COBS 18.5 6Residual CIS operators and small authorised UK AIFMs

Application

COBS 18.5.1RRP

1Subject to COBS 18.5.1A R12, this6 section applies to a firm which is:6

696
  1. (1)

    [deleted]12

    6
  2. (2)

    [deleted]12

    6
  3. (3)

    a small authorised UK AIFM; 6or12

  4. (4)

    a residual CIS operator.12

    6
  5. (5)

    [deleted]12

    6
COBS 18.5.1BRRP

[deleted]12

Application or modification of general COBS rules

COBS 18.5.2RRP

A firm6 when it is carrying on scheme management activity or, for an AIFM, AIFM investment management functions6:

6
  1. (1)

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

  2. (2)

    need not comply with any other rule in COBS.

    12Table: 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

66
COBS 18.5.2-AGRP

[deleted]12

6
COBS 18.5.2-BG
  1. (1)

    12For 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. (2)

    This may include, for example, activities relating to the administration of the fund and marketing.

COBS 18.5.2ARRP

[deleted]12

4

General modifications

COBS 18.5.3RRP

Where6 COBS rules specified in the table in COBS 18.5.2 R apply to a firm carrying on scheme management activity12 or, for an AIFM, AIFM investment management functions, the following modifications apply:6

66
  1. (1)

    subject to (2), references to customer or client are to be construed as references to any fund6for12 which the firm6 is acting or intends to act12;

    66
  2. (2)

    in the case of a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6, when a firm6 is required by the rules12 in COBS to provide information to, or obtain consent from, a customer or client, the firm6 must ensure that the information is provided to, or consent obtained from, an investor6 or a potential investor in the fund6 as the case may be; and12

    666666
  3. (3)

    references to the service of portfolio management in COBS 11.2 (Best execution for AIFMs and residual CIS operators12) and12 11.3 (Client order handling)12 are to be read6as references to the management by a firm of financial instruments held for or within thefund.12

    66666
  4. (4)

    [deleted]12

    6
COBS 18.5.3AG
  1. (1)

    12COBS 1.2 (Markets in Financial Instruments Directive) contains modifications to the text of the MiFID Org Regulation where this is applied as rules to firms that are not subject to those provisions directly.

  2. (2)

    These modifications apply to COBS 11.3 (Client order handling), which is applied in the table at COBS 18.5.2R.

Research and inducements

COBS 18.5.3BR

12Subject 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 18.5.3CR

12COBS 18 Annex 1 does not apply in relation to an AIF or CIS which in accordance with its core investment policy:

  1. (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. (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

COBS 18.5.4RRP

The best execution provisions in COBS 11.2 (Best execution for AIFMs and residual CIS operators) do not apply12 to a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 of12 a fund6 whose fund6 documents include a statement that best execution does not apply in relation to the fund6 and in which:

6666
  1. (1)

    no investor6 is a retail client; or

    6
  2. (2)

    no current investor in the fund6 was a retail client when it invested in the fund.6

    66
COBS 18.5.4ARRP

[deleted]12

6

Modification of periodic reporting requirements

COBS 18.5.4BRRP

6A 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.

COBS 18.5.4CRRP

[deleted]12

7
COBS 18.5.4DGRP

[deleted]12

7

Scheme documents for an unauthorised fund

COBS 18.5.5RRP

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 must not accept a retail client as an investor in the fund6 unless it has taken reasonable steps to offer and, if requested, provide to the potential investor, fund6 documents which adequately describe how thefund6 is governed.

666

Distance marketing

COBS 18.5.5AGRP

6Firms 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 or another EEA State, COBS 5.1 applies specific requirements for that activity.

Format and content of fund documents

COBS 18.5.6GRP

The fund documents required under COBS 18.5.5 R6 may consist of any number of documents provided that it is clear that collectively they constitute the fund6 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.6

666
COBS 18.5.6AG

11Where a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator is required to publish a key information document, only information that is additional to that contained in the key information document needs be disclosed under COBS 18.5.5R.

