COLL 6.2 Dealing
Application
- (R
This section applies to an authorised fund manager, a depositary, an ICVC and any other director of an ICVC.
Purpose
- (1)
This section helps in achieving the regulatory objective of securing an appropriate degree of protection for consumers. In accordance with Principle 6, this section is also concerned with ensuring the authorised fund manager pays due regard to its clients' interests and treats them fairly.
- (2)
An authorised fund manager is responsible for arranging for the issue and the cancellation of units for the authorised fund, and is permitted to sell and redeem units for its own account. The rules in this section are intended to ensure that the authorised fund manager treats the authorised fund fairly when arranging for the issue or cancellation of units, and treats clients fairly when they purchase or sell units.
- (3)
This section also sets out common standards for how the amounts in relation to unit transactions are to be paid. These arrangements include the initial offer of units, the exchange of units for scheme property and issues and cancellations of units by an ICVC, or by the trustee of an AUT, carried out directly with the unitholder.
- (4)
This section also sets out rules and guidance relating to the authorised fund manager's controls over the issue and cancellation of units including any box holdings.
- (5)
The requirements in this section are to be applied separately to each sub-fund of a scheme which is an umbrella, and, if appropriate, the currency of a sub-fund may be used instead of the base currency of the umbrella.
Initial offers
- (1)
During the initial offer period, units may only be issued at the initial price.
- (2)
The length of any initial offer should not be unreasonable when considered alongside the characteristics of the authorised fund.
- (3)
The authorised fund manager must, as soon as practicable after receiving the initial price from the purchaser and no later than the fourth business day following the end of the initial offer, pay the depositary the initial price of any unit it has agreed to sell during the period of the initial offer.
- (4)
The period of the initial offer comes to an end if the authorised fund manager reasonably believes the price that would reflect the current value of the scheme property would vary by more than 2% from the initial price.
Initial offer: guidance
- (1)
Details of any initial offer period must be provided in the relevant prospectus as described in COLL 4.2.5R (17)(h) (Table: contents of the prospectus).
- (2)
It may be appropriate that the initial offer for a scheme operating limited issue or limited redemption arrangements, or intending to invest in illiquid assets, is longer than one for a scheme which does not have these features.
Issue and cancellation of units by an ICVC
- (1)
Units in an ICVC are issued or cancelled by the ACD making a record of the issue or cancellation and of the number of the units of each class concerned, and cannot be issued or cancelled in any other manner, unless COLL 3.2.6R (11) (Table: contents of the instrument constituting the scheme) applies.
- (2)
The time of the issue or cancellation under (1) is the time when the record is made.
Issue and cancellation of units in an AUT
- (1)
The trustee must issue or cancel units in an AUT when instructed by the manager.
- (2)
Any instructions given by the managermust state, for each class of unit to be issued or cancelled, the number to be issued or cancelled, expressed either as a number of units or as an amount in value (or as a combination of the two).
- (3)
If the trustee is of the opinion that it is not in the interests of unitholders that any units should be issued or cancellation or that to do so would not be in accordance with the trust deed or prospectus, it must notify the manager of that fact and it is then relieved of the obligation to issue or cancel those units.
Issue and cancellation of units through an authorised fund manager
- (1)
The authorised fund manager may require, on agreement with the depositary, or may permit, on the request of the investor, direct issues and cancellations of units by an ICVC or by the trustee of an AUT.
- (2)
If (1) applies:
(a) the instrument constituting the scheme must provide for this; and
(b) the prospectus must provide details of the procedure to be followed which must be consistent with the rules in this section.
Controls over the issue and cancellation of units
- (1)
An authorised fund manager must ensure that at each valuation point there are at least as many units in issue of any class as there are units registered to unitholders for that class.
- (2)
An authorised fund manager must not:
- (a)
for an AUT, when giving instructions to the depositary for the issue or cancellation of units; or
- (b)
for an ICVC, when arranging for the issue or cancellation of units;
do, or omit to do, anything which would, or might, confer on himself or an associate a benefit or advantage at the expense of a unitholder or a potential unitholder.
