PS21/14: A new authorised fund regime for investing in long term assets

A new authorised fund regime for investing in

long term assets

Policy Statement

PS21/14

October 2021

PS21/14

Financial Conduct Authority

A new authorised fund regime for investing in long term assets

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This relates to

Consultation Paper 21/12

which is available on our website at

www.fca.org.uk/publications

Email:

cp21-12@fca.org.uk

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Contents

1 Summary 4

2 The long-term asset fund 9

3 Permitted links rules 26

4 Distribution 32

Annex 1

List of non-confidential respondents 37

Annex 2

Abbreviations used in this paper 39

Appendix 1

Made rules (legal instrument)

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A new authorised fund regime for investing in long term assets

Contents by sector

This table sets out which chapters are particularly relevant for each sector. This is

where you will find the most relevant chapter(s) for your firm.

Sector Chapter

Fund managers

1, 2, 4

Insurers

1, 2, 3

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1 Summary

1.1 This Policy Statement (PS) sets out our response to the feedback we received to

Consultation Paper CP21/12 proposing a new category of authorised open-ended

fund called the long-term asset fund (LTAF). It also details the final rules and guidance

that we are introducing following the consultation.

1.2 The LTAF regime creates a category of authorised open-ended fund designed

specifically to facilitate investment in long-term, illiquid assets. Illiquid assets include

venture capital, private equity, private debt, real estate and infrastructure. They can

provide a useful alternative investment opportunity for investors able to bear the

risks of such investments. The ability to invest in illiquid assets, through appropriately

designed and managed investment vehicles, is also important in supporting economic

growth and the transition to a low carbon economy. Such investments can be higher

risk than diversified portfolios of listed equities or bonds but have the potential for

higher long-term returns in return for less or no immediate liquidity.

1.3 Evidence suggests that even some investors with long-term investment horizons are

not investing in long-term assets due to barriers, or perceived barriers, to doing so.

For instance, default arrangements of defined contribution (DC) pension schemes

commonly choose not to invest significantly in these assets, despite the long-term

nature of their investment horizons. If DC schemes were to invest in long-term illiquid

assets their expected returns would likely increase on average over time, although

potentially at higher risk.

1.4 The rules and guidance in this PS aim to address 2 barriers that stakeholders say

hamper investment in long-term illiquid assets, that:

• there is no UK authorised open-ended fund structure that enables investment in

long-term illiquid assets while offering appropriate structural safeguards

• the permitted links rules for unit-linked insurance hinder investment in illiquid

assets

1.5 Open-ended funds that invest in illiquid underlying assets yet allow investors to

redeem their investment on any given day, without notice, create a liquidity mismatch.

This can be hard for the fund manager to deal with. The Bank of England’s Financial

Policy Committee’s (FPC) ‘Financial Stability Report’ (2019) judged that the mismatch

between redemption terms and the liquidity of some funds’ assets creates a potential

systemic risk. In creating an open-ended fund regime to invest in illiquid assets, we

have considered the observations of the FPC, and international bodies such as the

Financial Stability Board and the International Organisation of Securities Commissions

(IOSCO), on the financial stability risks of liquidity mismatch in open-ended funds.

1.6 As part of the Bank of England's and FCA’s review of open-ended funds, we established

there should be greater consistency between the liquidity of a fund’s assets and its

redemption terms. To address this, there must be consistency between the amount

of notice investors have to give to redeem their investment and how long it will

realistically take the LTAF to sell these assets. To set a minimum standard, we have

decided to require LTAFs to permit redemptions no more frequently than monthly, and

to have at least a 90-day notice period on redemptions.

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1.7 We have tried to design an LTAF that has robust governance. It must also satisfy

appropriate regulatory standards to enable investors who understand the risks of

investing in long-term illiquid assets to invest with confidence. Given the regulatory

standards that LTAFs must meet, and following consultation feedback, we have

amended the distribution rules we proposed to enable LTAFs to be promoted to high

net worth individuals in addition to sophisticated and professional investors.

1.8 In line with our proposed consumer investments strategy, we do not want to impose

unnecessary restrictions on where consumers can invest. We want them to be able

to access suitable investments that are consistent with their attitude to risk. We

therefore plan to consult in 2022 on proposals to amend the rules further to enable a

broader range of consumers to invest in LTAFs in a controlled way.

Who this affects

1.9 This policy statement will primarily be of interest to:

• asset managers with experience of managing illiquid, long-term assets

• depositaries

• potential investors in long-term asset funds, like pension providers and trustees of

DC or hybrid pension schemes, and sophisticated or wealthy investors

• investment advisers and private wealth managers

• insurers who write unit-linked insurance business

• fund distributors

The wider context of this policy statement

Our consultation

1.10 Establishing a new fund regime is only one step in creating an environment where

investment in longer-term, less liquid assets, by investors who understand the risks,

do not need immediate liquidity and have long-term investment horizons, can flourish.

To address wider matters, together with the Treasury and the Bank of England, we

convened an industry working group (the Productive Finance Working Group (PFWG)).

The PFWG has been considering how the wider ecosystem can operationally support

the LTAF as a non-daily dealing fund. It has published a report setting out a number

of recommendations to overcome the barriers to investing in long-term illiquid

investments via authorised open-ended funds. We have been engaging with the PFWG

throughout the development of the LTAF. We are also undertaking work to establish

how value for money in pensions can be measured more holistically considering both

performance and cost.

1.11 Our August 2020 consultation on certain types of property funds (CP20/15) proposed

a move to notice periods of between 90-180 days. Respondents to the consultation

noted that much of the wider operational infrastructure around the distribution of

open-ended funds currently only supports daily dealing funds. This infrastructure

will need to change to support funds with notice periods. We are considering the

recommendations from the PFWG together with the responses to CP21/12 to

determine the most appropriate next steps around property funds.

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How it links to our objectives

1.12 The final rules set out in this policy statement advance our operational objective of

promoting effective competition in the interest of consumers. They are also relevant

to our consumer protection and market integrity objectives.

1.13 We consider that the LTAF advances our strategic objective of ensuring that the

relevant markets function well because the LTAF structure addresses the market

failure that DC default pension schemes do not invest in long-term, illiquid assets,

despite having the investment horizon to do so. The LTAF has been designed to

secure an appropriate degree of protection for consumers, by considering the degree

of risk from investing in a fund that is predominantly exposed to illiquid assets and

building protections into the structure that we believe are commensurate with the

risk. While these protections cannot remove all investment risk, we think that this

secures an appropriate level of consumer protection for investors to whom an LTAF

can be marketed or offered as part of a DC pension scheme default strategy. The LTAF

means that scheme members now have better opportunities to benefit from potential

illiquidity premiums of long-term illiquid assets. By requiring the LTAF’s redemption

terms to match the liquidity of the underlying investments, we consider this will help

advance our market integrity objective.

What we are changing

1.14 We are creating a new category of authorised fund called the LTAF, with its own distinct

chapter in the Collective Investment Schemes sourcebook (COLL), which forms part

of our Handbook. The framework provides flexibility to facilitate investment in long-

term illiquid assets combined with rules to address the specific risks these assets pose.

Outcome we are seeking

1.15 We want investment in long-term illiquid assets, including productive finance, to be a

viable option for investors with long-term investment horizons who understand and

are able to bear the risks of such investments, and who are seeking the potential for

higher long-term returns in return for less or no immediate liquidity.

1.16 We want funds investing in illiquid assets to have appropriate redemption terms

in place, including a mandatory notice period of at least 90 days. This will enable

the liquidity within the portfolio to be managed in a way that is fair to all investors.

Investment in productive finance assets is important for economic growth and

job creation. Without it, some long-term projects with good potential returns may

not happen. While the new LTAF fund structure will not address all the barriers to

investment in productive finance, we hope it will contribute to improving long-term

illiquid investment opportunities and will help promote effective competition.

Measuring success

1.17 If the new rules are successful, LTAFs will be launched and DC pension schemes will

choose to invest in them, increasing their exposure to long-term illiquid assets, and

improving the returns for their members in the longer term.

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Summary of feedback and our response

1.18 We received 46 written responses to CP21/12 and have engaged extensively with

stakeholders, including through the PFWG.

1.19 Respondents generally supported creating a new category of authorised fund to invest

in long-term, illiquid assets.

1.20 Some respondents argued that the proposed rules would not work as intended in

some areas, for example the rules around investing in loans and second schemes. We

have modified the rules to address the feedback.

1.21 We have addressed feedback on the role of the depositary in overseeing the

authorised fund manager’s (AFM) competence in valuing the fund. We have also

addressed other technical feedback on the drafting of the rules, including the

permitted links rules.

1.22 Given the nature of the investments permitted within an LTAF our CP said that we

did not expect any LTAFs to offer daily dealing but would not be prescriptive about

how liquidity issues could be addressed. We received feedback on this suggesting

that some firms could still try to seek authorisation for daily dealing LTAFs. We need

to reinforce our expectations and our position on the types of redemption terms

for LTAFs that are more likely to be appropriate, and to avoid LTAFs being developed

which we would not authorise. So we have set a minimum notice period of 90 days and

a requirement that LTAFs cannot offer redemptions more frequently than monthly.

These are minimum requirements and longer notice periods or less frequent dealing

are likely to be appropriate for some LTAFs. Managers must set appropriate terms and

redemption policies for an LTAF, ensuring they are consistent with the fund’s liquidity

profile and the investment strategy they are operating.

1.23 We have modified the Handbook provisions on the promotion of non-mainstream

pooled investments so that LTAFs can be promoted to high net worth investors

under these rules. However, firms should still have regard to their wider duties under

our principles and rules. In response to feedback, we plan to consult next year on

potentially changing the distribution restrictions on promoting LTAFs to a broader

range of retail investors.

1.24 We also plan to consult on amending the requirement for the depositary to be the legal

owner of an LTAF’s non-custodial assets. Where a firm wishes to launch an LTAF under

the rules we are now making, we will consider applications to waive this requirement

in accordance with the relevant statutory tests. Amongst other things, waiver

applications will need to satisfy us that proposed alternative custody arrangements

provide appropriate investor protection. We recommend firms approach us before

submitting a waiver application.

Equality and diversity considerations

1.25 In putting together the final rules and guidance in this PS, we have had due regard to

the need to eliminate unlawful discrimination, harassment, victimisation and other

conduct prohibited under the Equality Act 2010, the need to advance equality of

opportunity between those who share a protected characteristic and those who do

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not, and the need to foster good relations between persons who share a relevant

protected characteristic and those who do not. Overall, we do not consider that

the rules and guidance in this PS adversely impact any of the groups with protected

characteristics ie age, disability, sex, marriage or civil partnership, pregnancy and

maternity, race, religion and belief, sexual orientation and gender reassignment.

However, we recognise that investing in LTAFs will require certain types of investor, for

example those close to retirement, to carefully consider when they might need to take

out the proceeds of their investment.

1.26 CP21/12 asked:

Q1: Do you consider that these proposals raise any equality and

diversity issues? If so, please provide further details and

suggest action we might take to address these.

1.27 None of the respondents to the consultation raised any concerns about equality and

diversity considerations.

Next steps

1.28 We set out the final Handbook text in Appendix 1. The new Handbook rules and

guidance will come into force on 15 November 2021. We encourage firms who are

considering making an authorisation application for an LTAF to engage with us prior to

submitting an application.

1.29 In Chapter 5 of CP21/12, we discussed broadening the LTAF distribution rules to a

wider retail audience in the future. We remain open to further broadening the base of

retail investors who can access the LTAF, and plan to consult on any proposals for rule

changes in the first half of 2022.

1.30 We also received feedback that the requirement for the depositary to register the

title to assets in its own name, rather than the name of the fund or the manager, is not

practical for all eligible assets that an LTAF might invest in. As this feedback applies

to other categories of fund and not just the LTAF, we aim to consult on alternative

registration options more broadly in the first half of 2022.

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2 The long-term asset fund

2.1 This chapter provides a summary of feedback we received and sets out our response

to the issues raised, including areas where we are changing the rules in response to

feedback.

Basis of regime: governance and disclosure

2.2 The basis of the LTAF regime that we proposed was strong governance and clear

disclosure. We set out in our consultation why we considered it appropriate for the

LTAF to operate to these standards. We asked:

Q2: Do you agree that clear disclosures and additional

governance (as set out in 3.9-3.13 and 3.39-3.43), in

addition to the existing rules, provide appropriate levels of

protection for potential investors in an LTAF? If not, what

alternative approach would you suggest?

2.3 Most stakeholders who responded to this question agreed with our proposal.

They noted that strong governance was important when dealing with illiquid long-

term assets. They also noted that clear disclosure would help investors and other

stakeholders, including advisers and depositaries.

Governance

2.4 Almost all respondents agreed that there should be independent directors on the

board of the AFM of an LTAF. They also agreed it was appropriate for a senior manager

within the AFM to have a prescribed responsibility to oversee that the LTAF was being

managed in the best interests of investors.

2.5 Some noted practical matters, such as situations where firms had different entities

managing authorised funds investing in liquid assets and unauthorised funds

investing in illiquid assets. They noted that there might be challenges in identifying

the right individual to take on the prescribed responsibility, and that our rules might

require a change of Chair. They also noted that, if the entity that currently operates

unauthorised funds was used to manage an LTAF, it would need to appoint non-

executive directors. Some noted that these firms may also need to add the regulatory

permission to manage authorised funds.

2.6 Some stakeholders argued that additional governance, beyond what we proposed,

would be desirable, such as an independent advisory committee. Some thought

that this should be required, while others argued that firms should be able to choose

whether to have additional governance.

2.7 We proposed that AFMs carry out an assessment, similar to the assessment of value

required for all authorised funds, of how an LTAF is being managed in the best interests

of the fund, its investors and the integrity of the market. Many stakeholders supported

this additional assessment but some raised concerns. Some argued that it would be

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too onerous, while others felt that it would lead to boiler-plate reporting. Some felt that

managers should be considering these factors anyway as part of the ‘quality of service’

consideration of the assessment of value. Depositaries were concerned that there

might be an implication that the depositary would oversee the additional assessment.

2.8 Many respondents pointed out that the governance requirements for an LTAF were

higher than those required for a fund designed for professional investors. They argued

that managers would not choose to operate a fund with these additional requirements

unless it was possible to distribute it to some categories of retail investor.

Our response

We have considered the feedback and we will proceed with the rules and

guidance we consulted on in this area.

We have designed the LTAF regime to allow firms to manage authorised

funds with high levels of investment flexibility. We have established a

regulated investment framework that has additional controls over and

above those of unauthorised funds. The LTAF has been designed to

permit firms to set up authorised funds to give confidence and clarity to

potential investors about the standards to which they must operate.

LTAFs will be able to invest in a wide range of illiquid assets. Good

governance will be important in managing the risks of such investments.

We consider that the proposed governance requirements will secure

an appropriate degree of protection for investors in LTAFs and will help

provide investors with the confidence to invest in them.

We do not consider it appropriate to prescribe additional governance

requirements beyond what we consulted on. While some managers may

wish to add other governance features such as independent advisory

boards, we think it is appropriate to allow investors to decide whether

such additional features, and the costs associated with them, are

worthwhile. We would note that any additional governance features do

not remove the responsibility from the AFM for managing the fund in

accordance with our rules.

We consider that it is appropriate that firms who do not currently

manage authorised funds would need to get additional permissions

to manage an LTAF. We would encourage firms who want to manage

LTAFs to engage with our Firm Authorisations team where they do not

currently have the permission to manage an authorised AIF.

Our rules will require governing bodies of the AFM of an LTAF to have the

collective knowledge, skills and experience to be able to understand the

AFM’s activities, in particular the main risks involved in those activities

and the assets in which the LTAF is invested. This is in line with existing

requirements in article 21 of of the UK version of the Alternative

Investment Fund Managers DIrective (AIFMD) level 2 Regulation, and

our expectations of any governing body of a full-scope UK alternative

investment fund manager (AIFM). It is particularly important for

managers of LTAFs, which may invest in complex or esoteric assets.

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The additional assessment is the responsibility of the AFM, and the

depositary does not have a role in overseeing it.

Disclosure

2.9 Respondents were generally supportive of clear disclosure underpinning the LTAF.

Most respondents agreed with the requirement for disclosures to be clear and in plain

language. Some stated that this should be the standard for all materials on the LTAF,

not just the prospectus, as the draft rules proposed. However, some respondents were

concerned this standard was hard in practice.

2.10 Some respondents commented on the disclosure of charges. Some argued that it

was important that LTAFs disclosed charges fully. Others felt that a disclosure of all

charges in underlying vehicles might make LTAFs appear expensive. They also felt that

investors may not consistently apply a look-through to underlying investments for

other similar products, making it hard to compare the costs of different products.

2.11 There was support for alignment with the Cost Transparency Initiative (CTI) templates.

Respondents also supported funds having to explain the operation of performance

fees, so that pension fund trustees could assess whether the scheme would comply

with the Department for Work and Pensions (DWP)'s rules. One respondent said it

could be extremely complicated for the AFM of an LTAF to describe how indirect

performance fees could affect the fund’s performance. Some respondents were

concerned about how to account for performance fees in underlying vehicles, citing

risks to fairness between different investors. One respondent asked us to clarify

whether the requirement to disclose the maximum that a performance fee can

amount to was indirectly imposing a cap on performance fees. Other respondents

suggested that such a cap should be imposed, to manage the risk of performance fees

breaching the charge cap for some default arrangements of DC workplace pensions.

Others suggested that performance fees should not be permitted for LTAFs.

2.12 A few respondents noted the potential for LTAFs to make additional disclosures if they

have sustainability objectives. Most of these respondents said that any obligations

should be consistent with requirements for other types of fund. One suggested

that the LTAF rules should prescribe specific disclosures for funds with sustainability

objectives.

Our response

We have considered the feedback and are proceeding with the rules as

consulted on.

We consider that disclosure is important to enable potential investors in

LTAFs to understand the fund that they are investing in. Materials should

be written in a way that is appropriate to the audience. When prospectus

disclosures are clear and in plain language it should be easier for other

disclosure materials to explain important features of the fund while being

consistent with the prospectus.

We support the CTI’s work and would welcome LTAFs disclosing

consistently with the CTI templates. We do not plan to require this, as

not all LTAFs may have investors who use these templates. We would

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encourage the CTI to ensure that its templates can be used for LTAFs.

We would encourage managers of LTAFs, where they have investors who

use the CTI, to provide the relevant information.

We proposed requiring disclosure of performance fees as they

can be complicated. We expect managers of LTAFs to explain

how their performance fees work, so that investors can make a

judgement about the merits of investing in a fund. The PFWG has

also made recommendations about how DC pension schemes might

accommodate funds with performance fees within the charge cap.

We did not intend to suggest a cap on performance fees. Where there

is no maximum fee, the disclosure should explain this. We also do not

plan to impose such a cap or to prohibit performance fees. The rules for

authorised funds do not contain any caps on fees, but managers must

undertake an annual assessment of value. We will allow the market to

decide the appropriate structure and amount of any performance fees

based on full disclosure.

We are not planning to add specific sustainability disclosures to the

LTAF rules. We note that the Government announced in October 2021

that it plans to introduce a sustainability disclosure regime which we

anticipate would apply to LTAFs. We would also draw the attention of

potential managers of LTAFs to the letter we sent to Chairs of AFMs on

funds with environmental, social and governance (ESG) / sustainable

investment objectives.

Detailed provisions

2.13 Our CP described the detailed provisions of the LTAF rules. We explained the rules we

had set out and asked:

Q3: Do you agree with the detailed requirements (on purpose,

investment powers, borrowing, valuation, redemptions

and subscriptions, due diligence, knowledge, skills and

experience, and reporting) which we propose for the LTAF?

If not, which requirements do you not agree with, and why?

What alternative requirements would you suggest?

Purpose

2.14 We proposed that an LTAF must have an investment strategy mainly to invest in

assets which are long-term and illiquid in nature. Respondents supported our overall

policy objective in limiting the purpose of an LTAF to invest in long-term illiquid assets.

Many respondents noted the guidance in COLL 15.6.7G. They noted our expectation

that an LTAF would invest at least 50% of its value in long-term, illiquid assets. Some

respondents argued that they would expect LTAFs to invest a significantly higher

proportion into illiquid assets. They argued that we should set a higher expectation of

the proportion of illiquid assets.

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2.15 Other respondents asked whether the 50% expectation should be seen as a hard limit

that should be encoded into compliance systems and monitored by the depositary.

Some of these respondents were concerned that a prescriptive limit could be difficult

to comply with at all times, and there might be legitimate situations where an LTAF held

less than 50% of its value in illiquid assets.

2.16 Some respondents suggested that the 50% expectation should be set at the point of

investment rather than on an ongoing basis. Others asked for greater clarity around

our expectations, for example around when an investment had become listed and

was no longer illiquid. One respondent noted the references to productive finance in

the CP and asked us to provide a definition of productive finance. One asked whether

LTAFs are required only to invest in productive finance assets, or in UK assets. Another

respondent asked us to provide a definition of illiquid assets.

Our response

We are finalising the rule as consulted on. We will modify the guidance to

clarify our expectations.

We set out a high-level permissive rule that requires that the investment

strategy of an LTAF must be to invest mainly in long-term illiquid assets.

Our guidance on this rule, set out that we would expect LTAFs to invest

at least 50% of their assets into unlisted securities, or other long-term

assets, or funds investing in such assets.

An LTAF must be managed in line with its investment objectives, policy

and strategy. We did not intend the 50% guidance to constitute a limit

to be monitored on a day-to-day basis either by the manager or by the

depositary. The guidance applies to the investment strategy and not to

the holdings in the fund at any time and we have altered it to make this

clear. We intended that this would explain what we meant by ‘mainly.’ We

did not seek to imply that LTAFs should not have an objective of investing

in a much higher proportion of illiquid assets, if this is what the manager

considers appropriate.

We do not propose to define productive finance. We are not limiting

LTAFs to investing only in assets considered to be productive finance.

There is also no requirement for LTAFs to invest only in UK assets.

LTAFs are intended to enable investment in productive finance,

and the PFWG has considered how the LTAF might be used for this

purpose, but we want to allow investors to choose how and where they

want to invest. We consider it is not necessary to define 'illiquid assets'

beyond the guidance in COLL 15.6.7G.

Investment powers

2.17 Respondents supported the principles-based approach and broad flexibility provided

by the investment powers. Most respondents supported basing the investment

powers on those for the qualified investor scheme (QIS). Respondents raised 3

particular questions around investment powers, including the rules on the prudent

spread of risk, the rules around loans, and also second schemes.

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Prudent spread of risk

2.18 Respondents generally supported the standard of a prudent spread of risk for an LTAF.

Some respondents noted that the requirement was a principles-based one, rather than

prescriptive and detailed rules similar to those for UCITS schemes and non-UCITS

retail schemes (NURS). While respondents supported a principles-based approach,

some asked for further guidance on our expectations of managers. Depositaries asked

how they would be able to monitor compliance with the prudent spread of risk, without

detailed rules. Some respondents questioned whether the requirement for a prudent

spread of risk was appropriate, if the LTAF could only be distributed to professional and

sophisticated retail investors.

2.19 Many respondents queried the rule giving managers a 24-month start-up period

during which an LTAF would not be subject to the rules covering limits on investments.

Some fund managers questioned whether this would be enough time to achieve a

prudent spread of risk, while some pension stakeholders asked whether trustees would

be unable to invest in an LTAF until it was subject to this requirement because of their

own obligation to spread risk. Those who supported a longer start-up period proposed

between 3 and 5 years as alternatives, potentially involving the fund manager applying

for an extension to the start-up period. Some stakeholders also asked whether the

wording of the rule achieved the policy intent, and whether the period should start at

the commencement of the initial offer, or when capital had been raised.

Our response

We continue to consider that a prudent spread of risk is appropriate for

the LTAF. The FCA Handbook does not define the term ‘prudent’, but in

our view the word should be given its ordinary natural meaning, even if it

is not supported by prescriptive requirements.

We have removed the rule giving a 24-month period during which

limits on investments do not apply. We have concluded that it does not

deliver the policy intention in this area. We consider that the overarching

requirement to have a prudent spread of risk gives LTAF managers a

sufficiently broad framework in which to operate. Because the LTAF

is not subject to many limits, providing relief from these does not in

practice provide the manager with scope to manage the fund differently.

We consider that an LTAF should be allowed time to build up its

portfolio, but that it should not engage in excessive concentration

of risk during this time. For example, we would not expect an LTAF to

invest all (or a high proportion of) its assets into a single investment

during the start-up phase. This would be an excessive concentration

of risk for investors during the time where the investment constituted

a high proportion of the assets.

Loan rules

2.20 Respondents welcomed the ability of LTAFs to invest in and to originate loans.

However, several respondents noted that the detailed provisions of COLL 15.6.8R(2)

would make it difficult or impossible to invest in loans in practice. Several respondents

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questioned whether the rules achieve the policy intent of permitting legitimate

investment in loans. Some respondents considered that some types of loan would

not be appropriate, for example loans to the AFM or its affiliates or connected parties.

However, many respondents highlighted that the rules were significantly more

restrictive, prohibiting loans to any authorised firm or affiliate of an authorised firm.

Respondents agreed that loans should not be made to natural persons.

2.21 Respondents also noted that the prohibition on loans to funds might be problematic,

and that the inability to lend to someone whose intention was to invest in a security

would limit common practices in the private equity industry.

2.22 Respondents argued that the requirement for an investment in a loan not to give rise

to a conflict of interest was too constraining. There are many common situations

where a conflict of interest would exist, for example if the LTAF invested in the loan

alongside other clients of the manager. Respondents suggested that the existing

provisions in FCA rules around conflicts of interest management would be sufficient to

manage risks in this area.

2.23 Respondents also noted that the requirement for various parties not to have a

commercial interest in a loan would prevent co-investment strategies. They pointed

out these strategies are common in private lending markets.

2.24 Some respondents noted that the rules on loans only apply to the extent that they

are not permitted investments under COLL 15.6.8R(1). They asked for clarity as they

were concerned that managers may not be comfortable investing in loans under the

proposed regime.

