Part Xvii: Collective Investment Schemes
454.This Part comprises six chapters concerning collective investment schemes, including unit trusts, open-ended investment companies (“oeics”) and overseas schemes. It includes provisions relating to the authorisation of schemes, their trustees, managers and operators and also to the rules applicable to them. The Part also makes provision for overseas collective investment schemes which may be promoted in the United Kingdom:
Chapter I provides the relevant definitions for this Part. It also gives the Treasury the power to specify by order that certain arrangements will not constitute a collective investment scheme.
Chapter II prohibits authorised persons from promoting participation in a collective investment scheme unless an exemption applies. Whilst the provisions broadly continue the prohibition on authorised persons promoting collective investment schemes under the FS Act 1986, changes have been made to reflect the new financial promotion regime set out in section 21.
Chapter III contains the provisions relating to authorised unit trust schemes. These broadly follow the provisions of the FS Act 1986, although the Authority is to be given the power to approve changes to an authorised unit trust’s investment and borrowing powers. There are also provisions to allow for rule waivers and modifications, and to grant operators and trustees of authorised unit trust schemes the right to refer matters to the Tribunal in certain circumstances.
Chapter IV contains provisions which enable the Treasury broadly to continue the regime for oeics, and to make regulations concerning the establishment and regulation of other forms of oeic in the United Kingdom. Under the FS Act 1986, oeics which are incorporated and authorised in the United Kingdom must invest solely in transferable securities. The Act will allow the Treasury to make regulations concerning the creation and operation of a wider range of authorised oeics, so that they can invest in assets other than transferable securities. The Treasury may also, under the relevant provisions, make regulations concerning the incorporation of unauthorised oeics. This might, for example, be done in order to allow the formation of common investment funds for charitable purposes, or in the context of ethical investments.
Chapter V broadly carries forward provisions of the FS Act 1986 and allows three kinds of overseas scheme to be “recognised” and marketed in the United Kingdom. First, schemes constituted in other member states which meet particular requirements; second, schemes authorised in designated territories; and third, schemes constituted in other territories, but which are individually recognised.
Chapter VI sets out the powers of investigation which will apply in relation to authorised unit trust and overseas schemes. It is intended that the principal provisions concerning investigations of oeics will be set out in the proposed Treasury regulations under Chapter IV.
Chapter I: Interpretation
Section 236: Open-ended investment companies
455.This section defines an open-ended investment company. This is done by reference to a “property” and an “investment” test (set out in subsections (2) and (3) respectively). Both tests must be satisfied in order for a corporate body to meet the definition of an open-ended investment company. The “property” test is carried over from the definition in section 75(8)(a) of the FS Act 1986.
456.The “investment” test is framed by reference to a hypothetical reasonable investor’s expectations, were he to participate in the scheme. A reasonable investor should expect to realise his investment within a reasonable period, and expect that the way in which this would be done would be calculated by reference to the value of the scheme property. In determining whether this condition is satisfied, certain actual or potential redemptions of his holdings are to be ignored, including those under certain provisions of the Companies Act and corresponding provisions in EEA states. Under subsection (4)(d), the Treasury may by order designate provisions in non-EEA states under which redemptions may be made and which may also be left out of the account.
457.Subsection (5) contains a Treasury order-making power to amend the definition of an open-ended investment company for the purposes of Part XVII.
Chapter II: Restrictions on promotion
Section 238: Restrictions on promotion
458.This section contains the basic marketing prohibition and some exemptions from it. The main exemption is for schemes which are marketed other than to the general public. Other exemptions include promotions made in respect of authorised unit trust schemes, authorised oeics and recognised overseas schemes. The marketing prohibition applies to communications which originate outside the United Kingdom if the communication is capable of having an effect in the United Kingdom.
459.Subsection (6) enables the Treasury by order to specify circumstances in which the subsection (1) prohibition does not apply. For incoming promotions, subsection (7) makes it clear that it will be possible to make exemptions dealing with promotions originating outside the United Kingdom even if they are capable of having an effect in the United Kingdom. Thus, subsection (7) makes clear that the order-making power in subsection (6) enables the Treasury to adjust the scope of the restriction on promotion of collective investment schemes by authorised persons to take full account of international and technological developments.
