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COLL 7.8 Side pockets

Application

COLL 7.8.1R
  1. (1)

    1Subject to (2), this section applies to:

    1. (a)

      the authorised fund manager of an AUT, ACS or an ICVC;

    2. (b)

      any other director of an ICVC;

    3. (c)

      the depositary of an AUT, ACS or an ICVC; and

    4. (d)

      an ICVC,

    which is a UCITS scheme or a non-UCITS retail scheme.

  2. (2)

    This section does not apply to a scheme which is a regulated money market fund.

COLL 7.8.2G
  1. (1)

    1This section sets out the terms on which the authorised fund manager of a scheme holding affected investments can segregate those affected investments from the other assets held in the scheme property by establishing a side pocket class.

  2. (2)

    The purpose of the rules in this section is to advance the FCA’s consumer protection and integrity objectives (see s1B(3) of the Act) by helping authorised fund managers deal with the consequences of the Russian invasion of Ukraine.

  3. (3)

    The rules in this section apply other rules in COLL, where necessary, with appropriate modifications, as well as imposing certain additional requirements.

Financial sanctions regimes relating to Russia

COLL 7.8.3G
  1. (1)

    1The definition for a ‘sanctioned investment’ in the Glossary (which is incorporated in the definition for ‘affected investment’) relates to the financial sanctions regimes of the Group of 7 (G7) countries comprising Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America, plus the EU, as those sanctions regimes relate to Russia.

  2. (2)

    Before deciding whether to create a side pocket class and determining the arrangements under which the class is to operate, the authorised fund manager will need to understand the legal requirements and obligations that apply under the relevant financial sanctions regimes. The authorised fund manager will need to be satisfied that creation of the side pocket class and the operational arrangements for the class will comply with those regimes.

  3. (3)

    The UK’s financial sanctions regime is set out in the Russia (Sanctions) (EU Exit) Regulations 2019. The Regulations are available at https://www.legislation.gov.uk/uksi/2019/855/contents. The UK regime prohibits certain types of activity and conduct, including dealing with funds and economic resources, and dealing with transferable securities and money-market instruments, subject to certain exceptions. Contravention of these prohibitions constitutes a criminal offence.

  4. (4)

    The Office of Financial Sanctions Implementation (OFSI) (part of HM Treasury) helps to ensure that the UK financial sanctions regime is properly understood, implemented and enforced in the United Kingdom.

Conditions for creating a side pocket class

COLL 7.8.4R
  1. (1)

    1If all the conditions in (2) are satisfied, the authorised fund manager of a scheme holding affected investments in the scheme property may, after consulting with the depositary, create a side pocket class.

  2. (2)

    The conditions are:

    1. (a)

      The authorised fund manager has determined that the affected investment in (1) is:

      1. (i)

        a sanctioned investment;

      2. (ii)

        a unit in a collective investment scheme or a share in an AIF within the meaning of paragraph (2)(b)(vii) of the definition of ‘affected investment’; or

      3. (iii)

        to the extent not in (i) or (ii), an affected investment for which there are no accurate, reliable and regular prices.

    2. (b)

      The authorised fund manager has determined that:

      1. (i)

        creating the side pocket class will protect the interests of unitholders;

      2. (ii)

        the rights of any unit in a side pocket class will not be unfairly prejudicial to the interests of unitholders generally or to the unitholders of any other class of units in the scheme;

      3. (iii)

        the issue of units in the side pocket class will be in the best interests of unitholders, the authorised fund and the integrity of the market; and

      4. (iv)

        all the unitholders in the authorised fund will be treated fairly.

    3. (c)

      The instrument constituting the fund and the prospectus:

      1. (i)

        provide for the issue of units in a side pocket class; and

      2. (ii)

        set out the terms on which that class will operate,

      in accordance with the rules in, and applied by, this section (see in particular COLL 7.8.13R (Modified application of COLL 4.2 (Pre-sale notifications)).

  3. (3)

    Before making the determination in (2)(b), the authorised fund manager must consider:

    1. (a)

      at least each of the matters specified in COLL 7 Annex 1 (Matters to be considered by the authorised fund manager before creating a side pocket class); and

    2. (b)

      whether it would be in the interest of all the unitholders in the authorised fund to suspend dealings in units in accordance with COLL 7.2.1R (Requirement) instead of creating a side pocket class.

