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COLL 3.1 Introduction

Application

COLL 3.1.1 R RP

This chapter applies to:

  1. (1)

    an authorised fund manager of an AUT or an ICVC;

  2. (2)

    any other director of an ICVC;

  3. (3)

    a depositary of an AUT or an ICVC; and

  4. (4)

    an ICVC,

where the AUT or ICVC is a UCITS scheme or a non-UCITS retail scheme.

Purpose

COLL 3.1.2 G RP

This chapter assists in achieving the regulatory objective of protecting consumers. In particular:

  1. (1)

    COLL 3.2 (The instrument constituting the scheme) contains requirements about provisions which must be included in the instrument constituting the scheme to give a similar degree of protection for investors in an ICVC or in an AUT; and

  2. (2)

    COLL 3.3 (Units) provides rules and guidance which deal with the classes of units to ensure that investors in each class are treated equally.

COLL 3.2 The instrument constituting the scheme

Application

COLL 3.2.1 R RP

This section applies to:

  1. (1)

    an authorised fund manager of an AUT or ICVC;

  2. (2)

    any other director of an ICVC;

  3. (3)

    a depositary of an AUT or an ICVC; and

  4. (4)

    an ICVC,

except COLL 3.2.8 R(UCITS obligations), which applies only to an ICVC or to the manager of an AUT where the ICVC or AUT is a UCITS scheme.

Relationship between the instrument constituting the scheme and the rulesRelationship between the instrument constituting the fund and the rules

COLL 3.2.2 R RP
  1. (1)

    The instrument constituting the scheme must not contain any provision that:

    1. (a)

      conflicts with any rule in this sourcebook;

    2. (b)

      prevents units in the scheme being marketed in the United Kingdom; or

    3. (c)

      is unfairly prejudicial to the interests of unitholders generally or to the unitholders of any class of units.

  2. (2)

    Any power conferred by the rules on the ICVC, the authorised fund manager, any other director of the ICVC, or the depositary, whether in a sole or joint capacity, is subject to any restriction in the instrument constituting the scheme.

The trust deed for AUTs

COLL 3.2.3 R RP

An AUT must be constituted by a trust deed made between the manager and the trustee.

Matters which must be included in the instrument constituting the scheme

COLL 3.2.4 R RP

The statements and provisions required by COLL 3.2.6 R (Table: contents of the instrument constituting the scheme) must be included in the instrument constituting the scheme, where appropriate.

The instrument constituting the scheme: OEIC Regulations and trust law requirements

COLL 3.2.5 G RP
  1. (1)

    Several of the matters set out in COLL 3.2.6 R are required to be included in the instrument constituting the scheme under the OEIC Regulations or as a consequence of relevant trust law. In addition, further statements are required if the scheme or the authorised fund manager are to take advantage of the powers under the rules in this sourcebook.

  2. (2)

    Additional matters which are not contained in COLL 3.2.6 R may be required to be included in the instrument constituting the scheme in order to comply with the OEIC Regulations, (particularly Schedule 2 - Instrument of Incorporation) and for the purposes of making the scheme eligible under relevant tax, pensions, or charities legislation.

Table: contents of the instrument constituting the scheme

COLL 3.2.6 R RP

This table belongs to COLL 3.2.4 R (Matters which must be included in the instrument constituting the scheme)

Name of scheme

1

A statement of:

(1)

the name of the authorised fund; and

(2)

whether the authorised fund is a UCITS scheme or a non-UCITS retail scheme.

Investment powers in eligible markets

2

A statement that, subject to any restriction in the rules in this sourcebook or the instrument constituting the scheme, the scheme has the power to invest in any eligible securities market or deal on any eligible derivatives market to the extent that power to do so is conferred by COLL 5 (Investment and borrowing powers).

Unitholder's liability to pay

3

A provision that a unitholder is not liable to make any further payment after he has paid the price of his units and that no further liability can be imposed on him in respect of the units which he holds.

Base currency

4

A statement of the base currency of the scheme.

Valuation and pricing

5

A statement setting out the basis for the valuation and pricing of the scheme.

Duration of the scheme

6

If the scheme is to be wound up after a particular period expires, a statement to that effect.

Object of the scheme

7

A statement:

(1)

as to the object of the scheme, in particular the types of investments and assets in which it and each sub-fund (where applicable) may invest; and

(2)

that the object of the scheme is to invest in property of that kind with the aim of spreading investment risk and giving unitholders the benefits of the results of the management of that property.

