FCA Handbook - COBS 18.5 Residual CIS operators and small authorised UK AIFMs

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COBS 18.5 Residual CIS operators and small authorised UK AIFMs

Application

Subject to COBS 18.5.1A R, this section applies to a firm which is:

(1)
[deleted]
(2)
[deleted]
(3)
a small authorised UK AIFM; or
(4)
a residual CIS operator.
(5)
[deleted]

COBS 18.5.3 R (2) and COBS 18.5.5 R to COBS 18.5.18 E do not apply to a small authorised UK AIFM of an unauthorised AIF which is not a collective investment scheme.

Application or modification of general COBS rules

A firm when it is carrying on scheme management activity or, for an AIFM, AIFM investment management functions:

(1)
must comply with the COBS rules specified in the table, as modified by this section; and

(2)

need not comply with any other rule in COBS.

Table: Application of conduct of business rules
Chapter, section, rule	Small authorised UK AIFM and a residual CIS operator
1 (Application)	Applies
2.1.1R (The client’s best interests rule)	Applies
2.3 (Inducements relating to business other than MiFID, equivalent third country or optional exemption business)	Applies
2.3B (Inducements and research)	Applies, as modified by COBS 18 Annex 1
2.4 (Agent as client and reliance on others)	Applies
4.2.1R, 4.2.2G and 4.2.3G (The fair, clear and not misleading rule)	Applies
5.2 (E-commerce)	Applies
11.2 (Best execution for AIFMs and residual CIS operators)	Applies to a small authorised UK AIFM of an authorised AIF. Applies (as modified by COBS 18.5.4R) to a small authorised UK AIFM of an unauthorised AIF or residual CIS operator.
11.3 (Client order handling)	Applies
16.3 (Periodic reporting)	Applies to a small authorised UK AIFM of an unauthorised AIF which is not a collective investment scheme, as modified by COBS 18.5.4BR. Otherwise does not apply.
18.5 (Residual CIS operators and small authorised UK AIFMs)	Applies
18 Annex 1 (Research and inducements for collective portfolio managers)	Applies (subject to COBS 18.5.3CR)
18 Annex 2 (Record keeping: client orders and transactions)	Applies

(1)
For activities which are not scheme management activity or, for an AIFM, AIFM investment management functions, the COBS rules apply under the general application rule, as modified in COBS 1 Annex 1.
(2)
This may include, for example, activities relating to the administration of the fund and marketing.

General modifications

Where COBS rules specified in the table in COBS 18.5.2 R apply to a firm carrying on scheme management activity or, for an AIFM, AIFM investment management functions, the following modifications apply:

(1)
subject to (2), references to customer or client are to be construed as references to any fund for which the firm is acting or intends to act;
(2)
in the case of a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator, when a firm is required by the rules in COBS to provide information to, or obtain consent from, a customer or client, the firm must ensure that the information is provided to, or consent obtained from, an investor or a potential investor in the fund as the case may be; and
(3)
references to the service of portfolio management in COBS 11.2 (Best execution for AIFMs and residual CIS operators) and 11.3 (Client order handling) are to be readas references to the management by a firm of financial instruments held for or within thefund.
(4)
[deleted]

Research and inducements

Subject to COBS 18.5.3CR, a firm must comply with COBS 18 Annex 1 (Research and inducements for collective portfolio managers) when executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund.

COBS 18 Annex 1 does not apply in relation to an AIF or CIS which in accordance with its core investment policy:

(1)
does not generally invest in financial instruments that can be:
1. (a)
  registered in a financial instruments account opened in the books of a depositary; or
2. (b)
  physically delivered to the depositary; or
(2)
generally invests in issuers or non-listed companies to potentially acquire control over such companies, either individually or jointly with other funds.

Modification of best execution

The best execution provisions in COBS 11.2 (Best execution for AIFMs and residual CIS operators) do not apply to a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator of a fund whose fund documents include a statement that best execution does not apply in relation to the fund and in which:

(1)
no investor is a retail client; or
(2)
no current investor in the fund was a retail client when it invested in the fund.

Modification of periodic reporting requirements

A small authorised UK AIFM of an unauthorised AIF which is not a collective investment scheme must comply with COBS 16.3 (Periodic reporting) with references to managing investments to be construed as providing AIFM investment management functions.

