A collective investment scheme ("CIS") is an arrangement that enables a number of investors (called 'participants' in the legislation) to pool their assets with a view to the investors sharing in the profits or income from the purchase, holding, management or disposal of the assets or sums paid out of such profits or income. To be a CIS, participants in the arrangement must not have day to day control over the management of the assets.
The consequences of a fund being a CIS include:
Which exemptions may help, and how?
The two most relevant exemptions that prevent arrangements from being a CIS are the 'group' exemption and the 'existing business'/ Article 9 exemption.
1 the 'group' exemption This can apply where the operator is in the same corporate group as the investors. If it applies, the scheme is not a CIS and does not need the operator to be authorised. 2. the 'existing business' (Article 9) exemption This exemption typically applies to joint venture structures, as funds with multiple participants who are not all "permitted participants" cannot benefit from it.
Existing and new vehicles can elect not to be a CIS. This can be done if all of the participants in the joint venture (or their immediate holding entities) are carrying on an existing business which is not a regulated activity under the Financial Services and Markets Act 2000 ("FSMA"). You can look through any special purpose vehicle which participates in the joint venture in the structure to its owner to determine if a permitted business is being carried on by its parent – but you cannot look through multiple SPVs. If the exception applies, the scheme is not a CIS and does not need to appoint an operator or comply with the various UK regulatory requirements.
Operation - what it means
Establishing, operating and winding-up a CIS is a regulated activity and has to be carried out by an FSA-authorised operator. In our view, operating a CIS means looking after relations with investors, rather than managing the assets of the CIS (for which, see below). Examples of operation include:
Any decisions on these matters that are discretionary should be carried out by the operator.
Management - what it means
The FSA also regulates anyone seeking to act as the advisor to, or third party discretionary manager of the assets of, a CIS where those assets include regulated instruments (such as shares or units in other CISs). Direct property investments are not regulated for these purposes.
Marketing in the UK and Europe
In the UK
Marketing funds is subject to the rules contained in the Financial Promotion Orders. These rules require a fund manager's marketing to be:
To rely on these exemptions, precise disclosure wording must often be included in marketing materials.
How these exemptions apply will depend on whether the marketing is:
A fund that is a CIS cannot be marketed to non-exempt persons even if by an authorised person, or even when the document is approved by an authorised person.
In Europe
As in the UK, most EEA jurisdictions have their own regulatory restrictions on the promotion and marketing of unregulated investment schemes. There are two possible ways to address this: Passporting and Exemptions. A significant benefit of being an authorised fund manager is that, if you obtain the MiFID passport enabling you to carry out MiFID business through EEA countries, you will usually also be able to market your fund and activities throughout Europe
Passporting relates to permissions to undertake regulated activities (as opposed to promotion). If a firm is permitted to undertake a regulated activity in the UK and it has a passport to do so in another country it simply means it can promote and undertake that "activity" in the other country. The views of the EEA member states are not always consistent on whether the passport can be used for all aspects of fund marketing.
Many European jurisdictions have exemptions similar to the UK which would allow the fund to be marketed to sophisticated investors.
The future
Important proposals have been put forward by the EU that may change the position set out in this note. Our advice to clients now needs to cover the potential impact of the Directive on Alternative Investment Fund Management, which may come into force in 2011.