Our response

We have amended the rules on investment in loans.

We have decided that existing rules around conflicts of interest

management and requirements to act in the client’s best interests will

manage the risks in this area that we wanted to address. Managers of

LTAFs, who must be full-scope UK AIFMs, will be subject to relevant rules

on conflicts of interest in SYSC 10 and Articles 30-36 of the AIFMD level

2 regulation. They will also be required to assess, at least annually as part

of the assessment report for the LTAF, how they have managed and

mitigated conflicts of interest. This includes outlining how their actions

have been in the best interests of the LTAF, its investors and the integrity

of the market. They must disclose this report publicly.

We have therefore made the rules on types of permitted loan less

prescriptive. We are keeping some limitations on lending, where

the loan is to a natural person, or to a party where it may be difficult

or impossible to manage a conflict, for example a loan to the fund

manager or to the depositary or an affiliate of those firms.

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Second scheme rules

2.25 Respondents welcomed the ability to invest in a wider range of second schemes than

a QIS can invest in. They noted that many private market structures use legal vehicles

that meet the definition of a collective investment scheme. Most respondents felt

that the rules would not lead to circular investment within LTAFs, although one raised

concerns that this rule created a risk of this happening.

2.26 Many respondents argued that there should not be a requirement for any prudent

spread of risk within a second scheme. They argued that it was appropriate for the

LTAF itself to be held to this standard, rather than any underlying investment. They

argued that this would severely limit the investment opportunities for an LTAF, and in

particular could prevent an LTAF investing in a vehicle that wraps a single asset. Some

respondents noted that this is common practice in private markets.

2.27 A small number of stakeholders raised concerns that the due diligence requirements

for second schemes would be impractical. They said that in private markets it is

common for investors to buy interests in schemes in the secondary markets, and

that this might be an attractive market for LTAFs. They said that the guidance in

COLL 5.7.11G could be impractical in these circumstances. The LTAF manager may

not be able to carry out due diligence on the manager of the underlying scheme as

envisaged by the guidance. This is because some of the information would not be

publicly available and the LTAF manager may not be able to get information directly

from the manager. They also noted that standards were not universal in all markets and

would not necessarily be met for all entities that met the legal definition of a collective

investment scheme.

2.28 Some stakeholders questioned the proposed rule on feeder funds, noting that a rule

(COLL 15.6.2R(1)) appeared to refer to the wrong entity.

Our response

We have amended the rules to remove the requirement for a second

scheme to have a prudent spread of risk. We have considered the

feedback and concluded that application of a prudent spread of risk

at the level of the LTAF itself delivers an appropriate level of investor

protection.

We consider that the due diligence requirements are appropriate for

second schemes. We would expect managers to make reasonable

efforts to consider basic protections when investing in second schemes.

We have amended the guidance to clarify that the guidance in COLL

5.7.11G can be applied in a proportionate way by managers of LTAFs.

Managers should make reasonable efforts to assess the matters

covered by COLL 5.7.11G. We recognise that it may not be possible to

assess some of the elements of COLL 5.7.11G for some schemes.

We agree that COLL 15.6.2R(1) is not accurately worded and have

amended it.

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Borrowing

2.29 There were mixed views on our proposed 30% limit for borrowing. Some stakeholders

suggested that LTAFs should not be permitted to borrow if they are open to retail

investors. Others suggested that the borrowing limit should be set at 100%, in line with

the QIS rules. The majority of respondents thought that the proposed 30% limit was

sensible and did not foresee major issues with it, though some of those who supported

it felt it would be better to have more flexibility.

2.30 Respondents noted that the practical impact of a 30% limit would be that managers

would stay significantly below that limit to avoid the risk of a breach. They noted that

this would be likely to discourage any systematic borrowing by LTAFs.

2.31 Many of those stakeholders who supported higher levels of borrowing suggested that

this was particularly important during the LTAF’s initial investment phase and proposed

that the limits on borrowing should be relaxed during this period.

2.32 Some respondents asked us to clarify the rules on borrowing. They noted that the CP

said that borrowing was only to be considered at the scheme level, not in underlying

investments, and felt this could be clarified by adding Handbook guidance. Others

sought clarification on the definition of borrowing, or confirmation that certain

practices did not constitute borrowing. One sought clarification that LTAFs could

borrow in different currencies.

Our response

We will proceed to make the rules as consulted on. As set out in the

CP, the manager will have to consider an appropriate level of borrowing

for the investment strategy. Because LTAFs will invest mainly in illiquid

assets, and because they are open-ended, we consider that it is

appropriate to limit the level of borrowing that an LTAF can undertake.

The rules only limit borrowing by the LTAF, and not in any underlying

investments.

We have reviewed questions around the definition of borrowing. We do

not think it is necessary to provide further detail as to how borrowing

should be defined under our rules.

Valuation

2.33 Respondents supported a principles-based approach to valuation requirements.

There was also widespread support in principle for the manager of an LTAF to use

either an internal or an external valuer. One respondent argued that LTAFs should be

independently valued.

2.34 Several respondents raised practical concerns about the proposed rules for

valuations. Respondents noted that the depositary would not be able to make an

assessment ‘without qualification’ as to whether the manager has the competence to

act as internal valuer without having valuation expertise which they do not currently

have. Some raised concerns about whether a depositary has the skills to make any

assessment of the fund manager’s competence. Others said that the depositary’s

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oversight of the manager’s competence to value the assets would increase confidence

in the LTAF.

2.35 Several respondents noted that, although AIFMD provides for external valuers, in

practice few firms are prepared to act as an external valuer because they are subject

to unlimited liability if they are found to be negligent in their valuation. Respondents

reported that this is widely interpreted as ‘simple’ negligence, which could be the result

of an error made in good faith. Several respondents suggested that we should change

the AIFMD wording to state that liability would only be in cases of gross negligence,

covering serious errors or an intentional failure to perform the valuation appropriately.

Respondents noted that valuers need professional indemnity insurance, but it would

not be possible to get this to cover simple negligence.

2.36 Some respondents argued that fund managers should be able to use valuation

advisers to support an internal valuation. They noted that the draft rules require the

manager itself to have the competence to value the assets, but that it is common

practice for managers to get independent valuation support. They noted that this is

similar to the role of the standing independent valuer for property funds, and that it

would be considered good practice to take this approach.

2.37 Respondents also said that, for a fund of funds investing in other funds where there

is independent valuation scrutiny, to require the fund of funds itself to have an

external valuer would be unnecessary and duplicate work already done. Respondents

suggested that such funds should not be subject to the requirement to appoint an

external valuer.

2.38 We proposed requiring LTAFs to be valued monthly, in line with the requirement for

NURS operating limited redemption arrangements. Several respondents noted that

normal valuation frequency in the illiquid asset market is quarterly. Some respondents

argued that while monthly might be appropriate for many LTAFs it would not

necessarily be right for all. They argued that the requirement for monthly valuation

would add cost to managing an LTAF. In contrast, some respondents representing DC

pension schemes said that monthly valuations might be too infrequent for the needs

of DC pension scheme defaults.

2.39 Respondents made other points about valuation. Some sought clarity around whether

the rules on suspension where there is material valuation uncertainty should apply.

Others noted that it was important to disclose the basis of the valuation of each asset

to give investors confidence and transparency.

Our response

We have amended the rules to address this feedback.

We have altered the requirement for the depositary to make a

determination without qualification that the AFM has the knowledge,

skills and experience required to value the assets independently. Instead

we will require the depositary to determine that the AFM has the

resources and procedures for carrying out a valuation of the assets. This

reflects the requirements in FUND 3.11.25R(2) and FUND 3.9.

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We note the points raised around the potential liability for external

valuers. We consider independent valuation of illiquid and hard-to-value

assets to be an important control to protect consumers. We would

like the market for external valuers to work better, so that all managers

of LTAFs can access their services on reasonable terms. The liability

standard comes from the AIFMD and was transposed through the

Treasury’s secondary legislation as part of implementing the Directive.

We are unable to change the requirement at this stage, but are

considering the function of external valuer together with the Treasury.

We are comfortable with AFMs using the support of valuation advisers

to value individual assets, but the AFM remains responsible for carrying

out the valuation and for ensuring that it is done impartially. We have

amended the rule to clarify this.

Where an LTAF invests in other collective investment schemes that are

themselves subject to an independent valuation by an external valuer, we

agree that the LTAF manager should be able to rely on that valuation.

We continue to consider that at least monthly valuation is important

and appropriate for LTAFs. Where our rules require a valuation that will

not be used for dealing in units in the fund, we do not consider that it

would be too onerous for the manager to produce an updated indicative

valuation based on known developments in the portfolio. This should

give investors in LTAFs confidence that the valuation of the LTAF is not

stale. Equally, we do not consider that it would be appropriate to require

more frequent valuation.

We considered whether the requirements for suspension of dealing

when there is material valuation uncertainty should apply. These rules

were introduced for NURS that invest in real estate. They require

suspension when the standing independent valuer deems that there

is material valuation uncertainty over more than 20% of the assets.

The rules were introduced to protect retail investors in daily-dealing

property funds. During the initial period of market turbulence during

the Covid pandemic, all daily-dealing property NURS were suspended

because of this rule. Many property QIS also suspended, although

there was no specific rule requiring them to do so. We do not plan

to require suspension for LTAFs where there is material valuation

uncertainty, but in such cases managers of LTAFs should consider

whether it is in the interests of unitholders to suspend dealings as per

COLL 15.10.3R.

Redemptions and subscriptions

2.40 Respondents generally supported our proposed non-prescriptive approach

to redemption and subscription terms. There was also widespread support for

suspensions only being used to protect the interests of investors in exceptional

circumstances.

2.41 Some respondents suggested that there should be elements of prescription within

the rules. They suggested that we could require minimum notice periods or maximum

dealing frequencies. They noted the policy intention that LTAFs should not be daily

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dealing, but said that there may be some market pressure to have more frequent

dealing than was appropriate for the assets. One respondent argued that we should

set a standard notice period, similar to the notice period proposed for property funds

in CP 20/15.

2.42 Some respondents argued that we should permit closed-ended LTAFs, or LTAFs with

a single dealing point, ie a fund with a fixed life where money is returned to investors

at the end of the fund’s life. They argued that such structures are commonly used to

invest in long-term assets in the professional investor market, and that some private

assets are not suited to open-ended structures.

2.43 Some respondents said that LTAF managers should be permitted to use a wide

range of liquidity tools including lock-ins, caps on redemptions and deferrals. One

respondent argued that we should consider redemption restrictions that could only be

imposed under certain circumstances, such as deferrals when redemptions exceed a

set amount, in the same category as suspensions, and only permit them in exceptional

circumstances.

2.44 Some respondents raised the prospects of an LTAF operating with a commitment

approach, where funds are drawn down only when the manager makes an investment.

They noted that this is a common model for existing funds that invest in illiquid private

assets.

2.45 One respondent highlighted that managers might have to control subscriptions as well

as redemptions to reduce the risk of an LTAF being diluted by large inflows.

2.46 Some respondents said that further guidance might be needed on liquidity

management tools. Some said that this should be industry guidance rather than

regulatory guidance. Some respondents pointed to the IOSCO principles for liquidity

management.

Our response

To reinforce our expectations and our position on what redemption

terms for LTAFs may be appropriate, we have made some adjustments

to address feedback to the consultation. These also reflect more clearly

in the rules the policy intention which we set out in the consultation

paper. This will reduce the risk that managers apply for a scheme to

be authorised as an LTAF where that scheme does not meet our

expectations.

We will add a rule that requires an LTAF to redeem units no more often

than monthly. Given the nature of investments LTAFs are likely to

hold, we consider that this sets an appropriate maximum redemption

frequency for an LTAF. It ensures that the policy intent for LTAFs not to be

daily dealing is clear within the rules.

We will also add a rule requiring an LTAF to have a notice period for

redemptions of at least 90 days. In practice, we would expect that many

LTAFs would have notice periods significantly longer than 90 days. For a

fund to be fair to all investors, we would expect redemptions to be met

from the sale of a representative sample of the investment portfolio.

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If an LTAF plans to invest in highly illiquid assets where a notice period

of 90 days would be insufficient to sell such a representative sample,

we would not expect to authorise it with a 90-day notice period. This

rule makes our expectations clear as to the minimum possible length

of notice period for redemptions. We do not consider it appropriate

to set a standard notice period. Managers of LTAFs must make their

own decisions on the appropriate terms for their fund, based on the

investment objectives, investment policy and investment strategy of the

LTAF, and the reasonable expectations of the target investor group.

It is important for funds authorised by the FCA to give unitholders or

shareholders the right to redeem their units or shares. If a fund intends

to make investments that are only suited to a closed-ended vehicle, we

would not expect the manager to seek authorisation as an open-ended

fund.

Our rules intend to allow managers to use a range of liquidity

management tools appropriate to investments in illiquid assets, provided

that they are disclosed clearly to investors.

Suspension of dealing is not a liquidity management tool. It exists to

protect investors in exceptional circumstances. We do not consider that

tools such as deferrals and limits to redemptions or subscriptions should

be put in the same category as suspensions.

We consider that our rules create a framework that reflects the IOSCO

principles for liquidity management.

We would welcome the development of guidance by industry on

appropriate lengths of notice periods for different types of asset as

recommended by the PFWG.

We have considered whether an LTAF may operate a commitment

approach to subscriptions. We do not rule this out, but any LTAF that

wanted to operate in this way would need to comply with the existing

legislative framework for authorised funds, as well as with the fund

rules. If a firm is considering applying for authorisation on this basis, we

would welcome early engagement with us on their proposed model.

Investment due diligence

2.47 Most respondents strongly supported our proposed approach to investment due

diligence. A small number felt the requirements potentially meant that firms would

have to duplicate the investment due diligence that they were required to do under

AIFMD. Some respondents suggested that we could provide more guidance around

our expectations, or that industry guidance could be developed to describe what good

practice would be for different private asset classes.

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Our response

We will proceed with the rules as consulted on in this area.

We consider that the rules are compatible with the AIFMD

requirements and do not require unnecessary duplication of effort. We

do not consider it is necessary for us to provide guidance, but would

welcome any work by the industry to set out what is good practice for

investment due diligence for different asset classes.

Knowledge, skills and experience

2.48 Those who responded on this topic agreed that only full-scope UK AIFMs should be

permitted to manage LTAFs. There was also widespread agreement that managers

of LTAFs should have the appropriate knowledge, skills and experience of managing

assets in the proposed asset class and be able to demonstrate this as part of the

authorisation process.

2.49 Some respondents were concerned that there was a gap between firms with

experience of managing authorised funds, and firms with experience of investing in

illiquid assets. They noted that firms might have to restructure their businesses or hire

relevant people to ensure they had the appropriate knowledge, skills and experience.

Our response

We will make the rules as consulted on.

Managers that want to offer LTAFs will have to have or acquire the

knowledge, skills and experience of managing the appropriate asset

classes.

Reporting

2.50 Feedback on the quarterly report was mixed. Several respondents noted that a

quarterly reporting cycle was normal for private market funds. Some respondents felt

that quarterly reports would help in providing investors with a regular update on their

investments. Other respondents argued that quarterly reports wrongly signal that

investors should consider their investment in the short term. Some argued that there

was a risk such reports would prompt investors in an open-ended fund to reconsider

their investment, potentially creating redemption pressure.

2.51 Several respondents noted that the requirement to produce the report within 20 days

of the quarter end would be challenging for many private market strategies. They

argued that a period of 60 days was more realistic for these asset classes, given the

time lags in collating information, particularly for funds of funds. Some respondents

also felt that the additional cost of producing the quarterly report was not justified, and

that 6-monthly reporting provided investors with adequate transparency. They argued

that firms should simply be under the more general obligation under Principle 7 of the

FCA Principles for business to pay due regard to the information needs of investors

and could choose whether this involved quarterly reporting.

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2.52 A small number of respondents commented on the annual reporting requirements.

They argued that the time to produce the annual report should be extended to 6

months, rather than 4 months, particularly for funds of private funds.

Our response

We will make the rules as consulted on.

Unlike funds investing in liquid assets, where public information

is always readily available about the markets in which the fund is

investing, investors in LTAFs will often need the fund manager to

give them information. The quarterly report will provide some basic

information about portfolio developments and should not be excessively

burdensome to produce, particularly as LTAFs are unlikely to be

undertaking many transactions in each period. We consider that the

information required for a quarterly report, which is either a matter

of record or information that the manager will produce at the time

of the transaction, should not take long to collate and produce, and

the requirement to report within 20 days of the quarter end provides

investors with timely information.

For annual reporting, we think the requirement to report within 4

months is appropriate.

Other matters raised

2.53 We asked:

Q4: Do you have any other observations on the proposed

regime for LTAFs?

2.54 We received a range of responses, including:

Depositary ownership of assets

2.55 Depositaries and fund managers noted that the draft LTAF rules proposed requiring

depositaries to take legal ownership of all assets of the LTAF. They explained this

created significant issues for depositaries in some cases. They presented a proposed

alternative model where the assets would be legally owned by the fund itself (if it has

legal personality), or by the fund manager on behalf of the fund. This model is aligned

with the requirements under AIFMD for non-custodial assets.

Our response:

We have considered the proposal for an alternative model of legal

ownership of assets compared to the requirements for authorised funds.

We accept that the proposed model, based on the rules for NURS and

QIS, may not work for some asset classes available through an LTAF

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and could be burdensome for other types of asset, such as real estate.

We agree that alternatives should be available, but note that these

could result in a transfer of risk from the depositary to the fund and its

investors.

We consider that the AIFMD ownership model may be appropriate

for funds aimed at professional investors who can assess the risks

and decide whether to accept them. However, we consider that retail

investors may expect some additional requirements to be put in place to

mitigate these risks. We plan to bring forward proposals to amend these

rules in a consultation in the first half of next year.

In the meantime, where a firm wishes to establish an LTAF, we will

consider applications to modify or waive this requirement. Among

other things, waiver applications will need to satisfy us that proposed

alternative custody arrangements provide appropriate investor

protection. Before modifying or waiving any such requirement, we

will need to be satisfied that the relevant conditions are satisfied. We

would recommend that firms approach us before submitting a waiver

application.

End of life

2.56 One respondent questioned whether there should be provisions for LTAFs to be

wound down efficiently. They noted that, while an LTAF could operate on a continuing

basis as an ‘evergreen’ structure, it was common for private market funds to be wound

down, and the LTAF rules should consider the risks associated with this.

Our response

We do not consider that this is an area where we need to make rules.

An AFM of an LTAF could consider if they want to address this issue,

and if so could include a provision within the instrument constituting

the fund and the prospectus.

Tax considerations

2.57 Respondents made a number of points regarding the tax treatment of LTAFs, including

in relation to ISA eligibility and the application of VAT to management fees.

Our response

We have been working closely with the Treasury and HMRC throughout

the development of the LTAF. Tax issues for the LTAF have primarily been

considered through the Treasury-led call for input on the Government’s

review of the UK fund regime.

The LTAF rules permit an LTAF to be authorised as a property

authorised investment fund (PAIF) and as an authorised contractual

scheme (ACS). We understand that the Government will ensure that

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pre-existing tax legislation continues to operate effectively in these

cases.

Listing of LTAFs

2.58 One respondent argued that LTAFs should be allowed to be listed and traded on a

secondary market.

Our response

An LTAF that has the legal form of an open-ended investment

company (OEIC) could seek a listing in the UK under the FCA’s listing

rules (currently LR 16.1.1R, from 4 January 2022 LR 16A.2.1R). It would

not be possible for an LTAF that is an authorised unit trust or an ACS to

seek a listing in the UK.

Handbook treatment of LTAFs

2.59 Some stakeholders argued that we should not classify the LTAF as a QIS for parts of

the Handbook other than COLL, but that we should treat it as a separate category of

authorised fund. They thought this was clearer and more transparent.

Our response

We have amended the Handbook so that the LTAF is a separate

category of fund from the QIS.

Cost benefit analysis (CBA)

2.60 Most respondents who commented on our CBA broadly agreed with it. A small number

raised concerns that service providers such as investment platforms and depositaries

might incur costs to develop systems to enable LTAFs to be launched.

Our response

We thank respondents for their comments on our CBA. The LTAF

regime permits firms to launch new funds but does not require them

to do so. Because of this we considered that we could not reasonably

estimate the costs of creating the LTAF regime but that LTAFs would

be launched only if the benefits of doing so exceed the costs. We do

not consider that the feedback means that we should amend our CBA.

We also do not consider that any of the amendments we have made to

the draft rules alter the CBA.

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3 Permitted links rules

3.1 This chapter provides a summary of feedback to the proposed amendments to our

permitted link rules and sets out our response. It also outlines our intended next steps

on discussion questions on the distribution of the LTAF.

Integration of the LTAF into the permitted links regime

3.2 We proposed integrating the LTAF into the regulatory framework for the investment by

DC pension schemes in unit-linked long-term insurance products, via amendments to

the ‘permitted links’ rules.

Additional flexibility for investments by DC pension schemes

3.3 We proposed amending the permitted links rules where the unit-linked contract forms

part of the default arrangement of an occupational or workplace DC pension scheme.

Industry feedback is that in practice the existing 20 / 35% cap on illiquid investments

within any unit-linked fund means that firms find it difficult to market these funds to DC

schemes. DC schemes typically construct their default arrangements from a number

of funds and use funds which are 100% illiquid as part of a wider diversified portfolio,

including more liquid funds.

3.4 So we proposed removing the 35% limit for LTAF-linked funds that form part of the

default arrangement of a pension scheme, while keeping requirements on insurers to

provide risk warnings and ensure that the fund is suitable for the ultimate investors. To

ensure these proposals only apply to default arrangements, we proposed introducing

conditional permitted LTAFs and making them available only in relation to default

arrangements. This would carve out the LTAF from the definition of QIS for COBS 21.3

purposes, so that the LTAF would not be available for retail investors investing outside

of the pension environment.

3.5 Responsibility for deciding the proportion of the default arrangement which is invested

in illiquid assets (such as LTAF), whether or not a regulatory limit applies, falls primarily

on the trustees (of an occupational scheme) or on the operator of a workplace

scheme (an insurer or SIPP operator). However, we proposed guidance clarifying that

the insurer is expected to consider the concentration risks of including the LTAF in a

default arrangement when complying with the conditions for the use of conditional

permitted LTAFs. Investment in LTAFs via unit-linked funds would only apply for default

arrangements in occupational or workplace pensions, not self-select options available

to pension scheme members, and not for non-workplace personal pensions. The 35%

limit would also continue to apply for the other investments that a default arrangement

may make in other conditional permitted links.

3.6 We asked:

Q5: Do you agree with our proposals to allow investments

in LTAF for default arrangements of DC schemes if the

conditions as outlined above are satisfied? If not, how

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would you change them to make them more workable for

DC default arrangements?

Q6: Are there any assets which can be included in an LTAF which

may be of concern regarding wider use for DC schemes? If

so, which assets are you concerned about and why, and how

would you mitigate the risk involved?

3.7 Most respondents broadly welcomed our proposal to make the LTAF a conditional

permitted link. They also welcomed its exclusion from the 35% cap on illiquid assets

for unit-linked funds where the investment comes from the default arrangement of a

DC pension scheme. Many saw this as providing maximum flexibility for DC schemes

in choosing how to structure their portfolios by enabling the LTAF to be effectively

identified as a ‘permitted link in its own right’ for DC default schemes.

3.8 Most respondents also supported the inclusion of guidance that the insurer must

consider the concentration risks at the default level associated with an LTAF allocation

as part of the ongoing suitability and appropriateness assessment of the default

investment strategy required under COBS 21.3.16R (2). Several respondents viewed

this as an important protection for DC default investors.

3.9 However, several respondents said that while the proposed rules would work well for

LTAF in a DC default context, the 35% limit may continue to create challenges for unit-

linked investment in illiquid assets through other structures and in products outside of

DC defaults. We cover this issue further under Q17 below.

3.10 One respondent noted a potential issue with the proposal in paragraphs 4.10 and

4.11 of the Consultation Paper to disapply the 35% limit on illiquid investments

made through an LTAF and to exclude investments in LTAFs from counting towards

the calculation of the 35% limit as reflected in the draft proposed new rule (COBS

21.3.19AR). They read this to say that, in calculating gross assets for the purpose

of applying the 35% test, the gross assets invested in conditional permitted long-

term asset funds are left out of account. However, they indicated that to achieve the

FCA’s aims in this context, COBS 21.3.19R(2) requires a corresponding amendment

to exclude conditional permitted long-term asset funds from the limit. That is, COBS

21.3.19R(2) should refer to conditional permitted links other than conditional permitted

long-term asset funds.

3.11 Other responses identified a further barrier in the permitted links rules from our

proposals that would prevent efficient structuring of illiquid assets under current

industry life company models. In these models, life funds invest in other life funds –

broadly analogous to the fund-of-funds structures seen in authorised investment

funds. Strategies constructed this way work on the basis of being allowed to hold

‘permitted units’. However, the definition of permitted units does not cover conditional

permitted links – including LTAFs. This means that a unit-linked fund could not invest

in another unit-linked fund containing LTAF (or any other unit-linked illiquid fund). This

would also be a barrier to allowing exposure to externally managed/ reinsured funds

invested in conditional permitted links. To address this barrier to distribution of illiquids

in the unit-linked insurance environment, the responses recommended that we expand

the definition of a permitted unit to cover conditional permitted links.

3.12 Most respondents to Q6 agreed that LTAFs should be able to invest in a broad range of

assets and did not have any specific concerns for DC schemes in relation to in-scope

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LTAF assets. Some commented that the flexibility incorporated into the proposals

would allow fund managers to take an in-house view on the most appropriate asset mix

and risk/return profiles to deliver to DC investors with exposure to long-term, illiquid

assets. In their view this should also ensure that upper or lower limits for specific asset

classes did not become a barrier to LTAF supply or demand.

Our response

We will implement our proposed amendments as planned to provide

increased flexibility for use of illiquid assets via the LTAF. This will enable

more flexibility in the construction of DC scheme portfolios while

maintaining an adequate level of protection for DC default scheme

investors.