Scheme documents for an unauthorised fund

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator must not accept a retail client as an investor in the fund unless it has taken reasonable steps to offer and, if requested, provide to the potential investor, fund documents which adequately describe how thefund is governed.

Prohibition on issue of bearer units

The effect of section 241A of the Act is that no bearer units in a collective investment scheme may be issued, converted or cancelled from 1 January 2021. However, the Bearer Certificates (Collective Investment Schemes) Regulations 2020 (SI 2020/1346) contain transitional provisions for the conversion of bearer units to registered units and the cancellation of bearer units on or before 1 January 2022.

Distance marketing

Firms should also be aware that if they are carrying on distance marketing activity from an establishment in the UK, with or for a consumer in the UK, COBS 5.1 applies specific requirements for that activity.

Format and content of fund documents

The fund documents required under COBS 18.5.5 R may consist of any number of documents provided that it is clear that collectively they constitute the fund documents and provided the use of several documents in no way diminishes the significance of any of the statements which are required to be given to the potential investor.

Where a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator is required to publish a product summary, only information that is additional to that contained in a product summary needs to be disclosed under COBS 18.5.5R.

The fund documents of an unauthorised fund managed by a small authorised UK AIFM or a residual CIS operator (if those fund documents exist) should make it clear that if an investor is reclassified as a retail client, this reclassification will not affect certain activities of the firm. In particular, despite such a reclassification, the firm will not be required to comply with the best execution provisions. It should be noted that there is no requirement that fund documents must be produced by a small authorised UK AIFM of an unauthorised fund or a residual CIS operator unless they are required to prepare a product summary under DISC.

Where the fund is an unauthorised fund managed by a small authorised UK AIFM or a residual CIS operator and no current investor in the fund was a retail client when it invested in the fund, the fund documents must include a statement that:

(1)
explains that if an investor is reclassified as a retail client subsequent to investing in the fund, then the firm may continue to treat all investors in the fund as though they were not retail clients;
(2)
explains that if an investor is reclassified as a retail client subsequent to investing in the fund, then the modification of best execution (see COBS 18.5.4 R) will continue to apply to that fund; and
(3)
explains that, in the event of such a reclassification, the firm will not be required to provide best execution in relation to the fund.

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator will still have to comply with other COBS provisions as a result of the reclassification of an investor as a retail client. For example, the firm must provide periodic statements to investors who are retail clients in an unauthorised fund (see the rule on periodic statements for an unauthorised fund (COBS 18.5.11 R)).

A small authorised UK AIFM that uses a sustainability label, or one of the terms in ESG 4.3.2R(2) in accordance with ESG 4.3.2R(1), in relation to a UK AIF is reminded of its obligations in ESG 5.3 to ESG 5.5 relating to the preparation of Part A of a public product-level sustainability report.

Adequate information

(1)
In order to provide adequate information to describe how the fund is governed, a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator should include in the fund documents a provision about each of the items of relevant information set out in the following table (Content of fund documents).
(2)
Compliance with (1) may be relied on as tending to establish compliance with COBS 18.5.5 R.
(3)
Contravention of (1) may be relied on as tending to establish contravention of COBS 18.5.5 R.

