COLL 5.6 Investment powers and borrowing limits for non-UCITS retail schemes

1. (1)

   This section applies to the authorised fund manager and the depositary of a non-UCITS retail scheme and to an ICVC which is a non-UCITS retail scheme.

2. (2)

   Where this section contains a reference to a rule in any of COLL 5.1 to COLL 5.5 , these rules and any rules to which they refer or any relevant guidance should be read as if any reference to a UCITS scheme is to a non-UCITS retail scheme.

1. (1)

   An authorised fund manager must ensure that, taking account of the investment objectives and policy of the non-UCITS retail scheme as stated in its most recently published prospectus, the scheme property of the non-UCITS retail scheme aims to provide a prudent spread of risk

2. (2)

   The rules in this section relating to spread of investments do not apply during any period in which it is not reasonably practical to comply,

   provided that (1) is complied with during such period.

1. (1)

   The scheme property of a non-UCITS retail scheme may, subject to the rules in this section, comprise any assets or investments to which it is dedicated.

2. (2)

   For an ICVC, the scheme property may also include movable or immovable property that is necessary for the direct pursuit of the ICVC's business of investing in those assets or investments.

3. (3)

   The scheme property must be invested only in accordance with the relevant provisions in this section that are applicable to that non-UCITS retail scheme and within any upper limit specified in this section.

4. (4)

   The instrument constituting the scheme may restrict the investment powers of a scheme further than the relevant restrictions in this section.

5. (5)

   The scheme property may only, except where otherwise provided in the rules in this section, consist of any one or more of:

   1. (a)

      transferable securities;

   2. (b)

      money-market instruments;

   3. (c)

      units in collective investment schemes permitted under COLL 5.6.10 R (Investment in collective investment schemes);

   4. (d)

      derivatives and forward transactions permitted under COLL 5.6.13 R (Permitted transactions (derivatives and forwards));

   5. (e)

      deposits permitted under COLL 5.2.26 R (Investment in deposits);

   6. (f)

      immovables permitted under COLL 5.6.18 R (Investment in property) and COLL 5.6.19 R (Investment limits for immovables); and

   7. (g)

      gold up to a limit of 10% in value of the scheme property.

Transferable securities and money-market instruments held within a non-UCITS retail scheme must:

1. (1)

   be admitted to or dealt in on an eligible market within COLL 5.2.10 R(Eligible markets: requirements);or2

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2. (2)

   subject to a limit of 20% in value of the scheme property be:

   1. (a)

      transferable securities which are not approved securities; or

   2. (b)

      money-market instruments which are liquid and have a value which can be determined accurately at any time.

In this section the value of the scheme property means the value of the scheme property determined in accordance with COLL 5.2.5 R (Valuation).

1. (1)

   This rule does not apply in respect of government and public securities.

2. (2)

   Not more than 20% in value of the scheme property is to consist of deposits with a single body.

3. (3)

   Not more than 10% in value of the scheme property is to consist of transferable securities or money-market instruments issued by any single body subject to COLL 5.6.23 R (Schemes replicating an index).

4. (4)

   In applying (3) certificates representing certain securities are to be treated as equivalent to the underlying security.

5. (5)

   The exposure to any one counterparty in an OTC derivative transaction must not exceed 10% in value of the scheme.

6. (6)

   Except for a feeder fund , not more than 35% in value of the scheme is to consist of the units of any one scheme.

7. (7)

   For the purpose of calculating the limit in (5), the exposure in respect of an OTC derivative may be reduced to the extent that collateral is held in respect of it if the collateral meets each of the conditions specified in (8).2

8. (8)

   The conditions referred to in (7) are that the collateral:2

   1. (a)

      is marked-to-market on a daily basis and exceeds the value of the amount at risk;2

   2. (b)

      is exposed only to negligible risks (e.g. government bonds of first credit rating or cash) and is liquid;2

   3. (c)

      is held by a third party custodian not related to the provider or is legally secured from the consequences of a failure of a related party; and2

   4. (d)

      can be fully enforced by the non-UCITS retail scheme at any time.2

9. (9)

   For the purpose of calculating the limit in (5), OTC derivative positions with the same counterparty may be netted provided that the netting procedures:2

   1. (a)

      comply with the conditions set out in Section 3(Contractual netting (Contracts for novation and other netting agreements)) of Annex III to the Banking Consolidation Directive; and2

   2. (b)

      are based on legally binding agreements.2

10. (10)

    In applying this rule, all derivatives transactions are deemed to be free of counterparty risk if they are performed on an exchange where the clearing house meets each of the following conditions:2

    1. (a)

       it is backed by an appropriate performance guarantee; and2

    2. (b)

       it is characterised by a daily mark-to-market valuation of the derivative positions and an at least daily margining.2

1. (1)

   This rule applies in respect of

   government and public securities.

