COLL 7.8 Side pockets

1. (1)

   1Subject to (2), this section applies to:

   1. (a)

      the authorised fund manager of an AUT, ACS or an ICVC;

   2. (b)

      any other director of an ICVC;

   3. (c)

      the depositary of an AUT, ACS or an ICVC; and

   4. (d)

      an ICVC,

   which is a UCITS scheme or a non-UCITS retail scheme.

2. (2)

   This section does not apply to a scheme which is a regulated money market fund.

1. (1)

   1If all the conditions in (2) are satisfied, the authorised fund manager of a scheme holding affected investments in the scheme property may, after consulting with the depositary, create a side pocket class.

2. (2)

   The conditions are:

   1. (a)

      The authorised fund manager has determined that the affected investment in (1) is:

      1. (i)

         a sanctioned investment;

      2. (ii)

         a unit in a collective investment scheme or a share in an AIF within the meaning of paragraph (2)(b)(vii) of the definition of ‘affected investment’; or

      3. (iii)

         to the extent not in (i) or (ii), an affected investment for which there are no accurate, reliable and regular prices.

   2. (b)

      The authorised fund manager has determined that:

      1. (i)

         creating the side pocket class will protect the interests of unitholders;

      2. (ii)

         the rights of any unit in a side pocket class will not be unfairly prejudicial to the interests of unitholders generally or to the unitholders of any other class of units in the scheme;

      3. (iii)

         the issue of units in the side pocket class will be in the best interests of unitholders, the authorised fund and the integrity of the market; and

      4. (iv)

         all the unitholders in the authorised fund will be treated fairly.

   3. (c)

      The instrument constituting the fund and the prospectus:

      1. (i)

         provide for the issue of units in a side pocket class; and

      2. (ii)

         set out the terms on which that class will operate,

      in accordance with the rules in, and applied by, this section (see in particular COLL 7.8.13R (Modified application of COLL 4.2 (Pre-sale notifications)).

3. (3)

   Before making the determination in (2)(b), the authorised fund manager must consider:

   1. (a)

      at least each of the matters specified in COLL 7 Annex 1 (Matters to be considered by the authorised fund manager before creating a side pocket class); and

   2. (b)

      whether it would be in the interest of all the unitholders in the authorised fund to suspend dealings in units in accordance with COLL 7.2.1R (Requirement) instead of creating a side pocket class.

4. (4)
   1. (a)

      The decision to create a side pocket class pursuant to (1) must be taken by the authorised fund manager’s governing body.

   2. (b)

      The authorised fund manager must make a record of the governing body’s decision and the reasons for it.

1. (1)

   1The authorised fund manager may:

   1. (a)

      issue units in a new class to unitholders in the authorised fund; or

   2. (b)

      convert a unit in an existing class into units in one or more new classes.

2. (2)

   Where the authorised fund manager has taken an action pursuant to (1)(a) or (1)(b), it must determine the price of units of each existing and new class by reference to a valuation of the portions of capital property and income property represented by either:

   1. (a)

      one or more affected investments held in the scheme property; or

   2. (b)

      the scheme property excluding some or any such affected investments,

   as provided for in the instrument constituting the fund and the prospectus.

3. (3)

   A new class within (2)(a) is referred to as a ‘side pocket class’.

4. (4)

   The authorised fund manager must determine the date and time on which the units in the new class are to be issued.

5. (5)

   On the date and time specified in (4):

   1. (a)

      the combined net asset value of all units of the new class and all units of the existing class; or

   2. (b)

      the combined net asset value of any new classes of unit issued by conversion from an existing class of unit,

   must equal the net asset value of all units of the class or classes that existed immediately before the specified date and time.

6. (6)

   On the date and time specified in (4), the number of units held by a unitholder in a new class must be proportionate to the number of units held by them in an existing class immediately before such date and time.

1The prospectus of the authorised fund must limit the issue of units in a side pocket class after the date and time specified in COLL 7.8.5R(4) (see COLL 7.8.30R(5) (Modified application of COLL 6.2 (Dealing)).