  4. (4)
    1. (a)

      The decision to create a side pocket class pursuant to (1) must be taken by the authorised fund manager’s governing body.

    2. (b)

      The authorised fund manager must make a record of the governing body’s decision and the reasons for it.

Side pocket classes

COLL 7.8.5R
  1. (1)

    1The authorised fund manager may:

    1. (a)

      issue units in a new class to unitholders in the authorised fund; or

    2. (b)

      convert a unit in an existing class into units in one or more new classes.

  2. (2)

    Where the authorised fund manager has taken an action pursuant to (1)(a) or (1)(b), it must determine the price of units of each existing and new class by reference to a valuation of the portions of capital property and income property represented by either:

    1. (a)

      one or more affected investments held in the scheme property; or

    2. (b)

      the scheme property excluding some or any such affected investments,

    as provided for in the instrument constituting the fund and the prospectus.

  3. (3)

    A new class within (2)(a) is referred to as a ‘side pocket class’.

  4. (4)

    The authorised fund manager must determine the date and time on which the units in the new class are to be issued.

  5. (5)

    On the date and time specified in (4):

    1. (a)

      the combined net asset value of all units of the new class and all units of the existing class; or

    2. (b)

      the combined net asset value of any new classes of unit issued by conversion from an existing class of unit,

    must equal the net asset value of all units of the class or classes that existed immediately before the specified date and time.

  6. (6)

    On the date and time specified in (4), the number of units held by a unitholder in a new class must be proportionate to the number of units held by them in an existing class immediately before such date and time.

COLL 7.8.6R

1The prospectus of the authorised fund must limit the issue of units in a side pocket class after the date and time specified in COLL 7.8.5R(4) (see COLL 7.8.30R(5) (Modified application of COLL 6.2 (Dealing)).

COLL 7.8.7G
  1. (1)

    1An authorised fund manager intending to issue units in a new class will need to consider the effect of section 235(4) of the Act. In broad terms, this provides that if the contributions of the participants and the profits or income out of which payments are to be made to them are pooled in relation to separate parts of the scheme property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another (see section 235(4) of the Act (Collective investment schemes)).

  2. (2)

    The authorised fund manager of an ICVC will also need to consider the effect of section 236(3) (Open-ended investment companies) of the Act. PERG 9.6 (The investment condition (section 236(3) of the Act): general) sets out the FCA’s view of this provision. In particular, PERG 9.6.3G and PERG 9.6.4G provide guidance on situations where an ICVC issues shares or securities that may not satisfy the investment condition.

Allocation of scheme property to a side pocket class

COLL 7.8.8G
  1. (1)

    1The authorised fund manager will need to consider carefully how to apply a fair accounting treatment when a side pocket class is created.

  2. (2)

    Where the unit price is determined only by reference to affected investments that are themselves valued at or close to zero, then a unit in the side pocket class will have minimal value. Where a portion of the income property of the scheme is attributable to affected investments, the unit price of the side pocket class should include that element of income.

  3. (3)

    The authorised fund manager may determine that a proportion of uninvested cash held in the capital property of the scheme should be attributed to the side pocket class, as a provision against costs and charges attributable to the class in the future. This will depend on the authorised fund manager’s policy for the treatment of costs and charges (see also COLL 7.8.36R (Modified application of COLL 6.7 (Payments))). If the side pocket class has an overdrawn cash position, it should not be netted off against a positive cash position attributable to other classes.

  4. (4)

    Some authorised fund managers may wish to use derivatives and forward transactions within the side pocket class to hedge exposure to currency fluctuations affecting asset valuations, especially if the affected investments acquire value at a later point. Authorised fund managers may also wish to replicate currency class hedging arrangements where these already exist. Such activities will require an allocation of capital property to cover transaction costs and margin requirements.

  5. (5)

    Decisions whether to undertake the activities in (4) should be taken by the authorised fund manager based on its judgment of unitholders’ reasonable expectations and future best interests. The authorised fund manager should take particular care to ensure its risk management process is properly applied to analyse the possible harm that could arise from such transactions. See also COLL 7.8.26R (Side pockets: modified application of COLL 5 (Investment and borrowing powers)) and the related guidance in COLL 7.8.27G.