COBS 18.5.7GRP

The fund documents of an unauthorised fund managed by a small authorised UK AIFM or a residual CIS operator (if those fund documents6 exist) should make it clear that if an investor6 is reclassified as a retail client, this reclassification will not affect certain activities of the firm6. In particular, despite such a reclassification, the firm6 will not be required to comply with the best execution provisions. It should be noted that there is no requirement that fund6 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 key information document under the PRIIPs Regulation11.

66666666
COBS 18.5.8RRP

Where the fund is an unauthorised fund managed by a small authorised UK AIFM or a residual CIS operator6 and no current investor6 in the fund6 was a retail client when it invested in the fund6, the fund6 documents must include a statement that:

66666
  1. (1)

    explains that if an investor6 is reclassified as a retail client subsequent to investing in the fund6, then the firm6 may continue to treat all investors in the fund6 as though they were not retail clients;

    6666
  2. (2)

    explains that if an investor6 is reclassified as a retail client subsequent to investing in the fund6, then the modification of best execution (see COBS 18.5.4 R6) will continue to apply to that fund6; and

    6666
  3. (3)

    explains that, in the event of such a reclassification, the firm6 will not be required to provide best execution in relation to the fund6.

    66
COBS 18.5.9GRP

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 investor6 as a retail client. For example, the firm must6 provide periodic statements to investors6 who are retail clients in an unauthorised fund6 (see the rule on periodic statements for an unauthorised fund6 (COBS 18.5.11 R6)).

666666

Adequate information

COBS 18.5.10ERP
  1. (1)

    In order to provide adequate information to describe how the fund6 is governed, a small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 should include in the fund6 documents a provision about each of the items of relevant information set out in the following table (Content of fund6 documents).

    666
  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with COBS 18.5.5 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of COBS 18.5.5 R.

Table: Content of fund6 documents

666

Thefund6 documents should include provision about:

6

(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 provide6;

6

(3)

Payments for services

details of any payment for services payable by the fund or from the property of the fund6 or investors in the fund to the firm6, including where appropriate:

66

(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 firm6 (or to its knowledge by any of its associates) in connection with any transactions effected by the firm6 with or for the fund6, in addition to or in lieu of any fees;

666

(4)

Commencement

when and how the firm6 is appointed;

6

(5)

Accounting

the arrangements for accounting to the fund or investors in the fund6 for any transaction effected;

6

(6)

Termination method

how the appointment of the firm6 may be terminated;

6

(7)

Complaints procedure

how to complain to the firm6 and a statement that the investors in the fund6 may subsequently complain direct to the Financial Ombudsman Service;

66

(8)

Compensation

whether or not compensation may be available from the compensation scheme should the firm6 be unable to meet its liabilities, and information about any other applicable compensation scheme; and, for each applicable compensation6 scheme, the extent and level of cover and how further information can be obtained;

6

(9)

Investment objectives

the investment objectives for the portfolio of the fund6;

6

(10)

Restrictions

(a)

any restrictions on:

(i)

the types of investments or property which may be included in the portfolio of the fund6;

6

(ii)

the markets on which investments or property may be acquired for the portfolio of the fund6;

6

(iii)

the amount or value of any one investment or asset, or on the proportion of the portfolio of the fund6 which any one investment or asset or any particular kind of investment or asset may constitute; or

6

(b)

that there are no such restrictions;

(11)

Holding fund6 assets

6

(a)

if it is the case, that the firm6 will:

6

(i)

hold money on behalf of the fund6 or be the custodian of investments or other property of the fund6; or

66

(ii)

arrange for some other person to act in either capacity and, if so, whether that person is an associate of the firm6 identifying that person and describing the nature of any association; and

6

(b)

in either case:

(i)

how any money is to be deposited;

(ii)

the arrangements for recording and separately identifying registrable investments of the fund6 and, where the registered holder is the firm's6 own nominee, that the firm6 will be responsible for the acts and omissions of that person;

