COLL 7 Annex 1 Matters to be considered by the authorised fund manager before creating a side pocket class

1.

Investment risk considerations

(1)

Whether there is agreement on which affected investments should be allocated to a side pocket class.

(2)

The possible impact of relevant sanctions regimes.

(3)

The authorised fund manager’s estimate of the likelihood of the affected investments achieving a realisable value within a range of timeframes.

(4)

Whether the authorised fund manager intends to invest in affected countries if the economic situation stabilises and relevant sanctions regimes allow it and, if so, how that might affect unitholders in the side pocket class.

(5)

Whether the authorised fund manager’s risk management function (see COLL 6.11 (Risk control and internal reporting)) has assessed the likely consequences for the authorised fund manager, the authorised fund and its unitholders if the authorised fund manager were to take no action to set up a side pocket class.

(6)

That there is a risk management plan which considers different scenarios for what might happen to the affected investments allocated to the side pocket class and how such scenarios would be dealt with.

2.

Costs

(1)

The authorised fund manager’s estimated one-off costs of establishing the side pocket class and whether these costs will be met by the authorised fund manager, or paid from the scheme property of the authorised fund, or apportioned between both.

(2)

The authorised fund manager’s estimated ongoing annual costs of operating the side pocket class, and the provision being made to pay these costs:

(a)

over various scenarios as to the duration of the class; and

(b)

(to the extent they differ) in relation to the scenarios considered by the risk management plan in paragraph 1(6) above.

(3)

Whether the authorised fund manager will take a fee for managing the side pocket class and, if so, what factors have been considered to determine whether it is set at a fair level and to prevent unitholders from being charged undue costs.

(4)

How the total costs, borne by a unitholder holding units in both the side pocket class and a class relating to unaffected investments, will compare to the total cost that the unitholder currently bears.

(5)

If the future total cost for unitholders is expected to be higher than the current cost, how this will be justified to unitholders against the uncertain benefit of a future realisation of value in the side pocket class.

3.

Legal and operational considerations

(1)

The authorised fund manager’s legal advice on the implications of setting up a side pocket class, having regard to s235(4) and, in the case of an ICVC, s236(3) of the Act (see the guidance in COLL 7.8.7G).

(2)

Whether the authorised fund’s auditor has been consulted and its view taken into account.

(3)

Whether the authorised fund manager is satisfied that all operational functions for which it is responsible, including fund accounting and transfer agency functions, are able to fully support the side pocket class.

(4)

The authorised fund manager’s assessment of the readiness of firms to implement and maintain arrangements for the side pocket class to operate effectively, such as those that arrange or deal in units in the authorised fund, providers of SIPPs and providers of linked funds.

4.

Longer-term investor considerations

(1)

The authorised fund manager’s policy for allowing unitholders to exit the class during its lifetime.

(2)

The authorised fund manager’s view of the likely future options for enabling the side pocket class to be terminated.

5.

Overall assessment

Whether the governing body of the authorised fund manager is satisfied that:

(1)

the potential benefits to unitholders of units in any side pocket class are proportionate to the estimated costs of establishing and running the class, including over the long term;

(2)

proceeding to set up the side pocket class will be in the best interests of the authorised fund and its unitholders; and

(3)

the depositary has been properly consulted and its view taken into account.