2. (2)

   The requirements in COLL 5.2.12 R (Spread: government and public securities) apply to investment in government and public securities by a non-UCITS retail scheme, except for COLL 5.2.12R (4) which will apply to such a scheme only to the extent that it concerns the most recently published prospectus of the scheme1.

A non-UCITS retail scheme must not invest in warrants, and nil and partly paid securities unless the investment complies with the conditions in COLL 5.2.17 R (Investment in warrants and nil and partly paid securities).

A non-UCITS retail scheme must not invest in units in a collective investment scheme (second scheme) unless the second scheme meets each of the requirements at (1) to (5)3:

1. (1)

   the second scheme:

   1. (a)

      satisfies the conditions necessary for it to enjoy the rights conferred by the UCITS Directive; or

   2. (b)

      is a non-UCITS retail scheme; or

   3. (c)

      is a recognised scheme; or

   4. (d)

      is constituted outside the United Kingdom and the investment and borrowing powers of which are the same or more restrictive than those of a non-UCITS retail scheme; or

   5. (e)

      is a scheme not falling within (a) to (d) and in respect of which no more than 20% in value of the scheme property (including any transferable securities which are not approved securities) is invested;

2. (2)

   the second scheme operates on the principle of the prudent spread of risk;

3. (3)

   the second scheme is prohibited from having more than 15% in value of the property of that scheme consisting of units in collective investment schemes;

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4. (4)

   the participants in the second scheme must be entitled to have their units redeemed in accordance with the scheme at a price:

   1. (a)

      related to the net value of the property to which the units relate; and

   2. (b)

      determined in accordance with the scheme; and3

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5. (5)

   where the second scheme is an umbrella, the provisions in (2) to (4) and COLL 5.6.7 R (Spread: general) 2apply to each sub-fund as if it were a separate scheme.

Units in a scheme do not fall within COLL 5.6.10 R if that scheme is managed or operated by (or, if it is an ICVC, has as its ACD) the authorised fund manager of the investing non-UCITS retail scheme or by an associate of that authorised fund manager, unless:

1. (1)

   the prospectus of the investing authorised fund clearly states that the property of that investing fund may include such units; and

2. (2)

   the conditions in COLL 5.2.16 R (Investment in other group schemes) are complied with.

1. (1)

   A transaction in derivatives or a forward transaction must not be effected for a non-UCITS retail scheme unless the transaction is:

   1. (a)

      of a kind specified in COLL 5.6.13 R2 (Permitted transactions (derivatives and forwards)); and

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   2. (b)

      covered, as required by COLL 5.3.3 R (Cover for transactions in derivatives and forward transactions).

2. (2)

   Where a scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in COLL 5.6.7 R (Spread: general) and COLL 5.6.8 R (Spread: government and public securities) except as provided in (4).

3. (3)

   Where a transferable security or money-market instrument embeds a derivative, this must be taken into account for the purposes of calculating any limit in this section.

4. (4)

   Where a scheme invests in an index-based derivative, provided the relevant index falls within COLL 5.6.23 R (Schemes replicating an index) the underlying constituents of the index do not have to be taken into account for the purposes of COLL 5.6.7 R and COLL 5.6.8 R.

5. (5)

   The relaxation in (4) is subject to the authorised fund manager taking account of COLL 5.6.3 R (Prudent spread of risk).

1. (1)

   A transaction in a derivative must be within COLL 5.2.20 R (1) (Permitted transactions (derivatives and forwards)) and:

   1. (a)

      the underlying must be within COLL 5.6.4 R (5) (Investment powers: general) or COLL 5.2.20R (2)(f) to (i)2; and

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   2. (b)

      the exposure to the underlying must not exceed the limits in COLL 5.6.7 R (Spread: general) and COLL 5.6.8 R (Spread: government and public securities).

2. (2)

   A transaction in an approved derivative must be effected on or under the rules of an eligible derivatives market.

3. (3)

   A transaction in a derivative must not cause a scheme to diverge from its investment objectives as stated in the instrument constituting the scheme and the most recently published prospectus.

4. (4)

   transaction in a derivative must not be effected if the intended effect is to create the potential for an uncovered sale of:

   1. (a)

      transferable securities;

   2. (b)

      money-market instruments;

   3. (c)

      units in collective investment schemes; or

   4. (d)

      derivatives.

5. (5)

   Any forward transaction must be made with an eligible institution or an approved bank.