460.The term “promotion otherwise than to the general public” is amplified in subsection (10) and includes promotions which are designed, so far as possible, to reduce the risk of participation by persons for whom it would be unsuitable. The prohibition on marketing to the general public will not therefore necessarily be breached if a promotion is inadvertently received by a member of the general public.
Section 239: Single property schemes
461.A single property scheme is, broadly, a collective investment scheme which relates to a single building or a group of buildings managed as a single enterprise. This section gives the Treasury power to make regulations exempting the promotion of participation in single property schemes to the general public from the prohibition in section 238. If the Treasury make regulations under this section, the Authority may then make rules imposing duties on the operator and trustee or depositary of schemes exempted under the regulations.
Section 240: Restriction on approval of promotion
462.This is a new provision designed to prevent an authorised person from approving a financial promotion under section 21 if the authorised person would not himself be permitted to make the communication under section 238.
Section 241: Actions for damages
463.If an authorised person contravenes a requirement under section 238 or 240, a private person, and other persons falling within such categories as may be prescribed in regulations made by the Treasury, who suffers loss as a result may claim damages.
Chapter III: Authorised unit trust schemes
Section 242: Applications for authorisation of unit trust schemes
464.Applications for an order declaring a unit trust scheme to be authorised must be made to the Authority by the manager and trustee of the scheme. The manager and trustee must be different persons. The section gives the Authority broad scope to determine the form and content of the application, including further information to be contained in it.
Section 243: Authorisation orders
465.If the conditions referred to in the section are met, the Authority may make an authorisation order declaring a unit trust scheme to be authorised. The conditions reflect certain requirements specified in the UCITS Directive which establishes a passporting regime whereby certain types of authorised collective investment scheme established in one EEA State may generally be entitled to equivalent authorisation in others. The section includes requirements that:
the manager and trustee must be bodies corporate which are independent of each other and incorporated in the United Kingdom or another EEA State;
they must be authorised persons holding the appropriate permissions;
the scheme must comply with the requirements of the trust scheme rules (referred to at section 247, below); and
participants must be able to have their units redeemed at a price related to the net asset value of the scheme property or be able to sell their units on an exchange at a similar price.
Section 244: Determination of applications
466.This section sets out the time limits within which applications should be determined (and specifies that completed applications shall be determined within six months). Applicants may withdraw their application at any time before the Authority makes a determination.
Section 245: Procedure when refusing an application
467.If the Authority wishes to refuse an application, it must issue each of the manager and trustee with a warning notice. Either the manager or the trustee may refer a refusal to the Tribunal.
Section 246: Certificates
468.If an authorised unit trust scheme meets with the requirements of the UCITS Directive, the manager or trustee of the scheme can request that the Authority issue a certificate to that effect. The certificate will be needed if the authorised unit trust scheme is to passport into other European jurisdictions.
Section 247: Trust scheme rules
469.This section permits the Authority to make rules (known as “trust scheme rules”) concerning the constitution, management and operation of authorised unit trust schemes. These cover broadly the same matters as constitution and management regulations under section 81 of the FS Act 1986, but without the arrangements under that legislation whereby the Treasury retained a degree of control over certain constitution and management matters (such as the investment and borrowing powers of authorised unit trusts). The Authority has direct responsibility for these matters under this section.
470.The trust scheme rules are binding on the manager, trustee and participants independently of any provisions contained in the trust deed. Participants can seek to enforce the trust scheme rules against the manager or trustee as if the rules were provisions contained directly in the trust deed.
471.The Treasury has the power to modify the Authority’s rule-making powers if there is a change in the company law relating to the rights of beneficial, but not legal, owners of shares. This would enable the rights of nominee holders in authorised unit trusts to be aligned to those of shareholders in companies should the need arise.
Section 248: Scheme particulars rules
472.These are rules which the Authority may make requiring the manager of an authorised unit trust scheme to give details of the scheme to the Authority and to publish or make available to the public on request certain particulars, including changes, concerning the scheme.
473.The scheme particulars rules can provide for compensation to be paid to certain people (described as “qualifying persons”) if they have suffered loss because of an untrue or misleading statement in the particulars or because of an omission from them. Qualifying persons include people who may have a beneficial, but not legal, interest in the scheme (for example, beneficiaries of a trust where the trustees hold units in the scheme).