We have reviewed the existing and draft rules against the potential issue

identified on calculation of gross assets for the purposes of applying the

35% limit. We have addressed the issue by amending COBS 23.1.19AR,

to ensure that our policy intention is met. First, firms should leave the

gross assets invested in conditional permitted LTAFs out of account

when calculating the total amount of gross assets of a linked fund to

which the limit applies. Next, when firms calculate whether the limit has

been exceeded, they should not aggregate the gross assets invested

in conditional permitted LTAFs to the other gross assets invested in

conditional permitted links.

On the potential barrier identified above for ‘permitted units’ and

conditional permitted links, we have reviewed and adjusted the

definition of ‘permitted units.’ It now explicitly includes conditional

permitted links. We have also made it clear that, when complying with

the conditions and requirements in relation to conditional permitted

links, firms need to also take into account any conditional permitted

links invested in via permitted units.

Wider application of LTAF to linked contracts of insurance

3.13 In CP 21/12 we indicated that, depending on feedback, we may consider changes to

the rules to allow insurance contracts to be linked to investments in LTAF more widely

than just when used in DC default arrangements. Under current rules where the

investment risk under the contract is with a ‘natural person bearing the investment

risk’ the degree to which they could be exposed to LTAF investments would be 20%

of the overall fund under the ordinary permitted links rules. It would be 35% where

the conditional permitted links are being used, requiring additional risk warnings and

suitability assessments on the part of the insurer. We welcomed detailed feedback on

potential issues that specifically affect permitted link investments.

3.14 We asked:

Q16: Do you think we should enable wider use of the LTAF as a

permitted link or conditional permitted link to long-term

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contracts of insurance? What do you see as the main

obstacles to this and how would you resolve them?

Q17: Do you have any views on how permitted links might be

expanded to other fund structures or direct investments in

illiquid assets?

3.15 Most respondents advocated wider use of the LTAF as a permitted link or conditional

permitted link to long-term contracts of insurance. Several respondents said that the

current proposal to restrict LTAF distribution to DC defaults is overly restrictive. They

pointed out that outside the DC default landscape, there are other balanced managed

investment arrangements where the provider designs and governs the portfolio on

the investor’s behalf. These look much like default arrangements but lack the formal

designation of a default because they are not part of workplace pension products.

These respondents felt that investors in these strategies (which could be found in

non-workplace pension products, for example) could also benefit from exposure to

LTAFs. More generally, where investors in a long-term unit-linked product have either

professional support on fund selection or are guided through an appropriate choice

architecture, they should be able to invest in an LTAF and the distribution rules should

reflect this.

3.16 Respondents therefore recommended that in the unit-linked market, the rules should

allow insurers to include the LTAF alongside other permitted links and conditional

permitted links in constructing managed multi-asset portfolios where the investor

is not required to make any investment decision. They suggested that, as with the

default in the proposed rules, such portfolios should not be constrained by the 35%

illiquid asset cap. Instead, they should be subject to the same rules on the insurer to

consider ongoing suitability and concentration risk. The rules should cater for the use

of LTAFs in such managed portfolios both within pension products (workplace and

non-workplace) and other long-term contracts of insurance.

3.17 These respondents made clear that they were not proposing LTAFs being made

available for standalone investment in a unit-linked wrapper without access to any

supporting guidance and choice architecture. For example, as a self-select fund option

in a pension product (workplace or non-workplace). However, looking at the potential

for wider retail distribution, they felt that investors in a long-term unit-linked product

who had either professional support on fund selection or are guided through an

appropriate choice architecture, should be able to invest in an LTAF. In their view, given

the degree of substitutability between authorised funds and unit-linked funds, if future

distribution rules allowed LTAFs to be sold to retail investors, they should also allow for

the distribution of unit-linked LTAFs to such investors. However, some acknowledged

that the practical implications could be challenging and that this could lead to complex

administration requirements.

3.18 Many respondents said that while our proposals for the LTAF would work well for unit-

linked DC default arrangements, the 35% cap remains a significant constraint within

the permitted links rules for structures other than LTAFs that seek to offer unit-linked

investors exposure to illiquid assets. It also meant the LTAF would have an advantage

over other fund structures, in particular the QIS and directly invested unit-linked funds,

because the cap would apply to these structures but not to a conditional permitted

LTAF. A more coherent regulatory approach would treat all fund structures the same

in this respect, and the proposals for the LTAF within the permitted links rules offered

a way forward for other structures as well. Some clarified that this might be achieved

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by extending the proposed guidance for LTAFs in COBS 21.3.18G(2). This states that

insurers must assess the ‘total exposure of the default arrangement to conditional

permitted LTAFs and other investments of similar risk profile to that of conditional

permitted LTAFs’ as part of the ongoing suitability checks required for insurers offering

conditional permitted links. These respondents felt that applying this requirement

outside the DC default would level the playing field for all investment structures

seeking to offer illiquid exposure in a unit-linked environment.

3.19 Some respondents went further to suggest that we should consider broader reform

of the permitted links rules. In their view the permitted links rules were largely written

with direct retail investors in mind. So where the underlying investor is investing via a

non-self-select portfolio, usually a DC scheme, they believed the illiquids cap should

also be removed for the other permitted and conditional links. In the absence of a full

removal of the illiquids cap for these investor types, they proposed that the cap should

be moved from the fund level to the portfolio level. They argued this would reflect

our intention to ensure liquidity and concentration risks are managed at the portfolio

level, while also keeping the policy intent behind the existing 35% cap to ensure that

underlying investors are not over-exposed to the risks of illiquid assets.

3.20 Similarly another respondent said that as part of a wider overhaul of the permitted

links rules, it would be useful to establish within the rules that the concentration limits

should be applied at the customer portfolio level (potentially on a look-through basis

where available). In this way, firms could consider wrapping illiquid investments 100%

within a unit linked fund and using those wraps as sub-funds of DC portfolios or retail

managed funds, without potentially breaching permitted links rules. In their view this

will ensure consistency of treatment for the same illiquid asset, regardless of how it is

held within the firm’s fund structures (direct, sub-unit linked fund or collective).

Our response

We are grateful to respondents for the detailed feedback. We believe our

proposals for use of the LTAF for DC default funds provide a sound and

workable starting point for initial use of the LTAF in unit-linked structures

while enabling an appropriate level of protection for DC default investors.

Insurers are responsible for ensuring suitability and appropriateness for

the relevant target market in line with PROD and (in conjunction with

trustees for trust-based schemes) for DC default scheme investors in

line with COBS. This will help ensure the LTAF is distributed appropriately.

We remain open to potentially extending the distribution of the

LTAF where investors in a long-term unit-linked product have either

professional support on fund selection or are guided through an

appropriate choice architecture. As this relates to the question of the

direct distribution of the LTAF to a wider group of consumers, we will

consider whether to consult on such changes in the future.

Similarly, we recognise the points about the constraints of the current

35% limit on conditional permitted links and the perceived potential

advantage afforded to the development of the LTAF over other fund

structures. We are sympathetic to arguments for extending the same

treatment to other fund structures and direct investment in illiquid

assets. Again, we will consider whether to consult on such changes in

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future. Any wider overhaul of the permitted links rules remains to be

determined. It may need to be carried out in conjunction with the PRA

given the interaction of the conduct rules for unit-linked long-term

insurance business under COBS with the prudential regulation of unit-

linked long-term insurance business under the PRA Rulebook.

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4 Distribution

4.1 This chapter provides an overview of the feedback we received to the questions about

the distribution of the LTAF. It sets out our response to the issues raised in questions 7

and 8, including the changes we intend to make to our rules following the feedback we

received. It also outlines our intended next steps on the discussion questions on the

distribution of the LTAF.

Treatment of the LTAF as an NMPI

4.2 We proposed that the LTAF would initially be subject to the same promotion

restrictions as QIS. This broadly means that, under the non-mainstream pooled

investment (NMPI) rules, an LTAF could only be promoted to professional clients

and certain types of retail client, as set out in COBS 4.12. This meant that it could be

marketed to most investors it was originally envisaged for if the LTAF was subject to

these rules.

4.3 We asked:

Q7: Do you agree that LTAFs should initially be treated as QIS

for distribution purposes? Do you agree that LTAFs should

be subject to the same guidance as QIS on sophisticated

and high net worth retail investors? If not, what alternative

approach would you propose?

Q8: Do you see any barriers within the existing NMPI rules that

will prevent the LTAF from being distributed to the target

market set out in 5.4? If so, please provide details and

evidence of the barriers.

4.4 Many respondents who represented fund managers, distributors and investors

disagreed with our proposal to treat the LTAF initially as an NMPI. They thought that

the additional protections for LTAFs compared to QIS meant that they should not be

restricted to professional investors and certified sophisticated retail investors and

should be made available to a wider range of retail investors.

4.5 Several respondents noted that by not allowing the LTAF to be promoted to high net

worth investors it would be more restricted than unauthorised funds, despite offering

greater levels of protection. They argued that classifying the LTAF as an NMPI would

therefore undermine the success of the LTAF as there would be little incentive to

launch such a fund. They thought that, at a minimum, promotion of the LTAF to high

net worth retail investors should be permitted and suggested that we modify the

guidance in COBS 4.12 to enable this if the LTAF were to be classed as an NMPI.

4.6 Some respondents suggested that the existing requirements in our Product

Intervention and Product Governance sourcebook (PROD), in conjunction with the

protections offered by the proposed fund rules, would ensure that the LTAF could be

appropriately distributed to a broader range of retail clients. Others suggested that

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the existing appropriateness test – that distributors would be required to conduct if

the LTAF were not to be classed as a non-complex product under MiFID – would also

provide sufficient levels of protection to ensure that the LTAF could be appropriately

distributed to a broader range of retail investors.

4.7 Some respondents thought that retail investors that are not high net worth investors

or sophisticated investors should be permitted to invest in the LTAF subject to getting

investment advice. They also suggested that a maximum proportion, for example

10%, of an investor’s portfolio should be allowed to be held in LTAFs, with the onus for

verifying this placed on the distributor rather than investor self-certification. Others

proposed that labels warning of the risks of investing into an LTAF would be sufficient

to permit opening up more broadly. A few respondents indicated that we might wish to

consider introducing a ‘well-informed’ investor category for distribution purposes or

require a test of investor understanding.

4.8 Some respondents thought that a minimum investment size, for example £10,000,

should be set for retail investors wanting to access the LTAF. Others thought this

would exclude some for whom an investment might be suitable, including young

people who are just starting to save into a personal pension. Some thought that

personal wealth should not be used as an indicator of investor understanding.

4.9 One respondent suggested categorising the LTAF as a non-readily realisable security

(NRRS). Several respondents thought that the promotion of the LTAF should be based

on the rules governing the NURS rather than the QIS, and as such should be permitted

to be promoted to all retail investors.

4.10 A minority of respondents (including representatives of closed-ended funds, and

authorised fund managers) agreed that the LTAF should initially be treated as a QIS for

distribution purposes. These respondents did not think that the LTAF was appropriate

to be distributed directly to retail investors. They thought that the assets in which

an LTAF, as an open-ended fund, is permitted to invest meant it was unlikely to be an

appropriate investment for anyone other than a professional investor or sophisticated

retail investor who would better understand the liquidity and valuation risks.

4.11 A small number of respondents said that the LTAF would require significantly greater

protections before being safely distributed to retail investors. They argued that other

investment vehicles, such as investment companies, provide retail investors with

appropriate products in this area. They felt that allowing retail investors to access

illiquid assets through an open-ended fund poses risks due to the potential liquidity

mismatch between the fund’s redemption terms and the assets it invests in. One

respondent suggested broader protections before marketing to retail investors, such

as listing or a secondary market for LTAFs, or requiring majority independent boards.

4.12 While respondents didn’t think that, in theory, the NMPI rules prevented the

distribution of the LTAF to the target market, many raised issues with how the NMPI

regime works in practice. They thought that the requirement to complete a preliminary

assessment of appropriateness or suitability before promotion would limit the LTAF’s

promotion opportunities. More generally, they thought that the requirement to

determine appropriateness creates an administrative and compliance burden on firms

that means most choose not to distribute these types of instruments.

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Our response

We think that proceeding with the introduction of the LTAF as an NMPI

remains an appropriate first step. This will mean that LTAFs may initially

be marketed to professional investors, such as DC pension schemes,

and certified sophisticated retail investors.

We agree that given the level of protection within the LTAF regime, and

the governance surrounding it, certified high net worth individuals should

be able to access the LTAF as part of a diversified portfolio, given that

they can access unauthorised funds. So we have amended COBS 4.12 to

achieve this.

As set out below, we remain open to potentially further broadening the

base of investors who can access the LTAF in a controlled way.

Discussion questions on the distribution of the LTAF

4.13 Questions 10 to 15 in the consultation were about the distribution of the LTAF. These

questions covered a range of topics, including:

• broadening the promotion of the LTAF to retail investors not permitted to invest in

NMPI

• the level of protection afforded by the appropriateness assessment

• the use of the non-readily realisable security (NRRS) regime as a means of

restricting investment in LTAFs

• minimum levels of investment from professional clients in order to protect retail

investors

• the changes that might be needed to enable a fund of alternative investment funds

(FAIF) to operate a portfolio of LTAFs

• the other options we could consider to make the promotion of the LTAF to retail

clients more appropriate

4.14 We received many responses to these questions, encompassing a wide range of views.

We set out a brief summary of the feedback we received on each topic below.

Distribution to a broader range of retail investors

4.15 Most respondents addressed the topic of whether and how the LTAF might be

promoted to a wider range of retail investors. Much of that feedback has been set

out earlier in this chapter. This includes treating the LTAF as a NURS for distribution

purposes, placing greater focus on the PROD measures, requiring retail investors to

take advice before investing, setting maximum levels of an investor’s portfolio that can

be exposed to LTAFs, or requiring the establishment of a secondary market for LTAFs.

Some thought that the LTAF should not be available for broader retail investment.

Appropriateness tests

4.16 We asked whether the appropriateness test that distributors would need to carry

out when selling LTAFs that are not classed as non-complex would provide sufficient

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protection for retail investors. Some respondents felt that the appropriateness test,

coupled with the measures set out in PROD, provide sufficient protection to permit

distribution to retail investors. Others thought that appropriateness tests are not

sufficient to exclude investors for whom the LTAF would be unsuitable.

FAIFs investing in LTAFs

4.17 We suggested that the FAIF regime could provide a way for retail investors to gain

exposure to a diversified portfolio of LTAFs. We were keen to understand if there are

any practical restrictions which might make it difficult or impossible to manage such a

fund.

4.18 Respondents were evenly split between being broadly supportive and unsupportive

of this alternative option. Most of the supportive respondents identified areas

where the rules could be amended to more easily facilitate investment by FAIFs

in LTAFs. For example, they suggested ways in which we could relax the second

scheme requirements for FAIFs to make it easier for them to hold LTAFs. Most of the

unsupportive respondents stated that more investigation of this option is required,

with some also raising concerns about liquidity or portfolio risk.

NRRS rules

4.19 We asked whether classifying LTAFs as NRRS would be a workable means of restricting

investment in LTAFs. Some respondents thought that this would work, while others

agreed with the principle of limiting retail investors’ exposure to the LTAF. Several

respondents commented that the requirement for investors to self-certify that

they have not invested more than 10% of their net assets in NRRS in the previous 12

months and will not do so in the coming 12 months is a good control. Respondents

argued that the NRRS requirements puts responsibility on investors to ensure they

would only invest in the LTAF as part of a wider investment portfolio. However, they

acknowledged that the NRRS rules are currently not designed for authorised funds.

A small number of respondents thought that the LTAF should not be available for

retail distribution and as such did not think that classifying it as an NRRS would be

appropriate.

Professional and retail investment

4.20 We asked whether a minimum level of investment from professional clients would

provide sufficient protection for retail investors. The majority of respondents did not

consider this would offer appropriate protections for retail investors. They stated that

professional investors are likely to have different investment objectives, risk appetite,

liquidity requirements and timescales, and these may not align with those of retail

investors. Professional co-investment will not provide retail investors with the ability

to understand the risks and complexity of investing in a LTAF. Instead, a number of

respondents suggested protection for retail investors should be addressed by strong

governance standards and disclosure requirements.

4.21 A small number of respondents noted that co-mingling of investment between retail

and institutional investors can help the LTAF build sufficient scale, especially if DC

schemes gradually increase their capital allocations to the LTAF over time. However,

LTAFs are likely to be designed for a distinct investor base, for instance, a particular

DC scheme, and may not be suitable for direct retail investors without an intermediary

acting on their behalf.

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4.22 Alternatively, LTAFs could be made available to retail investors on an advised-only

basis.

Next steps

4.23 In line with our Consumer Investments strategy, we plan to consult in the first half of

2022 on potentially changing the restrictions on promoting LTAFs to retail investors.

We will continue considering the feedback that we received on the discussion chapter

on facilitating wider retail distribution against this strategy, before we determine our

policy position.

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Financial Conduct Authority

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Annex 1

List of non-confidential respondents

Aberdeen Standard Investments

AJ Bell

Alternative Investment Management Association (AIMA) and Alternative Credit

Council

Apex Group

Association of British Insurers

Association of Investment Companies

Association of Pension Lawyers

Association of Real Estate Funds

Aviva Investors

BlackRock

BNY Mellon

British Private Equity and Venture Capital Association (BVCA)

British Property Federation

Commercial Real Estate Finance Council

Depositary and Trustee Association

Eversheds Sutherland

Financial Services Consumer Panel

Hargreaves Lansdown

IN Partnership

INREV

Institute and Faculty of Actuaries

Investment Association

Isio

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Financial Conduct Authority

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John Forbes Consulting

Lane, Clark & Peacock

Law Society

Legal and General Investment Management

London Stock Exchange Group

London Stock Exchange Investment Fund Group

M&G

Macfarlanes

Mercer

NatWest Trustees and Depositaries

Royal Institution of Chartered Surveyors

Royal London Asset Management

Schroders

ShareSoc / UKSA

Simmons & Simmons

State Street

The Thomson's Partnership LLP

Transparency Task Force

XPS Pensions

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Annex 2

Abbreviations used in this paper

Abbreviation Description

ACS authorised contractual scheme

AFM authorised fund manager

AIFM alternative investment fund manager

AIFMD Alternative Investment Fund Managers Directive

CBA cost benefit analysis

COBS Conduct of Business sourcebook

COLL Collective Investment Schemes sourcebook

CP consultation paper

CTI Cost Transparency Initiative

DC defined contribution

DWP Department for Work and Pensions

ESG Environmental, Social and Governance

FAIF fund of alternative investment funds

FCA Financial Conduct Authority

FPC Financial Policy Committee

FUND Investment Funds sourcebook

IOSCO International Organization of Securities Commissions

LR Listing Rules sourcebook

LTAF long-term asset fund

NMPI non-mainstream pooled investment

NRRS non-readily realisable security

NURS non-UCITS retail scheme

OEIC open-ended investment company

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Abbreviation Description

PAIF property authorised investment fund

PFWG Productive Finance Working Group

PRA Prudential Regulation Authority

PROD Product Intervention and Product Governance sourcebook

PS policy statement

QIS qualified investor scheme

UCITS undertaking for collective investment in transferable securities

All our publications are available to download from www.fca.org.uk. If you would like to receive this paper

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PS21/14

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Appendix 1

Made rules (legal instrument)

FCA 2021/41

LONG-TERM ASSET FUND INSTRUMENT 2021

Powers exercised

A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise

of the following powers and related provisions in or under:

(1) the following sections of the Financial Services and Markets Act 2000 (“the

Act”):

(a) section 59 (Approval for particular arrangements);

(b) section 60 (Applications for approval);

(d) section 61 (Determination of applications);

(e) section 62A (Changes in responsibilities of senior managers);

(f) section 137A (The FCA’s general rules);

(g) section 137D (FCA general rules: product intervention);

(h) section 137R (Financial promotion rules);

(i) section 137T (General supplementary powers);

(j) section 138D (Action for damages);

(k) section 139A (Power of the FCA to give guidance);

(l) section 242 (Application for authorisation of unit trust schemes);

(m) section 247 (Trust scheme rules);

(n) section 248 (Scheme particulars rules);

(o) section 261C (Applications for authorisation of contractual schemes);

(p) section 261I (Contractual scheme rules);

(q) section 261J (Contractual scheme particulars rules);

(r) section 340 (Appointment);

(s) paragraph 23 of Schedule 1ZA (Fees);

(2) regulations 6 (FCA rules) and 12 (Applications for authorisation) of the Open-

Ended Investment Companies Regulations 2001 (SI 2001/1228); and

(3) the other rule and guidance making powers listed in Schedule 4 (Powers

exercised) to the General Provisions of the FCA’s Handbook.

B. The rule-making provisions listed above are specified for the purposes of section

138G(2) (Rule-making instruments) of the Act.

Commencement

C. This instrument comes into force on 15 November 2021.

Amendments to the Handbook

D. The modules of the FCA’s Handbook of rules and guidance listed in column (1)

below are amended in accordance with the Annexes to this instrument listed in

column (2) below.

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(1)

(2)

Glossary of definitions

Annex A

Senior Management Arrangements, Systems and Controls

sourcebook (SYSC)

Annex B

Fees manual (FEES)

Annex C

Conduct of Business sourcebook (COBS)

Annex D

Collective Investment Schemes sourcebook (COLL)

Annex E

Citation

E. This instrument may be cited as the Long-Term Asset Fund Instrument 2021.

By order of the Board

21 October 2021

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Annex A

Amendments to the Glossary of definitions

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless indicated otherwise.

Insert the following new definitions in the appropriate alphabetical position. The text is not

underlined.

conditional permitted

long-term asset fund

in relation to conditional permitted links, and in respect of a firm’s

business with linked policyholders, a long-term asset fund.

feeder LTAF an LTAF which is dedicated to units in either:

(a) a single qualifying master LTAF; or

(b)

a single sub-fund of a qualifying master LTAF that is an

umbrella.

intermediate unitholder

in a long-term asset

fund

a firm whose name is entered in the register of a long-term asset

fund, or which holds units in a long-term asset fund indirectly

through a third party acting as a nominee, and is not the beneficial

owner of the relevant unit, and:

(a) does not manage investments on behalf of the relevant

beneficial owner of the unit; or

(b)

does not act as a depositary of a collective investment

scheme or on behalf of such a depositary in connection with

its role in holding property subject to the scheme.

For the purposes of this definition, “register” has the meaning set

out in paragraph (3) of the Glossary definition of “register”.

long-term asset fund an authorised fund whose authorised fund manager operates, or

proposes to operate, it in accordance with the rules in COLL 15

(Long-term asset funds).

LTAF a long-term asset fund.

notice period (in relation to a long-term asset fund) has the meaning given in

COLL 15.8.12R(2)(f) (Dealing: redemption of units).

qualifying master

LTAF

where a feeder LTAF is dedicated to units in a single collective

investment scheme which is a second scheme that operates in

accordance with the principle of prudent risk spreading (see COLL

15.6.3R (Prudent spread of risk)) and that meets the requirements

in COLL 15.6.9R (Investment in collective investment schemes),

that collective investment scheme.

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quarterly reporting

period

(in COLL) a period determined in accordance with COLL

15.5.9R(2) (Quarterly reports).

redemption

determination

(in relation to a long-term asset fund) has the meaning given in

COLL 15.8.12R(1) (Dealing: redemption of units).

Amend the following definitions as shown.

appropriate valuer

(in COLL) a person who complies with the requirements

requirements of COLL 5.6.18R(7) (Investment in property), or

COLL 8.4.11R(4) (Investment in property) or COLL 15.6.18R(4)

(Investment in property).

CoCo fund

an unregulated collective investment scheme, qualified investor

scheme, long-term asset fund or a special purpose vehicle under

which the investment returns received by the investor, or the

scheme or vehicle’s ability to fulfil any payment obligations to the

investor, are wholly or predominantly linked to, contingent on,

highly sensitive to or dependent on, the performance of or changes

in the value of contingent convertible instruments.

conditional permitted

links

where the conditions in COBS 21.3.16R are met, the property in

COBS 21.3.15R that an insurer may use, whether by linking to it

directly or via permitted units, for the purposes of determining

property-linked benefits or index-linked benefits under linked long-

term contracts of insurance.

distribution account

(in COLL) the account to which the amount of income of an

authorised fund allocated to classes of units that distribute income

must be transferred as at the end of each annual accounting period

under COLL 6.8.3R (Income allocation and distribution), or COLL

8.5.15R (Income) or COLL 15.8.18R (Income).

excluded security any of the following investments:

…

(h) a security issued by a regulated collective investment

scheme other than:

(A) a qualified investor scheme; or

(B) a long-term asset fund.

inherently illiquid asset an asset which is:

…

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(6) a unit in a qualified investor scheme where that qualified

investor scheme:

…

(b)

permits redemptions of units on timescales which do

not reflect the time typically needed to sell, liquidate

or close out the assets in which the qualified investor

scheme invests, those assets being ones which fall

within paragraphs (1) to (5) above or (6A) and (7)

below; and

…

(6A)

a unit in a long-term asset fund where that long-term asset

fund:

(a) would itself meet condition (1) of the definition of a

FIIA if it were a non-UCITS retail scheme; and

(b) is not in the process of winding up or termination;

(7)

a unit in an open-ended unregulated collective investment

scheme where that unregulated collective investment

scheme:

(a) aims to invest at least 50% of the value of the

property of the unregulated collective investment

scheme in assets falling within paragraphs (1) to (6)

(6A) above;

…

intermediate holding

vehicle

a company, trust or partnership but not a collective investment

scheme, whose purpose is to enable the holding of overseas

immovables on behalf of a non-UCITS retail scheme, or a qualified

investor scheme or a long-term asset fund.

non-mainstream pooled

investment

any of the following investments:

…

(b) a unit in a qualified investor scheme;

(ba)

a unit in a long-term asset fund;

…

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non-UCITS retail

scheme

an authorised fund which is neither not a UCITS scheme, or a

qualified investor scheme or a long-term asset fund.

permitted scheme

interests

(a) [deleted]

(b) in respect of a firm’s firm’s business with linked

policyholders any of the following:

(i) an authorised fund, except a long-term asset fund;

…

permitted links the property in COBS 21.3.1R(1) and (2)(a) to (l) that an insurer

insurer may use, whether by linking to it directly or via permitted

units, for the purposes of determining property-linked benefits or

index-linked benefits under linked long-term contracts of insurance

contracts of insurance.

permitted units in relation to permitted links, units or beneficial interests in any real

or notional fund that invests in permitted links or conditional

permitted links, or both, and is managed either:

(a) …

…

prospectus …

(2) (except in LR and PRR) (in relation to a collective

investment scheme) a document containing information

about the scheme and complying with the requirements

requirements in COLL 4.2.5R (Table: contents of the

prospectus), COLL 8.3.4R (Table: contents of qualified

investor scheme prospectus), or COLL 9.3.2R (Additional

information required in the prospectus for an application

under section 272), or COLL 15.4.5R (Table: contents of a

long-term asset fund prospectus), applicable to a prospectus

of a scheme of the type concerned.

qualifying scheme …

21) in addition to the schemes in (a) as qualified by (b), a

defined contribution occupational pension scheme that is a

qualifying scheme for the purposes of the Pensions Act

2008.

