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COB 10.6 Scheme documents for an unregulated collective investment scheme

COB 10.6.1G

Except in relation to a distance contract with a retail customer for the sale or purchase as principal of units in a scheme (for which see COB 4.2.5 R and COB 4 Annex 1.1 R), COB 10.6.2 R fulfils the purpose of the terms of business (including the client agreement) requirements (see COB 4.2) in the context of an unregulated collective investment scheme by application of content requirements in scheme documents. In this way, the scheme documents record the basis on which the operator provides investment management services to a participant in the scheme. The Collective Investment Schemes sourcebook deals separately with the basis upon which an operator of a regulated collective investment scheme provides investment management services to a participant of the scheme.2

Provision of scheme documents to private customers

COB 10.6.2R

An operator of an unregulated collective investment scheme must not accept a private customer as a participant in the scheme unless it has taken reasonable steps to offer and, if requested, provide to the potential participant scheme documents which adequately describe how the operation of the scheme is governed.

Format and content of scheme documents

COB 10.6.3G

An operator's scheme documents may consist of any number of documents provided that it is clear that collectively they constitute the scheme 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 participant.

COB 10.6.4G

COB 10.6.4 G is intended to ensure that the scheme documents of an unregulated collective investment scheme (if they exist) make it clear that if a participant is reclassified as a private customer, this reclassification will not affect certain scheme management activities of the operator of the scheme. In particular, despite such a reclassification, the operator will not be required to comply with COB 7.5.3 R (that is, the best execution rule) and the requirement in COB 10.3.3 E (1) to complete the allocation of an aggregated transaction order within one business day of the transaction. It should be noted that COB 10.6.5 Rdoes not require that scheme documents must be produced for an unregulated collective investment scheme.

COB 10.6.5R

Where the scheme is an unregulated collective investment scheme where no current participant in the scheme was a private customer on joining the scheme as a participant, the scheme documents must include a statement that:

  1. (1)

    explains that if a participant is reclassified as a private customer subsequent to joining the scheme as a participant, then the operator may continue to treat all participants in the scheme as though they were not private customers; and

  2. (2)

    explains that, in respect of an order aggregated under COB 7.7.4 R, the operator may allocate the designated investments concerned within five business days of the transaction;

  3. (3)

    explains that if a participant is reclassified as a private customer subsequent to joining the scheme as a participant, then COB 10.5.3 R will continue to apply to that scheme; and

  4. (4)

    explains that, in the event of a reclassification described in (3), the operator will not be required to provide best execution under COB 7.5.3 R in relation to the scheme.

COB 10.6.6G

It should be noted that the operator will still have to comply with other COB provisions as a result of the reclassification of a participant as a private customer: for example, the requirement under COB 10.7.2 R to provide periodic statements to participants who are private customers in an unregulated collective investment scheme.

Adequate Information

COB 10.6.7E
  1. (1)

    In order to provide adequate information in scheme documents under COB 10.6.2 R, an operator should include in the scheme documents required by COB 10.6.2 R a provision about each of the items of relevant information set out in COB 10.6.8 E.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with COB 10.6.2 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of COB 10.6.2 R.

COB 10.6.8E

Content of scheme documents

This table belongs to COB 10.6.7 E

Content of scheme documents

The scheme documents should include provision about:

(1)

Regulator

The firm statutory status in accordance with GEN 4 Annex 1 (Statutory status disclosure);1

(2)

Services

the nature of the services that the operator will provide in relation to the scheme;

(3)

Payments for services

details of any payment for services payable by the scheme or from the property of the scheme or participants in the scheme to the operator, 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 operator (or to its knowledge by any of its associates) in connection with any transactions effected by the operator with or for the scheme, in addition to or in lieu of any fees;

(4)

Commencement

when and how the operator is appointed;

(5)

Accounting

the arrangements for accounting to the scheme or participants in the scheme for any transaction effected;

(6)

Termination method

how the appointment of the operator may be terminated;

(7)

Complaints procedure

how to complain to the operator and a statement that the participants in the scheme may subsequently complain direct to the Financial Ombudsman Service;

(8)

Compensation

whether or not compensation may be available from the compensation scheme should the operator be unable to meet its liabilities, and information about any other applicable compensation scheme; and, for each applicable scheme, the extent and level of cover and how further information can be obtained (see the example in COB 5.5.11 G (Example of compensation information for a UK domestic investment firm operating from the United Kingdom);1

