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A guide to Practical Law's investment fund materials
A guide to Practical Law's investment fund materials, including details about regulated funds, unregulated funds, hedge funds, private equity funds, Islamic funds, and property funds.
What are investment funds?
An investment fund is, in essence, a vehicle for collective investment by two or more investors, whose money is invested on a pooled basis on their behalf by an investment manager in return for a fee.
In the UK, section 235 of the Financial Services and Markets Act 2000 (FSMA) sets out the definition of a collective investment scheme (CIS), commonly known as a "fund". Under section 235(1), CIS means:
"Any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income."
For more information about the definition of a CIS, see Practice note, Investment funds: overview: Definition (www.practicallaw.com/4-203-1837).
Investment funds can be regulated or unregulated. A regulated fund is broadly one that is authorised, recognised, or registered by a regulator. The section below explains where to find Practical Law materials on regulated funds. For information about unregulated funds, see Unregulated funds.
UK regulated funds
The following types of funds can be authorised by the FCA for sale to retail customers:
Open-ended investment companies (OEICs), also known as investment companies with variable capital (ICVCs). These are established and authorised by the FCA under the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228).
Authorised unit trusts (AUTs), established under trust law and authorised by the FCA under section 243 of FSMA.
Authorised contractual schemes (ACS) (also referred to as tax transparent funds (TTFs)), established under the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013 (SI 2013/1388) and authorised by the FCA under section 261C of FSMA.
In practice, this means that, in order to be authorised in the UK, a fund must fall within one of the following categories:
A UCITS scheme (that is, an undertaking for collective investment in transferable securities).
A non-UCITS retail scheme (NURS) (including a NURS operating as a fund of alternative investment funds (FAIF)).
A qualified investor scheme (QIS).
Relevant rules for UK authorised investment funds are set out in the Collective Investment Schemes sourcebook (COLL) and the Investment Funds sourcebook (FUND).
For an overview of UK authorised investment funds, see Practice note, Investment funds: overview (www.practicallaw.com/4-203-1837).
For more information about UK regulated funds, see the following resources:
For more information on marketing investment funds, see Offering and promoting investment funds below.
UK recognised funds
In the UK, certain funds can be recognised by the FCA under the following sections of the FSMA:
Section 264. This section applies to funds constituted (that is, incorporated) in another EEA state.
Section 272. This section applies to funds that can be individually recognised by the FCA because they meet specified criteria.
Before July 2013, some funds authorised in a designated country or territory could be recognised under section 270 of FSMA. However, section 270 was repealed by the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773).
For more information about UK recognised funds, see the following resources:
UCITS (that is, undertakings for collective investment in transferable securities) are open-ended CISs that comply with the requirements of the UCITS IV Directive (2009/65/EC).
There have been five directives relating to UCITS funds:
The UCITS Directive (85/611/EEC). This is commonly known as UCITS I and set out the legal framework for the single market for investment funds, including requirements for the organisation, management and oversight of UCITS funds.
The Management Company Directive (2001/107/EC). This introduced new requirements for management companies and a simplified disclosure document.
The Product Directive (2001/108/EC). This extended the range of assets in which UCITS are eligible to invest. The Management Company Directive and the Product Directive, which both amended UCITS I, are collectively known as UCITS III.
The UCITS IV Directive (2009/65/EC). The final text of UCITS IV was published in the Official Journal of the European Union (OJ) on 17 November 2009 and member states had to implement this Directive by 1 July 2011.
The UCITS V Directive (2014/91/EU). This amends the UCITS IV Directive and introduces changes relating to the depositary function, manager remuneration and sanctions. The Directive came into force on 17 September 2014 and member states have until 18 March 2016 to transpose it into national law.
For more information about UCITS funds and ongoing reform in this area, see the following resources:
Exchange traded funds
Exchange traded funds (ETFs) are typically open-ended CISs, the units of which are traded on regulated markets and investment exchanges. ETFs aim to replicate indices (such as the FTSE 100 or S&P 500) and are typically redeemable on a daily basis. Broadly, ETFs can be physical (where the fund invests directly in the underlying assets that comprise the index) or synthetic (where the fund gains exposure to the index by entering into a swap agreement with a counterparty).
For more information about ETFs, see the following resources:
An unregulated fund is not authorised or recognised by a regulator (although the fund manager will typically be authorised or regulated).
Common unregulated fund structures include unauthorised unit trusts, limited partnerships and investment trusts. The section below explains where to find Practical Law materials on unregulated funds.