1The rules and guidance in COLL 3 (Constitution) apply to an authorised fund with a side pocket class subject to the modifications specified in COLL 7.8.11R.

1In COLL 3.3.5R (Rights of unit classes), paragraphs (2) and (3) do not prohibit the issue of units in a side pocket class.

1The rules and guidance in COLL 4 (Investor relations) apply to an authorised fund with a side pocket class, subject to:

1. (1)

   the modifications in COLL 7.8.13R to COLL 7.8.21R; and

2. (2)

   the additional requirements in COLL 7.8.22R and COLL 7.8.24R.

1In relation to a side pocket class, the information required to be included in the prospectus under COLL 4.2.5R (Table: contents of prospectus) must cover at least the additional matters set out in (1) to (4).

1. (1)

   In COLL 4.2.5R(5) (Characteristics of units):

   1. (a)

      a general description of the affected investments to be allocated to the side pocket class (or side pocket classes);

   2. (b)

      an explanation of how the scheme property (both capital property and income property) will be allocated between the side pocket class (or side pocket classes) and other classes at the outset and on an ongoing basis; and

   3. (c)

      information which explains:

      1. (i)

         that the authorised fund manager will seek to dispose of all the affected investments over time, on terms that it judges to be in the best interests of unitholders; and

      2. (ii)

         that the units in the side pocket class (or side pocket classes) will be cancelled when this has been done, indicating where possible what options may be offered to unitholders for exiting the side pocket class (or side pocket classes) under the process.

2. (2)

   In COLL 4.2.5R(16) (Valuation and pricing of scheme property), the frequency at which:

   1. (a)

      affected investments allocated to the side pocket class will be valued; and

   2. (b)

      the prices of units in the side pocket class will be calculated, where these differ from other classes of the scheme.

3. (3)

   In COLL 4.2.5R(17) (Dealing):

   1. (a)

      that the issue of units in the side pocket class is limited, and the circumstances and conditions for issuing them;

   2. (b)

      a statement of when the dealing days for the side pocket class will be;

   3. (c)

      details of any cut-off point for the receipt of dealing instructions prior to the valuation point for the relevant dealing day; and

   4. (d)

      if applicable, details of:

      1. (i)

         any special arrangements put in place for redemptions of units in the side pocket class, including any extended time period for settlement and any facility to pay the proceeds of redemption to a person other than the unitholder;

      2. (ii)

         whether redemption proceeds can be reinvested in units of other classes of the scheme or in units of other schemes; and

      3. (iii)

         any facility for a unitholder to dispose of an interest in units by transferring title to them to another person (other than by operation of law), as a donation or for financial consideration.

4. (4)

   In COLL 4.2.5R(27)(b) (Additional information):

   1. (a)

      an explanation that there is no certainty that any affected investment will ever recover its value to a significant extent, or at all, and that the authorised fund manager may be unable to realise any material value for unitholders in respect of units held in the side pocket class;

   2. (b)

      if applicable, that the costs and charges for operating the side pocket class may significantly erode the returns from any realisable value from the affected investments over time; and

   3. (c)

      whether the authorised fund manager has undertaken to bear all the costs and charges associated with operating the side pocket class from its own resources and, if not, a statement explaining:

      1. (i)

         the risk that costs and charges might cause the cash position of the side pocket class to become overdrawn;

      2. (ii)

         that a liability arising as a result of (i) would be accounted for against the scheme property allocated to the other classes in the scheme; and

      3. (iii)

         the steps the authorised fund manager would take to ensure unitholders in other classes do not bear such a liability.

1The authorised fund manager need not treat the creation of a side pocket class as a fundamental change for the purposes of COLL 4.3.4R (Fundamental change requiring prior approval by meeting) provided the authorised fund manager is satisfied on reasonable grounds that the foreseeable costs of this course of action are not disproportionate to the benefits.