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(3) (in COLL) the register of unitholders kept under Schedule 3

to the OEIC Regulations, or COLL 6.4.4R (Register:

general requirements and contents), or COLL 8.5.8R (The

(The register of unitholders: AUTs or ACSs) as appropriate

or, in relation to a collective investment scheme that is not

an authorised fund, a record of the holders (other than of

bearer certificates) of units in it.

standing independent

valuer

the person appointed as such under COLL 5.6.20R (Standing

independent valuer and valuation), and COLL 8.4.13R(1) (Standing

independent valuer and valuation), or COLL 15.6.22R(1) (Standing

independent valuer and valuation).

valuation point (in COLL) a valuation point fixed by the authorised fund manager

for the purpose of COLL 6.3.4R (Valuation points), or COLL

8.5.9R (Valuation, pricing and dealing) or COLL 15.8.2R

(Valuation, pricing and dealing) or, in the case of a regulated

money market fund, the applicable requirements of article 29 to

article 32 of the Money Market Funds Regulation.

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Annex B

Amendments to the Senior Management Arrangements, Systems and

Controls sourcebook (SYSC)

In this Annex, underlining indicates new text and striking through indicates deleted text.

24 Senior managers and certification regime: Allocation of prescribed

responsibilities

…

24.2

Allocation of FCA-prescribed senior management responsibilities: Main

allocation rules

…

What the FCA-prescribed senior management responsibilities are

…

24.2.6 R Table: FCA-prescribed senior management responsibilities

FCA-prescribed senior

management responsibility

Explanation Reference

letter

…

(20) The responsibilities

allocated under COLL 6.6.27R,

or COLL 8.5.22R or COLL

15.7.24R (Allocation of

responsibility for compliance

to an approved person).

Only applies to a firm to

which the rules in column

(1) apply.

(za)

…

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Annex C

Amendments to the Fees manual (FEES)

In this Annex, underlining indicates new text and striking through indicates deleted text.

3 Application, Notification and Vetting Fees

…

3 Annex

Application and notification fees payable in relation to collective investment

schemes, LTIFs, money market funds and AIFs marketed in the UK

…

Legislative

provision

Nature and

purpose of fee

Payable

Amount of

fee (£)

Umbrella

factor (note

…

Part 2 Application fees payable for firms to be subject to COLL

Regulation 12

of the OEIC

Regulations

This section

applies to

funds where

an application

is also made

to be

authorised

under the

Money Market

Funds

Regulation.

On application for

an order declaring a

scheme to be an

ICVC, where the

scheme is a:

applicant

… …

Qualified investor

scheme

2,400

Long-term asset

fund

2,400

Section 242 of

the Act

This section

applies to

funds where

an application

is also made

to be

authorised

On application for

an order declaring a

scheme to be an

AUT, where the

scheme is a:

applicant

… …

Qualified investor

scheme

2,400

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under the

Money Market

Funds

Regulation

Long-term asset

fund

2,400

…

Section 261C

of the Act

This section

applies to

funds where

an application

is also made

to be

authorised

under the

Money Market

Funds

Regulation

On application for

an order declaring a

scheme to be an

ACS, where the

scheme is a:

applicant

… …

Qualified investor

scheme

2,400

Long-term asset

fund

2,400

Section 272 of

the Act

On application for

an order declaring a

scheme to be

recognised where

the scheme is:

applicant

a non-UK AIF or

AIF equivalent to a

UK UCITS, non-

UCITS retail

scheme, or a

qualified investor

scheme or a long-

term asset fund

8,000 2

…

Part 2B Application fees payable for UK or non-EEA firms applying for

authorisation under article 5 of the Money Market Funds Regulation

Article 5 of

the Money

UK AIF (apart from

those authorised as a

UK UCITS, a non-

UCITS retail

500

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Market Funds

Regulation

scheme, or a

qualified investor

scheme or a long-

term asset fund)

…

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Annex D

Amendments to the Conduct of Business sourcebook (COBS)

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless indicated otherwise.

4 Communicating with clients, including financial promotions

…

4.12 Restrictions on the promotion of non-mainstream pooled investments

…

Sophisticated and high net worth investors: guidance on certification by

authorised person and reliance on self-certification

Exemptions from the restrictions on the promotion of non-mainstream pooled

investments

4.12.4 R …

(5) Title of Exemption Promotion to: Promotion of a

non-mainstream

pooled investment

which is:

…

11. Excluded

communications

Any person. Any non-

mainstream pooled

investment, provided

the financial

promotion is an

excluded

communication.

[See COBS

4.12.12G, and

COBS 4.12.13G and

COBS 4.12.13AG.]

…

4.12.10 G (1) …

(2) (a)

For example, a retail client whose investment experience is

limited to mainstream investments such as securities issued

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by listed companies, life policies or units in regulated

collective investment schemes (other than qualified investor

schemes or long-term asset funds) is generally unlikely to

possess the requisite knowledge to adequately understand the

risks associated with investing in non-mainstream pooled

investments.

…

Qualified investor schemes

4.12.13 G …

Long-term asset funds

4.12.13

G A firm which wishes to rely on the excluded communications exemption in

COBS 4.12.4R(5) to promote units in a long-term asset fund to a retail

client should have regard to its duties under the Principles and the client’s

best interests rule. As explained in COLL 15.1.4G (Long-term asset funds –

explanation), long-term asset funds are authorised funds which are intended

only for professional clients and for retail clients who are sophisticated

investors or certified high net worth investors.

…

21 Permitted Links and conditional permitted links

21.1 Application

…

21.1.-1A

Where this chapter sets out conditions or requirements in relation to

conditional permitted links, those conditions or requirements also apply in

relation to any conditional permitted links that a linked fund invests in via

permitted units.

…

21.3 Further rules for firms engaged in linked-long-term insurance business

…

Conditional permitted links

21.3.15 R

A conditional permitted link is any of the following property where the

conditions in COBS 21.3.16R are met:

(1) conditional permitted unlisted securities;

(2) conditional permitted immovables;

(3) conditional permitted loans; and

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(4) conditional permitted scheme interests.; and

(5) (only in respect of a linked fund included in the default arrangement

of a qualifying scheme) conditional permitted long-term asset funds.

21.3.16 R …

(3)

(only in respect of conditional permitted long-term asset funds) the

linked fund investing in conditional permitted long-term asset funds

may only be included in the default arrangement of a qualifying

scheme.

…

21.3.18 G The assessment in COBS 21.3.16R(2), in relation to a linked fund which is

included in a default or similar arrangement for a pension scheme, would

include ongoing consideration of:

(1) whether the investment risks of any conditional permitted links

remain suitable and appropriate for a particular cohort of linked

policyholders, including as that cohort moves toward retirement.;

and

(2) where the linked fund contains conditional permitted long-term asset

funds, the total exposure of the default arrangement to conditional

permitted long-term asset funds and other investments of similar risk

profile to that of conditional permitted long-term asset funds.

Conditional permitted links: requirements

…

21.3.19

R The gross assets that a linked fund invests in conditional permitted long-

term asset funds must not be included in any part of the calculation when

working out whether the limit set out in COBS 21.3.19R has been exceeded.

21.3.20 R Where a linked fund is invested in any conditional permitted link, the

information that a firm must give a linked policyholder under COBS

21.2.4R must also prominently include, clearly and in language capable of

being understood by a linked policyholder:

(1) an explanation of the risks associated with any conditional permitted

links and/or gross assets in permitted scheme interests in (b)(v) of

the Glossary definition of that term exceeding 20%, how these might

crystallise and how they might impact on a linked policyholder;

(2) …

…

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Annex E

Amendments to the Collective Investment Schemes sourcebook (COLL)

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless indicated otherwise.

1 Introduction

…

1.2 Types of authorised fund

Types of authorised fund

1.2.1 R An application for an authorisation order must propose that the scheme be

one of the following types:

…

(2) a non-UCITS retail scheme, including:

…

(b) a non-UCITS retail scheme which is an umbrella with sub-

funds operating as:

…

(iii) a mixture of (i) and (ii); or

(3) a qualified investor scheme.; or

(4) a long-term asset fund.

…

Types of authorised fund – explanation

1.2.2 G …

(3A)

(a) A long-term asset fund may be promoted only to:

(i) professional clients; and

(ii) retail clients who are sophisticated investors or certified

high net worth investors,

on the same terms as non-mainstream pooled investments.

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(b) A long-term asset fund is an AIF and must be managed by a

full-scope UK AIFM (see COLL 15.2.2R (Authorised fund

manager to be a full-scope UK AIFM)).

(c)

Under the Act and the UK AIFM regime, the FCA is able to

impose stricter requirements on an AIFM or an AIF marketed

to retail clients than the requirements that apply to an AIF

marketed only to professional clients. This sourcebook

contains stricter requirements for an AIF which is a long-term

asset fund.

(d) A full-scope UK AIFM must also comply with the

requirements in FUND and any other applicable provisions of

the UK AIFM regime.

(e) A long-term asset fund could change to become a qualified

investor scheme, a non-UCITS retail scheme or a UCITS

scheme, provided it complies with the necessary conditions.

The authorised fund manager of an LTAF may need to make

significant changes to the LTAF’s constitution, objectives and

investment powers for it to become a UCITS scheme or a non-

UCITS retail scheme.

(f)

A qualified investor scheme could become authorised as a

long-term asset fund if the authorised fund manager operates,

or proposes to operate, the scheme in accordance with the

rules in COLL 15 (Long-term asset funds).

(g)

The nature of the assets that are held (or expected to be held)

by a long-term asset fund means that it will not be able to seek

authorisation as a regulated money market fund, or to have the

characteristics of such a fund without significant changes to its

constitution, objectives and investment powers. See also

article 6 of the Money Market Funds Regulation.

(4) The changes referred to in (2), and (3) and (3A) require approval by

the FCA and further information on that process is provided in

COLLG 3A.1.6G (Notification of changes to unit trusts (sections 251

and 252A)) and COLLG 4A.1.3G (Notification of changes to ICVCs

(Regulations 21 and 22A)).

…

4 Investor Relations

…

4.5 Reports and accounts

…

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Comparative information

4.5.10 R The comparative information required by COLL 4.5.7R (Contents of the

annual long report), and COLL 8.3.5AR (Contents of the annual report), and

COLL 15.5.3R (Contents of the annual report) must be shown for the last

three annual accounting periods (or all of the authorised fund’s annual

accounting periods, if fewer than three) and must set out:

…

5 Investment and borrowing powers

5.1 Introduction

…

Indicative overview of investment and borrowing powers

5.1.4 G This table belongs to COLL 5.1.2G(2).

Scheme investments and

investment techniques

Limits for UCITS

schemes

Limits for non-

UCITS retail

schemes

…

Regulated schemes other than

qualified investor schemes and

long-term asset funds

Yes None Yes None

Unregulated schemes, and

qualified investor schemes, and

long-term asset funds

No N/A Yes 20%(C)

(D)

…

Note: Meaning of terms used:

…

“(C)” …

“(D)” The second scheme would also need to

meet the applicable requirements specified

in the rules.

…

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6 Operating duties and responsibilities

…

6.9 Independence, names and UCITS business restrictions

…

Use of the term ‘UCITS ETF’

6.9.8B G …

Use of the term ‘long-term asset fund’ or ‘LTAF’

6.9.8C R (1)

Paragraph (2) applies to the authorised fund manager of a UCITS

scheme or a non-UCITS retail scheme, an ICVC which is such a

scheme, and any other directors of such an ICVC.

(2) The scheme or sub-fund:

(a)

must not use ‘Long-Term Asset Fund’ or ‘LTAF’ in its name;

and

(b) must not otherwise suggest through its name that it is a fund

which invests in long-term assets or describe itself as such.

6.9.8D G (1)

The term ‘Long-Term Asset Fund’ or ‘LTAF’ is reserved for long-

term asset funds (see COLL 15).

(2) Only AIFs that are authorised in accordance with the LTIF Regulation

may use the designation ‘LTIF’ or ‘long-term investment fund’.

…

8 Qualified investor schemes

…

8.2 Constitution

…

Names of schemes, sub-funds, and classes of units

8.2.3 R (1) …

(2) [deleted] Paragraph (3) applies to an authorised fund manager of a

qualified investor scheme, an ICVC which is such a scheme, and any

other directors of such an ICVC.

(3) The scheme or sub-fund:

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(a) must not use ‘Long-Term Asset Fund’ or ‘LTAF’ in its name;

and

(b) must not otherwise suggest through its name that it is a fund

which invests in long-term assets or describe itself as such.

Undesirable and misleading names

8.2.4 G (1)

COLL 6.9.6G (Undesirable and misleading names) contains guidance

as to names which may be undesirable or misleading.

(2)

The term ‘Long-Term Asset Fund’ or ‘LTAF’ is reserved for long-

term asset funds (see COLL 15).

(3) Only AIFs that are authorised in accordance with the LTIF Regulation

may use the designation ‘LTIF’ or ‘long-term investment fund’.

…

8.3 Investor relations

…

Drawing up and availability of a prospectus

…

8.3.2A G (1) …

(2) The requirements of the PRIIPs Regulation are directly applicable

form part of UK law.

…

14 Charity authorised investment funds

14.1 Introduction

…

Types of charity authorised investment fund

14.1.3 R (1) A charity authorised investment fund may be:

…

(b) a non-UCITS retail scheme; or

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(d) a long-term asset fund.

Insert the following chapter after COLL 14. All of the text is new and is not underlined.

15 Long-term asset funds

15.1 Introduction

Application

15.1.1 R (1) This chapter applies to:

(a) an authorised fund manager of an AUT, ACS or an ICVC;

(b) any other director of an ICVC;

(d) an ICVC,

which is a long-term asset fund.

(2)

Where this chapter refers to rules in any other chapter of this

sourcebook, those rules and any relevant guidance should be applied

as if they referred to long-term asset funds.

Purpose

15.1.2 G (1)

This chapter assists in achieving the statutory objective of securing an

appropriate degree of protection for consumers in respect of

authorised funds that are only intended for investors that are, in

general, prepared to accept a higher degree of risk in their investments

or have a higher degree of experience and expertise than investors in a

UCITS scheme or a non-UCITS retail scheme.

(2) A long-term asset fund is essentially a type of scheme where different

types of permitted asset may be included as part of the scheme

property, depending on the investment objectives and policy of that

scheme and within any restrictions in the rules. The FCA expects the

investment strategy of an LTAF to be to invest at least 50% of the

scheme property of an LTAF in assets that are illiquid and need to be

held over the longer term.

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(3) In comparison to qualified investor schemes, long-term asset funds

have greater flexibility in their investment powers. Therefore, to assist

the FCA in achieving the statutory objective of securing an appropriate

degree of protection for consumers, this chapter balances this

additional flexibility by placing other requirements on the authorised

fund managers and depositaries of LTAFs.

(4) This chapter ceases to apply where a long-term asset fund has

converted to be authorised as a UCITS scheme, a non-UCITS retail

scheme or a qualified investor scheme.

Long-term asset funds: eligible investors

15.1.3 R (1) Subject to (3), the authorised fund manager of a long-term asset fund

must take reasonable care to ensure that ownership of units in that

scheme is recorded in the register only for a person to whom such

units may be promoted under COBS 4.12.4R (Exemptions from the

restrictions on the promotion of non-mainstream pooled investments).

(2)

In addition to (1), the authorised contractual scheme manager of a

long-term asset fund which is an ACS must take reasonable care to

ensure that ownership of units in that scheme is only recorded in the

1R (ACS Long-term asset funds: eligible investors).

(3) The authorised fund manager will be regarded as complying with (1)

and (2) to the extent that it can show that it was reasonable for it to

rely on relevant information provided by another person.

Long-term asset funds - explanation

15.1.4 G (1) Long-term asset funds are authorised funds which are intended only

for professional clients and for retail clients who are sophisticated

investors or certified high net worth investors. For this reason, long-

term asset funds are subject to a restriction on promotion under COBS

4.12.3R (Restrictions on the promotion of non-mainstream pooled

investments).

(2) The authorised contractual scheme manager of a long-term asset fund

which is an ACS must take reasonable care to ensure that it accepts

subscription to units in the LTAF only from a person to whom such

units may be promoted under COBS 4.12.4R (Exemptions from the

restrictions on the promotion of non-mainstream pooled investments)

and who also meets the criteria in COLL 15 Annex 1R.

Application and notification procedures

15.1.5 G

Details of the application procedures in respect of long-term asset funds are

contained in COLL 2.1 (Authorised fund applications). Further information

is available on the FCA website at www.fca.org.uk/firms/authorised-

recognised-funds/apply-fund-authorisation.

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15.2 Eligibility to act as the authorised fund manager

Application

15.2.1 R This section applies to:

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

(2) any other director of an ICVC;

(3) the depositary of an AUT, ACS or an ICVC; and

(4) an ICVC,

which is a long-term asset fund.

Authorised fund manager to be a full-scope UK AIFM

15.2.2 R The authorised fund manager of a long-term asset fund must be a full-scope

UK AIFM.

15.2.3 G (1)

To ensure an appropriate degree of consumer protection, only a full-

scope UK AIFM is able to act as the authorised fund manager for an

LTAF.

(2) Full-scope UK AIFMs that manage authorised AIFs are subject to the

requirements of both COLL and FUND, and must also comply with

any other applicable provisions of the UK AIFM regime, including the

AIFMD level 2 regulation and the AIFMD UK regulation. Small

authorised UK AIFMs are subject to a more limited set of rules and

requirements.

Competence and resources of the authorised fund manager

15.2.4 R (1) The authorised fund manager of a long-term asset fund must, having

regard to the investment objectives, policy and strategy of the LTAF:

(a)

possess the knowledge, skills and experience necessary to

understand the activities of the LTAF and, in particular, the

risks involved in those activities and the assets which the LTAF

holds (or is to hold) in the scheme property; and

(b)

employ sufficient personnel with the skills, knowledge and

expertise necessary for discharging the responsibilities

allocated to them.

(2) The authorised fund manager may not rely on a delegation or

outsourcing arrangement to satisfy (1).

15.2.5 R The authorised fund manager of a long-term asset fund must at all times be

able to demonstrate to the FCA that it complies with COLL 15.2.4R.

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[Note: Article 22 of the AIFMD level 2 regulation.]

Appointment of external valuer or authorised fund manager with knowledge, skills

and experience of valuing long-term assets

15.2.6 R (1)

The authorised fund manager of a long-term asset fund must appoint

an external valuer to perform the valuation function for the LTAF, but

this is subject to (2) and (5).

(2) The authorised fund manager need not appoint an external valuer

under (1) if:

(a) the authorised fund manager possesses the knowledge, skills

and experience necessary to be able to carry out a proper and

independent valuation of the assets and types of assets which

the long-term asset fund holds or is to hold (see FUND 3.9.4R);

and

(b) the depositary of the long-term asset fund, having made an

assessment of the matters in (a), has determined that the

authorised fund manager has the resources and procedures for

carrying out a valuation of those assets in accordance with the

applicable law, the instrument constituting the fund and FUND

3.9 (Valuation).

(3) The depositary must:

(a) review its determination under (2)(b):

(i) regularly, and in any event at least annually; and

(ii) whenever the depositary becomes aware of any

circumstances which could affect the determination;

(b) for a period of six years, keep a written record of its

determination under (2)(b) and any review under (3)(a), and the

reasons for the assessment; and

(4) Where the authorised fund manager performs the valuation function

itself in accordance with (2), the authorised fund manager may

appoint, as applicable:

(a)

for the purpose of valuing immovables in accordance with

COLL 15.6.18R (Investment in property), an appropriate

valuer;

(b) for the purpose of valuing immovables in accordance with

COLL 15.6.22R (Standing independent valuer and valuation), a

standing independent valuer;

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property, a delegate appointed in accordance with FUND 3.10

(Delegation) and the relevant provisions of section 8

(Delegation of AIFM functions) of Chapter III of the AIFMD

level 2 regulation.

(5) The authorised fund manager need not appoint an external valuer

under (1) if:

(a)

the scheme property of the long-term asset fund is constituted

solely of units or shares in other collective investment schemes

or AIFs; and

(b) an external valuer performs the valuation function of each such

collective investment scheme or AIF.

[Note: FUND 3.9 (Valuation), FUND 3.10 (Delegation), FUND 3.11.25R

(Depositary functions: oversight), article 19(5) of AIFMD, and articles 67 to

74 (Valuation) and article 94(4) (Duties regarding the valuation of

shares/units) of the AIFMD level 2 regulation.]

15.2.7 G Where an authorised fund manager appoints an external valuer under COLL

15.2.6R(1) certain additional requirements apply. For example, FUND

3.9.7R(3) (Performance of the valuation function) sets certain conditions

relating to the independence of the external valuer, and the authorised fund

manager will also need to be able to demonstrate the matters set out in

FUND 3.9.9R (Appointment of external valuer). The AIFMD level 2

regulation contains further requirements that apply to the authorised fund

manager where an external valuer is used. Certain requirements also apply

to the external valuer and the depositary of an LTAF with an external valuer.

[Note: Articles 67 to 74 and article 94(4) of the AIFMD level 2 regulation.]

15.2.8 R The governing body of the authorised fund manager of a long-term asset

fund must:

(1) possess the collective knowledge, skills and experience to be able to

understand the authorised fund manager’s activities, in particular, the

main risks involved in those activities and the assets in which the

long-term asset fund is invested;

(2) have members that commit sufficient time to properly perform their

functions in the authorised fund manager; and

(3) have members that act with honesty, integrity and independence of

mind.

[Note: Article 21 of the AIFMD level 2 regulation.]

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15.2.9 G (1) In order to establish whether an authorised fund manager of a long-

term asset fund conducts its activities honestly, fairly and with due

skills, the FCA is required to assess various matters, including those

set out in articles 21 and 22 of the AIFMD level 2 regulation. In

addition, under COLL 15.2.4R, the authorised fund manager must

possess the knowledge, skills and experience necessary to understand

the activities of the LTAF and, in particular, the risks involved in those

activities and the assets which the LTAF holds (or is to hold) in the

scheme property without relying on delegation arrangements to satisfy

the requirement.

(2) The authorised fund manager of a long-term asset fund is subject to

various other requirements relating to its governance arrangements; its

organisational structure; the skills, knowledge, expertise and

competence of those it employs; and its obligation to act honestly,

fairly and with due skill, care and diligence. See for example the rules

in SYSC 4 (General organisational requirements), SYSC 5 (Employees,

agents and other relevant persons) and COBS 2.1 (Acting honestly,

fairly and professionally).

(3) The authorised fund manager of a long-term asset fund should also

note the organisational requirements set out in the AIFMD level 2

regulation; for example, article 57 (General requirements).

15.3 Constitution

Application

15.3.1 R

This section applies to an authorised fund manager of a long-term asset

fund.

Classes of unit

15.3.2 R A long-term asset fund may issue such classes of unit as are set out in the

instrument constituting the fund, provided the rights of any class are not

unfairly prejudicial as against the interests of the unitholders of any other

class of units in that scheme.

Names of schemes, sub-funds, and classes of units

15.3.3 R (1)

The authorised fund manager must ensure that the name of the

scheme, a sub-fund or a class of unit is not undesirable or misleading.

(2) The authorised fund manager of a long-term asset fund must include

the term ‘long-term asset fund’ or ‘LTAF’ in the name of the scheme

and in relation to any sub-fund which is also a long-term asset fund.

Undesirable and misleading names

15.3.4 G (1) COLL 6.9.6G (Undesirable and misleading names) contains guidance

as to names which may be undesirable or misleading.

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(2) The term ‘Long-Term Asset Fund’ or ‘LTAF’ is reserved for a long-

term asset fund whose authorised fund manager operates, or proposes

to operate, it in accordance with the rules in this chapter.

(3)

Only AIFs that are authorised in accordance with the LTIF Regulation

may use the designation ‘LTIF’ or ‘long-term investment fund’.

Instrument constituting the fund

15.3.5 R (1) The statements and provisions required by COLL 15.3.6R must be

included in the instrument constituting the fund of a long-term asset

fund.

(2) The instrument constituting the fund must not contain any provision

that conflicts with any applicable rule.

Table: contents of the instrument constituting the fund

15.3.6 R This table belongs to COLL 15.3.5R.

1 Description of the authorised fund

Information detailing:

(1) the name of the authorised fund;

(2) that the authorised fund is a long-term asset fund;

(3) in the case of an ICVC, whether the head office of the company is

situated in England and Wales, Wales, Scotland or Northern Ireland.

2 Property Authorised Investment Funds

For a property authorised investment fund, a statement that:

(1) it is a property authorised investment fund;

(2) no body corporate may seek to obtain or intentionally maintain a

holding of more than 10% of the net asset value of the scheme; and

(3) in the event that the authorised fund manager reasonably considers

that a body corporate holds more than 10% of the net asset value of

the scheme, the authorised fund manager is entitled to delay any

redemption or cancellation of units in accordance with 8 if the

authorised fund manager reasonably considers such action to be:

(a) necessary in order to enable an orderly reduction of the holding

to below 10%; and

(b) in the interests of the unitholders as a whole.