27A

Where the authorised fund is a qualifying money market fund, a statement to that effect and a statement that the authorised fund's investment objectives and policies will meet the conditions specified in the definition of qualifying money market fund.

Government and public securities: investment in one issuer

8

Where relevant, for a UCITS scheme, a statement in accordance with COLL 5.2.12 R (Spread: government and public securities) as to the individual states or bodies in which over 35% of the value of the scheme may be invested in government and public securities.

Classes of unit

9

A statement:

(1)

specifying the classes of unit that may be issued, and for a scheme which is an umbrella, the classes that may be issued in respect of each sub-fund; and

(2)

if the rights of any class of unit differ, a statement describing those differences in relation to the differing classes.

Authorised fund manager's charges and expenses

10

A statement setting out the basis on which the authorised fund manager may make a charge and recover expenses out of the scheme property.

Issue or cancellation directly through the ICVC or trustee

11

Where relevant, a statement authorising the issue or cancellation of units to take place through the ICVC or trustee directly.

In specie issue and cancellation

12

Where relevant, a statement authorising payment for the issue or cancellation of units to be made by the transfer of assets other than cash.

Restrictions on sale and redemption

13

Where relevant, the restrictions which will apply in relation to the sale and redemption of units under COLL 6.2.16 R (Sale and redemption).

Voting at meetings

14

The manner in which votes may be given at a meeting of unitholders under COLL 4.4.8 R (Voting rights).

Certificates

15

A statement:

(1)

authorising the issue of bearer certificates if any, and how such holders are to identify themselves; and

(2)

authorising the person responsible for the register to charge for issuing any document recording, or for amending, an entry on the register, other than on the issue or sale of units.

Income

16

A statement setting out the basis for the distribution or re-investment of income.

Income equalisation

17

Where relevant, a provision for income equalisation.

Redemption or cancellation of units on breach of law or rules

18

A statement that where any holding of units by a unitholder is (or is reasonably considered by the authorised fund manager to be) an infringement of any law, governmental regulation or rule, those units must be redeemed or cancelled.

ICVCs: larger and smaller denomination shares

19

A statement of the proportion of a larger denomination share represented by a smaller denomination share for any relevant unit class.

ICVCs: resolution to remove a director

20

A statement that the ICVC may (without prejudice to the requirements of regulation 21 of the OEIC Regulations (The Authority's approval for certain changes in respect of a company), by a resolution passed by a simple majority of the votes validly cast for and against the resolution at a general meeting of unitholders, remove a director before his period of office expires, despite anything else in the ICVC's instrument of incorporation or in any agreement between the ICVC and that director.

ICVCs: unit transfers

21

A statement that the person designated for the purposes of paragraph 4 of Schedule 4 to the OEIC Regulations (Share transfers) or for an ICVC established in Northern Ireland, paragraph 3 of Schedule 4 to the Open-Ended Investment Companies Regulations (Northern Ireland) 2004 (SR 2004/335) is the person who, for the time being, is the ACD of the ICVC.1

ICVCs: Charges and expenses

22

A statement that charges or expenses of the ICVC may be taken out of the scheme property.

AUTs: governing law for a trust deed

23

A statement that the trust deed is made under and governed by the law of England and Wales, Wales or Scotland or Northern Ireland.

AUTs: trust deed to be binding and authoritative

24

A statement that the trust deed:

(1)

is binding on each unitholder as if it had been a party to it and that it is bound by its provisions; and

(2)

authorises and requires the trustee and the manager to do the things required or permitted of them by its terms.

AUTs: declaration of trust

25

A declaration that, subject to the provisions of the trust deed and all rules made under section 247 of the Act (Trust scheme rules) and for the time being in force:

(1)

the scheme property (other than sums standing to the credit of the distribution account) is held by the trustee on trust for the unitholders according to the number of units held by each unitholder or, where relevant, according to the number of undivided shares in the scheme property represented by the units held by each unitholder; and

(2)

the sums standing to the credit of the distribution account are held by the trustee on trust to distribute or apply them in accordance with COLL 6.8 (Income: accounting, allocation and distribution).

AUTs: trustee's remuneration

26

Where relevant, a statement authorising payments to the trustee by way of remuneration for its services to be paid (in whole or in part) out of the scheme property.

AUTs: responsibility for the register

27

A statement identifying the person responsible under the rules for the maintenance of the register.

3 Investment in property through an intermediate holding vehicle

328

3If investment in an immovable is to be made through an intermediate holding vehicle or a series of intermediate holding vehicles, a statement that the purpose of that intermediate holding vehicle or series of intermediate holding vehicles will be to enable the holding of immovables by the scheme.