1If the authorised fund manager considers that the creation of a side pocket class constitutes a significant change, the authorised fund manager:

1. (1)

   may, but need not, give prior written notice to unitholders under COLL 4.3.6R(1) (Significant change requiring pre-event notification); and

2. (2)

   is not required to comply with COLL 4.3.6R(3).

1. (1)

   1COLL 4.4.8R (Voting rights) applies to an authorised fund with a side pocket class with the modifications set out in (2) and (3) below.

2. (2)

   Before a resolution is put to a vote at a unitholder meeting, it must be made clear whether the resolution relates to or affects:

   1. (a)

      all the classes of unit in the authorised fund;

   2. (b)

      those classes of unit in the authorised fund excluding the side pocket class; or

   3. (c)

      only the side pocket class.

3. (3)

   On a poll, the votes of a unitholder may only be counted to the extent that the unitholder’s voting rights are attached to units in the class or classes to which the resolution relates or which the resolution affects in accordance with (2).

1The rules in COLL 4.7.2R (Key investor information) do not require an authorised fund manager to draw up a key investor information document or a NURS-KII document in relation to a side pocket class.

1The authorised fund manager must provide a written notification to unitholders which meets the requirements of (1) to (3).

1. (1)

   The notification must be provided to unitholders in a timely way, either shortly before the side pocket class is created or as soon as practicable afterwards.

2. (2)

   If the unitholder has a financial adviser, the requirement to provide the notification in (1) may be satisfied by sending it to the financial adviser.

3. (3)

   The notification must explain in a comprehensive manner:

   1. (a)

      the reasons for the authorised fund manager’s decision to create a side pocket class, including the expected benefits and the costs and charges;

   2. (b)

      the effect on unitholders’ ability to exercise their rights;

   3. (c)

      if applicable, the basis on which the authorised fund manager has satisfied itself as to the cost impact of its decision under COLL 7.8.14R;

   4. (d)

      a description of the main features of the side pocket class;

   5. (e)

      practical information that unitholders will need to understand about the changes to their investment in the authorised fund; and

   6. (f)

      each of the matters specified in COLL 7.8.13R(4) (Modified application of COLL 4.2 (Pre-sale notifications)).

4. (4)

   The notification must:

   1. (a)

      be written in clear and plain language;

   2. (b)

      be provided in a durable medium; and

   3. (c)

      be accessible by existing and prospective unitholders (e.g. by publishing a copy in a prominent location on the authorised fund manager’s website).

1The authorised fund manager must, as soon as reasonably practicable after the date on which the side pocket class is created, send a written statement to each unitholder confirming the number and type of units of each class the unitholder holds in the authorised fund as a result of the creation of the side pocket class.

1. (1)

   1COLL 5 (Investment and borrowing powers) applies to the side pocket property, subject to the modifications in this rule.

2. (2)

   Subject to (4) to (6), in the case of a UCITS scheme, the authorised fund manager must comply with as much of COLL 5.1 (Introduction), COLL 5.2 (General investment powers and limits for UCITS schemes) and COLL 5.3 (Derivative exposure) as is practicable having regard to the limited purpose for which the side pocket class was created.

3. (3)

   Subject to (4) to (6), in the case of a non-UCITS retail scheme, the authorised fund manager must comply with as much of COLL 5.1 (Introduction) and COLL 5.6 (Investment powers and borrowing limits for non-UCITS retail schemes) as is practicable having regard to the limited purpose for which the side pocket class was created.

4. (4)

   The authorised fund manager may only enter into a derivative or a forward transaction which:

   1. (a)

      is a ‘class hedging transaction’ within the meaning of COLL 3.3.5R(4)(d); and

   2. (b)

      falls within COLL 3.3.5AR (Hedging of unit classes) (see also COLL 3.3.5BG (Guidance on hedging of unit classes)),

   and all provisions of COLL 5 relevant to such transactions apply.

5. (5)

   COLL 5.5.3R (Cash and near cash) applies, except that references to the ‘investment objectives’ of the scheme should be read as references to the objective in COLL 7.8.33R(2)(b) (Modified application of COLL 6.6 (Operating duties and responsibilities)).