666

(iii)

the extent to which the firm6 accepts liability for any loss of the investment of the fund6;

66

(iv)

the extent to which the firm6 or any other person mentioned in (11)(a)(ii), may hold a lien or security interest over investments of the fund6;

66

(v)

where investments of the fund6 will be registered collectively in the same name, a statement that the entitlements of the fund6 may not be identifiable by separate certificates or other physical documents of title, and that, should the firm6 default, any shortfall in investments of the fund6 registered in that name may be shared proportionately among all fund6 and any other customers of the firm6 whose investments are so registered;

666666

(vi)

whether or not investments or other property of the fund6 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 fund6 against the security of those investments or property and, if so, the terms upon which they may be lent or deposited;

66

(vii)

the arrangements for accounting to the fund6 for investments of the fund6, for income received (including any interest on money and any income earned by lending investments or other property) of the fund6, and for rights conferred in respect of investments or other property of the fund6;

666

(viii)

the arrangements for determining the exercise of any voting rights conferred by investments of the fund6; and

6

(ix)

where investments of the fund6 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;

6

(12)

Clients' money outside the United Kingdom

if it is the case, that the firm6 may hold the money of the fund6 in a client bank account outside the United Kingdom;

66

(13)

Exchange rates

if a liability of the fund6 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 fund6 may relate to an investment denominated in a currency other than the currency in which the investments of the fund6 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 fund6;

6666

(14)

Stabilised investments

if it is the case, that the firm6 is to have the right under the fund6 documents to effect transactions in investments the prices of which may be the subject of stabilisation;

66

(15)

Conflict of interest and material interest

if it is the case, that the firm6 is to have the right under the agreement or instrument constituting the fund6 to effect transactions on behalf of the fund6 in which the firm6 has directly or indirectly a material interest (except for an interest arising solely from the investment of the firm6 as agent for the fund6), or a relationship of any description with another party which may involve a conflict with the firm6 duty to the fund6, together with a disclosure of the nature of the interest or relationship;

66666666

(16)

Research and inducements12

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 account12;

66

(17)

Acting as principal

if it is the case, that the firm6 may act as principal in a transaction with the fund6;

66

(18)

Stock lending

if it is the case, that the firm6 may undertake stock lending activity with or for the fund6 specifying the type of assets of the fund6 to be lent, the type and value of relevant collateral from the borrower and the method and amount of payment due to the fund6 in respect of the lending;

6666

(19)

Transactions involving contingent liability investments

(a)

if it is the case, that the agreement orinstrument constituting the fund6 allows the firm6 to effect transactions involving contingent liability investments for the account of the portfolio of the fund6;

666

(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 firm6 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;

68

(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 fund6 are to be valued;

6

(22)

Borrowings

if it is the case, that the firm6 may supplement the funds in the portfolio of the fund6 and, if it may do so:

66

(a)

the circumstances in which the firm6 may do so;

6

(b)

whether there are any limits on the extent to which the firm6 may do so and, if so, what those limits are; and

6

(c)

any circumstances in which such limits may be exceeded;

(23)

Underwriting commitments

if it is the case, that the firm6 may for the account of the portfolio of the fund6 underwrite or sub-underwrite any issue or offer for sale of securities, and:

66

(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 funds6

whether or not the portfolio may invest in fund either managed or advised by the firm6 or by an associate of the firm or in a fund6 which is not a regulated collective investment scheme;

666

(25)

Investments in securities underwritten by the firm6

whether or not the portfolio may contain securities of which any issue or offer for sale was underwritten, managed or arranged by the firm6 or by an associate of the firm6 during the preceding 12 months.

666
COBS 18.5.10ARRP

[deleted]12

6
COBS 18.5.10BG

[deleted]12

11

Periodic statements for an unauthorised fund

COBS 18.5.11RRP

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 must, subject to the exceptions from the requirement to provide a periodic statement, provide to investors in the fund6, 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 fund6 at the beginning and end of the period of the statement.