Umbrella scheme with only one sub-fund

COLL 3.2.7 R
  1. (1)

    If, after the first issue of a unit in a scheme which is an umbrella, for a period of 24 consecutive months, units of less than two sub-funds are in issue, the authorised fund manager or, for an ICVC, its other directors must take such action as is necessary to reflect the fact that the scheme is no longer an umbrella or cause units of more than one sub-fund to be in issue.

  2. (2)

    If (1) applies or is reasonably expected to become applicable by the authorised fund manager or, for an ICVC, its other directors, the authorised fund manager or, for an ICVC, its other directors, the authorised fund manager or its other directors must notify the unitholders and the FSA of any action to comply with (1).

  3. (3)

    Paragraph (1) does not apply if before the expiry of the 24 month period, winding up of the scheme has commenced.

UCITS obligations

COLL 3.2.8 R RP

  1. (1)

    The instrument constituting a UCITS scheme may not be amended in such a way that it ceases to be a UCITS scheme.

  2. (2)

    If it is proposed to market units of a UCITS scheme in any EEA State other than the United Kingdom, the authorised fund manager of that scheme must notify the FSA of its proposal, specifying the EEA State concerned.

  3. (3)

    The ICVC or the manager must make the notification in (2) no later than the notification to the authorities in that EEA State of that proposal.

COLL 3.3 Units

Application

COLL 3.3.1 R RP

This section applies to an authorised fund manager, an ICVC and the trustee of an AUT.

Classes of units

COLL 3.3.2 G RP
  1. (1)

    The instrument constituting the scheme may provide for different classes of unit to be issued in an authorised fund and, for a scheme which is an umbrella, provide that classes of units may be issued for each sub-fund.

  2. (2)

    In order to be satisfied that COLL 3.2.2 R (Relationship between the instrument constituting the schemeand the rules) is complied with, the FSA will take into account the principles in (a) to (c) when considering proposals for unit classes:

    1. (a)

      a unit class should not provide any advantage for that class if that would result in prejudice to unitholders of any other class;

    2. (b)

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

    3. (c)

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

Currency class units

COLL 3.3.3 G RP

A currency class unit differs from other units 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.

Currency class units: requirements

COLL 3.3.4 R RP

For a currency class unit:

  1. (1)

    the currency of the class concerned must not be the base currency (or, in the case of a sub-fund which, in accordance with a statement in the prospectus, is to be valued in some other currency, the currency of the class may be in the base currency, but must not be in that other currency);

  2. (2)

    the price must be expressed in the currency of the class concerned;

  3. (3)

    any distribution must be paid in the currency of the class concerned; and

  4. (4)

    statements of amounts of money or values included in statements and in tax certificates must be given in the currency of the class concerned (whether or not also given in the base currency).

Rights of unit classes

COLL 3.3.5 R RP
  1. (1)

    If any class of units in an authorised fund has different rights from another class of units in that fund, the instrument constituting the scheme must provide how the proportion of the value of the scheme property and the proportion of income available for allocation attributable to each such class must be calculated.

  2. (2)

    For an authorised fund which is not an umbrella, the instrument constituting the scheme must not provide for any class of units in respect of which:

    1. (a)

      the extent of the rights to participate in the capital property, income property or distribution account would be determined differently from the extent of the corresponding rights for any other class of units; or

    2. (b)

      payments or accumulation of income or capital would differ in source or form from those of any other class of units.

  3. (3)

    For a scheme which is an umbrella, the provisions in (2)(a) apply to classes of units in respect of each sub-fund as if each sub-fund were a separate scheme.

  4. (4)

    Paragraphs (2) and (3) do not prohibit a difference between the rights attached to one class of units and to another class of units that relates solely to:

    1. (a)

      the accumulation of income by way of periodical credit to capital rather than distribution; or

    2. (b)

      charges and expenses that may be taken out of the scheme property or payable by the unitholders; or

    3. (c)

      the currency in which prices or values are expressed or payments made; or1

      1
    4. (d)

      the use of derivatives and forward transactions entered into for the purpose of reducing the effect of fluctuations in the rate of exchange between the currency of a currency class unit

      and either the base currency of the scheme or any currency in which all or part of the scheme property is denominated or valued (in this section referred to as a "currency

      class hedging transaction").1

Hedging of unit classescurrency class units

COLL 3.3.5A R RP

1A currency class hedging transaction must:

  1. (1)

    be undertaken in accordance with the requirements of COLL 5 (Investment and borrowing powers); and

  2. (2)

    (for the purposes of valuing scheme property and calculating the price of units in accordance with COLL 6.3 (Valuation and pricing)) be attributed only to the currency class units for which it is undertaken.