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3 Constitution

The following statements:

(1) the scheme property of the scheme is entrusted to a depositary f or

safekeeping (subject to any exception permitted by the rules);

(2) if relevant, the duration of the scheme is limited and, if so, for how

long;

(3)

charges and expenses of the scheme may be taken out of scheme

property;

(4) for an ICVC:

(a)

what the maximum and minimum sizes of the scheme’s capital

are; and

(b) the unitholders are not liable for the debts of the company;

(5)

for an ICVC which is an umbrella, a statement that the assets of a sub-

fund belong exclusively to that sub-fund and shall not be used to

discharge directly or indirectly the liabilities of, or claims against, any

other person or body, including the umbrella, or any other sub-fund,

and shall not be available for any such purpose;

(6) for a co-ownership scheme which is an umbrella, the property subject

to a sub-fund is beneficially owned by the participants in that sub-fund

as tenants in common (or, in Scotland, is the common property of the

participants in that sub-fund) and must not be used to discharge any

liabilities of, or meet any claims against, any person other than the

participants in that sub-fund;

(7)

for a limited partnership scheme, that the scheme prohibits pooling as

is mentioned in section 235(3)(a) of the Act in relation to separate

parts of the scheme property, with the effect that the scheme cannot be

an umbrella;

(8) for an AUT:

(a) the trust deed:

(i) is made under and governed by the law of England and

Wales, or the law of Scotland or the law of Northern

Ireland;

(ii) is binding on each unitholder as if that person had been

a party to it, and that the unitholder is bound by its

provisions; and

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(iii)

authorises and requires the trustee and the manager to

do the things required or permitted of them by its terms;

(b)

subject to the provisions of the trust deed and all the rules made

under section 247 of the Act (Trust scheme rules):

(i) the scheme property (other than sums held to the credit

of the distribution account) is held by the trustee on

trust for the unitholders according to the number of

units held by each unitholder or, where relevant,

according to the number of individual shares in the

scheme property represented by the units held by each

unitholder; and

(ii) the sums standing to the credit of any distribution

account are held by the trustee on trust to distribute or

apply them in accordance with COLL 15.8.18R

(Income);

having paid the price of the units held, and that no further

liability can be imposed on the unitholder in respect of those

units; and

(d) payments to the trustee by way of remuneration are authorised

to be paid (in whole or in part) out of the scheme property; and

(9) for an ACS:

(a) the contractual scheme deed:

(i) is made under and governed by the law of England and

Wales, or the law of Scotland or the law of Northern

Ireland;

(ii)

is binding on each unitholder as if that person had been

a party to it, and that the unitholder is bound by its

provisions;

(iii) authorises and requires the depositary and the

authorised contractual scheme manager to do the things

required or permitted of them by its terms; and

(iv) states that units may not be issued to a person other than

a person:

(A) who is a:

(i) professional ACS investor; or

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(ii) large ACS investor; or

(iii) person who already holds units in the

scheme; and

(B)

to whom units in a long-term asset fund may be

promoted under COBS 4.12.4R;

(v)

states that the authorised contractual scheme manager

of an ACS must redeem units as soon as practicable after

becoming aware that those units are vested in anyone

(whether as a result of subscription or transfer of units)

other than a person meeting the criteria in (iv)(A) and

(B);

(vi) states that for a co-ownership scheme:

(A)

the scheme property is beneficially owned by the

participants as tenants in common (or, in

Scotland, is the common property of the

participants);

(B) the arrangements constituting the scheme are

intended to constitute a co-ownership scheme as

defined in section 235A(2) of the Act; and

(C)

the operator and depositary are required to wind

up the scheme if directed to do so by the FCA in

exercise of its power under section 261X

(Directions) of the Act;

(vii) states:

(A) whether the transfer of units in the ACS scheme

or, for a co-ownership scheme which is an

umbrella (sub-funds of which pursue differing

policies in relation to transfer of units), in each

particular sub-fund, is either:

(i) prohibited; or

(ii) allowed;

(B) where a transfer of units is allowed by the

scheme or, where appropriate the sub-fund, in

accordance with (A)(ii), units may only be

transferred in accordance with the conditions

specified by FCA rules, including that units may

not be transferred to a person other than a

person:

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(i) who is a:

(1) professional ACS investor; or

(2) large ACS investor; or

(3) person who already holds units in

the scheme; and

(ii) to whom units in a long-term asset fund

may be promoted under COBS 4.12.4R;

and

(vii)

states that for a limited partnership scheme, the scheme

is not dissolved on any person ceasing to be a limited

partner or nominated partner provided that there

remains at least one limited partner;

(b) subject to the provisions of the contractual scheme deed and all

the rules made under section 261I of the Act (Contractual

scheme rules) and for the time being in force:

(i)

the scheme property (other than sums standing to the

credit of the distribution account) is held by, or to the

order of, the depositary for and on behalf of the

unitholders according to the number of units held by

each unitholder or, where relevant, according to the

number of individual shares in the scheme property

represented by the units held by each unitholder; and

(ii) the sums standing to the credit of any distribution

account are held by the depositary to distribute or apply

them in accordance with COLL 15.8.18R (Income); and

further payment after having paid the price of the units held,

and that no further liability can be imposed on the unitholder in

respect of those units;

(d) a unitholder in a limited partnership scheme is not liable for the

debts or obligations of the limited partnership scheme beyond

the amount of the scheme property which is available to the

authorised contractual scheme manager to meet such debts or

obligations, provided that the unitholder does not take part in

the management of the partnership business;

(e) the exercise of rights conferred on limited partners by FCA

rules does not constitute taking part in the management of the

partnership business;

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(f)

the limited partners, other than the nominated partner, are to be

the participants in the scheme; and

(g) the operator of a co-ownership scheme is authorised to:

(i)

acquire, manage and dispose of the scheme property;

and

(ii)

enter into contracts which are binding on unitholders for

the purposes of, or in connection with, the acquisition,

management or disposal of scheme property.

4 Investment objectives

A statement of the object of the scheme, in particular the types of investments

and assets in which it and each sub-fund (where applicable) may invest and

that the object of the scheme is to invest in property of that kind with the aim

of spreading investment risk.

5 Units in the scheme

A statement of:

(1) the classes of units which the scheme may issue, indicating, for a

scheme which is an umbrella, which class or classes may be issued in

respect of each sub-fund; and

(2)

the rights attaching to units of each class (including any provisions for

the expression in two denominations of such rights).

6 Limitation on issue of and redemption of units

(1) Details as to:

(a)

the provisions relating to any restrictions on the right to redeem

units in any class; and

(b)

the circumstances in which the issue of the units of any

particular class may be limited.

(2) A statement setting out the dealing frequency f or sales and

redemptions of units in the scheme, and the applicable notice period

for redemptions.

7 Income and distribution

Details of the person responsible for the calculation, transfer, allocation and

distribution of income for any class of unit in issue during the accounting

period.

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8 Redemption or cancellation of units on breach of law or rules

A statement that where any holding of units by a unitholder is (or is

reasonably considered by the authorised fund manager to be) an

infringement of any law, governmental regulation or rule, those units must

be redeemed or cancelled.

9 Base currency

A statement of the base currency of the scheme.

10 Meetings

Details of the procedures for the convening of meetings and the procedures

relating to resolutions, voting and the voting rights for unitholders.

11 Powers and duties of the authorised fund manager and depositary

Where relevant, details of any function to be undertaken by the authorised

fund manager and depositary which the rules in COLL require to be stated in

the instrument constituting the fund.

12 Termination and suspension

Details of:

(1) the grounds under which the authorised fund manager may initiate a

suspension of the scheme and any associated procedures; and

(2) the methodology for determining the rights of unitholders to

participate in the scheme property on winding up.

13 Investment in overseas property through an intermediate holding

vehicle

If investment in an overseas immovable is to be made through an

intermediate holding vehicle or a series of intermediate holding vehicles, a

statement that the purpose of that intermediate holding vehicle or series of

intermediate holding vehicles will be to enable the holding of overseas

immovables by the scheme.

14 Other relevant matters

Details of those matters which enable the scheme, authorised fund manager

or depositary to obtain any privilege or power conferred by the rules in

COLL which is not otherwise provided for in the instrument constituting the

fund.

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Limited issue

15.3.7 R Units whose issue may be limited can only be issued if permitted by the

instrument constituting the fund, under the conditions set out in the

prospectus and provided that this will not materially prejudice any existing

unitholders in the scheme.

15.4 Prospectus and other pre-sale notifications

Application

15.4.1 R This section applies to:

(1) the authorised fund manager of an AUT, ACS or an ICVC; and

(2) an ICVC,

which is a long-term asset fund.

Drawing up and availability of a prospectus

15.4.2 R (1) An authorised fund manager must ensure that a prospectus of a long-

term asset fund is drawn up which contains:

(a) the information specified in COLL 15.4.5R (Table: contents of

long-term asset fund prospectus);

(b) the information for investors required by FUND 3.2.2R and

FUND 3.2.3R (Prior disclosure of information to investors);

and

(c)

the information for investors required by FUND 3.2.5R and

FUND 3.2.6R (Periodic disclosure), unless the up-to-date

information has been published in the scheme’s most recent

annual report or half-yearly report.

(2) An authorised fund manager must:

(a) revise the prospectus immediately upon the occurrence of any

materially significant change in the information required to be

stated within it;

(b)

include the date of any revision in a prominent manner in the

revised prospectus;

FCA; and

(d)

review the prospectus periodically and revise it to take account

of any significant change or new matter.

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(3) The prospectus must not contain any provision which is unfairly

prejudicial to the interests of unitholders generally or to the

unitholders of any class of units.

(4)

The authorised fund manager must ensure that the prospectus does not

contain any provision that conflicts with any applicable rule.

(5) An ICVC or the authorised fund manager of an AUT or ACS must

offer a copy of the scheme’s most recent prospectus free of charge to

any person eligible to invest in a long-term asset fund, prior to the

purchase of any units.

15.4.3 G (1) The information specified in COLL 15.4.5R (Table: contents of long-

term asset fund prospectus) includes the provisions specified in FUND

3.2.2R(1) to (12) and (16), as well as certain additional pieces of

information. A ‘Note’ indicates whether the information is derived

from FUND 3.2.2R.

(2) The authorised fund manager of an LTAF will also need to comply

with FUND 3.2.2R by providing investors with the information

specified in FUND 3.2.2R(13) to (15) and (17).

False or misleading prospectus

15.4.4 R The authorised fund manager must ensure that the prospectus does not

contain any untrue or misleading statement or omit any matter required by

the rules in this sourcebook to be included in it.

Table: contents of a long-term asset fund prospectus

15.4.5 R This table belongs to COLL 15.4.2R.

1 Document status

A statement that this document is the prospectus of the authorised fund valid

as at a particular date which shall be the date of the document.

2 Description of the authorised fund

Information detailing:

(1) the name of the authorised fund;

(2) its FCA product reference number (PRN);

(3) that the authorised fund is either an ICVC, ACS or an AUT;

(4) that the scheme is a long-term asset fund;

(5)

where relevant, that the shareholders in an ICVC are not liable for the

debts of the authorised fund;

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(6)

where relevant, the address of the ICVC’s head office and the address

in the United Kingdom for service on the ICVC of documents required

or authorised to be served on it;

(7) the effective date of the authorisation order made by the FCA and, if

the duration of the authorised fund is not unlimited, when it will or

may terminate;

(8) the base currency for the authorised fund;

(9) where relevant, the maximum and minimum sizes of the ICVC’s

capital;

(10) for an ACS that is a limited partnership scheme, the address of the

proposed principal place of business of the limited partnership

scheme; and

(11)

a description of the other main legal implications of the contractual

relationship entered into for the purpose of investment, including

information on jurisdiction, the applicable law and the existence or

absence of any legal instruments providing for the recognition and

enforcement of judgments.

[Note: FUND 3.2.2R(3).]

3 Investment objectives, policy and strategy

The following particulars, which must be set out fairly, clearly and in plain

language:

(1) Information to enable a unitholder to ascertain:

(a) the investment objectives of the authorised fund;

(b) the authorised fund’s investment policy for achieving those

investment objectives, including:

(i) the general nature of the portfolio and any intended

specialisation;

(ii) the policy for providing a prudent spread of risk in the

scheme property; and

(iii)

the policy in relation to the exercise of powers to borrow

cash and use leverage, including:

(A)

the purposes for which cash borrowing and

leverage may be used;

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(B)

the nature of the cash borrowing, including

whether it is short- or long-term, temporary or

otherwise;

the associated risks;

(D) any restrictions on the use of leverage and any

collateral and asset reuse arrangements;

(E) the maximum level of leverage which the

authorised fund manager is entitled to employ

on behalf of the LTAF;

(F)

an explanation of how and why that is

compatible with the objectives of the LTAF;

(c)

whether there are any restrictions in the assets which may be

held in the scheme property; and

(d) the extent (if any) to which that investment policy does not

envisage remaining fully invested at all times.

(2) A description of the investment strategy of the long-term asset fund

which must comply with COLL 15.6.6R (Long-term asset funds:

investment strategy).

[Note: FUND 3.2.2R(1)(a), FUND 3.2.2R(1)(f) and FUND 3.2.2R(1)(g) to

(j).]

4 Feeder LTAFs

If the LTAF is a feeder LTAF:

(1) the name and (where applicable) the FCA product reference number

(PRN) of the qualifying master LTAF;

(2) the country or territory where the qualifying master LTAF is

established; and

(3) the following details of the qualifying master LTAF:

(a) its investment objective, policy and strategy, including its risk

profile;

(b) the minimum and (if relevant) maximum investment that the

feeder LTAF may make in it;

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(d)

how the unitholders of the feeder LTAF may obtain further

information about it; and

(e)

a description of all remuneration or reimbursement of costs

payable by the feeder LTAF by virtue of its investment in units

of the qualifying master LTAF, as well as the aggregate charges

of the two schemes.

[Note: FUND 3.2.2R(1)(b).]

5 Fund of funds

If the LTAF is a fund of funds, information on where the underlying funds are

established.

[Note: FUND 3.2.2R(1)(c).]

6 Assets in which the LTAF may invest

A description of the types of assets in which the LTAF may invest, including,

where relevant:

(1) for investment in immovables:

(a) the countries or territories in which the authorised fund may

invest in immovables;

(b) the authorised fund manager’s policy in relation to insuring any

immovables which form part of the scheme property; and

granting of options over immovables in the scheme property

and the purchase of options on immovables.

(2)

if intended, whether the scheme property may consist of units in

collective investment schemes (“second schemes”) which are managed

by or operated by the authorised fund manager or by one of its

associates and a statement as to:

(a) the basis of the maximum amount of the charges in respect of

transactions in a second scheme; and

(b) the extent to which any such charges will be reimbursed to the

scheme;

(3) if intended, whether the scheme may enter into stock lending

arrangements and repo contracts and, if so, what procedures will

operate and what collateral will be required.

[Note: FUND 3.2.2R(1)(d).]

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7 Investment techniques and associated risks

At least the following information, which must be set out fairly, clearly and

in plain language, about the investment techniques that the authorised fund

manager may employ and all associated risks, including:

(1) having regard to the investment strategy of the long-term asset fund

and the type of assets in which the scheme may invest, an explanation

of the risks associated with the scheme investing in those assets and

how those risks might crystallise;

(2) any other risks for unitholders investing in the long-term asset fund;

(3) a description of the tools and arrangements the authorised fund

manager would propose using, including those required by rules, to

mitigate the risks referred to in (1) and (2); and

(4)

an explanation of the circumstances in which those tools and

arrangements would typically be deployed and the likely

consequences for investors.

[Note: FUND 3.2.2R(1)(e).]

8 Procedures to change of strategy or policy

A description of the procedures by which the authorised fund manager o f the

LTAF may change its investment objective and policy or its investment

strategy, or both.

[Note: FUND 3.2.2R(2).]

9 Classes of units

Information as to:

(1) the names of the classes of units in issue or available for issue and the

rights attached to them in so far as they vary from the rights attached

to other classes;

(2) how unitholders may exercise their voting rights and what these are;

and

(3) the circumstances where a mandatory redemption, cancellation or

conversion of units from one class to another may be required.

[Note: FUND 3.2.2R(3), (8), (9), (11) and (12).]

10 Identity and duties of the authorised fund manager, depositary, auditor

and other service providers, and investors’ rights

(1) The following particulars of the authorised fund manager:

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(a) its name and the nature of its corporate form;

(b) the country or territory of its incorporation;

status is limited, when that status will or may cease;

(d) if it is a subsidiary, the name of its ultimate holding company

and the country or territory in which that holding company is

incorporated;

(e) the address of its registered office, its head office, and, if

different, the address of its principal place of business in the

United Kingdom;

(f) the amount of its issued share capital and how much of it is

paid up;

(g) for an ICVC, a summary of the material provisions of the

contract between the ICVC and the authorised fund manager

which may be relevant to unitholders including provisions (if

any) relating to termination, compensation on termination and

indemnity;

(h) the names of the directors of the authorised fund manager; and

(i) a description of the duties of the authorised fund manager.

(2) Where the LTAF is an ICVC, other than for the ACD:

(a) the names and positions in the ICVC of the directors; and

(b)

the manner, amount and calculation of the remuneration of the

directors.

(3) The following particulars of the depositary

(a) its name and the nature of its corporate form;

(b) the country or territory of its incorporation;

office if that is different from the address of its registered

office;

(d) if neither its registered office nor its head office is in the United

Kingdom, the address of its principal place of business in the

United Kingdom; and

(e) a description of the duties of the depositary.

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(4)

If an investment adviser or any other person is retained to provide

services in connection with the business of the authorised fund:

(a) the name of the person;

(b) whether or not the person is authorised by the FCA; and

(5) The name of the auditor of the authorised fund and a description of the

duties of the auditor.

[Note: FUND 3.2.2R(4).]

11 Professional liability

A description of how the authorised fund manager complies with the

requirements referred to in IPRU-INV 11.3.11G (Professional negligence)

relating to professional liability risk.

[Note: FUND 3.2.2R(5).]

12 Delegation arrangements

To the extent not covered by (10), a description of:

(1) any AIFM management function delegated by the authorised fund

manager;

(2) any safe-keeping function delegated by the depositary;

(3) the identity of each delegate appointed under FUND 3.10

(Delegation); and

(4) any conflicts of interest that may arise from such delegation.

[Note: FUND 3.2.2R(6).]

13 Valuation of scheme property and due diligence

(1) A statement setting out whether the valuation function is performed by

an external valuer or the authorised fund manager and:

(a) where an external valuer is used to perform the valuation

function, an explanation of how that person meets the

requirements set out in FUND 3.9.7R(3) (Performance of the

valuation function) and the relevant requirements in articles 67

to 74 of the AIFMD level 2 regulation, and how the authorised

fund manager is able to demonstrate the matters specified in

FUND 3.9.9R (Appointment of an external valuer) and FUND

3.10.2R(2)(f) (General delegation requirements); or

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(b)

where the authorised fund manager performs the valuation

function itself, details of the depositary’s determination of the

matters referred to in COLL 15.2.6R(2) (Appointment of

external valuer or authorised fund manager with knowledge,

skills and experience of valuing long-term assets).

(2) A description of the valuation procedure and of the pricing

methodology for valuing assets, including the methods used in valuing

hard-to-value assets, in line with FUND 3.9 (Valuation), and details as

to:

(a) how frequently and at what times of the day the scheme

property will be regularly valued to determine the price at

which units in the scheme may be purchased from or redeemed

by the authorised fund manager and a description of any

circumstance where the scheme property may be specially

valued;

(b) in relation to each purpose for which the scheme property must

be valued and each category of asset held in the scheme

property, the basis on which it will be valued, identifying any

codes of good practice used by the external valuer (where

relevant) or the authorised fund manager; and

including a statement that a forward price basis is to be applied.

(3) Details as to:

(a) the authorised fund manager’s policies and procedures in

relation to the selection and ongoing monitoring of investments

(see article 18(2) of the AIFMD level 2 regulation);

(b) the arrangements for ensuring that investment decisions on

behalf of the long-term asset fund are carried out in compliance

with the objectives and the investment strategy of the scheme

(see article 18(3) of the AIFMD level 2 regulation);

in line with good market practice.

[Note: FUND 3.2.2R(7).]

[Note 2: Articles 67 to 71 of the AIFMD level 2 regulation contain detailed

requirements relating to the valuation of assets by full-scope UK AIFMs.

Articles 18 and 19 of the AIFMD level 2 regulation also contain detailed

requirements relating to the due diligence obligations of full-scope UK

AIFMs.]

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14 Fees, charges and expenses

A description of all fees, charges and expenses, including:

(1) the maximum amounts directly or indirectly borne by investors;

(2) the payments that may be made out of the scheme property to any

person whether by way of remuneration for services, reimbursement

of expense, or charge or other payment and for each category of

remuneration, expense, charge or payment the following should be

specified:

(a) (i) the person to whom the remuneration, charge, expense

or payment is payable or made;

(ii) what that payment is for;

(iii) the current rates or amounts of such remuneration,

charge, expense or payment;

(iv) how the remuneration, charge, expense or payment will

be calculated;

(v) when it will be paid; and

(vi) where a performance fee is taken, whether by the

authorised fund manager or any other person providing

services to the authorised fund manager or the long-

term asset fund in relation to the operation of the

scheme, examples of how the performance fee works in

plain English and the maximum it can amount to;

(b) if notice has been given to unitholders of the authorised fund

manager’s intention to:

(i) introduce a new category of remuneration for its

services;

(ii) increase the basis of any current charge; or

(iii) change the basis of the treatment of a payment from the

capital property set out in COLL 15.8.16R(2)

(Payments),

particulars of that introduction or increase and when it will take

place; and

part of the remuneration or expense are to be treated as a

capital charge:

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(i) that fact; and

(ii) the basis of the charge which may be so treated; and

(3) if the authorised fund manager makes any charges on sale or

redemption of units, details of the charging structure and how notice

will be provided to unitholders of any increase.

[Note: FUND 3.2.2R(9).]

[Note 2: Annex VI of the onshored Commission Delegated Regulation (EU)

2017/653 laying down regulatory technical standards with regard to the

presentation, content, review and revision of key information documents, sets

out detailed requirements in relation to the costs to be disclosed in a key

information document.]

15 Fair treatment of investors and investor rights

(1) A description of how the authorised fund manager ensures a fair

treatment of investors.

(2) Whenever an investor obtains preferential treatment or the right to

obtain preferential treatment, a description of:

(a) that preferential treatment;

(b) the type of investors who obtain such preferential treatment;

and

(c)

where relevant, their legal or economic links with the LTAF or

the authorised fund manager.

(3) A description of the rights of investors.

[Note: FUND 3.2.2R(4), (10) and (11).]

16 Dealing

The procedure and conditions for the issue, sale, redemption and cancellation

of units or shares including details of the following, in fair, clear and plain

language, using worked examples to explain how these procedures might

apply to unitholders in practice:

(1) the dealing days and times in the dealing day on which the authorised

fund manager will receive and determine requests for the sale and

redemption of units, including any cut-off point f or receiving

redemption requests before the authorised fund manager makes the

next redemption determination (see COLL 15.8.12R(2)(a) (Dealing:

redemption of units));

(2) the procedures for effecting the issue and cancellation of units;

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(3) the procedures for effecting the sale and redemption of units and the

settlement of transactions;

(4) the steps required to be taken by a unitholder in redeeming units in the

long-term asset fund (see COLL 15.8.12R (Dealing: redemption of

units)), using worked examples to explain how these arrangements may

affect unitholders in the scheme, including:

(a) the notice period, and the normal period that unitholders will

need to wait from the authorised fund manager accepting a

unitholder’s instruction to redeem units in the LTAF to payment

of the appropriate proceeds of redemption to the unitholder;

(b) (if applicable) the circumstances and periods where:

(i)

the execution of a

redemption request may be deferred;

(ii)

payment may be deferred; or

(iii)

a limit on the amount that can be

redeemed may be

applied, and

if so, the effect on the unitholder of such a deferral or limit (see

COLL 15.8.12R(6) (Dealing: redemption of units));

suspended in accordance with COLL 15.10.3R (Suspension);

and

(d) that once the authorised fund manager has accepted a

unitholder’s request to redeem units in the LTAF it is

irrevocable and they will not be able to withdraw that request;

(5) a description of the LTAF’s liquidity risk management, including how

an investor’s ability to redeem units in the LTAF may be affected in

exceptional circumstances, and the circumstances in which the

redemption of units may be suspended;

(6) the days and times in the day on which recalculation of the price will

commence;

(7) details of the minimum number or value of each type of unit in the

authorised fund which:

(a) any one person may hold; and

(b) may be the subject of any one transaction of sale or redemption;

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(8) the circumstances in which the authorised fund manager may arrange

for, and the procedure for, a redemption of units in specie;

(9) the circumstances in which the further issue of units in any particular

class may be limited and the procedures relating to this;

(10) the circumstances in which direct issue or cancellation of units by the

ICVC or the depositary of an AUT or ACS (as appropriate) may occur

and the relevant procedures for such issues and cancellations;

(11) whether a unitholder may effect transfer of title to units on the

authority of an electronic communication and if so the conditions that

must be satisfied in order to effect a transfer;

(12) if the authorised fund manager deals as principal in units of the scheme

and holds them for that purpose, a statement of its policy for doing so

and, where applicable:

(a) a description of when the authorised fund manager may retain

any profits it earns and absorb any losses it incurs for these

activities; and

(b) a statement of non-accountability as referred to in COLL

15.8.17G; and

(13) any other features relating to dealing in units in the scheme which

unitholders would reasonably expect to be aware of, including (but not

limited to):

(a) any minimum periods for which unitholders must hold units in

any class of the scheme;

(b) any limits or caps on the number or value of units in any class

that a unitholder may redeem, whether on one occasion or over

a period of time;

procedures for their use,

using worked examples to explain the effects or consequences that

these features may have on unitholders in the scheme.