Costs and charges for a side pocket class

COLL 7.8.9G
  1. (1)

    1The FCA accepts that a side pocket class should bear a proportionate share of the costs and charges which arise and are incurred for the benefit of all unitholders, such as depositary expenses and fees, audit fees, and regulatory charges. The authorised fund manager, in managing and administering the authorised fund, will also incur necessary expenses which it may recover from the scheme property. The FCA would not expect unitholders in classes without any interest in the affected investments to cross-subsidise the costs and charges of managing the side pocket class. Such costs and charges may be recovered in the first instance out of available income or capital attributable to the side pocket class, depending on the normal charging policy set out in the prospectus.

  2. (2)

    Since it is not possible to know whether any income from affected investments will be receivable on an ongoing basis in future, the authorised fund manager will have to determine how to account for such income and for expenses attributable to the side pocket class. The authorised fund manager may decide to accrue such costs and charges indefinitely until sufficient cash is available to cover them, or to waive some charges or pay them from its own resources. The governing body of the authorised fund manager should consider this when evaluating whether to proceed with creating a side pocket class.

  3. (3)

    The governing body should also consider whether the authorised fund manager should be remunerated for managing a class that is valued largely or solely by reference to affected investments. To ensure fair treatment of all unitholders in the fund, it may be more appropriate for the authorised fund manager to forego some or all remuneration from the side pocket class.

  4. (4)

    An authorised fund manager may be able to charge a fee for managing the side pocket class, but the fee should fairly reflect the services provided and activities carried on by the authorised fund manager for unitholders in that class. The fee should not exceed what is reasonable to cover the necessary costs and charges of the authorised fund manager (including any firm which has been given the mandate to manage investments for the scheme under COLL 6.6.15AR (Committees and delegation)) and to reward the amount of work entailed in seeking opportunities over time to dispose of the affected investments in an orderly way. The FCA would expect such a fee to be less than the authorised fund manager’s charges for managing the rest of the scheme property.

Application of COLL 3 (Constitution)

COLL 7.8.10R

1The rules and guidance in COLL 3 (Constitution) apply to an authorised fund with a side pocket class subject to the modifications specified in COLL 7.8.11R.

COLL 7.8.11R

1In COLL 3.3.5R (Rights of unit classes), paragraphs (2) and (3) do not prohibit the issue of units in a side pocket class.

Application of COLL 4 (Investor relations): General

COLL 7.8.12R

1The rules and guidance in COLL 4 (Investor relations) apply to an authorised fund with a side pocket class, subject to:

  1. (1)

    the modifications in COLL 7.8.13R to COLL 7.8.21R; and

  2. (2)

    the additional requirements in COLL 7.8.22R and COLL 7.8.24R.

Modified application of COLL 4.2 (Pre-sale notifications)

COLL 7.8.13R

1In relation to a side pocket class, the information required to be included in the prospectus under COLL 4.2.5R (Table: contents of prospectus) must cover at least the additional matters set out in (1) to (4).

  1. (1)

    In COLL 4.2.5R(5) (Characteristics of units):

    1. (a)

      a general description of the affected investments to be allocated to the side pocket class (or side pocket classes);

    2. (b)

      an explanation of how the scheme property (both capital property and income property) will be allocated between the side pocket class (or side pocket classes) and other classes at the outset and on an ongoing basis; and

    3. (c)

      information which explains:

      1. (i)

        that the authorised fund manager will seek to dispose of all the affected investments over time, on terms that it judges to be in the best interests of unitholders; and

      2. (ii)

        that the units in the side pocket class (or side pocket classes) will be cancelled when this has been done, indicating where possible what options may be offered to unitholders for exiting the side pocket class (or side pocket classes) under the process.

  2. (2)

    In COLL 4.2.5R(16) (Valuation and pricing of scheme property), the frequency at which:

    1. (a)

      affected investments allocated to the side pocket class will be valued; and

    2. (b)

      the prices of units in the side pocket class will be calculated, where these differ from other classes of the scheme.