- (a)
- (3)
For the purpose of (1), the authorised fund manager may take into account instructions to redeem units at the following valuation point received before any time agreed with the depositary for such purpose.
Controls over the issue and cancellation of units - guidance
- (1)
As the authorised fund manager normally controls the issue, cancellation, sale and redemption of an authorised fund's units, it occupies a position that could, without appropriate systems and controls, involve a conflict of interest between itself and its clients.
- (2)
SYSC 3.1.1 R (Systems and controls) requires that a firm take reasonable care to establish and maintain such systems and controls as are appropriate to its business and Principle 8 requires a firm to manage conflicts of interest between itself and a customer fairly.
- (3)
To manage the conflict of interest that arises, when an authorised fund manager gives an instruction to issue or cancel units, the price of the units should be calculated at the valuation pointbefore or after the instruction has been given, in accordance with (4).
- (4)
An authorised fund manager should agree a period of time with the depositary during which it will give instructions to issue or cancel units. Where the authorised fund manager operates a box with the principal aim of making a profit, this period will be short (for example, two hours); otherwise a longer period (for example, up to the next valuation point but in all cases within 24 hours) may be acceptable, provided the principles in (2) are followed.
- (5)
The last valuation point should be used for the pricing of units where instructions are given before the expiry of the period of time agreed in (4); otherwise the next valuation point should be used.
- (6)
Where an in specie issue or cancellation occurs it should be undertaken using the next valuation point's price.
Modification to number of units issued or cancelled
- (1)
Any instruction for the issue or cancellation of units under COLL 6.2.5 R (Issue and cancellation of units by an ICVC) or COLL 6.2.6 R (Issue and cancellation of units in an AUT) may be modified but only if the depositary agrees and has taken reasonable care to determine that:
- (2)
Any error in (1) must be corrected within the payment period applicable under COLL 6.2.13 R (Payment for units issued) or COLL 6.2.14 R (Payment for cancelled units).
Compensation for box management errors
- (1)
Where the authorised fund manager has not complied with COLL 6.2.8 R (1) (Controls over the issue and cancellation of units), it must correct the error as soon as possible and must reimburse the authorised fund any costs it may have incurred in correcting the position.
- (2)
The authorised fund manager need not reimburse the authorised fund when:
- (a)
the amount under (1) is not, in the depositary's opinion, material to the authorised fund;
- (b)
the authorised fund manager can demonstrate that it has effective controls in place over box management, including all of the areas that affect the figures which are included in the box management calculations; and
- (c)
the requirements of COLL 6.2.10 R (Modification to number of units issued or cancelled) are complied with.
- (a)
Box management errors guidance
Explanatory table: This table belongs to COLL 6.2.2 G (4) (Purpose).
Correction of box management errors |
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1 |
Controls by authorised fund managers |
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An authorised fund manager needs to be able to demonstrate that it has effective controls over: |
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(1) |
its calculations of what units are owned by it (its 'box'); and |
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(2) |
compliance with COLL 6.2.8 R which is intended to prevent a negative box. |
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2 |
Controls by depositaries |
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(1) |
Under COLL 6.6.4 (General duties of the depositary), a depositary should take reasonable care to ensure that a scheme is managed in accordance with COLL 6.2 (Dealing) and COLL 6.3 (Pricing and valuation). |
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(2) |
A depositary should therefore make a regular assessment of the authorised fund manager's box management procedures (including supporting systems) and controls. This should include reviewing the authorised fund manager's controls and procedures when the depositary assumes office, on any significant change and on a regular basis, to ensure that a series of otherwise minor changes do not have a cumulative and a significant effect on the accuracy of the controls and procedures. |
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3 |
Recording and reporting of box management errors |
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(1) |
An authorised fund manager should record all errors which result in a breach of COLL 6.2.8 R (Controls over the issue and cancellation of units) and as soon as an error is discovered, the authorised fund manager should report the fact to the depositary, together with details of the action taken, or to be taken, to avoid repetition of the error. |
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(2) |
A depositary should report material box management errors to the FSA immediately. Materiality should be determined by taking into account a number of factors including:
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(3) |
A depositary should also make a return to the FSA (in the manner prescribed by SUP 16.6.8 R) on a quarterly basis. |
Payment for units issued
- (1)
The authorised fund manager must, by the close of business on the fourth business day following the issue of any units arrange for payment of the value of the units issued and any payment required under COLL 6.3.7 R (SDRT provision) and COLL 6.3.8 R (Dilution) to the trustee or the ICVC.
