Contributed By Travers Smith LLP
As stated above, a closed ended fund in the UK will almost certainly be an AIF for the purposes of the AIFMD. As such, the AIF's manager will be an alternative investment fund manager (AIFM) for the purposes of the AIFMD and will need to be authorised to carry out AIF management in respect of that vehicle. Any person who carries on the activity of managing an AIF in the UK without being duly authorised, and in the absence of an exclusion, commits an offence. In addition, if he or she has entered into an agreement with another person (eg, an investor) in the course of that activity, this agreement is unenforceable against that other party, who is entitled to receive his or her money back, and to compensation for any loss.
An investment trust could be self-managed or managed by an external manager. The board of an externally managed ITC will generally consist of non-executive directors, the majority of whom must be independent of the investment manager. In many cases investment trusts will now have no manager representative on the board, due to its unpopularity with investors.
Open- ended Funds
The manager of open-ended authorised funds must be authorised by the FCA, with permission to either "manage a UCITS" or "manage an authorised AIF". A management company authorised in another EEA state may also manage an open-ended fund in the UK.
Each open-ended fund must also have a depositary which, in the UK, is a regulated activity for which the depositary must hold the appropriate FCA permissions.
It is possible for EEA-authorised AIFMs and UCITS managers to provide management services to a UK domiciled fund by exercising management passport rights available under the AIFMD or UCITS Directive, as the case may be. In order to exercise these rights, the manager must make a notification to its home state’s competent authority.
Generally, a fund delegates investment management and it is usual to see delegation to either a FCA regulated investment management firm or to an investment manager domiciled outside of the UK. Any firm applying for authorisation or registration by the FCA must have its head office in the UK. Although the FCA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control.
A non-EEA manager intending to market under the UK national private placement regime must give notice to the FCA under the AIFM Directive and conform to certain transparency obligations. In the future, non-EEA managers may be able to benefit from a marketing passport under the AIFM Directive if the European Commission has adopted a delegated act extending the availability of the passport to the jurisdiction in which they are based. The UK has adopted the Alternative Investment Fund Managers (Amendment) Regulations 2013 (SI 2013/1797), which will give effect to passporting rights of non-EEA managers in the UK, the provisions of which are contingent upon the European Commission first adopting the relevant delegated act.
In respect of closed-ended funds, there are three types of licence which are available to an AIFM which has its registered office in the UK:
There are separate application forms in respect of each of these categories. The type of licence which is applicable to the manager will depend on the total amount of assets it has under management and the nature of the AIFs managed.
In respect of open-ended funds, marketing can only be undertaken once the required documents have been filed with the FCA.
The activity of marketing or promoting securities or other investments is not in itself a regulated activity requiring any form of licence in the UK. However, there are circumstances where someone whose main aim is to either to make promotions for their own purposes or on behalf of others (or to help others to make promotions) may, in conjunction with the marketing or promotion, be engaged in regulated activities. In this regard the most likely regulated activities under the Regulated Activities Order are those of "arranging deals in investments" or "advising on investments". A firm will require authorisation, with specific permission for the relevant activity, to the extent that it is deemed to carry on such activities in the UK.
In view of this, fund marketing activities in the UK are generally conducted only by authorised persons. Any person conducting marketing activities in relation to a fund should consider whether authorisation is required and, if it is authorised, whether it has the appropriate permissions from the FCA to undertake these activities.
As stated above, the two main investor categories in relation to the distribution of funds in the UK are "professional investors" and "retail investors". A "professional investor" means an investor which is considered to be a "professional client" (ie, a "per se professional client" or an "elective professional client", in each case within the meaning of MiFID).
An investor will be a "per se professional client" if it fulfils one of a number of objective criteria listed in MiFID. The list includes regulated financial entities, large undertakings, governments and public bodies and investors whose main activity is to invest in financial instruments.
Any investor which does not satisfy any of the "per se" criteria in MiFID, will be categorised as a "retail client", unless it can be treated as an "elective professional client". To be able to do this the AIFM must assess the expertise, experience and knowledge of the investor and whether this makes him or her capable of making his or her own investment decisions and understanding the risks involved (the "qualitative test"). The investor must further pass the "quantitative test", meaning that the investor has satisfied two out of the three following requirements:
An investor satisfying the relevant qualitative and quantitative tests and wishing to opt up must be given a clear written warning of the protections and investor compensation rights he or she may lose and he or she must state in writing that he or she is aware of the consequences of losing these protections and wishes to be treated as a "professional client".
Open-ended funds can only be distributed to retail investors. Private closed-ended funds tend to be marketed only to non-retail investors. Listed closed-ended funds are available to both professional and retail investors.
The FCA is regarded as being co-operative and regularly publishes guidance on relevant regulatory matters.