Contributed By Travers Smith LLP
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.