Section 249: Disqualification of auditor for breach of trust scheme rules
474.The Authority may disqualify an auditor from auditing authorised unit trust schemes or authorised oeics if the auditor does not comply with the trust scheme rules. Warning and decision notice procedures will apply, as well as rights to refer a decision to the Tribunal.
Section 250: Modification or waiver of rules
475.This allows the Authority to modify or waive the application of any of the trust scheme rules or scheme particulars rules in respect of authorised unit trusts. If there is a modification or waiver of rules under this section, certain of the provisions of section 148 (relating to the modification or waiver of various other of the Authority’s rules and providing for the circumstances in which waivers or modifications will be granted) will apply.
Section 251: Alteration of schemes and changes of manager or trustee
476.Alterations to an authorised unit trust scheme or a change in the manager or trustee may not take place without the Authority’s approval, or the Authority not notifying its disapproval. New managers or trustees must satisfy the requirements specified in section 243.
Section 252: Procedure when refusing approval of change of manager or trustee
477.If the Authority proposes to refuse to approve the replacement of the trustee or manager, a warning notice must be given. If the Authority proposes to refuse to approve changes to the scheme, warning and decision notice procedures will apply and the matter can be referred to the Tribunal.
Section 253: Avoidance of exclusion clauses
478.As a result of this section, if a trust deed for an authorised unit trust scheme seeks to avoid the manager’s or trustee’s duty to exercise due care, the deed will be ineffective.
Section 254: Revocation of authorisation order otherwise than by consent
479.The Authority may revoke an order authorising a unit trust in the circumstances specified in the section. These include any of the following situations:
the manager or trustee has contravened a requirement imposed by the Act or the Authority’s rules;
either of them has given the Authority misleading information;
the requirements for making an authorisation order (referred to in section 243) are no longer met;
the scheme has been inactive for 12 months or more; or
it is desirable in the interests of participants to revoke the scheme’s authorisation.
Section 255: Procedure
480.If the Authority wishes to revoke an authorisation order, it must go through the warning and decision notice procedure, giving notice to both the manager and trustee. Either of them may refer the decision to the Tribunal.
Section 256: Requests for revocation of authorisation order
481.The Authority can revoke an authorisation order where the manager or trustee requests it to, but it can also refuse to revoke authorisation where it considers that refusal would be in the interests of participants, or that the public interest requires an investigation before authorisation is revoked. Warning and decision notice procedures will apply and the decision may be referred to the Tribunal.
Section 257: Directions
482.The Authority may give directions requiring the manager of the scheme to cease the issue or redemption of units, or to require the manager and trustee of the scheme to wind it up in the circumstances specified in the section (which are broadly similar to those specified as grounds for revoking a scheme’s authorisation under section 254). If a person contravenes a direction under this section, private persons, and others falling within such categories as may be prescribed in regulations made by the Treasury, who suffer loss as a result may be able to bring an action. Once a direction has been given, the Authority may revoke or vary that direction, either of its own accord, or on the application of the manager or trustee.
Section 258: Applications to the court
483.In cases where the Authority is able to give a direction under section 257, it may also apply to the court for an order removing and replacing the manager or the trustee, or simply removing them and appointing an authorised person to wind up the scheme.
Section 259: Procedure in giving directions under section 257 and varying them on Authority’s own initiative
484.This section sets out the procedure the Authority must follow when it proposes to give, or on its own initiative vary, a direction in relation to an authorised unit trust scheme under section 257. This is the same written notice procedure as described in relation to section 53, except that in this case separate notices must be given to both the manager and trustee of the scheme. If a notice under this section imposes a requirement for the manager of the scheme to cease issue or redemption of units, it will either give a date when the requirement ends, or else provide for the requirement to continue until a further notice is given. If a notice under this section imposes a requirement to wind up a scheme, the scheme must be wound up either by a date given in the notice or else (if no date is given) as soon as possible.
Section 260: Procedure: refusal to revoke or vary direction
485.If the manager or trustee applies to the Authority for it to revoke or vary a direction given under section 257, but the Authority proposes to refuse to do so, the warning and decision notice procedures will apply. The decision may be referred to the Tribunal.