[Note: FUND 3.2.2R(8).]

17 Issue of units in ACSs: eligible investors

(1) A statement that units may not be issued to a person other than to a

person:

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(a) who is a:

(i) professional ACS investor; or

(ii) large ACS investor; or

(iii) person who already holds units in the scheme; and

(b) to whom units in a long-term asset fund may be promoted

under COBS 4.12.4R.

(2) A statement that the authorised contractual scheme manager of an

ACS must redeem units as soon as practicable after becoming aware

that those units are vested in anyone (whether as a result of

subscription or transfer of units) other than a person meeting the

criteria in (1).

[Note: FUND 3.2.2R(12).]

18 Transfer of units in ACSs

(1) A statement whether the transfer of units in the ACS scheme is either:

(a) prohibited; or

(b) allowed;

by the instrument constituting the fund and prospectus.

(2) A statement that where transfer of units is allowed by the instrument

constituting the fund and prospectus in accordance with (1)(b), units

may only be transferred in accordance with the conditions specified by

FCA rules, including that units may not be transferred to a person

other than a person:

(a) who is a:

(i) professional ACS investor; or

(ii) large ACS investor; or

(iii) person who already holds units in the scheme; and

(b) to whom units in a long-term asset fund may be promoted

under COBS 4.12.4R.

(3) For a co-ownership scheme which is an umbrella, a statement in

accordance with (1)(a) or (1)(b) and, where appropriate, a statement in

accordance with (2), must also be made for the sub-funds. Where

individual sub-funds have differing policies in relation to transfer of

units, separate statements are required.

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[Note: FUND 3.2.2R(12).]

19 Prime brokerage firms

(1) The identity of any prime brokerage firm.

(2)

A description of any material arrangements of the LTAF with its prime

brokerage firm and the way any conflicts of interest are managed.

(3) The provision in the contract with the depositary on the possibility of

transfer and reuse of the scheme property of the LTAF.

(4) Information about any transfer of liability to the prime brokerage firm

that may exist.

[Note: FUND 3.2.2R(16).]

20 Distributions and accounting dates

Relevant details of accounting and distribution dates and a description of the

procedures:

(1) for determining and applying income (including how any distributable

income is paid); and

(2) relating to unclaimed distributions.

The register of unitholders

Details of the address in the United Kingdom where the register of

unitholders is kept and can be inspected by unitholders.

22 Property Authorised Investment Funds

For a property authorised investment fund, a statement that:

(1) it is a property authorised investment fund;

(2) no body corporate may seek to obtain or intentionally maintain a

holding of more than 10% of the net asset value of the scheme; and

(3) in the event that the authorised fund manager reasonably considers that

a body corporate holds more than 10% of the net asset value of the

scheme, the authorised fund manager is entitled to delay any

redemption or cancellation of units if the authorised fund manager

reasonably considers such action to be:

(a) necessary in order to enable an orderly reduction of the holding

to below 10%; and

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(b) in the interests of the unitholders as a whole.

23 General information

Details as to:

(1) when annual and half-yearly reports will be published; and

(2) the address at which copies of the instrument constituting the fund, any

amending instrument and the most recent annual reports may be

inspected and from which copies may be obtained.

24 Winding up of the LTAF

Information detailing the circumstances in which the authorised fund may be

wound up under the rules in COLL and a summary of the procedure for, and

the rights of unitholders under, such a winding up.

25 Information on the umbrella

In the case of a scheme which is an umbrella, the following information:

(1) that a unitholder may exchange units in one sub-fund for units in

another sub-fund and that such an exchange is treated as a redemption

and sale;

(2) what charges may be made on exchanging units in one sub-fund for

units in other sub-funds;

(3) the policy for allocating between sub-funds any assets of, or costs,

charges and expenses payable out of, the scheme property which are

not attributable to any particular sub-fund;

(4) in respect of each sub-fund, the currency in which the scheme property

allocated to it will be valued and the price of units calculated and

payments made, if this currency is not the base currency of the

umbrella;

(5) the circumstances in which a sub-fund may be terminated under the

rules in COLL and a summary of the procedures for, and the rights of

unitholders under, such a termination;

(6) for an ICVC or a co-ownership scheme, that:

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(a) for an ICVC, its sub-funds are segregated portfolios of assets

and, accordingly, the assets of a sub-fund belong exclusively to

that sub-fund and shall not be used to discharge directly or

indirectly the liabilities of, or claims against, any other person or

body, including the umbrella, or any other sub-fund, and shall

not be available for any such purpose;

(b) for a co-ownership scheme, the property subject to a sub-fund is

beneficially owned by the participants in that sub-fund as

tenants in common (or, in Scotland, is the common property of

the participants in that sub-fund) and must not be used to

discharge any liabilities of, or meet any claims against, any

person other than the participants in that sub-fund; and

the OEIC Regulations, and section 261P (Segregated liability in

relation to umbrella co-ownership schemes) of the Act in the

case of co-ownership schemes, provide for segregated liability

between sub-funds, the concept of segregated liability is

relatively new. Accordingly, where claims are brought by local

creditors in foreign courts or under foreign law contracts, it is

not yet known how those foreign courts will react to regulations

11A and 11B of the OEIC Regulations or, as the case may be,

section 261P of the Act; and

(7) the FCA product reference number (PRN) of each sub-fund.

26 Application of the prospectus contents to an umbrella

For a scheme which is an umbrella, information required must be stated:

(1) in relation to each sub-fund where the information for any sub-fund

differs from that for any other; and

(2) for the umbrella as a whole, but only where the information is relevant

to the umbrella as a whole.

27 Investment in overseas property through an intermediate holding vehicle

If investment in an overseas immovable is to be made through an

intermediate holding vehicle or a series of intermediate holding vehicles, a

statement:

(1) disclosing the existence of that intermediate holding vehicle or series

of intermediate holding vehicles; and

(2) confirming that the purpose of that intermediate holding vehicle or

series of intermediate holding vehicles is to enable the holding of

overseas immovables by the scheme.

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28 Information on authorised contractual schemes

A statement that:

(1) a unitholder in a co-ownership scheme is not liable to make any further

payment after having paid the price of the units held and that no further

liability can be imposed on the unitholder in respect of those units;

(2) a unitholder in a limited partnership scheme is not liable for the debts

or obligations of the limited partnership scheme beyond the amount of

the scheme property which is available to the authorised contractual

scheme manager to meet such debts or obligations, provided that the

unitholder does not take part in the management of the partnership

business;

(3) the exercise of rights conferred on limited partners by FCA rules does

not constitute taking part in the management of the partnership

business; and

(4) the scheme property of a co-ownership scheme is beneficially owned

by the participants as tenants in common (or, in Scotland, is the

common property of the participants).

29 Additional information

Any other material information which is within the knowledge of the

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

which the directors or authorised fund manager would have obtained by the

making of reasonable enquiries which investors and their professional

advisers would reasonably require, and reasonably expect to find in the

prospectus, for the purpose of making an informed judgement about the

merits of investing in the authorised fund and the extent and characteristics of

the risks accepted by participating.

Additional information to be made available on securities financing transactions

and total return swaps

15.4.6 G (1)

The Securities Financing Transactions Regulation sets out the

additional information which an authorised fund manager of a long-

term asset fund must make available to investors before they invest.

(2) COLL 4.2.5BUK and COLL 4.2.5CUK copy out the relevant

provisions of that regulation.

(3) An authorised fund manager of a long-term asset fund should publish

the information in the prospectus.

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(4) An authorised fund manager of a long-term asset fund that does not

use securities financing transactions or total return swaps is not

required to include the information in COLL 4.2.5CUK in the

prospectus or other pre-sale documents.

Preparation of key information document in accordance with the PRIIPs regulation

15.4.7 G (1) The PRIIPs Regulation requires the manufacturer of a PRIIP to draw

up a key information document in accordance with the PRIIPs

Regulation before that PRIIP is made available to retail investors (as

defined in the PRIIPs Regulation).

(2) The requirements of the PRIIPs Regulation form part of UK law by

virtue of the EUWA.

(3)

As a result, when a long-term asset fund is made available to retail

clients, the authorised fund manager in the United Kingdom must

comply with the PRIIPs Regulation and will need to prepare a key

information document in accordance with the PRIIPs Regulation, in

addition to the prospectus.

15.5 Annual report and investor relations

Application

15.5.1 R This section applies to:

(1) the authorised fund manager of an AUT, ACS or an ICVC; and

(2) an ICVC,

which is a long-term asset fund.

Report and accounts

15.5.2 R (1)

The authorised fund manager must prepare a report in respect of each

annual accounting period, half-yearly accounting period and

quarterly reporting period.

(2) Where the first annual accounting period of a scheme is less than 12

months, a half-yearly report need not be prepared.

(3) The authorised fund manager must:

(a) publish the annual report not more than four months after the

end of each relevant annual accounting period;

(b)

publish the half-yearly report not more than two months after

the end of each relevant half-yearly accounting period; and

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after the end of each relevant quarterly reporting period,

and in each case provide a copy free of charge on request to any

unitholder.

(4) The authorised fund manager must provide free of charge, on the

request of any person eligible to invest in the scheme, a copy of the

latest:

(a) annual report and (if more recent) half-yearly report; and

(b) quarterly report,

before the conclusion of any sale to such a person.

(5) The authorised fund manager must provide a copy of each annual,

half-yearly and quarterly report to the FCA.

(6) For a scheme which is an umbrella, any annual report provided under

(3) or (4) may be a report prepared under COLL 15.5.3R(3), but the

authorised fund manager must nevertheless provide free of charge the

report prepared under COLL 15.5.3R(2) if a unitholder or any other

person eligible to invest in the scheme requests it.

Contents of the annual report

15.5.3 R (1) An annual report, other than for a scheme which is an umbrella, must

contain:

(a) the accounts for the annual accounting period prepared in

accordance with the requirements of the IMA SORP;

(b) the report of the authorised fund manager in accordance with

COLL 15.5.6R (Authorised fund manager’s report);

(1A) and (2A) (Comparative information);

(d) the report of the depositary in accordance with COLL 15.5.7R

(Report of the depositary); and

(e) the report of the auditor in accordance with COLL 4.5.12R

(Report of the auditor).

(2) An annual report on a scheme which is an umbrella must be prepared

for the umbrella as a whole and must contain:

(a) for each sub-fund:

(i) the accounts required by (1)(a);

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(ii) the report of the authorised fund manager in accordance

with COLL 15.5.6R; and

(iii) comparative information in accordance with COLL

4.5.10R(1A) and (2A);

(b) the report of the depositary in accordance with COLL 15.5.7R;

and

(3)

The authorised fund manager of a scheme which is an umbrella may,

in addition to complying with (2), prepare a further annual report for

any one or more individual sub-funds of the umbrella, in which case it

must contain:

(a) for the sub-fund:

(i) the accounts required by (1)(a);

(ii) the report of the authorised fund manager in accordance

with COLL 15.5.6R; and

(iii)

comparative information in accordance with COLL

4.5.10R(1A) and (2A);

(b) the report of the depositary in accordance with COLL 15.5.7R;

and

(4) The directors of an ICVC or the authorised fund manager of an AUT

or ACS must ensure that the accounts referred to in (1)(a), (2)(a) and

(3)(a) give a true and fair view of the net revenue and the net capital

gains or losses on the scheme property of the authorised fund or sub-

fund for the relevant annual accounting period, and of the financial

position of the authorised fund or sub-fund as at the end of that period.

(5) An annual report of a long-term asset fund must also contain a

statement setting out a description of the assessment of value required

by COLL 15.7.17R including:

(a) a separate discussion and conclusion for the matters covered in

each paragraph of COLL 6.6.21R, and for each other matter that

formed part of the assessment, covering the considerations

taken into account in the assessment, a summary of its findings

and the steps undertaken as part of or as a consequence of the

assessment;

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(b) an explanation for any case in which benefits from economies

of scale that were identified in the assessment have not been

passed on to unitholders;

(c)

an explanation for any case in which unitholders hold units in a

class for which the payments out of scheme property in relation

to that class as set out in the prospectus (in this rule, “charges”)

are higher than those applying to other classes of the same

scheme with substantially similar rights;

(d) the conclusion of the authorised fund manager’s assessment of

whether the charges are justified in the context of the overall

value delivered to the unitholders in the scheme; and

(e)

if the assessment has identified that the charges are not justified

in the context of the overall value delivered to the unitholders, a

clear explanation of what action has been or will be taken to

address the situation.

(6)

An annual report of a long-term asset fund must also contain a

statement setting out a description of the assessment required by

COLL 15.7.20R (Assessment of investment valuations, due diligence,

conflicts of interest and liquidity management), including:

(a)

a separate discussion and conclusion for each of the matters

specified in COLL 15.7.21R (Table: minimum considerations –

assessment of investment valuations, due diligence, conflicts of

interest and liquidity management) and for each other matter

that formed part of the assessment;

(b) a summary of the assessment’s findings and the steps

undertaken as part of or as a consequence of the assessment;

and

(c)

the conclusion of the authorised fund manager’s assessment of

how it managed the LTAF in the best interests of the scheme, its

investors and the integrity of the market.

Information to be included in annual reports on securities financing transactions

and total return swaps

15.5.4 G (1) The Securities Financing Transactions Regulation sets out the

additional information which an authorised fund manager who is a

full-scope UK AIFM of a long-term asset fund must include in the

scheme’s annual report.

(2) COLL 4.5.8ABUK and COLL 4.5.8ACUK copy out the relevant

provisions of that regulation.

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(3) An authorised fund manager of a long-term asset fund that has not

used securities financing transactions or total return swaps during the

relevant annual accounting period is not required to include the

information in COLL 4.5.8ACUK in its reports.

Contents of the half-yearly report

15.5.5 R (1) A half-yearly report on an authorised fund or sub-fund must contain:

(a) the accounts for the half-yearly accounting period which must

be prepared in accordance with the requirements of the IMA

SORP; and

(b) the report of the authorised fund manager in accordance with

COLL 15.5.6R.

(2)

For a scheme which is an umbrella, the authorised fund manager may

choose whether the half-yearly report is prepared for the umbrella as a

whole, or for each individual sub-fund, or both.

Authorised fund manager’s report

15.5.6 R The report of the authorised fund manager must include:

(1) a review of the investment activities during the period to which the

report relates;

(2) a portfolio statement prepared in accordance with the requirements of

the IMA SORP;

(3) in the case of an umbrella which has more than one sub-fund,

particulars in the form of a table showing, as at the end of the period to

which the report relates:

(a)

for each sub-fund, the number of units in that sub-fund that

were held by a second sub-fund of that umbrella; and

(b) the value of each such holding;

or, alternatively, a statement that there were no such holdings as at the

end of that period;

(4) particulars of any fundamental or significant change to the authorised

fund made since the date of the last report;

(5) in relation to each scheme or sub-fund which is a long-term asset fund:

(a)

the amount of any remuneration, charge, payment or expense

paid out of the scheme property during the period to which the

report relates;

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(b) the person to whom that amount was paid;

and

(d)

how the remuneration, charge, payment or expense was

calculated; and

(6) any other information which would enable unitholders to make an

informed judgement on the development of the activities of the

authorised fund during the period and the results of those activities as

at the end of the period.

Report of the depositary

15.5.7 R (1) The depositary must make an annual report to unitholders which must

be included in the annual report.

(2) The depositary’s report must contain:

(a) a description, which may be in summary form, of the duties of

the depositary under COLL 15.7.6R and COLL 15.7.7R (Duties

of the depositary) and in respect of the safekeeping of the

scheme property;

(b) in relation to its oversight and monitoring obligations:

(i) a description of the reasonable steps the depositary has

taken to ensure that the LTAF has been managed in

accordance with each of the matters specified in COLL

15.7.6R(2)(e) (Duties of the depositary); and

(ii) where an external valuer has not been appointed, a

statement setting out the depositary’s determination of

the matters in COLL 15.2.6R(2)(a) (Appointment of

external valuer or authorised fund manager with

knowledge, skills and experience of valuing long-term

assets); and

(i) the issue, sale, redemption and cancellation and

calculation of the price of the units and the application

of the authorised fund’s revenue, have not been carried

out in accordance with the rules in this sourcebook and,

where applicable, the OEIC Regulations and the

instrument constituting the fund; and

(ii)

the investment and borrowing powers and restrictions

applicable to the authorised fund have been exceeded.

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Signing of the annual and half-yearly reports

15.5.8 R The annual reports in COLL 15.5.3R(1) and (2) and the half-yearly reports in

COLL 15.5.5R(1) must:

(1) in the case of an ICVC, if there is:

(a) more than one director, be approved by the board of directors

and signed on their behalf by the ACD and at least one other

director; or

(b) no director other than the ACD, be signed by the ACD;

(2) in the case of an AUT or ACS, if the authorised fund manager has:

(a) more than one director, be signed by at least two directors of

the authorised fund manager; or

(b)

only one director, be signed by the director of the authorised

fund manager.

Quarterly reports

15.5.9 R (1) A quarterly report must contain details of any transactions executed

by, or for or on behalf of, the long-term asset fund in the relevant

quarterly reporting period which have resulted in assets being held in

the LTAF’s scheme property, including:

(a) the date of each transaction;

(b)

details of the asset and type of asset which was the subject of

the transaction; and

LTAF’s investment objectives, investment policy and

investment strategy.

(2) A quarterly reporting period for a long-term asset fund must be

determined in accordance with (a) to (c).

(a) Each quarterly reporting period must be three months long.

(b)

There must be four consecutive quarterly reporting periods in

each annual accounting period.

period must begin when the annual accounting period begins.

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Alterations to the scheme and notices to unitholders

15.5.10 R (1) Any proposed change which would be reasonably considered to be a

fundamental change to the scheme requires the prior sanction of an

extraordinary resolution of the unitholders.

(2) Any proposed change to the scheme which is not within (1) but which

would be reasonably considered to be significant, requires the giving

of reasonable notice to unitholders to become effective.

(3)

Alterations affecting only a particular sub-fund or class of units may

be approved in accordance with (1) or (2) for the particular sub-fund

or class of units, with the consent of, or, as the case may be, notice to,

the relevant unitholders.

(4)

This rule and COLL 15.5.12R (Meetings) will apply (unless the

context requires otherwise) to alterations concerning unitholders of a

particular sub-fund or class of units rather than the scheme or sub-fund

as a whole.

Alterations to the scheme and notices to unitholders: guidance

15.5.11 G Although account should be taken of the guidance on fundamental changes

(COLL 4.3.5G (Guidance on fundamental changes)) and significant changes

(COLL 4.3.7G (Guidance on significant changes)) the impact of any change

to the scheme should be assessed individually based on the nature of the

scheme and its investor profile.

Meetings

15.5.12 R (1) Details of the procedures for the convening and conducting of

meetings and resolutions must be set out in the instrument constituting

the fund and be reasonable and fair as between all relevant parties.

(2) The authorised fund manager must record and keep minutes for six

years of all proceedings to which COLL 15.5.10R (Alterations to the

scheme and notices to unitholders) and this rule are relevant.

(3) The provisions in COLL 4.4.12R (Notices to unitholders), COLL

4.4.13R (Other notices) and COLL 4.4.14G (References to writing and

electronic documents) apply in relation to long-term asset funds.

15.6 Investment and borrowing powers

Application

15.6.1 R This section applies to:

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

(2) the depositary of an AUT, ACS or an ICVC; and

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(3) an ICVC,

which is a long-term asset fund.

15.6.2 R (1) Where this section refers to a second scheme, and the second scheme

is a feeder scheme, which (in respect of investment in units in

collective investment schemes) is dedicated to units in a single

collective investment scheme, the reference in this section to the

second scheme must be read as if it were a reference to the feeder

scheme’s master scheme.

(2) Where this section refers to a second scheme, and the second scheme

is a master scheme to which (in respect of investment in units in

collective investment schemes) the relevant long-term asset fund is

dedicated, the reference in this section to the second scheme must be

read as if it were a reference to any scheme into which that master

scheme invests.

Prudent spread of risk

15.6.3 R

An authorised fund manager must ensure that, taking account of the

investment objectives, policy and strategy of the long-term asset fund as

stated in its most recently published prospectus, the scheme property of the

long-term asset fund aims to provide a prudent spread of risk.

15.6.4 G

For the purpose of COLL 15.6.3R, an authorised fund manager should

consider the risks to which the LTAF is exposed, including:

(1) whether the assets or investments held in the scheme property provide

a sufficient diversification of exposure including, for example, in

respect of the underlying assets or investments held by any holding

company or other collective investment scheme;

(2) the spread of any other risks arising from the assets or investments

held in the scheme property of the LTAF such as market risks, credit

risks, liquidity risks and counterparty risks.

[Note: Article 44 of the AIFMD level 2 regulation.]

Investment powers: general

15.6.5 R (1) The scheme property of a long-term asset fund may, subject to the

rules in this chapter, comprise any assets or investments to which it is

dedicated.

(2) The instrument constituting the fund and the prospectus may further

restrict:

(a)

the kinds of assets in which the scheme property may be

invested;

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(b) the types of transactions permitted and any relevant limits; and

Long-term asset funds: investment strategy

15.6.6 R

The investment strategy of a long-term asset fund must be to invest mainly in

long-term illiquid assets.

15.6.7 G The FCA expects the investment strategy of a long-term asset fund to be to

invest at least 50% of the value of the scheme property in unlisted securities

and other long-term assets such as interests in immovables or other collective

investment schemes investing in such securities or long-term assets.

However, a long-term asset fund could have a strategy of investing mainly in

a mix of unlisted assets and listed but illiquid assets.

Long-term asset funds: general

15.6.8 R The scheme property of a long-term asset fund must, except where otherwise

provided by the rules in this chapter, consist only of one or more of the

following to which it is dedicated:

(1) any specified investment:

(a) within articles 74 to 86 of the Regulated Activities Order;

(b) within article 89 (Rights to or interests in investments) of the

Regulated Activities Order where the right or interest relates to

a specified investment within (a);

(2) (to the extent not within (a)), an interest in a loan, provided that the

loan was not originated to:

(a) a natural person;

(b) the authorised fund manager of the long-term asset fund;

(d) an affiliated company of the person in (b) or (c); or

(e) a person who intends to use, or uses, the credit for the purpose

of investing in a derivative, cryptoasset derivative, an

unregulated transferable cryptoasset, precious metals or a

commodity contract within (5);

(3) an interest in an immovable under COLL 15.6.18R (Investment in

property);

(4) precious metals; or

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(5) a commodity contract traded on an RIE or a recognised overseas

investment exchange.

[Note: Full-scope UK AIFMs are subject to specific requirements relating to

conflicts of interest (see articles 30 to 36 in the AIFMD level 2 regulation and

SYSC 10.1.23R to SYSC 10.1.26R (Additional requirements for an AIFM)).]

[Note 2: In relation to (2), a borrower who receives money by way of deposit from

a person who is not a bank may (if the borrower is acting by way of business) be

carrying on the regulated activity of accepting deposits, but an exclusion in the

Regulated Activities Order may be available. See also article 2 of the Business

Order.]

Investment in collective investment schemes

15.6.9 R (1)

Subject to (2), a long-term asset fund may invest in units in a scheme

(a ‘second scheme’) only if the second scheme is:

(a) a regulated collective investment scheme; or

(b) a scheme not within (a) where the authorised fund manager has

taken reasonable care to determine that:

(i) it is the subject of an independent annual audit

conducted in accordance with international standards on

auditing;

(ii)

the calculation of the net asset value of each of the

second schemes and the maintenance of their accounting

records is segregated from the investment management

function; and

(iii)

it (and any master scheme to whose units it is dedicated)

is prohibited from investing in the long-term asset fund,

or, if there is no such prohibition, the authorised fund

manager is satisfied, on reasonable grounds and after

making all reasonable enquiries, that no such investment

will be made by either the second scheme or any fund in

which the second scheme invests.

(2) A long-term asset fund must not invest more than 20% in value of the

scheme property in units in second schemes which are unregulated

schemes, qualified investor schemes or long-term asset funds unless

the authorised fund manager has carried out appropriate due diligence

on each of the second schemes and has taken reasonable care to

determine that, after making all reasonable enquiries and on

reasonable grounds, the second scheme complies with relevant legal

and regulatory requirements.

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(3) The authorised fund manager of a long-term asset fund with more

than 20% in value of the scheme property invested in one or more

second schemes which are unregulated schemes, qualified investor

schemes or long-term asset funds must carry out appropriate due

diligence on those schemes on an ongoing basis.

15.6.10 G (1) The authorised fund manager of a long-term asset fund carrying out

due diligence for the purpose of COLL 15.6.9R should use reasonable

efforts to make enquiries and obtain the information needed to be able

to consider the matters specified in COLL 5.7.11G(1) to (12), as if that

guidance related to COLL 15.6.9R.

(2) Where COLL 5.7.11G(10) refers to COLL 6.3 (Valuation and pricing),

that reference should be read as if it were a reference to COLL 15.8.2R

(Valuation, pricing and dealing).

(3) In addition to the guidance at COLL 5.7.11G the authorised fund

manager should, as part of its due diligence process, consider whether

the property of each of the second schemes is held in safekeeping by a

third party, which is subject to prudential regulation and independent

of the investment manager of the second scheme and, if not, what

controls over the property of the second scheme are in place to protect

investors.

(4) Further specific requirements relating to due diligence apply to the

authorised fund manager of a long-term asset fund under the rules in

this chapter and in articles 18 to 20 of the AIFMD level 2 regulation.

Investment in a collective investment scheme that is an umbrella

15.6.11 R Where the second scheme in COLL 15.6.9R is an umbrella, the provisions

apply to each sub-fund as if it were a separate scheme.

Delivery of property under a transaction in derivatives or a commodities contract

15.6.12 R (1)

An authorised fund manager must take reasonable care to determine

the following when entering into any transaction in derivatives or any

commodity contract which may result in any asset becoming part of

the scheme property:

(a)

if it is an asset in which the scheme property could be invested,

that the transaction:

(i) can be readily closed out; or

(ii) would at the expected time of delivery relate to an asset

which could be included in the scheme property under

the rules in this chapter; or

(b) in any other case, that the transaction can be readily closed out.