Table: Content of fund documents

Thefund documents should include provision about:
(1)	Regulator The firm statutory status in accordance with GEN 4 Annex 1 R (Statutory status disclosure);
(2)	Services the nature of the services that the firm will provide;
(3)	Payments for services details of any payment for services payable by the fund or from the property of the fund or investors in the fund to the firm, including where appropriate:
	(a)	the basis of calculation;
	(b)	how it is to be paid and collected;
	(c)	how frequently it is to be paid; and
	(d)	whether or not any other payment is receivable by the firm (or to its knowledge by any of its associates) in connection with any transactions effected by the firm with or for the fund, in addition to or in lieu of any fees;
(4)	Commencement when and how the firm is appointed;
(5)	Accounting the arrangements for accounting to the fund or investors in the fund for any transaction effected;
(6)	Termination method how the appointment of the firm may be terminated;
(7)	Complaints procedure how to complain to the firm and a statement that the investors in the fund may subsequently complain direct to the Financial Ombudsman Service;
(8)	Compensation whether or not compensation may be available from the compensation scheme should the firm be unable to meet its liabilities, and information about any other applicable compensation scheme; and, for each applicable compensation scheme, the extent and level of cover and how further information can be obtained;
(9)	Investment objectives the investment objectives for the portfolio of the fund;
(10)	Restrictions
	(a)	any restrictions on:
		(i)	the types of investments or property which may be included in the portfolio of the fund;
		(ii)	the markets on which investments or property may be acquired for the portfolio of the fund;
		(iii)	the amount or value of any one investment or asset, or on the proportion of the portfolio of the fund which any one investment or asset or any particular kind of investment or asset may constitute; or
	(b)	that there are no such restrictions;
(11)	Holding fund assets
	(a)	if it is the case, that the firm will:
		(i)	hold money on behalf of the fund or be the custodian of investments or other property of the fund; or
		(ii)	arrange for some other person to act in either capacity and, if so, whether that person is an associate of the firm identifying that person and describing the nature of any association; and
	(b)	in either case:
		(i)	how any money is to be deposited;
		(ii)	the arrangements for recording and separately identifying registrable investments of the fund and, where the registered holder is the firm's own nominee, that the firm will be responsible for the acts and omissions of that person;
		(iii)	the extent to which the firm accepts liability for any loss of the investment of the fund;
		(iv)	the extent to which the firm or any other person mentioned in (11)(a)(ii), may hold a lien or security interest over investments of the fund;
		(v)	where investments of the fund will be registered collectively in the same name, a statement that the entitlements of the fund may not be identifiable by separate certificates or other physical documents of title, and that, should the firm default, any shortfall in investments of the fund registered in that name may be shared proportionately among all fund and any other customers of the firm whose investments are so registered;
		(vi)	whether or not investments or other property of the fund can be lent to, or deposited by way of collateral with, a third party and whether or not money can be borrowed on behalf of the fund against the security of those investments or property and, if so, the terms upon which they may be lent or deposited;
		(vii)	the arrangements for accounting to the fund for investments of the fund, for income received (including any interest on money and any income earned by lending investments or other property) of the fund, and for rights conferred in respect of investments or other property of the fund;
		(viii)	the arrangements for determining the exercise of any voting rights conferred by investments of the fund; and
		(ix)	where investments of the fund may be held by an eligible custodian outside the United Kingdom, a general statement that different settlement, legal and regulatory requirements, and different practices relating to the segregation of those investments, may apply;
(12)	Clients' money outside the United Kingdom if it is the case, that the firm may hold the money of the fund in a client bank account outside the United Kingdom;
(13)	Exchange rates if a liability of the fund in one currency is to be matched by an asset in a different currency, or if the services to be provided to the firm for the fund may relate to an investment denominated in a currency other than the currency in which the investments of the fund are valued, a warning that a movement of exchange rates may have a separate effect, unfavourable or favourable, on the gain or loss otherwise made on the investments of the fund;
(14)	Stabilised investments if it is the case, that the firm is to have the right under the fund documents to effect transactions in investments the prices of which may be the subject of stabilisation;
(15)	Conflict of interest and material interest if it is the case, that the firm is to have the right under the agreement or instrument constituting the fund to effect transactions on behalf of the fund in which the firm has directly or indirectly a material interest (except for an interest arising solely from the investment of the firm as agent for the fund), or a relationship of any description with another party which may involve a conflict with the firm duty to the fund, together with a disclosure of the nature of the interest or relationship;
(16)	Research and inducements how the firm intends to pay for research. For example, whether the firm proposes to pay for research directly or to use a research payment account;
(17)	Acting as principal if it is the case, that the firm may act as principal in a transaction with the fund;
(18)	Stock lending if it is the case, that the firm may undertake stock lending activity with or for the fund specifying the type of assets of the fund to be lent, the type and value of relevant collateral from the borrower and the method and amount of payment due to the fund in respect of the lending;
(19)	Transactions involving contingent liability investments
	(a)	if it is the case, that the agreement orinstrument constituting the fund allows the firm to effect transactions involving contingent liability investments for the account of the portfolio of the fund;
	(b)	if applicable, whether there are any limits on the amount to be committed by way of margin and, if so, what those limits are; and
	(c)	if applicable, that the firm has the authority to effect transactions involving contingent liability investments otherwise than under the rules of a recognised investment exchange and in a contract traded thereon;
(20)	Periodic statements
	(a)	the frequency of any periodic statement (this should not be less than once every 12 months) except where a periodic statement is not required (see COBS 18.5.13R); and
	(b)	whether those statements will include some measure of performance, and, if so, what the basis of that measurement will be;
(21)	Valuation the bases on which assets comprised in the portfolio of the fund are to be valued;
(22)	Borrowings if it is the case, that the firm may supplement the funds in the portfolio of the fund and, if it may do so:
	(a)	the circumstances in which the firm may do so;
	(b)	whether there are any limits on the extent to which the firm may do so and, if so, what those limits are; and
	(c)	any circumstances in which such limits may be exceeded;
(23)	Underwriting commitments if it is the case, that the firm may for the account of the portfolio of the fund underwrite or sub-underwrite any issue or offer for sale of securities, and:
	(a)	whether there are any restrictions on the categories of securities which may be underwritten and, if so, what these restrictions are; and
	(b)	whether there are any financial limits on the extent of the underwriting and, if so, what these limits are;
(24)	Investments in other funds whether or not the portfolio may invest in fund either managed or advised by the firm or by an associate of the firm or in a fund which is not a regulated collective investment scheme;
(25)	Investments in securities underwritten by the firm whether or not the portfolio may contain securities of which any issue or offer for sale was underwritten, managed or arranged by the firm or by an associate of the firm during the preceding 12 months.