  3. (3)

    In COLL 4.2.5R(17) (Dealing):

    1. (a)

      that the issue of units in the side pocket class is limited, and the circumstances and conditions for issuing them;

    2. (b)

      a statement of when the dealing days for the side pocket class will be;

    3. (c)

      details of any cut-off point for the receipt of dealing instructions prior to the valuation point for the relevant dealing day; and

    4. (d)

      if applicable, details of:

      1. (i)

        any special arrangements put in place for redemptions of units in the side pocket class, including any extended time period for settlement and any facility to pay the proceeds of redemption to a person other than the unitholder;

      2. (ii)

        whether redemption proceeds can be reinvested in units of other classes of the scheme or in units of other schemes; and

      3. (iii)

        any facility for a unitholder to dispose of an interest in units by transferring title to them to another person (other than by operation of law), as a donation or for financial consideration.

  4. (4)

    In COLL 4.2.5R(27)(b) (Additional information):

    1. (a)

      an explanation that there is no certainty that any affected investment will ever recover its value to a significant extent, or at all, and that the authorised fund manager may be unable to realise any material value for unitholders in respect of units held in the side pocket class;

    2. (b)

      if applicable, that the costs and charges for operating the side pocket class may significantly erode the returns from any realisable value from the affected investments over time; and

    3. (c)

      whether the authorised fund manager has undertaken to bear all the costs and charges associated with operating the side pocket class from its own resources and, if not, a statement explaining:

      1. (i)

        the risk that costs and charges might cause the cash position of the side pocket class to become overdrawn;

      2. (ii)

        that a liability arising as a result of (i) would be accounted for against the scheme property allocated to the other classes in the scheme; and

      3. (iii)

        the steps the authorised fund manager would take to ensure unitholders in other classes do not bear such a liability.

Modified application of COLL 4.3 (Approvals and notifications)

COLL 7.8.14R

1The authorised fund manager need not treat the creation of a side pocket class as a fundamental change for the purposes of COLL 4.3.4R (Fundamental change requiring prior approval by meeting) provided the authorised fund manager is satisfied on reasonable grounds that the foreseeable costs of this course of action are not disproportionate to the benefits.

COLL 7.8.15G

1The guidance in COLL 4.3.5G (Guidance on fundamental change) should be read in accordance with the modification in COLL 7.8.14R.

COLL 7.8.16R

1If the authorised fund manager considers that the creation of a side pocket class constitutes a significant change, the authorised fund manager:

  1. (1)

    may, but need not, give prior written notice to unitholders under COLL 4.3.6R(1) (Significant change requiring pre-event notification); and

  2. (2)

    is not required to comply with COLL 4.3.6R(3).

COLL 7.8.17G

1The guidance in COLL 4.3.7G (Guidance on significant changes) should be read in accordance with the modification in COLL 7.8.16R.

COLL 7.8.18G

1Before announcing its intention to create a side pocket class, the authorised fund manager should have regard to the reasonable operational needs of intermediate unitholders and any reasonable periods of time they will need to establish processes and procedures and communicate information to those clients for whom the intermediate unitholder acts as a nominee in relation to units in the scheme.

Modified application of COLL 4.4 (Meetings of unitholders and service of notices)

COLL 7.8.19R
  1. (1)

    1COLL 4.4.8R (Voting rights) applies to an authorised fund with a side pocket class with the modifications set out in (2) and (3) below.

  2. (2)

    Before a resolution is put to a vote at a unitholder meeting, it must be made clear whether the resolution relates to or affects:

    1. (a)

      all the classes of unit in the authorised fund;

    2. (b)

      those classes of unit in the authorised fund excluding the side pocket class; or

    3. (c)

      only the side pocket class.

  3. (3)

    On a poll, the votes of a unitholder may only be counted to the extent that the unitholder’s voting rights are attached to units in the class or classes to which the resolution relates or which the resolution affects in accordance with (2).

COLL 7.8.20G
  1. (1)

    1The authorised fund manager will need to ensure that the instrument constituting the fund and the prospectus reflect the modified application of COLL 4.4.8R as set out in COLL 7.8.19R.

  2. (2)

    COLL 7.8.19R modifies the application of COLL 4.4.8R but does not affect the other matters dealt with in COLL 4.4, such as COLL 4.4.6R (Quorum).