Section 261: Procedure: revocation of direction and grant of request for variation
486.If the Authority decides to revoke a direction under section 257, or to vary a direction in accordance with a request, it must give written notice of that fact. The Authority may publish information about the revocation or variation of the direction.
Chapter IV: Open-ended investment companies
Section 262: Open-ended investment companies
487.This section creates the broad framework for Treasury regulations relating to the establishment, carrying on, and regulation, of oeics. It provides a wide-ranging and non-exhaustive list of matters which the regulations may provide for. These include imposing criminal liability, conferring functions on the Authority (including rule-making powers and power to waive or modify rules) and power to modify or exclude any statute or rule of law. In particular, the regulations may revoke the existing regulations governing oeics and provide for transitional arrangements for “grandfathering” under those regulations.
Section 263: Amendment of section 716 Companies Act 1985
488.This section amends the Companies Act, so that the prohibition on formation of companies with more than 20 members other than under the Companies Act will not apply to oeics incorporated by virtue of regulations made the by Treasury under section 262.
Chapter V: Recognised overseas schemes
Section 264: Schemes constituted in other EEA States
489.This section relates to the ability of collective investment schemes constituted in other EEA States to passport into the United Kingdom. EEA schemes will be recognised if:
they satisfy requirements prescribed by Treasury regulations;
the operator of the scheme gives notice to the Authority of the proposal to invite UK persons to participate in the scheme; and
the Authority does not give notice that the way in which the invitation is to be made does not comply with the relevant UK law.
Section 265: Representations and references to the Tribunal
490.This section sets out the procedure if the Authority gives notice that it does not consider that the proposed invitations will comply with UK law, and representations are made to the Authority in response. The procedures allow for rights of reference to the Tribunal where the Authority issues a decision notice confirming that the way in which the proposed invitations are to be made does not comply with UK law.
Section 266: Disapplication of rules
491.Rules made by the Authority will not generally apply to the operator, trustee or depositary of a recognised scheme under section 264. The exceptions are financial promotion rules, and rules relating to the maintenance of facilities in the United Kingdom (under section 283(1)).
Section 267: Power of authority to suspend promotion of scheme
492.Although it cannot suspend an EEA scheme’s recognition, the Authority can suspend its promotion to the public if it appears that the operator has contravened financial promotion rules. The warning and decision notice procedure will apply and the Authority will be required to notify the scheme’s home State authority if it decides to give a direction under this section. The operator will have a right to refer the decision to the Tribunal.
493.Under this section, the Authority may also revoke, as well as vary, a direction suspending the promotion of an EEA scheme, where specified conditions are met.
Section 268: Procedure in giving directions under section 267 and varying them on Authority’s own initiative
494.This section establishes the procedure the Authority must follow when it proposes to give, or on its own initiative vary, a direction under section 267 suspending the promotion of a scheme which is recognised under section 264. This is the same written notice procedure as described in relation to section 53 except that the notices in question are to be given to the operator of the scheme concerned. In addition the Authority is required, when giving notice under this section, to inform the competent authorities in the scheme’s home State.
Section 269: Procedure on application for variation or revocation of direction
495.This section sets out the procedure the Authority must follow on receipt of an application under section 267(4) or (5) for variation or revocation of a direction suspending the promotion of a scheme which is recognised under section 264. Where an application is granted in full, simple written notice is to be given under subsection (4). The same applies where the Authority decides to revoke a direction on its own initiative under subsection (5). Where the Authority proposes to refuse the application, or proposes to vary the direction in a way other than that requested in the application, the applicant is entitled to receive a warning notice setting out the reasons for the decision, the standard opportunity to make representations, a decision notice and the right to refer the matter to the Tribunal if still aggrieved by the decision. Notices under this section are to be given to the operator of the scheme concerned, but in addition the Authority is required to inform the competent authorities in the scheme’s home State.
Section 270: Schemes authorised in designated countries or territories
496.Schemes managed in, and authorised under, the law of non-EEA territories can be recognised under this section. In order to be recognised, the relevant territory needs to be designated by an order made by the Treasury, and the Authority must give its approval to the scheme being recognised. The Treasury may not make an order designating a territory unless it is satisfied that the relevant overseas law under which the scheme is authorised and supervised affords at least equivalent protection to that provided by the UK law on collective investment schemes.