6. (6)

   The following rules apply:

   1. (a)

      COLL 5.5.4R (General power to borrow);

   2. (b)

      COLL 5.5.5R (Borrowing limits);

   3. (c)

      COLL 5.5.6R (Restrictions on lending of money);

   4. (d)

      COLL 5.5.7R (Restrictions on lending of property other than money);

   5. (e)

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

   6. (f)

      COLL 5.5.9R (Guarantees and indemnities).

1. (1)

   1This rule applies to the authorised fund manager and depositary of an authorised fund with a side pocket class.

2. (2)

   For the purpose of interpreting references to the ‘scheme property’ in COLL 5 in relation to the part of the scheme which is not a ‘side pocket’, the authorised fund manager and depositary may disregard the side pocket property.

3. (3)

   The reference to a ‘side pocket’ in (2) is a reference to a part of the scheme which is represented by units in a side pocket class.

1The rules and guidance in COLL 6 (Operating duties and responsibilities) apply in relation to an authorised fund with a side pocket class subject to the modifications specified in COLL 7.8.30R (Modified application of COLL 6.2 (Dealing)) to COLL 7.8.36R (Modified application of COLL 6.7 (Payments)).

1. (1)

   1COLL 6.2 (Dealing) applies to a side pocket class subject to the modifications specified in this rule.

2. (2)

   For the purposes of COLL 6.2.8R (Issue and cancellation of units through an authorised fund manager), if the authorised fund manager redeems a unit in a side pocket class from a unitholder, the authorised fund manager must immediately cancel the unit or, in relation to an AUT or ACS, instruct the depositary to do so.

3. (3)
   1. (a)

      Subject to (b) and (c), the requirement in COLL 6.2.13R (Payment for units issued) may be satisfied by the authorised fund manager allocating such proportion of the scheme property to that class as the authorised fund manager may determine.

   2. (b)

      Before making the allocation of scheme property in (a), the authorised fund manager must consult the depositary and take its views into account.

   3. (c)

      After being consulted under (b), the depositary must consider the proposed allocation of the scheme property and inform the authorised fund manager if it considers that the allocation is not appropriate, having regard to the purpose of the side pocket class.

4. (4)

   In COLL 6.2.16R (Sale and redemption), in relation to the redemption of units in a side pocket class:

   1. (a)

      paragraphs (4) and (5) apply unless the prospectus makes alternative provision for how unitholders may be paid; and

   2. (b)

      paragraphs (5A), (6) and (7) do not apply.

5. (5)

   The authorised fund manager must apply COLL 6.2.18R (Limited issue) as follows:

   1. (a)

      COLL 6.2.18R(1) applies to the issue of units in a side pocket class;

   2. (b)

      COLL 6.2.18R(2) does not apply to a side pocket class, and the authorised fund manager must not provide for the further issue of units in the same class; and

   3. (c)

      COLL 6.2.18R(3) applies where a scheme has a side pocket class.

1. (1)

   1COLL 6.3 (Valuation and pricing) applies in relation to a side pocket class subject to the modifications specified in this rule (see also COLL 7.8.32G).

2. (2)

   For the purpose of COLL 6.3.5R (Price of a unit), the authorised fund manager must ensure that the price of a unit in a side pocket class is calculated:

   1. (a)

      by reference to the net value of the side pocket property; and

   2. (b)

      in accordance with the provisions of both the instrument constituting the fund and the prospectus.

3. (3)

   Notwithstanding COLL 6.3.11R (Publication of prices), the authorised fund manager must make public in an appropriate manner the price of a unit in the side pocket class after every valuation point (see COLL 6.3.4R (Valuation points)), even if the authorised fund manager is not holding itself out to deal in such units at that valuation point.

1. (1)

   1COLL 6.6 (Operating duties and responsibilities) applies to the authorised fund manager and depositary of an authorised fund with a side pocket class, subject to the modifications specified in this rule and COLL 7.8.34R (Modified application of the assessment of value rules).