- (2)
The authorised fund manager must make the payment referred to in (1) in cash or cleared funds unless COLL 6.2.15 R (In specie issue and cancellation) applies.
- (3)
Where the authorised fund manager has not complied with (1), it must reimburse the authorised fund for any lost interest unless the amount involved is not, in the depositary's opinion, material to the authorised fund.
Payment for cancelled units
- (1)
On cancelling units the authorised fund manager must, before the expiry of the fourth business day following the cancellation of the units or, if later, as soon as practicable after delivery to the trustee or the ICVC of such evidence of title to the units as it may reasonably require, require the depositary to pay the price of the units (less any deduction required under COLL 6.3.7 R and COLL 6.3.8 R)
to the authorised fund manager or, where relevant, the unitholder or, for a relevant pension scheme, in accordance with the relevant provisions of the trust deed.
- (2)
If the authorised fund manager has not ensured that the scheme property includes or will include sufficient cash in the appropriate currency (or a sufficient facility to borrow without infringing any restriction in COLL 5 (Investment and borrowing powers)) within the period in (1), that period is extended, for any relevant currency, until the shortage is rectified.
- (3)
If (2) applies, the authorised fund manager must take reasonable steps to rectify the currency shortage as quickly as possible.
- (4)
This rule does not apply where COLL 6.2.15 R is in operation.
- (5)
Nothing in this section requires an ICVC, a depositary or an authorised fund manager to part with money or to transfer scheme property for a cancellation or redemption of units where any money due on the earlier issue or sale of those units has not been received.
In specie issue and cancellation
The depositary may take into or pay out of scheme property assets other than cash as payment for the issue or cancellation of units but only if:
- (1)
it has taken reasonable care to ensure that the property concerned would not be likely to result in any material prejudice to the interests of unitholders; and
- (2)
the instrument constituting the scheme so provides.
Sale and redemption
- (1)
In accordance with COLL 4.2.5R (17) (Table: contents of the prospectus), the authorised fund manager must describe the arrangements for the sale and redemption of units in the prospectus.
- (2)
The authorised fund manager must, at all times during the dealing day, be willing to effect the sale of units in the authorised fund, in accordance with the conditions in the instrument constituting the scheme and the prospectus unless:
- (a)
it has reasonable grounds to refuse such sale; or
- (b)
the issue of units is prevented under COLL 6.2.18 R (Limited issue).
- (a)
- (3)
Subject to COLL 6.2.19 R (Limited redemption) and COLL 6.2.21 R (Deferred redemption), the authorised fund manager must, at all times during the dealing day, on request of any qualifying unitholder, effect the redemption of units in accordance with the conditions in the instrument constituting the scheme and the prospectus unless it has reasonable grounds to refuse such redemption.
- (4)
On agreeing to a redemption of units in (3), the authorised fund manager must pay the unitholder the appropriate proceeds of redemption within the period specified in (5) unless the authorised fund manager has reasonable grounds for withholding all or any part of the proceeds.
- (5)
The period in (4) expires at the close of business on the fourth business day following the later of:
- (a)
the valuation point at which the price for the redemption was determined; or
- (b)
the time when the authorised fund manager has all the duly executed instruments and authorisations to effect (or enable the authorised fund manager to effect) the transfer of title to the units.
- (a)
- (6)
Except where (7) applies, and subject to COLL 6.2.21 R (Deferred redemption), the authorised fund manager must sell or redeem units at a price determined no later than the end of the business day immediately following the receipt and acceptance of an instruction to do so, or at the next valuation point for the purposes of buying or selling units if later (or, for a sale or redemption at an historic price, at the price determined at the last valuation point).