Periodic statements for an unauthorised fund

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator must, subject to the exceptions from the requirement to provide a periodic statement, provide to investors in the fund, promptly and at suitable intervals, a statement in a durable medium which contains adequate information on the value and composition of the portfolio of the fund at the beginning and end of the period of the statement.

Promptness, suitable intervals and adequate information

(1)
A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator should act in accordance with the provisions in the right hand column of the periodic statements table (see COBS 18.5.15E) to fulfil the requirement to prepare and issue periodic statements indicated in the left hand column against these provisions.
(2)
Compliance with (1) may be relied on as tending to establish compliance with the requirement to prepare and issue periodic statements.
(3)
Contravention of (1) may be relied on as tending to establish contravention of the requirement to prepare and issue periodic statements.

Exceptions from the requirement to provide a periodic statement

(1)
A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator need not provide a periodic statement:
1. (a)
  1. (i)
    to an investor in the fund who is a retail client ordinarily resident outside the United Kingdom; or
  2. (ii)
    to an investor in the fund who is a professional client; if the investor has so requested or the firm has taken reasonable steps to establish that the investor does not wish to receive it; or
2. (b)
  if it would duplicate a statement to be provided by someone else.
(2)
[deleted]

Record keeping requirements

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator must make a copy of any periodic statement it has provided in accordance with the requirement to prepare and issue periodic statements to investors in the fund. The record must be retained for a minimum period of three years.

Table: Periodic statements

This table belongs to COBS 18.5.12 E.

Periodic statements
Suitable intervals	(1)	A periodic statement should be provided at least:
		(a)	six-monthly; or
		(b)	once in any other period, not exceeding 12 months, which has been mutually agreed between the firm and the investor in the fund.
Adequate information	(2)	(a)	A periodic statement should contain:
			(i)	(A)	The information set out in the table of general contents of a periodic statement;
				(B)	where the portfolio of the fund includes uncovered open positions in contingent liability investments, the additional information in the table listing the contents of a periodic statement (see COBS 18.5.18 E) in respect of contingent liability investments; or
			(ii)	such information as an investor who is a retail client ordinarily resident outside the United Kingdom, or a professional client, has on his own initiative agreed with the firm as adequate.
		(b)	[deleted]

Examples of uncovered open positions include:

(1)
selling a call option on an investment not held in the portfolio;
(2)
unsettled sales of call options on currency in amounts greater than the portfolio's holding of that currency in cash or in readily realisable investments denominated in that currency; and
(3)
transactions having the effect of selling an index to an amount greater than the portfolio's holdings of investments included in that index.

Table: General contents of a periodic statement

This table belongs to COBS 18.5.15 E.