2. (2)

   For the purposes of COLL 6.6.3R(3)(a) (Functions of the authorised fund manager), the authorised fund manager must make decisions as to the constituents of the scheme property:

   1. (a)

      in accordance with the investment objectives and policy of the scheme, but may disregard any affected investment in the side pocket property; and

   2. (b)

      with a view to disposing of those affected investments over time as and when the authorised fund manager considers this can be done in the best interests of unitholders.

3. (3)

   For the purposes of COLL 6.6.4R(1) (General duties of the depositary), the depositary must take reasonable care to ensure that the scheme is managed by the authorised fund manager in accordance with the matters specified in COLL 6.6.4R(1)(a) to (e) as modified by the rules in this section, and COLL 6.6.4R(2) is to be read accordingly.

4. (4)
   1. (a)

      The duty in COLL 6.6.14R(2) (Duties of the depositary and the authorised fund manager: investment and borrowing powers) requiring the authorised fund manager to rectify at its own expense a breach of COLL 5 (Investment and borrowing powers), or any provision of the instrument constituting the fund or the prospectus, does not apply to the extent that:

      1. (i)

         the breach relates to affected investments in the side pocket property; and

      2. (ii)

         the depositary is satisfied that it is not practicable for the authorised fund manager to comply with the relevant rule in COLL 5, the provision of the instrument constituting the fund or the prospectus.

   2. (b)

      COLL 6.6.14R(4), (5) and (6) do not apply to the extent that the breach falls within (a) above.

1When conducting an assessment of value for the purposes of COLL 6.6.20R (Assessment of value) in relation to a scheme that has a side pocket class, the authorised fund manager:

1. (1)

   must consider each of the matters included in COLL 6.6.21R (Table: minimum considerations – assessment of value) in relation to the scheme as a whole, including the side pocket class, but may adopt a proportionate approach to the assessment as it applies specifically to the side pocket class;

2. (2)

   in relation to the side pocket class, need not consider a matter included in COLL 6.6.21R if, in all the circumstances, it is not relevant to that class;

3. (3)

   must consider whether, to the extent that payments are being made out of the scheme property attributable to the side pocket class or are being accrued for that purpose, those payments:

   1. (a)

      are justified in terms of the value delivered to unitholders in the side pocket class; and

   2. (b)

      are not prejudicial to the interests of unitholders of other classes; and

4. (4)

   must consider whether it remains in unitholders’ best interests for the side pocket class to continue in operation.

1. (1)

   1COLL 6.7 (Payments) applies in relation to an authorised fund with a side pocket class subject to the modifications and additional requirements specified in this rule.

2. (2)

   The authorised fund manager must not impose any of the following charges or levies on unitholders of the side pocket class:

   1. (a)

      a preliminary charge or levy when the units in the side pocket class are issued;

   2. (b)

      a charge or levy on the redemption or cancellation of units;

   3. (c)

      a performance-related management fee.

3. (3)

   The authorised fund manager must prevent undue costs being charged to the scheme and its unitholders.

[Note: In relation to (3), see also COLL 6.6A.2R(5) (Duties of AFMs of UCITS schemes to act in the best interests of the scheme and its unitholders) and article 17 of the AIFMD level 2 regulation (Duty to act in the best interests of the AIF or the investors in the AIF and the integrity of the market).]

1. (1)

   1COLL 7.2 (Suspension and restart of dealings) applies in relation to a side pocket class subject to the modifications specified in this rule.

2. (2)

   The authorised fund manager may suspend dealings in units of a side pocket class, while continuing to deal in other classes of the scheme.

3. (3)

   If the authorised fund manager suspends dealings in accordance with (1), it is not required to carry out any request by a unitholder to convert units in the suspended side pocket class into units of another class in which dealing continues.

4. (4)

   COLL 7.2.1R applies to the suspension of dealings in units of a side pocket class under (2).