Modified application of COLL 4.7 (Key investor information and marketing communications)

COLL 7.8.21R

1The rules in COLL 4.7.2R (Key investor information) do not require an authorised fund manager to draw up a key investor information document or a NURS-KII document in relation to a side pocket class.

Additional information for unitholders on the creation of a side pocket class

COLL 7.8.22R

1The authorised fund manager must provide a written notification to unitholders which meets the requirements of (1) to (3).

  1. (1)

    The notification must be provided to unitholders in a timely way, either shortly before the side pocket class is created or as soon as practicable afterwards.

  2. (2)

    If the unitholder has a financial adviser, the requirement to provide the notification in (1) may be satisfied by sending it to the financial adviser.

  3. (3)

    The notification must explain in a comprehensive manner:

    1. (a)

      the reasons for the authorised fund manager’s decision to create a side pocket class, including the expected benefits and the costs and charges;

    2. (b)

      the effect on unitholders’ ability to exercise their rights;

    3. (c)

      if applicable, the basis on which the authorised fund manager has satisfied itself as to the cost impact of its decision under COLL 7.8.14R;

    4. (d)

      a description of the main features of the side pocket class;

    5. (e)

      practical information that unitholders will need to understand about the changes to their investment in the authorised fund; and

    6. (f)

      each of the matters specified in COLL 7.8.13R(4) (Modified application of COLL 4.2 (Pre-sale notifications)).

  4. (4)

    The notification must:

    1. (a)

      be written in clear and plain language;

    2. (b)

      be provided in a durable medium; and

    3. (c)

      be accessible by existing and prospective unitholders (e.g. by publishing a copy in a prominent location on the authorised fund manager’s website).

COLL 7.8.23G
  1. (1)

    1In relation to COLL 7.8.22R(3)(a), the information in the notification should include:

    1. (a)

      a description of the scheme’s exposure to affected investments and the authorised fund manager’s approach to valuing them;

    2. (b)

      an explanation of the risks such affected investments pose to the scheme and its unitholders, and the authorised fund manager’s policies for mitigating those risks;

    3. (c)

      a description of what measures the authorised fund manager is taking as a result of those risks, and in relation to which affected investments;

    4. (d)

      either a detailed list of the affected investments or a link to a place where they are (or will be) set out, making clear (if applicable) which affected investments are not subject to any of the measures referred to in (c); and

    5. (e)

      an explanation of the costs and charges to be borne by unitholders in the new classes, and of any resulting change in the costs and charges borne by existing classes.

  2. (2)

    In relation to COLL 7.8.22R(3)(d), the information in the notification should include:

    1. (a)

      the name of each side pocket class and a description of how the rights of a unitholder differ from the rights attached to existing classes and any other new classes;

    2. (b)

      any alteration in the rights attached to an existing class (e.g. that it will be valued without reference to affected investments);

    3. (c)

      the terms on which new units are issued to existing unitholders, i.e. whether units in a new class are issued in addition to units in an existing class, or by way of conversion into units in one or more new classes;

    4. (d)

      the terms on which units are issued to both existing and new unitholders; and

    5. (e)

      the date on which the changes take effect.

  3. (3)

    In relation to COLL 7.8.22R(3)(e), the information in the notification should include:

    1. (a)

      an explanation of the dealing arrangements for redemptions, including the dealing days;

    2. (b)

      if applicable, that dealing in units in the side pocket class has been suspended (see also COLL 7.2.1R(2A), (2B) and (2C) (Requirement));

    3. (c)

      when and how redemption proceeds will be paid, including any alternative arrangements for payment;

    4. (d)

      the circumstances in which unitholders may convert their units in a side pocket class to units of another class of the scheme; and

    5. (e)

      the circumstances in which unitholders may transfer title to their units in the class to another person.

COLL 7.8.24R

1The authorised fund manager must, as soon as reasonably practicable after the date on which the side pocket class is created, send a written statement to each unitholder confirming the number and type of units of each class the unitholder holds in the authorised fund as a result of the creation of the side pocket class.