6. (6)

   The authorised fund manager must ensure compliance with COLL 5.3.6 R (Continuing nature of limits and requirements).

The requirements of COLL 5.2.21 R (Transactions for the purchase of property) and COLL 5.2.22 R (Requirement to cover sales) apply to non-UCITS retail schemes in the same manner as to UCITS schemes.

Any transaction in an OTC derivative under COLL 5.6.13 R (Permitted transactions (derivatives and forwards)) must comply with the requirements of COLL 5.2.23 R (OTC transactions in derivatives).

An authorised fund manager must use a risk management process enabling it to monitor and measure as frequently as appropriate the risk associated with a non-UCITS retail scheme's derivatives and forwards positions and their contribution to the overall risk profile of the scheme.

1. (1)

   Any investment in land or a building held within the scheme property of a non-UCITS retail scheme must be an immovable within (2) to (5).

2. (2)

   An immovable must:

   1. (a)

      be situated in a country or territory identified in the prospectus for the purpose of this rule; and

   2. (b)

      if situated in:

      1. (i)

         England and Wales or Northern Ireland, be a freehold or leasehold interest; or

      2. (ii)

         Scotland, be any interest or estate in or over land or heritable right including a long lease; or

   3. (c)

      if not situated in the jurisdictions referred to in (b)(i) or (ii), be equivalent to any of the interests in (b)(i) or (ii)

3. (3)

   The authorised fund manager must have taken reasonable care to determine that the title to the immovable is a good marketable title.

4. (4)

   The manager or the ICVC must:

   1. (a)

      have received a report from an appropriate valuer which:

      1. (i)

         contains a valuation of the immovable (with and without any relevant subsisting mortgage); and

      2. (ii)

         states that in the appropriate valuer's opinion the immovable would, if acquired by the scheme, be capable of being disposed of reasonably quickly at that valuation; or

   2. (b)

      have received a report from an appropriate valuer as required by (4)(a)(i) and stating that:

      1. (i)

         the immovable is adjacent to or in the vicinity of another immovable included in the scheme property or is another legal interest as defined in (2)(b) or (c) in an immovable which is already included in the scheme property; and

      2. (ii)

         in the opinion of the appropriate valuer, the total value of both immovables would at least equal the sum of the price payable for the immovable and the existing value of the other immovable.

5. (5)

   An immovable must:

   1. (a)

      be bought or be agreed by enforceable contract to be bought within six months after receipt of the report of the appropriate valuer under (4);

   2. (b)

      not be bought, if it is apparent to the authorised fund manager that the report in (a) could no longer reasonably be relied upon; and

   3. (c)

      not be bought at more than 105% of the valuation for the relevant immovable in the report in (4).

6. (6)

   Any furniture, fittings or other contents of any building may be regarded as part of the relevant immovable.

7. (7)

   An appropriate valuer must be a person who:

   1. (a)

      has knowledge of and experience in the valuation of immovables of the relevant kind in the relevant area;

   2. (b)

      is qualified to be a standing independent valuer of a non-UCITS retail scheme or is considered by the scheme's standing independent valuer to hold an equivalent qualification;

   3. (c)

      is independent of the ICVC, the depositary and each of the directors of the ICVC or of the manager and trustee of the AUT; and

   4. (d)

      has not engaged himself or any of his associates in relation to the finding of the immovable for the scheme or the finding of the scheme for the immovable.

The following limits apply in respect of immovables held as part of scheme property of a scheme:

1. (1)

   not more than 15% in value of the scheme property is to consist of any one immovable;

2. (2)

   in (1), immovables within COLL 5.6.18 R (4) (b) (Investment in property) must be regarded as one immovable;

3. (3)

   the figure of 15% in (1) may be increased to 25% once the immovable has been included in the scheme property in compliance with (1);

4. (4)

   the income receivable from any one group in any accounting period must not be attributable to immovables comprising;

   1. (a)

      more than 25%; or

   2. (b)

      in the case of a government or public body more than 35%;

   of the value of the scheme property;

5. (5)

   not more than 20% in value of the scheme property is to consist of immovables that are subject to a mortgage3 and any mortgage must not secure more than 100% of the value in COLL 5.6.18 R (4) (on the assumption the immovable is not mortgaged);

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6. (6)

   the aggregate value of:3

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   1. (a)

      mortgages secured on immovables under (5);3

   2. (b)

      borrowing of the scheme under COLL 5.6.22 R (5); and3

   3. (c)

      any transferable securities that are not approved securities;3

   must not at any time exceed 20% of the value of the scheme property;3

7. (7)

   not more than 50% in value of the scheme property is to consist of immovables which are unoccupied and non-income producing or in the course of substantial development, redevelopment or refurbishment; and

8. (8)

   no option may be granted to a third party to buy any immovable comprised in the scheme property unless the value of the relevant immovable does not exceed 20% of the value of the scheme property together with, where appropriate, the value of investments in:

   1. (a)

      unregulated collective investment schemes; and

   2. (b)

      any transferable securities which are not approved securities.

