Policy paper

Common investment funds Questions and Answers

Published 1 July 2014

Applies to England and Wales

This guidance is not intended to relate to Charitable Authorised Investment Funds (CAIFs), which are collective investment schemes authorised by the Financial Conduct Authority and registered as charities with the Charity Commission. This guidance should not be taken as representing the Commission’s policy regarding CAIFs. Further information regarding the Commission’s CAIF policy will be issued separately.

1. Question 1: When amending governing documentation of existing CIFs, do charity trustees have to follow precisely the changes made in the revised model schemes?

Answer: The commission’s model schemes are exactly that: just models. Accordingly, existing CIFs do NOT need to use precisely the same text as that used in the revised model schemes. The revised model schemes are intended to act as a guide to the type of changes existing CIFs may wish to make to their existing schemes to make them AIFMD compliant. Consequently, they are also free to make different and/or more detailed AIFMD-specific provisions, if they consider it prudent to do so according to the individual circumstances of their case. They may also therefore deviate from the language and phraseology used in the revised model scheme in exercising the s280 power.

2. Question 2: Can the terms of the amended governing document of a CIF incorporate by reference provisions contained in another contract (eg the terms of an appointment made between the Trustee(s) of a CIF and depositary or AIFM)?

Answer: There is no reason why the trustees of a CIF should not be entitled to incorporate the terms of such a party’s contract into the CIF scheme by reference, if the trustees feel that it is appropriate to do so. This may be, for example, because the relevant depositary appointment sets out the scope of the depositary’s liability and the scope of the depositary services it provides. However, if trustees do go down this route, it may be sensible, for future reference, to ensure that a copy of such contract is set out in a schedule to the revised scheme or attached as an appendix.

3. Question 3: The revised model schemes contain certain changes which are not strictly required by, or consequential to, the AIFMD, for example, 10% borrowing threshold. Are existing CIFs able to make the similar changes using the s280 power or would such changes require further approvals?

Answer: Yes, CIFs are able to make such changes using the s280 power but they must still notify the commission of them, once made. The only amendments which will need express commission prior approval will be most commonly those involving changes to a fund’s objects, changes to remuneration of its trustees/trustee benefits. In other words, any changes which do not come within the scope of the s280 power.

4. Question 4: Can existing CIFs ‘cherry pick’ provisions of the revised model scheme they wish to adopt and retain some of the existing provisions of their current schemes including retaining provisions which the commission has deleted from its revised model scheme?

Answer: Yes CIFs can cherry pick provisions from the revised model schemes and retain other clauses from their existing schemes. In its revised model schemes the commission removed the provisions which previously required its approval to be obtained for things such as the appointment/retirement/replacement of a fund manager. The commission would however prefer funds to remove provisions from their existing schemes which give the commission a role which it does not wish to continue to exercise and which would not require its involvement under the revised model schemes.

5. Question 5: In practical terms how should funds deal with amending the terms of an existing CIF where the amendments include both provisions which require commission approval and provisions which do not?

Answer: This will depend on how extensive the proposed amendments to the CIF scheme are. If the CIF is only looking to make changes to individual clauses of its scheme , the CIF should use the s280 procedure where this is applicable and only apply for commission approval of such changes that cannot be made using the s280 power, for example amendment of the fund’s objects or trustee remuneration clauses etc.

However, if the proposed amendments are so extensive that they amount effectively to wholesale substitution of a revised AIFMD compliant scheme (or one of the commission’s revised model schemes) in place of the existing scheme document, and effecting this involves numerous changes which require commission authorisation, such an application should be made by submitting a clean copy of the proposed wholesale replacement scheme or tailored revised model scheme (as applicable) together with a red line/track changed version showing the amendments which have been made. If the commission consider such draft acceptable, it will then make the scheme.

6. Question 6: When does AIFMD compliance become compulsory for CIFs?

Answer: 22 July 2014 - this is when transitional period for implementation of the AIFMD expires.

7. Question 7: When AIFMD compliance becomes compulsory will CIFs need to comply with FCA or commission regulation or both?

Answer: In short, both so far as applicable.

The commission has no statutory role in the regulation of CIFs other than the power to create them and its general powers in respect of charities. However, its approach has always been to regulate CIFs as charities (which they are treated as pursuant to section 99(3) Charities Act 2011) and ensure that they comply with applicable charity law, for example in relation to the trustees exercising their powers and decision making duties.

When AIFMD compliance becomes compulsory, CIF managers will become subject to compulsory compliance with various provisions of the AIFMD and oversight by the FCA in various regards.

A CIF will therefore need to comply with the requirements to file accounts with the commission, notify the commission of its winding up as charity law requirements, but will also need to comply with applicable FCA regulation so far as it is an investment fund. There will therefore be an element of dual regulation and potential dual notification requirements. This means that trustees and managers of CIFs will need to determine which Regulator to approach regarding any issues. They need to ask themselves whether the issue is an investment one or a charity law one, or even both.

8. Question 8: What is the commission’s policy on the creation of new CIFs?

Answer: The commission considers that charity investors are entitled to the protection that investment in an authorised investment fund provides. CIFs are not authorised investment funds but are alternative investment funds and subject to a more limited regulatory regime. Accordingly, when considering whether to create a CIF, the commission will firstly consider whether it should more properly be created as an authorised investment fund. The commission consider it is only in the interests of charity to make a CIF scheme if there are compelling reasons why an authorised investment fund is not an appropriate structure and, as the tax advantages of being a CIF as opposed to an authorised investment fund have been eroded, it does not consider these to be a necessarily significant factor in deciding what form an investment fund for charities should take. Accordingly, it anticipates the occasions when it will be prepared to create a new CIF will be limited.