COLL 7.8.25G

1The notification required by COLL 7.8.22R and the written statement of holdings required by COLL 7.8.24R may be issued to existing unitholders in a single combined communication. However, it will not be possible to use a single combined communication where the notification required by COLL 7.8.22R is provided to a unitholder’s financial adviser instead of the unitholder (see COLL 7.8.22R(2)).

Side pockets: modified application of COLL 5 (Investment and borrowing powers)

COLL 7.8.26R
  1. (1)

    1COLL 5 (Investment and borrowing powers) applies to the side pocket property, subject to the modifications in this rule.

  2. (2)

    Subject to (4) to (6), in the case of a UCITS scheme, the authorised fund manager must comply with as much of COLL 5.1 (Introduction), COLL 5.2 (General investment powers and limits for UCITS schemes) and COLL 5.3 (Derivative exposure) as is practicable having regard to the limited purpose for which the side pocket class was created.

  3. (3)

    Subject to (4) to (6), in the case of a non-UCITS retail scheme, the authorised fund manager must comply with as much of COLL 5.1 (Introduction) and COLL 5.6 (Investment powers and borrowing limits for non-UCITS retail schemes) as is practicable having regard to the limited purpose for which the side pocket class was created.

  4. (4)

    The authorised fund manager may only enter into a derivative or a forward transaction which:

    1. (a)

      is a ‘class hedging transaction’ within the meaning of COLL 3.3.5R(4)(d); and

    2. (b)

      falls within COLL 3.3.5AR (Hedging of unit classes) (see also COLL 3.3.5BG (Guidance on hedging of unit classes)),

    and all provisions of COLL 5 relevant to such transactions apply.

  5. (5)

    COLL 5.5.3R (Cash and near cash) applies, except that references to the ‘investment objectives’ of the scheme should be read as references to the objective in COLL 7.8.33R(2)(b) (Modified application of COLL 6.6 (Operating duties and responsibilities)).

  6. (6)

    The following rules apply:

    1. (a)

      COLL 5.5.4R (General power to borrow);

    2. (b)

      COLL 5.5.5R (Borrowing limits);

    3. (c)

      COLL 5.5.6R (Restrictions on lending of money);

    4. (d)

      COLL 5.5.7R (Restrictions on lending of property other than money);

    5. (e)

      COLL 5.5.8R (General power to accept or underwrite placings); and

    6. (f)

      COLL 5.5.9R (Guarantees and indemnities).

Side pockets: guidance on modified application of COLL 5

COLL 7.8.27G
  1. (1)

    1The nature of a side pocket class means that the authorised fund manager cannot apply the same risk controls to affected investments that would apply to the rest of the scheme property. In the FCA’s view, it would not be practicable for the authorised fund manager to apply a prudent spread of risk to the affected investments or to comply in full with the specific eligibility and risk-spreading limits set out in COLL 5 for transferable securities, money-market instruments and units in collective investment schemes.

  2. (2)

    However, the modification of the rules provided in COLL 7.8.26R(2) and (3) is to be interpreted narrowly and only to the extent necessary to allow the authorised fund manager to manage the risks of the affected investments allocated to the side pocket class and to deal efficiently with them. In particular, the modifications in those rules do not permit an authorised fund manager to take any action that increases the risk profile of the scheme as a whole, such as acquiring property or entering into transactions that would not be permitted by the unmodified rules of COLL 5.

COLL 5 references to ‘scheme property’ in relation to other parts of the scheme

COLL 7.8.28R
  1. (1)

    1This rule applies to the authorised fund manager and depositary of an authorised fund with a side pocket class.

  2. (2)

    For the purpose of interpreting references to the ‘scheme property’ in COLL 5 in relation to the part of the scheme which is not a ‘side pocket’, the authorised fund manager and depositary may disregard the side pocket property.

  3. (3)

    The reference to a ‘side pocket’ in (2) is a reference to a part of the scheme which is represented by units in a side pocket class.

Application of COLL 6 (Operating duties and responsibilities): General

COLL 7.8.29R

1The rules and guidance in COLL 6 (Operating duties and responsibilities) apply in relation to an authorised fund with a side pocket class subject to the modifications specified in COLL 7.8.30R (Modified application of COLL 6.2 (Dealing)) to COLL 7.8.36R (Modified application of COLL 6.7 (Payments)).