Guidance on hedging of currency classes

COLL 3.3.5B G RP
  1. (1)

    1Before undertaking a currencyclass hedging transaction for a class of units, the authorised fund manager should:

    1. (a)

      ensure that the relevant prospectus clearly:

      1. (i)

        states that such a transaction may be undertaken for the relevant class of currency class units; and

      2. (ii)

        explains the nature of the risks that such a transaction may pose to investors in all classes;

    2. (b)

      consult the depositary about the adequacy of the systems and controls it uses to ensure compliance with COLL 3.3.5A R (Hedging of currency class units); and

    3. (c)

      consult the schemeauditor and, where appropriate, depositary to determine how:

      1. (i)

        the transaction will be treated in the scheme's accounts; and

      2. (ii)

        any consequential tax liability will be met;

      (in each case) without prejudice to unitholders of classes other than the relevant currencyclass.

  2. (2)

    Currency class hedging transactions should be entered into for the purpose of reducing risk by limiting the effect of movements in exchange rates on the value of acurrency class unit. The authorised fund manager should ensure that the total value of the hedged position does not exceed the value of the relevant currency class units unless there is adequate cover and it is reasonable for it to do so on a temporary basis for reasons of efficiency (for example, to avoid the need to make small and frequent adjusting transactions). In such cases, the difference between the value of the hedged position and the value of the currency class units should not be so large as to be speculative or to constitute an investment strategy.

Requirement: larger and smaller denomination shares in an ICVC

COLL 3.3.6 R RP
  1. (1)

    This rule applies whenever the instrument of incorporation of an ICVC provides, in relation to any class, for smaller denomination shares and larger denomination shares.

  2. (2)

    Whenever a registered holding includes a number of smaller denomination shares that can be consolidated into a larger denomination share of the same class, the ACD must consolidate the relevant number of those smaller denomination shares into a larger denomination share.

  3. (3)

    The ACD may, to effect a transaction in shares, substitute for a larger denomination share the relevant number of smaller denomination shares, in which case (2) does not apply to the resulting smaller denomination shareholding or holdings until immediately after the completion of the transaction.

Characteristics of larger and smaller denomination shares in an ICVC

COLL 3.3.7 G RP

Regulation 45 of the OEIC Regulations (Shares) allows the rights attached to a share in an ICVC of any class to be expressed in two denominations, in which case the 'smaller' denomination must be such proportion of the 'larger' denomination (a standard share) as is fixed by the ICVC's instrument of incorporation as described in COLL 3.2.6R (19). This will enable holdings to consist of more or less than a complete number of larger denomination shares.

Sub-division and consolidation of units

COLL 3.3.8 R RP

  1. (1)

    The directors of an ICVC or the manager of an AUT may, unless expressly forbidden to do so by the instrument constituting the scheme, determine that:

    1. (a)

      each unit of any class is to be subdivided into two or more units; or

    2. (b)

      units of any class are to be consolidated.

  2. (2)

    The ICVC or the manager must (unless it has done so before the sub-division or consolidation became effective) immediately give notice to each unitholder (or the first named of joint unitholders) of any sub-division or consolidation under (1).

Guarantees and capital protection

COLL 3.3.9 R RP

If there is any arrangement intended to result in a particular capital or income return from a holding of units in an authorised fund, or any investment objective of giving protection to the capital value of, or income return from, such a holding:

  1. (1)

    that arrangement or protection must not be such as to cause the possibility of a conflict of interest as between:

    1. (a)

      unitholders and the authorised fund manager or depositary; or

    2. (b)

      unitholders intended and not intended to benefit from the arrangement; and

  2. (2)

    where, in accordance with any statement required by COLL 4.2.5R (27)(c)(iv) (Table: contents of the prospectus), action is required by the unitholders to obtain the benefit of any guarantee, the authorised fund manager must provide reasonable notice in writing to unitholders before such action is required.

Switching rights: umbrella schemes

COLL 3.3.10 G RP
  1. (1)

    In accordance with section 235(4) of the Act (Collective investment schemes), the participants in a scheme which is an umbrella are entitled to exchange rights in one sub-fund for rights in another sub-fund of the umbrella.

  2. (2)

    To satisfy (1), where any sub-fund in a scheme which is an umbrella has provisions in its prospectus limiting the issue of units in that sub-fund, the authorised fund manager should ensure that at least two sub-funds are able to issue units at any time.