.
- (b)
In exceptional circumstances, however, the retail client may have acquired the requisite knowledge through means other than his own investment experience, for example, if the retail client is a professional of several years’ experience with the design, operation or marketing of complex investments such as options, futures, contracts for differences or non-mainstream pooled investments.
- (a)
- (1)
3A firm which wishes to rely on any of the self-certified sophisticated investor exemptions (see Part II of the Schedule to the Promotion of Collective Investment Schemes Order, Part II of Schedule 5 to the Financial Promotions Order and COBS 4.12.8 R) should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should consider whether the promotion of the non-mainstream pooled investment is in the interests of the client and whether it is fair to make the promotion to that client on the basis of self-certification.
- (2)
For example, it is unlikely to be appropriate for a firm to make a promotion under any of the self-certified sophisticated investor exemption without first taking reasonable steps to satisfy itself that the investor does in fact have the requisite experience, knowledge or expertise to understand the risks of the non-mainstream pooled investment in question. A retail client who meets the criteria for a self-certified sophisticated investor but not for a certified sophisticated investor may be unable to properly understand and evaluate the risks of a non-mainstream pooled investment which invests wholly or predominantly in assets other than shares in or debentures of unlisted companies.
One-off promotions
- (1)
3A firm which wishes to rely on one of the one-off promotion exemptions provided by the Promotion of Collective Investment Schemes or the Financial Promotion Order to promote a non-mainstream pooled investment to a retail client should have regard to its duties under the Principles and the client's best interests rule. In particular, the firm should consider whether the promotion of the non-mainstream pooled investment is in the interests of the client and whether it is fair to make the promotion to that client on the basis of a one-off promotion exemption.
- (2)
The one-off promotion exemptions permit the promotion of investments to clients under certain conditions (see PERG 8.14.3 G to PERG 8.14.13 G for guidance on the scope of the one-off exemptions in the Financial Promotion Order). Firms should note that, in the FCA's view, promotion of a non-mainstream pooled investment to a retail client who is not a certified high net worth investor, a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client's best interests.
Qualified investor schemes
- (1)
3A firm which wishes to rely on the excluded communications exemption in COBS 4.12.4R (5) to promote units in a qualified investor scheme to a retail client should have regard to its duties under the Principles and the client's best interests rule.
- (2)
As explained in COLL 8.1, qualified investor schemes are intended only for professional clients and retail clients who are sophisticated investors. Firms should note that, in the FCA's view, promotion of units in a qualified investor scheme to a retail client who is not a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client’s best interests.
Electronic documents
7In this section:
- (1)
any requirement that a document is signed may be satisfied by an electronic signature or electronic evidence of assent; and
- (2)
any references to writing should be construed in accordance with GEN 2.2.14R and its related guidance provisions.