Modified application of COLL 6.2 (Dealing)

COLL 7.8.30R
  1. (1)

    1COLL 6.2 (Dealing) applies to a side pocket class subject to the modifications specified in this rule.

  2. (2)

    For the purposes of COLL 6.2.8R (Issue and cancellation of units through an authorised fund manager), if the authorised fund manager redeems a unit in a side pocket class from a unitholder, the authorised fund manager must immediately cancel the unit or, in relation to an AUT or ACS, instruct the depositary to do so.

  3. (3)
    1. (a)

      Subject to (b) and (c), the requirement in COLL 6.2.13R (Payment for units issued) may be satisfied by the authorised fund manager allocating such proportion of the scheme property to that class as the authorised fund manager may determine.

    2. (b)

      Before making the allocation of scheme property in (a), the authorised fund manager must consult the depositary and take its views into account.

    3. (c)

      After being consulted under (b), the depositary must consider the proposed allocation of the scheme property and inform the authorised fund manager if it considers that the allocation is not appropriate, having regard to the purpose of the side pocket class.

  4. (4)

    In COLL 6.2.16R (Sale and redemption), in relation to the redemption of units in a side pocket class:

    1. (a)

      paragraphs (4) and (5) apply unless the prospectus makes alternative provision for how unitholders may be paid; and

    2. (b)

      paragraphs (5A), (6) and (7) do not apply.

  5. (5)

    The authorised fund manager must apply COLL 6.2.18R (Limited issue) as follows:

    1. (a)

      COLL 6.2.18R(1) applies to the issue of units in a side pocket class;

    2. (b)

      COLL 6.2.18R(2) does not apply to a side pocket class, and the authorised fund manager must not provide for the further issue of units in the same class; and

    3. (c)

      COLL 6.2.18R(3) applies where a scheme has a side pocket class.

Modified application of COLL 6.3 (Valuation and pricing)

COLL 7.8.31R
  1. (1)

    1COLL 6.3 (Valuation and pricing) applies in relation to a side pocket class subject to the modifications specified in this rule (see also COLL 7.8.32G).

  2. (2)

    For the purpose of COLL 6.3.5R (Price of a unit), the authorised fund manager must ensure that the price of a unit in a side pocket class is calculated:

    1. (a)

      by reference to the net value of the side pocket property; and

    2. (b)

      in accordance with the provisions of both the instrument constituting the fund and the prospectus.

  3. (3)

    Notwithstanding COLL 6.3.11R (Publication of prices), the authorised fund manager must make public in an appropriate manner the price of a unit in the side pocket class after every valuation point (see COLL 6.3.4R (Valuation points)), even if the authorised fund manager is not holding itself out to deal in such units at that valuation point.

COLL 7.8.32G

1The guidance in COLL 6.3.12G(1)(a) to (c) is unlikely to be relevant to an authorised fund manager when publishing the price of a unit in a side pocket class in accordance with the rules in this section.

Modified application of COLL 6.6 (Operating duties and responsibilities)

COLL 7.8.33R
  1. (1)

    1COLL 6.6 (Operating duties and responsibilities) applies to the authorised fund manager and depositary of an authorised fund with a side pocket class, subject to the modifications specified in this rule and COLL 7.8.34R (Modified application of the assessment of value rules).

  2. (2)

    For the purposes of COLL 6.6.3R(3)(a) (Functions of the authorised fund manager), the authorised fund manager must make decisions as to the constituents of the scheme property:

    1. (a)

      in accordance with the investment objectives and policy of the scheme, but may disregard any affected investment in the side pocket property; and

    2. (b)

      with a view to disposing of those affected investments over time as and when the authorised fund manager considers this can be done in the best interests of unitholders.

  3. (3)

    For the purposes of COLL 6.6.4R(1) (General duties of the depositary), the depositary must take reasonable care to ensure that the scheme is managed by the authorised fund manager in accordance with the matters specified in COLL 6.6.4R(1)(a) to (e) as modified by the rules in this section, and COLL 6.6.4R(2) is to be read accordingly.