497.In considering whether to make an order designating a country or territory under this section, the Treasury must ask the Authority for a report on the law and practice of the country or territory in question and on any arrangements it has made to co-operate with the authorities there.
Section 271: Procedure
498.If the Authority proposes to refuse to approve a scheme under section 270, it must give the operator a warning notice. The decision notice procedure will apply, and the decision may be referred to the Tribunal.
Section 272: Individually recognised overseas schemes
499.This section allows the Authority to recognise schemes which are not managed in an EEA country or a designated territory.
500.In order to be recognised, the Authority must be satisfied as to various matters, including the adequacy of protection for the participants in the place where the scheme is established, the adequacy of the constitution and management and of the powers and duties of the operator, trustee and depositary (if any), and that those persons are either authorised (with appropriate permissions) or, if not authorised, fit and proper persons. In addition, overseas schemes will only be recognised under this section if they are oeics or schemes where the operator is a body corporate.
Section 273: Matters that may be taken into account
501.This section specifies matters which the Authority can take into account when considering whether the operator, trustee or depository of an individually recognised scheme is fit and proper.
Section 274: Applications for recognition of individual schemes
502.The Authority has broad scope to specify the form and content of applications (which must be made by the operator) and to seek additional information before determining an application.
Section 275: Determination of applications
503.This section sets out the time periods which will apply for the determination of an application. Completed applications are to be determined within six months.
Section 276: Procedure when refusing an application
504.The Authority must go through the warning and decision notice procedure if it proposes to refuse an application. The applicant may refer the refusal to the Tribunal.
Section 277: Alteration of schemes and changes of operator, trustee or depository
505.Changes to the scheme itself cannot be made unless the operator has given notice to the Authority, and the Authority has either approved the proposal, or not notified its disapproval. As for the replacement of the operator, trustee or depositary, at least one month’s notice must be given to the Authority either by the person being replaced, or the person proposing to replace him, but there is no express provision for the Authority to approve or disapprove the replacements.
Section 278: Rules as to scheme particulars
506.The Authority may make rules imposing duties on the operators of recognised schemes which are constituted in designated territories under section 270 or which are individually recognised under section 272. These rules broadly correlate to scheme particulars rules for authorised unit trusts.
Section 279: Revocation of recognition
507.Recognition of schemes constituted in designated territories or individually recognised schemes can be revoked in the circumstances set out in this section. These are broadly similar to the grounds for revocation of an authorisation order under section 254.
Section 280: Procedure
508.If the Authority proposes to revoke recognition under section 279, the warning and decision notice procedure will apply. Notice must be given to the operator, and if any, the trustee and depositary. The decision may be referred to the Tribunal.
Section 281: Directions
509.Instead of proposing to revoke recognition under section 279, the Authority can effectively direct that a scheme’s recognition will be suspended.
Section 282: Procedure on giving directions under section 281 and varying them otherwise than as requested
510.This section establishes the procedure the Authority must follow when it proposes to give a direction by virtue of its powers of intervention against schemes recognised under sections 270 and 272. This is the same written notice procedure as described in relation to section 53, except that in this case separate notices must be given to both the operator and (if there is one) to the trustee or depository of the scheme.
Section 283: Facilities and information in the UK
511.The Authority may make rules requiring operators of all recognised schemes to maintain facilities in the United Kingdom. It may also require the operator of a recognised scheme to include explanatory information in financial promotions which name the scheme.
Chapter VI: Investigations
Section 284: Power to investigate
512.The Authority or the Secretary of State can appoint a person to carry out investigations into collective investment schemes. The provisions do not generally extend to the investigation of oeics. Provision concerning those investigations can be made in Treasury regulations under section 262.
513.The person carrying out the investigation has powers to investigate other persons or matters where necessary or relevant. The provisions concerning the conduct of investigations set out in section 170 will generally apply and statements made to the investigator may be admissible in proceedings in the circumstances set out in section 174. Persons other than the managers, trustees, operators or depositaries of schemes, or directors of oeics, will not generally be required to disclose information subject to the bankers’ duty of confidentiality. The power of entry under section 176 will be available to back up information requirements imposed under this section. The provisions of section 177 will also apply, so that failure to comply with a requirement imposed in connection with an investigation can be certified to a court and falsification or concealment will be an offence.