1. (1)

   The following requirements apply in relation to the appointment of a valuer:

   1. (a)

      the authorised fund manager must ensure that any immovables in the scheme property are valued by an appropriate valuer (standing independent valuer) appointed by the authorised fund manager; and

   2. (b)

      the appointment must be made with the approval of the trustee or depositary at the outset and upon any vacancy.

2. (2)

   The standing independent valuer in (1) must be:

   1. (a)

      for an AUT, independent of the manager and trustee; and

   2. (b)

      for an ICVC, independent of the ICVC, the directors and the depositary.

3. (3)

   The following requirements apply in relation to the functions of the standing independent valuer:

   1. (a)

      the authorised fund manager must ensure that the standing independent valuer values all the immovables held within the scheme property, on the basis of a full valuation with physical inspection (including, where the immovable is or includes a building, internal inspection), at least once a year;

   2. (b)

      for the purposes of (a) any inspection in relation to adjacent properties of a similar nature may be limited to that of only one such representative property;

   3. (c)

      the authorised fund manager must ensure that the standing independent valuer values the immovables, on the basis of a review of the last full valuation, at least once a month;

   4. (d)

      if either the authorised fund manager or the depositary becomes aware of any matters that appear likely to:

      1. (i)

         affect the outcome of a valuation of an immovable; or

      2. (ii)

         cause the valuer to decide to value under (a) instead of under (c);

      it must immediately inform the standing independent valuer of that matter;

   5. (e)

      the authorised fund manager must use its best endeavours to ensure that any other affected person reports to the standing independent valuer immediately upon that person becoming aware of any matter within (d); and

   6. (f)

      any valuation by the standing independent valuer must be on the basis of an 'Open Market value' as defined in Practice Statement 3 in the Royal Institute of Chartered Surveyors' Appraisal and Valuation Manual (first edition published September 1995) but subject to COLL 6.3 (Valuation and pricing).

4. (4)

   In relation to an immovable:

   1. (a)

      any valuation under COLL 6.3 (Valuation and pricing) has effect, until the next valuation under that rule, for the purposes of the value of immovables; and

   2. (b)

      an agreement to transfer an immovable or an interest in an immovable is to be disregarded for the purpose of the valuation of the scheme property unless it reasonably appears to the authorised fund manager to be legally enforceable.

A non-UCITS retail scheme may undertake stock lending in accordance with COLL 5.4 (Stock lending).

The following rules in Chapter 5 apply to a non-UCITS retail scheme:

1. (1)

   COLL 5.2.7 R (Transferable securities);

2. (2)

   COLL 5.5.1 R(Application) and COLL 5.5.2 R (Table of application)2;

3. (3)

   COLL 5.5.3 R (Cash and near cash);

4. (4)

   COLL 5.5.4 R (1), COLL 5.5.4 R (2), COLL 5.5.4 R (3) and COLL 5.5.4R (8) (General power to borrow);

5. (5)

   COLL 5.5.5 R (1) and3 COLL 5.5.5 R (2) (Borrowing limits);

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6. (6)

   COLL 5.5.6 R (Restrictions on lending of money) ;

7. (7)

   COLL 5.5.7 R (1), (2) and (4)2 (Restrictions on lending of property other than money);

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8. (8)

   COLL 5.5.8 R (General power to accept or underwrite placings); and

9. (9)

   COLL 5.5.9 R (Guarantees and indemnities).

1. (1)

   A non-UCITS retail scheme may invest up to 20% in value of the scheme property in shares and debentures which are issued by the same body where the aim of the investment policy of that scheme as stated in its most recently published prospectus is to replicate the performance or composition of an index within (2).

2. (2)

   The index must:

   1. (a)

      have a sufficiently diversified composition;

   2. (b)

      be a representative benchmark for the market to which it refers; and

   3. (c)

      be published in an appropriate manner.

3. (3)

   The limit in (1) may be raised for a particular scheme up to 35% in value of the scheme property, but only in respect of one body and where justified by exceptional market conditions.

1. (1)

   In relation to a scheme which is an umbrella, the provisions in this section apply to each sub-fund as they would for a non-UCITS retail scheme.

2. (2)

   A sub-fund must not invest in another sub-fund of the same umbrella.