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(2) An authorised fund manager may acquire an asset within (1) if its

determination has proved incorrect and if it determines that acquisition

is in the interests of the unitholders, provided it has the consent of the

depositary.

(3) Any asset within (1) acquired in accordance with (2) may form part of

the scheme property despite any other rule in this chapter until the

position can be rectified.

Cover for transactions in derivatives and forward transactions

15.6.13 R (1) A transaction in derivatives or a forward transaction may be entered

into only if the maximum exposure, in terms of the principal or

notional principal created by the transaction to which the scheme is or

may be committed by another person, is covered globally under (2).

(2) Exposure is globally covered if adequate cover from within the

scheme property is available to meet the scheme’s total exposure

taking into account any reasonably foreseeable market movement.

(3)

The total exposure relating to derivatives held in a long-term asset

fund may not exceed the net value of the scheme property.

(4) No element of cover may be used more than once.

Valuation of an OTC derivative

15.6.14 R

A transaction in an OTC derivative must be capable of valuation which it

will only be if the authorised fund manager having taken reasonable care

determines that, throughout the life of the derivative (if the transaction is

entered into), it will be able to value the investment concerned with

reasonable accuracy:

(1) on the basis of the pricing model; or

(2) on some other reliable basis reflecting an up-to-date market value,

which has been agreed between the authorised fund manager and the

depositary.

Continuing nature of limits and requirements

15.6.15 R (1) An authorised fund manager must, as frequently as necessary to

ensure compliance with COLL 15.6.13R(2) and COLL 15.6.13R(4),

re-calculate the amount of cover required in respect of derivatives and

forward transactions in existence under this chapter.

(2) Derivatives and forward transactions may be retained in the scheme

property only so long as they remain covered globally under COLL

15.6.13R.

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(3) An authorised fund manager must use a risk management process

enabling it to monitor and measure as frequently as appropriate the

risk of a scheme’s derivatives positions and their contribution to the

overall risk profile of the scheme.

Permitted stock lending

15.6.16 R (1) The ICVC, or the depositary at the request of the ICVC, or the

depositary of an AUT or ACS at the request of the authorised fund

manager, may enter into a repo contract or a stock lending

arrangement within section 263B of the Taxation of Chargeable Gains

Act 1992 (without extension by section 263C).

(2) The depositary must ensure that the value of any collateral for the

stock lending arrangement is at all times at least equal to the value of

the securities transferred by the depositary.

(3) In the case of the expiry of validity of any collateral, the duty in (2) is

satisfied if the depositary or the authorised fund manager, as

appropriate, takes reasonable care to determine that sufficient

collateral will be transferred by close of business on the day of expiry.

General power to borrow

15.6.17 R (1) The ICVC or depositary of an AUT or ACS (on the instructions of the

authorised fund manager) may borrow money for the use of the

authorised fund on terms that the borrowing is to be repayable out of

the scheme property.

(2) The authorised fund manager must ensure that the authorised fund’s

borrowing does not, on any day, exceed 30% of the net value of the

scheme property and must take reasonable care to ensure that

arrangements are in place that will enable borrowings to be closed out

to ensure such compliance.

(3)

In this rule “borrowing” also includes any arrangement (including a

combination of derivatives) designed to achieve a temporary injection

of money into the scheme property in the expectation that the sum will

be repaid.

(4)

Where the limit in (2) is breached, the authorised fund manager must

take action in accordance with the principles set out in COLL

15.7.3R(3) to COLL 15.7.3R(5) (Duties of the authorised fund

manager: investment and borrowing powers) to deal with that breach.

Investment in property

15.6.18 R (1) Any investment in land or a building held within the scheme property

of a long-term asset fund must be in an immovable within (2).

(2) For an immovable:

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(a) it must be situated in a country or territory identified in the

prospectus;

(b) the authorised fund manager must have taken reasonable care

to determine that the title to the interest in the immovable is a

good marketable title; and

must have received a report from an appropriate valuer that:

(i)

contains a valuation of the interest in the immovable

(with and without any relevant existing mortgage); and

(ii) states that in the appropriate valuer’s opinion the

interest in the immovable would, if acquired by the

scheme, be capable of being disposed of at that

valuation in a timeframe which is consistent with the

LTAF’s liquidity profile and redemption policy;

(d) unless (c) is satisfied, the authorised fund manager of an AUT

or ACS or the ICVC must have received a report from an

appropriate valuer valuing the interest in the immovable and

stating that:

(i) the immovable is adjacent to or in the vicinity of another

immovable included in the scheme property; and

(ii) in the opinion of the appropriate valuer, the total value

of the interests in both immovables would at least equal

the sum of the price payable for the interest in the

immovable and the existing value of the interest in the

other immovable; and

(e) it must not be bought:

(i) if it becomes apparent to the authorised fund manager

that the report in either (c) or (d) could no longer

reasonably be relied upon; or

(ii) at a price more than 105% of the valuation relevant to

the interest for that immovable in the report in either (c)

or (d).

(3) Any contents of any building may be regarded as part of the relevant

immovable.

(4) An appropriate valuer must be a person who:

(a)

has knowledge of and experience in the valuation of

immovables of the relevant kind in the relevant area;

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(b) is qualified to be a standing independent valuer of an

authorised fund or is considered by the scheme’s standing

independent valuer to hold an equivalent qualification;

(c)

is independent of the ICVC, the depositary and each of the

directors of the ICVC or of the authorised fund manager and

depositary of the AUT or ACS; and

(d) has not been engaged, and whose associates have not been

engaged, in relation to the finding of the immovable for the

scheme or the finding of the scheme for the immovable.

Investment in overseas property through an intermediate holding vehicle

15.6.19 R (1) An overseas immovable may be held by a scheme through an

intermediate holding vehicle whose purpose is to enable the holding of

immovables by the scheme or a series of such intermediate holding

vehicles, provided that the interests of unitholders are adequately

protected. Any investment in an intermediate holding vehicle for the

purpose of holding an overseas immovable shall be treated for the

purposes of this section as if it were a direct investment in that

immovable.

(2) An intermediate holding vehicle must be wholly owned by the scheme

or another intermediate holding vehicle or series of intermediate

holding vehicles wholly owned by the scheme, unless and to the extent

that local legislation or regulation relating to the intermediate holding

vehicle holding the immovable requires a proportion of local

ownership.

15.6.20 G (1) The authorised fund manager may transfer capital and income

between an intermediate holding vehicle and the scheme by the use of

inter-company debt if the purpose of this is for investment in

immovables and repatriation of income generated by such investment.

In using inter-company debt, the authorised fund manager should

ensure the following:

(a) a record of inter-company debt is kept in order to provide an

accurate audit trail; and

(b) interest paid out on the debt instruments is equivalent to the net

rental income earned from the immovables after deduction of

the intermediate holding vehicle’s reasonable running costs

(including tax).

(2) An intermediate holding vehicle should undertake the purchase, sale

and management of immovables on behalf the scheme in accordance

with the scheme’s investment objectives and policy.

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(3) Wherever reasonably practicable, an intermediate holding vehicle

should have the same auditor and accounting reference date as the

scheme.

(4)

The accounts of any intermediate holding vehicle should be

consolidated into the annual and interim reports of the scheme.

(5) The authorised fund manager should provide sufficient information to

enable the depositary to fulfil its duties under COLL in relation to the

immovables held through an intermediate holding vehicle.

Investment limits for immovables

15.6.21 R The following limits apply in respect of immovables held as part of the

scheme property:

(1)

the amount secured by mortgages over any immovable must not

exceed 100% of the latest valuation by an appropriate valuer under

COLL 15.6.18R(2)(c) or COLL 15.6.18R(2)(d) or COLL 15.6.22R, as

appropriate;

(2)

no option may be granted to a person to buy or obtain an interest in

any immovable comprised in the scheme property if this might unduly

prejudice the ability to provide redemption; and

(3) the total of all premiums paid for options to purchase immovables

must not exceed 10% of the scheme value in any 12-month period,

calculated at the date of the granting of the option.

Standing independent valuer and valuation

15.6.22 R (1) In relation to the appointment of a valuer the authorised fund manager

must:

(a) at the outset appoint the standing independent valuer with the

approval of the depositary and likewise upon any vacancy; and

(b) ensure that any immovables in the scheme property are valued

by an appropriate valuer (standing independent valuer)

appointed by the authorised fund manager.

(2) The following apply in relation to the functions of the standing

independent valuer:

(a)

the authorised fund manager must ensure that the standing

independent valuer appointed under (1), procures the valuation

of all the immovables held within the scheme property, on the

basis of a full valuation with physical inspection (including,

where the immovable is or includes a building, internal

inspection) at least once a year;

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(b) for the purposes of (a), any inspection in relation to adjacent

properties of a similar nature and value may be limited to that

of only one such representative property;

(c)

the authorised fund manager must ensure that the standing

independent valuer values the immovables, on the basis of a

review of the last full valuation, at least once a month;

(d) if either the authorised fund manager or the depositary

becomes aware of any matter which appears likely to:

(i) affect the outcome of a valuation of an immovable; or

(ii) cause the valuer to decide to value under (a), instead of

under (c),

it must immediately inform the standing independent valuer of

that matter;

(e) the authorised fund manager must use its best endeavours to

ensure that any other affected person reports to the standing

independent valuer immediately upon that person becoming

aware of any matter within (d); and

(f) any valuation by the standing independent valuer must be

undertaken in accordance with UKVPS 3 and 2.3 of UKVPGA

2 of the RICS Valuation – Global Standards 2017 UK national

supplement 2018 (the RICS Red Book) or, in the case of

overseas immovables, on an appropriate basis but subject to any

provisions of the instrument constituting the fund.

(3) In relation to immovables:

(a) any valuation under this rule has effect, until the next valuation

under this rule, for the purposes of the value of immovables;

and

(b)

an agreement to transfer an immovable or an interest in an

immovable is to be disregarded for the purpose of the valuation

of the scheme property unless it reasonably appears to the

authorised fund manager to be legally enforceable.

15.6.23 G

In considering whether a valuation of overseas immovables by the standing

independent valuer is made on an appropriate basis for the purpose of COLL

15.6.22R(2)(f), the authorised fund manager should consider whether that

valuation was made in accordance with internationally accepted valuation

principles, procedures and definitions as set out in the International

Valuation Standards published by the International Valuation Standards

Council.

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15.7 Powers and responsibilities of the authorised fund manager and the

depositary

Application

15.7.1 R This section applies to:

(1) an authorised fund manager of an AUT, ACS or an ICVC;

(2) any other director of an ICVC;

(3) the depositary of an AUT, ACS or an ICVC; and

(4) an ICVC,

which is a long-term asset fund.

Functions of the authorised fund manager

15.7.2 R (1) The authorised fund manager must manage the scheme in accordance

with:

(a) the instrument constituting the fund;

(b) the applicable rules;

(d) for an ICVC, the OEIC Regulations.

(2) The authorised fund manager must carry out such functions as are

necessary to ensure compliance with the rules that impose obligations

on the authorised fund manager or ICVC, as appropriate.

(3) The authorised fund manager must:

(a) make decisions as to the constituents of the scheme property in

accordance with the investment objectives and policy of the

scheme;

(b)

instruct the depositary how rights attaching to the ownership of

scheme property are to be exercised;

methodology set out in the prospectus, which must (unless the

authorised fund manager determines on reasonable grounds

that the breach is of minimal significance) extend to payment of

money:

(i) by the authorised fund manager to unitholders and

former unitholders;

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(ii) by the ACD to the ICVC;

(iii) by the ICVC to the ACD;

(iv) by the authorised fund manager of the AUT or ACS to

the depositary; or

(v) by the depositary (for the account of the AUT or ACS)

to the authorised fund manager;

(d) ensure where relevant that the ICVC complies with the relevant

obligations imposed by, and when appropriate exercises the

relevant powers provided under, the OEIC Regulations;

(e) maintain such records as are necessary to enable the authorised

fund manager or the ICVC, as appropriate, to comply with and

demonstrate compliance with the rules in this sourcebook and

also in the case of an ICVC, the OEIC Regulations; and

(f) maintain for a period of six years a daily record of the units

held, acquired or disposed of by the authorised fund manager

including the classes of such units, and of the balance of any

acquisitions and disposals.

Duties of the authorised fund manager: investment and borrowing powers

15.7.3 R (1) An authorised fund manager may give instructions to deal in the

scheme property.

(2) An authorised fund manager must avoid the scheme property being

used or invested contrary to any provision in COLL 15.6 (Investment

and borrowing powers).

(3)

An authorised fund manager must immediately on becoming aware of

any breach of COLL 15.6 take action, at its own expense, to rectify

that breach.

(4) An authorised fund manager must take the action in (3) immediately,

except in circumstances where doing so would not be in the best

interests of unitholders, in which case the action must be taken as soon

as such circumstances cease to apply.

(5) An authorised fund manager must not postpone taking action in

accordance with (3) unless the depositary has given its consent.

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Duties of the ACD or the authorised contractual scheme manager of a co-

ownership scheme: umbrella schemes

15.7.4 R Where reasonable grounds exist for an ACD of an ICVC, or an authorised

contractual scheme manager of a co-ownership scheme which is an

umbrella, to consider that a foreign law contract entered into by the ICVC or

authorised contractual scheme manager on behalf of the co-ownership

scheme may have become inconsistent with the principle of limited recourse

stated in the instrument constituting the fund of the ICVC or co-ownership

scheme (see COLL 15.3.6R(3)(5) and COLL 15.3.6R(3)(6)), the ACD or

authorised contractual scheme manager of the co-ownership scheme must:

(1) promptly investigate whether there is an inconsistency; and

(2)

if the inconsistency still appears to exist, take appropriate steps to

remedy that inconsistency.

15.7.5 G In deciding what steps are appropriate to remedy the inconsistency, the ACD

or authorised contractual scheme manager of the co-ownership scheme

should have regard to the best interests of the unitholders. Appropriate steps

to remedy the inconsistency may include:

(1) where possible, renegotiating the foreign law contract in a way that

remedies the inconsistency; or

(2)

causing the ICVC or the authorised contractual scheme manager on

behalf of the co-ownership scheme to exit the foreign law contract.

Duties of the depositary

15.7.6 R (1) The depositary is responsible for the safekeeping of all the scheme

property.

(2) The depositary must:

(a) take all steps to ensure that transactions properly entered into

for the account of the scheme are completed;

(b)

take all steps to ensure that instructions properly given by the

authorised fund manager in respect of the exercise of rights

related to scheme property are carried out;

transaction is received by itself in respect of the scheme;

(d) hold and deal with any income received in respect of the

scheme property in accordance with COLL 15.8.18R (Income);

(e) take reasonable care to ensure that the scheme is managed by

the authorised fund manager in accordance with:

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(i) the investment objectives, policy and strategy set out in

the LTAF’s most recent prospectus;

(ii) COLL 15.6 (Investment and borrowing powers);

(iii) COLL 15.8.2R (Valuation, pricing and dealing);

(iv) COLL 15.8.18 (Income); and

(v) any provision of the instrument constituting the fund or

the prospectus that relates to the provisions in (ii) to

(iv);

(f) where applicable, comply with its obligations under COLL

15.2.6R (Appointment of external valuer or authorised fund

manager with knowledge, skills and experience of valuing

long-term assets);

(g) keep records so as to comply with the rules in this sourcebook

and so as to demonstrate such compliance; and

(h) be responsible for any other duties as set out in the instrument

constituting the fund.

(3) If a relevant ICVC ceases to have any directors, the depositary may

act in accordance with COLL 6.5.6R (ICVC without a director).

(4) This rule applies to the depositary of a long-term asset fund to the

extent the provisions are consistent with the requirements of the

AIFMD level 2 regulation.

[Note: Articles 88 to 90 of the AIFMD level 2 regulation make provision

relating to custody and safekeeping of scheme property. The AIFMD level 2

regulation applies to the depositary of a long-term asset fund because an

LTAF must be managed by a full-scope UK AIFM.]

15.7.7 R The depositary must also:

(1) ensure that any scheme property in registered form is as soon as

reasonably practicable registered in its name or that of its nominee or

delegate, as appropriate; and

(2) take into its custody or control all documents of title of the scheme

property other than in respect of derivatives or forward transactions.

Delegation

15.7.8 G (1) The delegation of AIFM management functions by a full-scope UK

AIFM is subject to the rules in FUND 3.10 (Delegation) and articles

75 to 82 of the AIFMD level 2 regulation. See also regulation 26 of

the AIFMD UK regulation.

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(2) The authorised fund manager of a long-term asset fund is required to

possess the knowledge, skills and experience necessary to understand

the activities of the LTAF and, in particular, the risks involved in those

activities and the assets which the LTAF holds (or is to hold) in the

scheme property. The authorised fund manager cannot rely on a

delegation arrangement to satisfy this requirement (see COLL 15.2.4R

(Competence and resources of the authorised fund manager)).

15.7.9 G (1)

This paragraph applies where the authorised fund manager delegates

portfolio management of particular assets to a third party under FUND

3.10 (Delegation).

(2) Where (1) applies, the authorised fund manager will need to retain

adequate risk management systems to identify, measure and monitor

the risks relevant to the long-term asset fund’s investment strategy in

accordance with the requirements in FUND 3.7 (Risk management)

and the applicable requirements of the AIFMD level 2 regulation.

[Note: See FUND 3.7 (Risk management) and articles 38 to 47 of the

AIFMD level 2 regulation.]

Delegation and responsibility for regulatory obligations

15.7.10 G (1) The authorised fund manager of an LTAF should note (and will need

to comply with) article 75 of the AIFMD level 2 regulation. This

provides that when delegating the task of carrying out one or more

functions on its behalf, an AIFM must comply with various general

principles, including the principle that the delegation structure does

not allow for the circumvention of the AIFM’s responsibilities or

liability, and that the obligations of the AIFM towards the AIF and its

investors are not altered as a result of the delegation.

(2) Directors of an ICVC and depositaries should also have regard to

SYSC 8 (Outsourcing). SYSC 8.1.6R states that a firm remains fully

responsible for discharging all of its obligations under the regulatory

system if it outsources crucial or important operational functions or

any relevant services and activities.

Conflicts of interest

15.7.11 R (1) The authorised fund manager and the depositary must ensure that any

transaction in respect of the scheme property undertaken with an

affected person is on terms at least as favourable to the scheme as any

comparable arrangement on normal commercial terms negotiated at

arm’s length with an independent third party.

(2) Paragraph (1) is subject to any provision in the instrument constituting

the fund and the prospectus imposing a prohibition in relation to any

type of transaction.

[Note: See articles 30 to 36 of the AIFMD level 2 regulation.]

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The register of unitholders: AUTs or ACSs

15.7.12 R (1) The authorised fund manager or the depositary of an AUT or ACS (in

accordance with their responsibilities as set out in the instrument

constituting the fund) must maintain a register of unitholders as a

document in accordance with this rule.

(2) The register must contain:

(a) the name and address of each unitholder (for joint unitholders

no more than four need to be registered);

(b) the number of units (including fractions of a unit) of each class

held by each unitholder; and

for those units.

(3) The authorised fund manager or the depositary of an AUT or ACS (as

appropriate) must take all reasonable steps and exercise all due

diligence to ensure the register is kept complete and up to date.

(4)

Where relevant, the authorised fund manager must immediately notify

the depositary of an AUT or ACS of any information it receives which

may affect the accuracy of any entry in the register.

(5) In the case of a limited partnership scheme, unregistered units may be

held by the authorised contractual scheme manager as the agent for

the scheme provided the authorised contractual scheme manager is

not entered in the register as the new unitholder.

Valuation of investments – good market practice

15.7.13 R

Subject to any legal requirements which apply to the valuation of

investments held or to be held in the scheme property of a long-term asset

fund, the authorised fund manager of a long-term asset fund which carries on

the valuation function itself must follow good market practice to value the

investments held or to be held in the scheme property.

[Note: See FUND 3.9 (Valuation) and articles 67 to 71 of the AIFMD level 2

regulation.]

Due diligence – good market practice

15.7.14 R

Subject to any applicable legal requirements, the authorised fund manager of

a long-term asset fund must use good market practice to:

(1) establish, implement and apply written policies and procedures on due

diligence; and

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(2) implement effective arrangements for ensuring that investment

decisions on behalf of the long-term asset fund are carried out in

compliance with the objectives, investment strategy and, where

applicable, the risk limits of the scheme.

[Note: See articles 18 to 20 of the AIFMD level 2 regulation.]

15.7.15 G The authorised fund manager may use an appropriate code of good market

practice for the purposes of conducting due diligence on investments held or

to be held in the scheme property.

Application of assessment of value, assessment of investment valuations, due

diligence, conflicts of interest and liquidity management and independent director

rules

15.7.16 R

COLL 15.7.17R to COLL 15.7.24R apply to an authorised fund manager of

an AUT, ACS or ICVC.

Assessment of value

15.7.17 R (1) An authorised fund manager must conduct an assessment at least

annually for each scheme it manages of whether the payments out of

scheme property set out in the prospectus are justified in the context of

the overall value delivered to unitholders.

(2) In carrying out the assessment required by (1), the AFM must,

separately for each class of units in a scheme, consider at least the

matters set out in COLL 6.6.21R (Table: minimum considerations –

assessment of value).

15.7.18 G The guidance in COLL 6.6.22G applies to interpreting the requirements of

COLL 6.6.21R as applied by COLL 15.7.17R.

15.7.19 E Failure by an AFM to take sufficient steps to address any instance where a

scheme’s charges are not justified in the context of the overall value

delivered to unitholders may be relied on as tending to establish

contravention of COBS 2.1.1R or COBS 2.1.4R as applicable.

Assessment of investment valuations, due diligence, conflicts of interest and

liquidity management

15.7.20 R (1) An authorised fund manager of a long-term asset fund must conduct

an assessment at least annually of how it has managed the LTAF in the

best interests of the LTAF, the LTAF’s investors and the integrity of

the market (see COBS 2.1.4R (AIFMs’ best interests rules)).

(2) In carrying out the assessment required by (1), the authorised fund

manager must consider at least the matters set out in COLL 15.7.21R

(Table: minimum considerations – valuation of investments, due

diligence, conflicts of interest and liquidity management assessment).

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Table: minimum considerations – assessment of investment valuations, due

diligence, conflicts of interest and liquidity management

15.7.21 R This table belongs to COLL 15.7.20R.

1 Valuation of investments

(1) Where the authorised fund manager performs the valuation function

itself:

(a) how the methodologies maintained by the authorised fund

manager to value the LTAF’s investments represent good

market practice;

(b)

where a methodology maintained by the authorised fund

manager was changed or modified in relation to the valuation

of a particular investment, the rationale for that change;

investment held in the scheme property during the relevant

period; and

(d) the consistency of valuation of the LTAF’s investments with

those of the other AIFs managed by the authorised fund

manager

(2) Where an external valuer has been appointed, the authorised fund

manager’s assessment during the relevant period of how:

(a) the external valuer satisfied FUND 3.9.7R(3) (Performance of

the valuation function);

(b) the authorised fund manager was satisfied that it could

demonstrate the matters specified in FUND 3.9.9R

(Appointment of an external valuer); and

demonstrate the matters specified in FUND 3.10.2R(2)(f)

(General delegation requirements).

2 Due diligence

In relation to due diligence carried out on investments, how that due

diligence was carried out in accordance with good market practice (see

COLL 15.7.14R (Due diligence – good market practice)).

3 Conflicts of interest

In relation to conflicts of interest:

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(1)

how any conflicts of interest identified by the authorised fund

manager under SYSC 10.1.23R (Additional requirements for an

AIFM) and article 30 of the AIFMD level 2 regulation have been

avoided, managed, monitored and (where applicable) disclosed under

SYSC 10.1.24R (Additional requirements for an AIFM) and articles 31

to 36 of the AIFMD level 2 regulation; and

(2)

how, in relation to each conflict of interest identified, those actions

were in the best interests of the LTAF, the LTAF’s investors and the

integrity of the market.

4 Liquidity management

In relation to the management of liquidity of the long-term asset fund:

(1) how the liquidity profile of the LTAF, taking into account borrowing

(if any), has been consistent with its redemption policy;

(2) where monitoring of the liquidity risk of the LTAF, including the

results of any stress tests, has identified any liquidity management

issues, how these were addressed in the best interests of the LTAF, the

LTAF’s investors and the integrity of the market;

(3)

where the authorised fund manager has sold an investment held in the

scheme property of the LTAF at a price adjusted to reflect the

authorised fund manager’s need to meet redemption requests, how

that price was determined to be in the best interests of the LTAF, the

LTAF’s investors and the integrity of the market; and

(4) how decisions to apply or refrain from applying any dilution levy or

adjustment to sales and redemptions of units ensured that all investors

in the LTAF were treated fairly, including those investors who were

dealing in units of the LTAF, and those investors who (as applicable)

were already invested or remained invested in the LTAF.

[Note: See FUND 3.6.3R (Liquidity systems and procedures) and articles 46

to 49 of the AIFMD level 2 regulation.]

Independent directors

15.7.22 R (1)

An authorised fund manager must ensure that at least one quarter of

the members of its governing body are independent natural persons. If

the AFM’s governing body comprises fewer than eight members, the

AFM must instead ensure that at least two of its members are

independent natural persons.

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(2) The authorised fund manager, in appointing an independent member

of its governing body, must determine whether such a member is

independent in character and judgement and whether there are

relationships or circumstances which are likely to affect, or could

appear to affect, that member’s judgement.

(3) The authorised fund manager must take reasonable steps to ensure

that independent members appointed to its governing body have

sufficient expertise and experience to be able to make judgements on

whether the AFM is managing each scheme in the best interests of

unitholders.

(4) (a) Independent members of an AFM’s governing body must be

appointed for terms of no longer than five years, with a

cumulative maximum duration of ten years.