General contents of periodic statements
1	Contents and value
	(a)	As at the beginning of the account period, the total value of the portfolio of the fund, being either:
		(i)	the value of the assets comprised in the portfolio on the date as at which the statement provided for the immediately preceding period of account is made up; or
		(ii)	in the case of the first periodic statement, the value of the assets comprised in the portfolio on the date on which the firm assumed responsibility for the management of the portfolio.
	(b)	As at the end of the account period:
		(i)	the number, description and value of each investment held on behalf of the fund;
		(ii)	the amount of cash held on behalf of the fund; and
		(iii)	the total value of the portfolio of the fund.
2	Basis of valuation A statement of the basis on which the value of each investment has been calculated and, if applicable, a statement that the basis for valuing a particular investment has changed since the previous periodic statement. Where any investments are shown in a currency other than the usual one used for valuation of the portfolio of the fund, the relevant currency exchange rates must be shown.
3	Details of any assets loaned or charged
	(a)	A summary of those investments (if any) which were, at the closing date, loaned to any third party and those investments (if any) that were at that date charged to secure borrowings made on behalf of the portfolio of the fund; and
	(b)	the aggregate of any interest payments made and income received during the account period in respect of loans or borrowings made during the period.
4	Transactions and changes in composition Except in the case of a portfolio which aims to track the performance of an external index:
	(a)	a statement that summarises the transactions entered into for the portfolio of the fund during the period; and
	(b)	the aggregate of money and a summary of all investments transferred into and out of the portfolio of the fund during the period; and
	(c)	the aggregate of any interest payments, dividends and other benefits received by the firm for the portfolio of the fund during that period.
5	Charges and remuneration If not previously advised in writing, a statement for the account period:
	(a)	of the aggregate charges of the firm and its associates; and
	(b)	of any remuneration received by the firm or its associates or both from a third party in respect of the transactions entered into, or any other services provided, for the portfolio of the fund.
6	Movement in value of portfolio A statement of the difference between the value of the portfolio at the closing date and its value at the starting date of the account period, having regard at least, during the account period, to the following:
	(a)	the aggregate of assets received from investors of the fund and added to the portfolio of the fund;
	(b)	the aggregate of the value of assets transferred, or of amounts paid, to thefund;
	(c)	the aggregate income received on behalf of the fund in respect of the portfolio; and
	(d)	the aggregate of realised and unrealised profits or gains and losses attributable to the assets comprised in the portfolio of the fund.
Notes: For the purposes of Item 1, where the fund is a property enterprise trust, it will be sufficient for the periodic statement to disclose the number of properties held in successive valuation bands where this is appropriate to the size and composition of the fund, rather than the value of each asset in the portfolio. The valuation bands of over £10m, £5-£10m, £2.5-£5m, £1-£2.5m and under £1m would be appropriate, unless a firm could show that different bands were justifiable in the circumstances. The statement to be provided under Item 6 is not intended to be an indicator of the performance of the portfolio of the fund. A firm may wish to distinguish capital and income, and thereby provide more information than referred to in this table. If the statement includes some measure of performance, the basis of measurement should be stated.

Table: Contents of a periodic statement in respect of contingent liability investments

This table belongs to COBS 18.5.15 E.

Contents of a periodic statement in respect of contingent liability investments
(1)	Changes in value The aggregate of money transferred into and out of the portfolio of the fund during the account period.
(2)	Open positions In relation to each open position in the portfolio of the fund at the end of the account period, the unrealised profit or loss to the portfolio of the fund (before deducting or adding any commission which would be payable on closing out).
(3)	Closed positions In relation to each transaction effected during the account period to close out a position of the fund, the resulting profit or loss to the portfolio of the fund after deducting or adding any commission. (Instead of the specific detail required by Items 2 or 3, the statement may show the net profit or loss in respect of the overall position of the fund in each contract)
(4)	Aggregate of contents The aggregate of each of the following in, or relating to, the portfolio of the fund at the close of business on the valuation date:
	(a)	cash;
	(b)	collateral value;
	(c)	management fees; and
	(d)	commissions attributable to transactions during the period or a statement that this information has been separately disclosed in writing on earlier statements or confirmations to the investor.
(5)	Option account valuations In respect of each open option comprising the portfolio of the fund on the valuation date:
	(a)	the share, future, index or other investment or asset involved;
	(b)	(unless the valuation statement follows the statement for the period in which the option was opened) the trade price and date for the opening transaction;
	(c)	the market price of the contract; and
	(d)	the exercise price of the contract.
	Options account valuations may show an average trade price and market price in respect of an option series where a number of contracts within the same series have been purchased on behalf of the fund.