(9)

Investment objectives

the investment objectives for the portfolio of the scheme;

(10)

Restrictions

(a)

any restrictions on:

(i)

the types of investments or property which may be included in the portfolio of the scheme; and

(ii)

markets on which investments or property may be acquired for the portfolio of the scheme;

(iii)

the amount or value of any one investment or asset, or on the proportion of the portfolio of the scheme 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 of scheme assets

(a)

if it is the case, that the operator will:

(i)

hold money on behalf of the scheme or be the custodian of investments or other property of the scheme; or

(ii)

arrange for some other person to act in either capacity and, if so, whether that person is an associate of the operator 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 scheme and, where the registered holder is the operator's own nominee, that the operator will be responsible for the acts and omissions of that person;

(iii)

the extent to which the operator accepts liability for any loss of the investment of the scheme;

(iv)

the extent to which the operator or any other person mentioned in (11)(a)(ii), may hold a lien or security interest over investments of the scheme;

(v)

where investments of the scheme will be registered collectively in the same name, a statement that the entitlements of the scheme may not be identifiable by separate certificates or other physical documents of title, and that, should the operator default, any shortfall in investments of the scheme registered in that name may be shared proportionately among all schemes and any other customers of the operator whose investments are so registered;

(vi)

whether or not investments or other property of the scheme can be lent to, or deposited by way of collateral with, a third party and whether or not money can be borrowed on the behalf of the scheme 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 scheme for investments of the scheme; for income received (including any interest on money and any income earned by lending investments or other property) of the scheme; and for rights conferred in respect of investments or other property of the scheme;

(viii)

the arrangements for determining the exercise of any voting rights conferred by investments of the scheme; and

(ix)

where investments of the scheme 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 operator may hold the money of the scheme in a client bank account outside the United Kingdom;

(13)

Exchange rates

if a liability of the scheme in one currency is to be matched by an asset in a different currency, or if the services to be provided to the operator for the scheme may relate to an investment denominated in a currency other than the currency in which the investments of the scheme 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 scheme;

(14)

Stabilised investments

if it is the case, that the operator is to have the right under the schemedocuments 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 operator is to have the right under the agreement or instrument constituting the scheme to effect transactions on behalf of the scheme in which the operator has directly or indirectly a material interest (except for an interest arising solely from the participation of the operator as agent for the scheme), or a relationship of any description with another party which may involve a conflict with the operator's duty to the scheme, together with a disclosure of the nature of the interest or relationship;

(16)

Use of soft commission agreements

if the operator is to be authorised under the agreement or instrument constituting the scheme to effect transactions with or through the agency of another person with whom the operator has a soft commission agreement, the prior disclosure required by COB 2.2.16 R;

(17)

Acting as principal

if it is the case, that the operator may act as principal in a transaction with the scheme;

(18)

Stock lending

if it is the case, that the operator may undertake stock lending activity with or for the scheme specifying the type of assets of the scheme to be lent, the type and value of relevant collateral from the borrower and the method and amount of payment due to the scheme in respect of the lending;

(19)

Transactions involving contingent liability investments

(a)

if it is the case, that the agreement or instrument constituting the scheme allows the operator to effect transactions involving contingent liability investments for the account of the portfolio of the scheme;

(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 operator has the authority to effect transactions involving contingent liability investments otherwise than under the rules of a recognised investment exchange or designated 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 under COB 10.7.3 E) except where a periodic statement is not required by COB 10.7.5 R (Exceptions from the requirement to provide a periodic statement); 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 scheme are to be valued;

(22)

Borrowings

if it is the case, that the operator may supplement the funds in the portfolio of the scheme and, if it may do so:

(a)

the circumstances in which the operator may do so;

(b)

whether there are any limits on the extent to which the operator 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 operator may for the account of the portfolio of the scheme 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 collective investment schemes

whether or not the portfolio may contain units in a collective investment scheme either operated or advised by the operator or by an associate of the operator or in a collective investment scheme which is not a regulated collective investment scheme;

(25)

Investments in securities underwritten by the operator

whether or not the portfolio may contain securities of which any issue or offer for sale was underwritten, managed or arranged by the operator or by an associate of the operator during the preceding 12 months.