(b) If an independent member is appointed to more than one

governing body within an AFM’s group, the cumulative

maximum duration of ten years referred to in (a) is calculated

by adding the durations of each separate appointment and

discounting periods during which appointments overlapped to

avoid double counting.

(c)

In relation to a person who served as an independent director of

an AFM’s governing body before 1 October 2019, the five-year

term(s) and cumulative maximum duration of ten years run

from that date.

(5)

Independent members are not eligible for reappointment to an AFM’s

governing body until five years have elapsed from the end of the ten-

year period referred to in (4).

(6) The terms of employment on which independent members are

appointed must be such as to secure their independence.

15.7.23 G The guidance in COLL 6.6.26G applies to interpreting the requirement for

independence in COLL 15.7.22R.

Allocation of responsibility for compliance to an approved person

15.7.24 R (1)

An AFM must allocate responsibility for ensuring its compliance with

COLL 15.7.17R, COLL 15.7.20R, COLL 15.7.22R and COBS 2.1.4R

(AIFMs’ best interests rules) to an approved person.

(2) Where the chair of the AFM’s governing body is an approved person,

the AFM must allocate the responsibility set out in (1) to that person.

[Note: See SYSC 24 (Senior managers and certification regime: Allocation of

prescribed responsibilities).]

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15.8 Valuation, pricing, dealing and income

Application

15.8.1 R This section applies to:

(1) an authorised fund manager of an AUT, ACS or an ICVC;

(2) any other director of an ICVC;

(3) the depositary of an AUT, ACS or an ICVC; and

(4) an ICVC,

which is a long-term asset fund.

Valuation, pricing and dealing

15.8.2 R (1) The value of the scheme property is the net value of the scheme

property after deducting any outstanding borrowings (including any

capital outstanding on a mortgage of an immovable).

(2) Any part of the scheme property which is not an investment (save an

immovable) must be valued at fair value.

(3) For the purposes of (2), any charges that were paid, or would be

payable, on acquiring or disposing of the asset must be excluded from

the value of that asset.

(4) The value of the scheme property of an authorised fund must, save as

otherwise provided in this section, be determined in accordance with

the provisions of the instrument constituting the fund and the

prospectus, as appropriate.

(5) The scheme must have a valuation point on each dealing day and there

must be at least one valuation point every month.

(6)

The authorised fund manager must prepare a valuation in accordance

with (4) for each relevant type of unit at each relevant valuation point.

(7) The price of a unit must be calculated on the basis of the valuation in

(6) in a manner that is fair and reasonable as between unitholders.

(8)

In respect of each valuation point under (5), the authorised fund

manager must publish in an appropriate manner the price of any type

of unit based on the valuation carried out in accordance with (6).

(9) The authorised fund manager must also provide on request to any

unitholder at any time an estimated price for any type of unit in the

scheme.

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(10) The period of any initial offer and how it should end must be set out in

the prospectus and must not be of unreasonable length.

Profits from dealing as principal

15.8.3 R (1) Where an authorised fund manager:

(a) accepts instructions to sell and redeem units as principal; and

(b) is able to execute a sale instruction by selling units it has

redeemed at the same valuation point, without placing its own

capital at risk,

subject to (2), the AFM must not retain for its own account, or the

account of any of its associates, the difference between the price at

which a unit was redeemed (before deduction of any redemption

charge) and the price at which the same unit was sold (after deduction

of any preliminary charge). Any such difference must be allocated in

a way that is fair to unitholders.

(2) In calculating the profit arising under (1), the AFM may offset any loss

it incurs at the same valuation point, calculated in accordance with (3),

when dealing as principal in relation to:

(a) a unit issued at that valuation point to fulfil a sale instruction

that cannot be matched against any redeemed unit or any other

unit of that class held by the manager as principal; and

(b) a unit redeemed and cancelled at that valuation point.

(3) The amount of the loss referred to in (2) is:

(a) for units issued in accordance with (2)(a), the difference

between the issue price of a unit and the sale price of that unit,

less any preliminary charge;

(b) for units cancelled in accordance with (2)(b), the difference

between the cancellation price of a unit and the redemption

price of that unit, before any redemption charge is applied.

(4) Where any loss arising under (2) is greater than any profit arising

under (1), that loss cannot be offset against any profit arising at a

subsequent valuation point.

(5)

This rule applies to the redemption and sale of units of different

classes at the same valuation point, if those classes are treated as one

for the purpose of COLL 15.8.6R (Issue and cancellation of units in

multiple classes).

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15.8.4 G (1) The authorised fund manager may commit its own capital to hold

units for dealing as principal and may seek to profit from gains in the

value of the units it holds, when it issues or redeems units at one

valuation point then sells or cancels them at a later valuation point.

However, it should not profit from situations in which it is not

exposed to an equal risk of loss if the units fall in value, or from the

ability to match simultaneous sales and redemptions at different prices

at no risk to its own capital.

(2) The AFM may allocate any amount arising under COLL 15.8.3R(1)

(Profits from dealing as principal) in the interests of investors by

paying it into scheme property for the benefit of all unitholders.

Alternatively, the AFM may redistribute it individually among the

transacting investors.

(3) Where the AFM intends to allocate a payment to scheme property, it

should determine if the amount (when added to any other amounts of

the same kind relating to that class of units) would, if taken into

account in the scheme’s valuation, affect the accuracy of the unit

prices to four significant figures. If so, and subject to (4) below, the

amount should be accrued in each subsequent valuation of the scheme

until the payment is transferred. Such payments into scheme property

should be made regularly and no less frequently than payments for the

AFM’s management charge are transferred out of scheme property.

(4) The calculation to be performed under COLL 15.8.3R (Profits from

dealing as principal) should be carried out in relation to each valuation

point of the scheme on a timely basis. Where it is not practical to do

this before unit prices are calculated and published, the AFM should

ensure that the accrual represents a reasonable estimate of the total

payment it intends to make to scheme property.

Issue and cancellation of units

15.8.5 R (1) The authorised fund manager must:

(a) 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 of that class; and

(b) not do or omit anything that would, or might, confer on itself a

benefit or advantage at the expense of a unitholder or potential

unitholder.

(2) For the purposes of (1) the authorised fund manager may take into

account sales and redemptions after the valuation point, provided it

has systems and controls to ensure compliance with (1).

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(3) The authorised fund manager must arrange for the issue and

cancellation of units and pay money or assets to or from the

depositary for the account of the scheme as required by the

prospectus.

(4) The authorised fund manager must keep a record of issues and

cancellations made under this rule.

(5) The authorised fund manager may arrange for the ICVC, or instruct

the depositary of the AUT or ACS, to issue or cancel units where the

authorised fund manager would otherwise be obliged to sell or redeem

the units in the manner set out in the prospectus.

(6) Where the authorised fund manager has not complied with (1), it must

correct the error as soon as possible and must reimburse the scheme

any costs it may have incurred in correcting the position, subject to

any reasonable minimum level for such reimbursement as set out in

the prospectus.

Issue and cancellation of units in multiple classes

15.8.6 R If a long-term asset fund has two or more classes of unit in issue, the

authorised fund manager may treat any or all of those classes as one for the

purpose of determining the number of units to be issued or cancelled by

reference to a particular valuation point, if:

(1) the depositary gives its prior agreement; and

(2) the relevant classes:

(a) have the same entitlement to participate in, and the same

liability for charges, expenses and other payments that may be

recovered from, the scheme property; or

(b) differ only as to whether income is distributed or accumulated

by periodic credit to capital, provided the price of the units in

each class is calculated by reference to undivided shares in the

scheme property.

Transfer of units in an ACS

15.8.7 R (1) Where transfer of units in an ACS is allowed by its contractual scheme

deed and prospectus in accordance with the conditions specified by

FCA rules, the authorised contractual scheme manager of the ACS

must take reasonable care to ensure that units are only transferred if

the conditions specified by the FCA under (2) are met.

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(2) The FCA specifies that for the purposes of (1), and for the purposes of

COLL 15.3.6R(3)(9)(a)(vii)(B) (Table: contents of the instrument

constituting the fund) and COLL 15.4.5R(18)(2) (Table: contents of

long-term asset fund prospectus), units in the ACS may only be

transferred to a person:

(a) who is a:

(i) professional ACS investor; or

(ii) large ACS investor; or

(iii) person who already holds units in the scheme; and

(b) to whom units in a long-term asset fund may be promoted

under COBS 4.12.4R.

15.8.8 G

The FCA recognises that some transfers of units arise by operation of law

(such as upon death or bankruptcy of the unitholder, or otherwise) and are

accordingly outside the control of the authorised contractual scheme

manager. The authorised contractual scheme manager is expected to comply

with its responsibilities under COLL 15.8.10R (Redemption of ACS units in

an LTAF by an authorised contractual scheme manager) in those cases by

redeeming those units.

Responsibilities of the authorised contractual scheme manager in relation to ACS

units

15.8.9 R (1) The authorised contractual scheme manager of an authorised

contractual scheme which is a long-term asset fund must take

reasonable care to ensure that rights or interests in units in the scheme

are not acquired by any person from or through an intermediate

unitholder in a long-term asset fund, unless:

(a) that person is a:

(i) professional ACS investor; or

(ii) large ACS investor; or

(iii) person who already holds units in the scheme; and

(b) units in a long-term asset fund may be promoted to that person

under COBS 4.12.4R.

(2)

The authorised contractual scheme manager will be regarded as

complying with (1) to the extent that it can show that it was reasonable

for it to rely on relevant information provided by another person.

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Redemption of ACS units in an LTAF by an authorised contractual scheme

manager

15.8.10 R The authorised contractual scheme manager of a long-term asset fund which

is an ACS must redeem units in the scheme as soon as practicable after

becoming aware that those units are vested in anyone (whether as a result of

subscription or transfer of units) other than a person meeting the criteria in

COLL 15 Annex 1R(1) and (2) (ACS Long-Term Asset Funds: eligible

investors).

Dealing: sale of units

15.8.11 R The authorised fund manager must, at all times during the dealing day, be

willing to effect the sale of units to any eligible investor (subject to any

conditions in the instrument constituting the fund and the prospectus, which

must be fair and reasonable as between all unitholders and potential

unitholders) for whom the authorised fund manager does not have

reasonable grounds to refuse such sale.

Dealing: redemption of units

15.8.12 R (1) In this rule, a ‘redemption determination’ is a determination by the

authorised fund manager of the long-term asset fund to:

(a) accept a request by a unitholder to redeem units in the scheme;

(b) refuse a redemption request (see paragraph (2)(c)); or

request as may be provided for in the instrument constituting

the fund and the prospectus (see paragraph (6) below, and

COLL 15.8.13G(6) and (7)).

(2) The redemption arrangements for a long-term asset fund must ensure

the following:

(a) A unitholder must be able to submit a request to redeem units

before the next date on which the authorised fund manager

makes a redemption determination, subject to any cut-off point

which may be specified in the prospectus for this purpose.

(b) The authorised fund manager must not make redemption

determinations more frequently than the dealing frequency of

the scheme and, in any event, not more than once a month.

request to redeem units in the scheme in accordance with any

conditions in the instrument constituting the fund and the

prospectus unless the authorised fund manager has reasonable

grounds to refuse the redemption request.

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(d) The authorised fund manager must inform the unitholder of the

outcome of the redemption determination.

(e) If the authorised fund manager accepts the unitholder’s request

to redeem units in the scheme:

(i) the redemption request is deemed to be irrevocable;

(ii) the authorised fund manager must undertake to effect

the redemption at the applicable time, in accordance

with any conditions in the instrument constituting the

fund and the prospectus; and

(iii) the authorised fund manager must confirm to the

unitholder:

(A)

that the redemption request has been accepted and

cannot be revoked; and

(B) having regard to the period specified for the

purposes of (f), the dates on which it is expected

that the redemption will be effected and the

appropriate proceeds paid.

(f) The authorised fund manager must determine the price for the

units being redeemed pursuant to the unitholder’s redemption

request at the first valuation point following the end of the

notice period specified in the instrument constituting the fund

and the prospectus (the ‘notice period’).

(g) The notice period must be at least 90 days after the day on

which the request to redeem units in the scheme was accepted.

(h) The authorised fund manager must redeem the units at the

price determined in accordance with (f) and pay the unitholder

the appropriate proceeds of redemption in accordance with

paragraphs (4) and (5).

(3) Subject to COBS 2.1.4R (AIFMs’ best interests rule) and COLL

15.3.2R (Classes of unit), where the long-term asset fund has more

than one class of unit, the arrangements for the redemption of units

may differ between classes provided the arrangements for all classes

of unit ensure the matters specified in (2).

(4) After having effected a redemption request, the authorised fund

manager must pay the full proceeds of the redemption to the

unitholder within any reasonable period specified in the prospectus,

unless it has reasonable grounds for withholding payment.

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(5) Payment of proceeds on redemption must be made by the authorised

fund manager in any manner provided for in the prospectus which

must be fair and reasonable as between redeeming unitholders and

continuing unitholders.

(6) If the instrument constituting the fund and the prospectus of a long-

term asset fund permit the authorised fund manager to defer or limit a

requested redemption, those arrangements must not result in:

(a)

the authorised fund manager making redemption

determinations more frequently than once a month (see

paragraph (2)(b)); or

(b) the notice period being shorter than 90 days (see paragraph

(2)(g)).

Sale and redemption of units: guidance

15.8.13 G (1) The authorised fund manager of a long-term asset fund is required to

ensure that the investment strategy, liquidity profile and redemption

policy for the scheme are consistent (see FUND 3.6.2R (Alignment of

investment strategy, liquidity profile and redemption policy)).

(2) Given the type of investments that a long-term asset fund is likely to

hold in its scheme property, the FCA considers that a long-term asset

fund will need to operate particular arrangements for the redemption

of units.

(3) The authorised fund manager of a long-term asset fund must not make

redemption determinations more frequently than once a month (see

COLL 15.8.12R(2)(b)), which is the maximum frequency for

determining such requests and effecting redemptions. The rules also

require a long-term asset fund to have a notice period of at least 90

days (see COLL 15.8.12R(2)(g)). This is the minimum notice period

for a long-term asset fund.

(4) However, the frequency of the days on which redemption

determinations are made and the particular notice period which is

appropriate for a long-term asset fund will depend on the reasonable

expectations of the target investor group and the particular investment

objectives, investment policy and investment strategy of the scheme.

(5) The authorised fund manager must also comply with the AIFMD level

2 regulation, which contains detailed requirements about liquidity

management taking into account the long-term asset fund’s investment

strategy, liquidity profile and redemption policy. See, for example,

articles 46 to 49 of the AIFMD level 2 regulation.

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(6) Other determinations which an authorised fund manager may make, if

provided for in the instrument constituting the fund and the prospectus

(see COLL 15.8.12R(1)(c)), could include a deferral of execution of a

redemption request or payment, or a limit on the value or number of

units which can be redeemed at any one valuation point.

(7) Redemption determinations should be carried out so that all

unitholders who have requested redemption at any one valuation point

are treated fairly.

Property Authorised Investment Funds

15.8.14 R (1) The authorised fund manager of a long-term asset fund that is also a

property authorised investment fund must take reasonable steps to

ensure that no body corporate holds more than 10% of the net asset

value of that scheme (the “maximum allowable”).

(2) For the purposes of (1), a body corporate shall not be treated as

holding more than the maximum allowable to the extent that:

(a)

the body corporate holds units in a unit trust scheme which

holds shares in the property authorised investment fund; and

(b) in their capacity as trustees of the unit trust scheme, the trustees

are chargeable in the United Kingdom either to income tax or to

corporation tax.

(3) Where the authorised fund manager of a property authorised

investment fund becomes aware that a body corporate holds more than

the maximum allowable, the authorised fund manager must:

(a) notify the body corporate of that event;

(b) not pay any income distribution to the body corporate; and

down to the maximum allowable within a reasonable

timeframe.

(4) For the purpose of (3)(c), a reasonable timeframe means the timeframe

which the authorised fund manager reasonably considers to be

appropriate having regard to the interests of the unitholders as a

whole.

15.8.15 G Reasonable steps to monitor the maximum allowable include:

(1) regularly reviewing the register; and

(2) taking reasonable steps to ensure that unitholders are kept informed of

the requirement that no body corporate may hold more than 10% of

the net asset value of a property authorised investment fund.

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Payments

15.8.16 R (1) An ICVC must not incur any expense in respect of the use of any

movable or immovable property unless the scheme is dedicated to

such investment or such property is necessary for the direct pursuit of

its business.

(2) Payments out of the scheme property may be made from capital

property rather than from income, provided the basis for this is set out

in the prospectus.

Exemption from liability to account for profits

15.8.17 G Except as provided in COLL 15.8.3R (Profits from dealing as principal), an

affected person is not liable to account to another affected person or to the

unitholders of the scheme for any profits or benefits it makes or receives that

are made or derived from or in connection with:

(1) dealings in the units of a scheme; or

(2) any transaction in scheme property; or

(3) the supply of services to the scheme;

where disclosure of the non-accountability has been made in the prospectus

of the scheme.

Income

15.8.18 R (1) A long-term asset fund must have:

(a) an annual accounting period;

(b) a half-yearly accounting period; and

the details of which must be set out in the prospectus.

(2) COLL 6.8.2R(2) to COLL 6.8.2R(7) (Accounting periods) also apply

to the half-yearly accounting period and annual accounting period of

a long-term asset fund.

(3)

A long-term asset fund must have an annual income allocation date,

which must be within four months of the accounting reference date.

(4) A long-term asset fund may have an interim income allocation date

and interim accounting periods and if it does, the interim income

allocation date must be within a reasonable period of the end of the

relevant interim accounting period as set out in the prospectus.

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(5) COLL 6.8.3R(3) (Income allocation and distribution) to COLL

6.8.3AG (Allocation of income to difference classes of unit) also

apply to a long-term asset fund.

15.9 Operational requirements for feeder LTAFs

Application

15.9.1 R This section applies as follows:

(1) COLL 15.9.2R to COLL 15.9.6R apply to the authorised fund

manager of a feeder LTAF;

(2) COLL 15.9.6R also applies to:

(a) an ICVC that is a feeder LTAF; and

(b) any person acting on behalf of either the feeder LTAF or the

authorised fund manager of the feeder LTAF; and

(3) COLL 15.9.7R applies to the authorised fund manager of a long-term

asset fund which operates as a qualifying master LTAF to a feeder

LTAF.

Pre-investment requirements of the authorised fund manager of a feeder LTAF

15.9.2 R Before investing in the qualifying master LTAF, the authorised fund

manager of the feeder LTAF must:

(1) be satisfied on reasonable grounds that it can obtain from the

qualifying master LTAF all the information necessary to comply on an

ongoing basis with the rules in COLL;

(2) having consulted with the depositary of the feeder LTAF, be satisfied

on reasonable grounds that the depositary of the feeder LTAF can

obtain from the qualifying master LTAF, the operator of the qualifying

master LTAF or the depositary of the qualifying master LTAF all the

information necessary to comply with its duties under COLL 15.7.6R

and COLL 15.7.7R (Duties of the depositary); and

(3)

inform the authorised fund manager of the qualifying master LTAF of

the date on which the feeder LTAF will begin to invest into the

qualifying master LTAF as a feeder LTAF.

Ownership of units in a feeder LTAF

15.9.3 R

The authorised fund manager of a feeder LTAF must take reasonable care to

ensure that its units are not owned, including beneficially owned, by the

qualifying master LTAF or any other scheme in which the qualifying master

LTAF invests.

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Charges made by the qualifying master LTAF or its operator to a feeder LTAF on

investment or disposal

15.9.4 R (1) Where the operator or the authorised fund manager of a qualifying

master LTAF imposes any charge which is, or is equivalent in effect

to, a preliminary charge or redemption charge on the feeder LTAF for

the acquisition or disposal of units in the qualifying master LTAF, the

authorised fund manager of the feeder LTAF must pay to the feeder

LTAF an amount equal to such charge within four business days

following the relevant acquisition or disposal.

(2) In this rule, where the operator or authorised fund manager of a

qualifying master LTAF requires any addition to or deduction from the

consideration paid on the acquisition or disposal of units in the

qualifying master LTAF which is, or is equivalent in effect to, a

dilution levy made in accordance with the instrument constituting the

fund and the prospectus, it is to be treated as part of the price of the

units and not as part of any preliminary charge or redemption charge

referred to in (1).

Avoidance of opportunities for market timing

15.9.5 R The authorised fund manager of a feeder LTAF must take appropriate

measures to co-ordinate the timing of the feeder LTAF’s valuation points and

dealing days with those of its qualifying master LTAF, including the

publication of dealing prices, in order to avoid market timing of their units,

and prevent arbitrage opportunities.

Inducements

15.9.6 R Where, in connection with an investment in the units of the qualifying master

LTAF, a distribution fee, commission or other monetary benefit is received

by:

(1) a feeder LTAF;

(2) an authorised fund manager of a feeder LTAF; or

(3) any person acting on behalf of (1) or (2),

that fee, commission or other monetary benefit must be paid into the scheme

property of the feeder LTAF within four business days of receipt of that fee,

commission or other monetary benefit.

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Obligations to unitholders of a qualifying master LTAF

15.9.7 R Where the qualifying master LTAF is an authorised fund, the authorised fund

manager of the qualifying master LTAF must not, if it would unfairly

prejudice the interests of unitholders of the qualifying master LTAF other

than the feeder LTAF, provide or make available information to the

authorised fund manager of the feeder LTAF without at the same time also

providing or making available that information to the unitholders of the

qualifying master LTAF other than the feeder LTAF.

15.10 Termination, suspension, and schemes of arrangement

Application

15.10.1 R This section applies to:

(1) an authorised fund manager of an AUT, ACS or an ICVC;

(2) any other director of an ICVC;

(3) the depositary of an AUT, ACS or an ICVC; and

(4) an ICVC,

which is a long-term asset fund.

Termination

15.10.2 R For a long-term asset fund the provisions in COLL 7.3 to COLL 7.5 will

apply as appropriate as if COLL 7 applied to long-term asset funds.

Suspension

15.10.3 R (1) The authorised fund manager may, with the prior agreement of the

depositary, and must without delay, if the depositary so requires,

within any parameters which are fair and reasonable in respect of all

the unitholders in the scheme and which are set out in the prospectus,

temporarily suspend dealings in units of the scheme, a sub-fund or a

class.

(2) Any suspension within (1) must only be where the authorised fund

manager has determined that due to exceptional circumstances the

suspension of dealings is in the interests of unitholders or potential

unitholders, and the authorised fund manager must have regard to the

interests of all the unitholders in the scheme in reaching such an

opinion.

(3) At the commencement of suspension under (1), the authorised fund

manager must immediately inform the FCA of the suspension and the

reasons for it.

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(4) The authorised fund manager must ensure that a notification of the

suspension is made to unitholders of the authorised fund as soon as

practicable after suspension commences.

(5)

The authorised fund manager and the depositary must ensure that the

suspension only continues for as long as it is justified having regard to

the interests of the unitholders.

(6) The suspension of dealings in units must cease, as soon as (2) no

longer applies.

(7) The authorised fund manager and the depositary must formally

review the suspension at least every 28 days and inform the FCA of

the results of this review and any change to the information provided

in (3).

(8) The authorised fund manager must inform the FCA immediately of

the resumption of dealings.

Schemes of arrangement

15.10.4 R

In relation to an ICVC, ACS or an AUT which is a long-term asset fund, the

provisions in COLL 7.6 (Schemes of arrangement) will apply as appropriate

to the authorised fund manager, any other directors of the ICVC and the

depositary as if COLL 7.6 applied to a long-term asset fund and did not

exclude unitholders becoming unitholders in another long-term asset fund.

Annex

1R ACS Long-term asset funds: Eligible investors

This Annex belongs to COLL 15.1.3R and COLL 15.1.4G.

For the purposes of the rule on qualified investors in a long-term asset fund which

is an ACS (see COLL 15.1.3R(2)), the authorised contractual scheme manager

must take reasonable care to ensure that ownership of units in the scheme is only

recorded in the register for a person:

(1) who is a:

(a) professional ACS investor; or

(b) large ACS investor; or

(2) to whom units in a long-term asset fund may be promoted to that person

under COBS 4.12.4R

…

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Amend the following text as shown.

Schedule 1 Record keeping requirements

Sch 1.1 G 1 Record keeping requirements

Handbook

reference

Subject of

record

Contents of

record

When record

must be made

Retention

period

…

COLL 14.3.6R …

COLL

15.2.6R(3)

The depositary’s

determination

The

determination

and the reasons

for making it

As implicit from

the rules in

COLL

6 years

COLL

15.5.12R(2)

Minutes of

meetings (AFM)

Full details As implicit from

the rules in

COLL

6 years

COLL

15.7.2R(3)(e)

General record

keeping

obligations

(AFM)

Full details As implicit from

the rules in

COLL

As implicit from

the rules in

COLL

15.7.2R(3)(f)

Units held,

acquired or

disposed of

(AFM)

Daily record of

units held,

acquired or

disposed of by

the AFM

As implicit from

the rules in

COLL

6 years

COLL

15.7.6R(2)(g)

General record

keeping

obligation

(depositary)

Full details As implicit from

the rules in

COLL

As implicit from

the rules in

COLL

15.8.5R(4)

Issues and

cancellations of

units (AFM)

Full details As implicit from

the rules in

COLL

As implicit from

the rules in

COLL

…

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Schedule 2 Notification requirements

…

Sch 2.2 G 1 Notification requirements

Handbook

reference

Matter to be

notified

Contents of

notification

Trigger event Time allowed

…

COLL 14.2.2R …

COLL 15.4.2R Prospectus and

revisions

Full documents Before

marketing

commences

Immediate

COLL

15.5.2R(5)

Annual, half

yearly and

quarterly reports

Copy of report End of annual or

half-yearly

accounting

period, or

quarterly

reporting period

Immediately on

publication

COLL

15.10.3R(3) and

(8)

Suspension and

resumption of

dealing (AFM)

Details,

including reason

for suspension

Occurrence Immediate

12 Endeavour Square London E20 1JN

Telephone: +44 (0)20 7066 1000

Website: www.fca.org.uk

Pub ref: 007757