  4. (4)
    1. (a)

      The duty in COLL 6.6.14R(2) (Duties of the depositary and the authorised fund manager: investment and borrowing powers) requiring the authorised fund manager to rectify at its own expense a breach of COLL 5 (Investment and borrowing powers), or any provision of the instrument constituting the fund or the prospectus, does not apply to the extent that:

      1. (i)

        the breach relates to affected investments in the side pocket property; and

      2. (ii)

        the depositary is satisfied that it is not practicable for the authorised fund manager to comply with the relevant rule in COLL 5, the provision of the instrument constituting the fund or the prospectus.

    2. (b)

      COLL 6.6.14R(4), (5) and (6) do not apply to the extent that the breach falls within (a) above.

Modified application of the assessment of value rules

COLL 7.8.34R

1When conducting an assessment of value for the purposes of COLL 6.6.20R (Assessment of value) in relation to a scheme that has a side pocket class, the authorised fund manager:

  1. (1)

    must consider each of the matters included in COLL 6.6.21R (Table: minimum considerations – assessment of value) in relation to the scheme as a whole, including the side pocket class, but may adopt a proportionate approach to the assessment as it applies specifically to the side pocket class;

  2. (2)

    in relation to the side pocket class, need not consider a matter included in COLL 6.6.21R if, in all the circumstances, it is not relevant to that class;

  3. (3)

    must consider whether, to the extent that payments are being made out of the scheme property attributable to the side pocket class or are being accrued for that purpose, those payments:

    1. (a)

      are justified in terms of the value delivered to unitholders in the side pocket class; and

    2. (b)

      are not prejudicial to the interests of unitholders of other classes; and

  4. (4)

    must consider whether it remains in unitholders’ best interests for the side pocket class to continue in operation.

COLL 7.8.35G
  1. (1)

    1In relation to COLL 7.8.34R(1), the authorised fund manager should consider the side pocket class when carrying out an assessment of value for a scheme. A side pocket class, because of its special purpose, might in isolation represent poor value according to the standard criteria for assessment, so the authorised fund manager should take account of that purpose in order to reach a proportionate assessment. However, where payments are being taken out of the side pocket property, the assessment of overall value delivered to unitholders in the scheme should give due weight to the impact of those payments.

  2. (2)

    In relation to COLL 7.8.34R(3)(a), the authorised fund manager should consider whether the payments out of scheme property can be justified when compared with the value it reasonably expects that unitholders might receive from any eventual disposal of the affected investments, taking into account current market conditions and relevant political and economic developments.

  3. (3)

    In relation to COLL 7.8.34R(3)(b), it is likely to be unfair or prejudicial to unitholders’ best interests for costs and charges borne by the side pocket class to be attributable to unitholders in other classes.

Modified application of COLL 6.7 (Payments)

COLL 7.8.36R
  1. (1)

    1COLL 6.7 (Payments) applies in relation to an authorised fund with a side pocket class subject to the modifications and additional requirements specified in this rule.

  2. (2)

    The authorised fund manager must not impose any of the following charges or levies on unitholders of the side pocket class:

    1. (a)

      a preliminary charge or levy when the units in the side pocket class are issued;

    2. (b)

      a charge or levy on the redemption or cancellation of units;

    3. (c)

      a performance-related management fee.

  3. (3)

    The authorised fund manager must prevent undue costs being charged to the scheme and its unitholders.

[Note: In relation to (3), see also COLL 6.6A.2R(5) (Duties of AFMs of UCITS schemes to act in the best interests of the scheme and its unitholders) and article 17 of the AIFMD level 2 regulation (Duty to act in the best interests of the AIF or the investors in the AIF and the integrity of the market).]

Application of COLL 7.2 (Suspension and restart of dealings)

COLL 7.8.37R
  1. (1)

    1COLL 7.2 (Suspension and restart of dealings) applies in relation to a side pocket class subject to the modifications specified in this rule.

  2. (2)

    The authorised fund manager may suspend dealings in units of a side pocket class, while continuing to deal in other classes of the scheme.

  3. (3)

    If the authorised fund manager suspends dealings in accordance with (1), it is not required to carry out any request by a unitholder to convert units in the suspended side pocket class into units of another class in which dealing continues.

  4. (4)

    COLL 7.2.1R applies to the suspension of dealings in units of a side pocket class under (2).