- (7)
Where the authorised fund operates limited redemption arrangements, the authorised fund manager must sell or redeem units at a price determined no later than the expiry of a period of 185 days from the date of the receipt and acceptance of the instruction to sell or redeem.
- (8)
The authorised fund manager must not sell a unit for more than the price of a unit of the relevant class at the relevant valuation point, to which may be added any preliminary charge permitted and any payment required under COLL 6.3.7 R and COLL 6.3.8 R.
- (9)
The authorised fund manager must not redeem a unit for less than the price of a unit of the relevant class at the relevant valuation point, less any redemption charge permitted and any deduction under COLL 6.3.7 R and COLL 6.3.8 R.
- (10)
Paragraphs (4), (5) and (9) do not apply where the authorised fund manager is buying units as principal on an investment exchange (for an AUT in accordance with a power in the trust deed) and settlement will be made in accordance with the rules of that exchange.
Sale and redemption: guidance
- (1)
The prospectus of an authorised fund that does not operate on the basis of historic prices may allow the authorised fund manager to identify a point in time in advance of a valuation point (a cut-off point) after which it will not accept instructions to sell or redeem units at that valuation point. In order to protect customers' interests, the cut-off point should be no earlier than the close of business on the business day before the valuation point it relates to. If there is more than one valuation point in a day the cut-off should not be before any previous valuation point.
- (2)
Where the authorised fund operates limited redemption arrangements, the cut-off point may reflect the expected length of time required to undertake transactions in the underlying investments provided the 185 day limit in COLL 6.2.16 R (7) (Sale and redemption) is complied with.
- (3)
Where (1) applies, different cut-off points may be used to differentiate between the methods of submitting instructions to sell or redeem to the authorised fund manager but not to differentiate between unitholders or potential unitholders.
Limited issue
- (1)
If an authorised fund limits the issue of any class of unit, the prospectus of an authorised fund must provide for the circumstances and conditions when units will be issued.
- (2)
Where (1) applies, the authorised fund manager may not provide for the further issue of units unless, at the time of the issue, heis satisfied on reasonable grounds that the proceeds of that subsequent issue can be invested without compromising the scheme's investment objective or materially prejudicing existing unitholders.
- (3)
Within a scheme, unit classes may operate different arrangements for the issue of units provided there is no prejudice to the interests of any unitholder.
Limited redemption
- (1)
The instrument constituting the scheme and the prospectus of a non-UCITS retail fund that invests substantially in approved immovables, or whose investment objective is to provide a specified level of return, may provide for limited redemption arrangements appropriate to its aims and objectives.
- (2)
Where (1) applies, the scheme must provide for redemptions at least once in every six months.
- (3)
Within a scheme, unit classes may operate different arrangements for redemption of units provided there is no prejudice to the interests of any unitholder.
Limited redemption: guidance
The conditions for limited redemption arrangements in COLL 6.2.19 R should be considered, for AUTs as well as for ICVCs, in conjunction with AUTH Appendix 2 (Meaning of an open-ended investment company) and AUTH Appendix 2.8 (The investment condition: the 'expectation test' (section 236(3)(a) of the Act)).
Deferred redemption
- (1)
The instrument constituting the scheme and the prospectus of an authorised fund which has at least one valuation point on each business day, may permit deferral of redemptions at a valuation point to the next valuation point where the requested redemptions exceed 10%, or some other reasonable proportion disclosed in the prospectus, of the authorised fund's value.
- (2)
Any deferral of redemptions under (1) must be undertaken in accordance with the procedures explained in the prospectus which must ensure:
- (a)
the consistent treatment of all unitholders who have sought to redeem units at any valuation point at which redemptionsare deferred; and
- (b)
that all deals relating to an earlier valuation point are completed before those relating to a later valuation point are considered.
- (a)
Deferred redemption: guidance
In times of high levels of redemption, deferred redemption will enable the authorised fund manager to protect the interests of continuing unitholders by allowing it to match the sale of scheme property to the level of redemptions. This should reduce the impact of dilution on the scheme.