666

Promptness, suitable intervals and adequate information

COBS 18.5.12ERP
  1. (1)

    A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 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.

    6
  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with the requirement to prepare and issue periodic statements.6

    6
  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of the requirement to prepare and issue periodic statements.6

    6

Exceptions from the requirement to provide a periodic statement

COBS 18.5.13RRP
  1. (1)

    A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 need not provide a periodic statement:

    6
    1. (a)
      1. (i)

        to an investor in the fund6 who is a retail client ordinarily resident outside the United Kingdom; or

        6
      2. (ii)

        to an investor in the fund6 who is a professional client; if the investor6 has so requested or the firm6 has taken reasonable steps to establish that the investor6 does not wish to receive it; or

        6666
    2. (b)

      if it would duplicate a statement to be provided by someone else.

  2. (2)

    For a firm acting as an outgoing ECA provider, the exemption for retail client investors6 ordinarily resident outside the United Kingdom applies only to an investor in the fund6 who is a retail client ordinarily resident outside the EEA.

    66

Record keeping requirements

COBS 18.5.14RRP

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator6 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 fund6. The record must be retained for a minimum period of three years.

66
COBS 18.5.15ERP

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.6

6

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 fund6 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 E6) in respect of contingent liability investments; or

66

(ii)

such information as an investor6 who is a retail client ordinarily resident outside the United Kingdom, or a professional client, has on his own initiative agreed with the firm6 as adequate.

66

(b)

For a firm acting as an outgoing ECA provider, the words 'United Kingdom' is replaced by 'EEA'

COBS 18.5.16GRP

Examples of uncovered open positions include:

  1. (1)

    selling a call option on an investment not held in the portfolio;

  2. (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. (3)

    transactions having the effect of selling an index to an amount greater than the portfolio's holdings of investments included in that index.

COBS 18.5.17ERP

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 fund6, being either:

6

(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 firm6 assumed responsibility for the management of the portfolio.

6

(b)

As at the end of the account period:

(i)

the number, description and value of each investment held on behalf of the fund6;

6

(ii)

the amount of cash held on behalf of the fund6; and

6

(iii)

the total value of the portfolio of the fund6.

6

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 fund6, the relevant currency exchange rates must be shown.

6

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 fund6; and

6

(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 fund6 during the period; and

6

(b)

the aggregate of money and a summary of all investments transferred into and out of the portfolio of the fund6 during the period; and

6

(c)

the aggregate of any interest payments, dividends and other benefits received by the firm6 for the portfolio of the fund6 during that period.

66

5

Charges and remuneration

If not previously advised in writing, a statement for the account period:

(a)

of the aggregate charges of the firm6 and its associates; and

6

(b)

of any remuneration received by the firm6 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 fund6.

66

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 fund6 and added to the portfolio of the fund6;

66

(b)

the aggregate of the value of assets transferred, or of amounts paid, to thefund;6

6

(c)

the aggregate income received on behalf of the fund6 in respect of the portfolio; and

6

(d)

the aggregate of realised and unrealised profits or gains and losses attributable to the assets comprised in the portfolio of the fund6.

6

Notes:

For the purposes of Item 1, where the fund6 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 fund6, 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 firm6 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.6

A firm6 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.

666
COBS 18.5.18ERP

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 fund6 during the account period.

6

(2)

Open positions

In relation to each open position in the portfolio of the fund6 at the end of the account period, the unrealised profit or loss to the portfolio of the fund6 (before deducting or adding any commission which would be payable on closing out).

66

(3)

Closed positions

In relation to each transaction effected during the account period to close out a position of the fund6, the resulting profit or loss to the portfolio of the fund6 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 fund6 in each contract)

66

(4)

Aggregate of contents

The aggregate of each of the following in, or relating to, the portfolio of the fund6 at the close of business on the valuation date:

6

(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.6

6

(5)

Option account valuations

In respect of each open option comprising the portfolio of the fund6 on the valuation date:

6

(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.6

6