The FCA Handbook defines an investment trust as a company listed in the UK or another EEA state that is approved by HMRC, or would qualify for such approval if resident and listed in the UK. Essentially, an investment trust is a company formed for the purposes of investing in other companies. They are closed-ended funds and do not constitute CISs.
For more information about investment trusts, see the following resources:
For more information about limited partnerships, see the following resources:
Unauthorised unit trusts
Unit trusts that have not been authorised by the FCA under section 243 of FSMA are unauthorised. For more information about unauthorised unit trusts, see the following resources:
For more information on marketing investment funds, see Offering and promoting investment funds below.
A hedge fund is notoriously difficult to define and there is no legal or regulatory definition of a hedge fund in the UK. The FCA has explained in its hedge fund survey that a hedge fund is one of a category of funds known as alternative investment funds (AIFs). They can invest in a variety of assets, including commodities, derivatives and property and often have a large degree of flexibility in how they invest. This means that they can pursue complex trading strategies, some have very concentrated portfolios, and others have very high levels of leverage.
For more information about hedge funds, see the following resources and AIFMD below:
Private equity funds
Private equity funds are funds established to invest specifically in unquoted securities. They are typically structured as limited partnerships and limited liability partnerships (LLPs). Their investments include venture capital, management buy-ins and management buyouts. The British Private Equity and Venture Capital Association's (BVCA) guide to private equity describes it as the:
"Medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies."
For more information about private equity funds, see the following resources and AIFMD below:
Practice note, An introduction to private equity (www.practicallaw.com/2-502-2699) (which links to a series of films in which leading private equity practitioners provide an insight into the nature of private equity transactions and funds).
For more information about private equity transactions, standard documents and checklists on private equity and venture capital, see Practice note, A guide to Practical Law's private equity and venture capital materials (www.practicallaw.com/9-502-9112).
Sharia funds (that is, funds that are consistent with the principles of Islamic law) are of real interest to financiers and global Islamic investors, both Sharia-compliant and conventional. In particular, financiers are attracted to the potential to create products aimed at sovereign wealth funds (SWFs) and high net worth individuals (HNWIs) in the Middle East, Malaysia and other Islamic countries. The creation of attractive Sharia-compliant funds can be more difficult, and may involve more development costs and time, than the creation of traditional investment funds. The fund's structure, its investment strategy (and therefore underlying investments) and contracts with service providers (especially the fund manager) must all comply with Sharia principles.
For more information about Sharia-compliant funds, see the following resources:
For resources on property funds, see:
Tax and investment funds
For resources on investment funds and tax issues, see:
The following global guides are available:
Each guide brings together a range of information on topical cross-border issues and includes country-specific Q&A guides. Each jurisdiction is described in a separate chapter, written by one of the leading firms on the subject in that jurisdiction. It is possible to search the guides by question or jurisdiction.
Regulation of investment managers
In the UK, most investment managers are authorised and regulated by the FCA. For more information about the authorisation process and the regulated activities carried on by investment managers, see the following resources:
Offering and promoting investment funds
The promotion or marketing of both regulated and unregulated investment funds triggers financial promotion issues in the UK. For more information about who can promote investment funds, to whom funds can be promoted, what financial promotion rules apply and whether exemptions exist, see the following resources:
EU legislation relating to investment funds
Forthcoming EU legislation
There are a number of proposed pieces of EU legislation that are likely to impact on investment funds and their managers. These are summarised in the section below, along with links to more detailed content on the legislation.
The MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) will repeal and recast the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). They will come into effect on 3 January 2017. Together, the new regulations will form the legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.
For more information about MiFID II, see Practice note, Hot topics: MiFID II.
The Market Abuse Regulation (Regulation 596/2014) (MAR) came into force on 2 July 2014. Subject to certain exceptions, it will apply from 3 July 2015.
The Directive on criminal sanctions for market abuse (2014/57/EU) (CSMAD) came into force on 3 July 2014. Member states (other than the UK and Denmark, having opted out) must transpose its provisions into national law by 3 July 2016.
For more information about the MAD II legislative package, see Practice note, Hot topics: MAD II.
In June 2013, the European Commission published a legislative proposal for a Regulation on European Long-Term Investment Funds (ELTIF Regulation). An ELTIF is a new type of fund that will allow investors to invest into companies and projects that need long-term capital. Long-term capital is sometimes known as patient capital and finances tangible assets (such as energy, transport, communication infrastructures, industrial and service facilities, housing and climate change technologies), as well as intangible assets (such as education and research and development). Broadly, the ELTIF Regulation lays down uniform rules on the authorisation, investment policies, and operating conditions of EU AIFs that are marketed as ELTIFs.
For more information about the ELTIF Regulation, see Practice note, Hot topics: European Long-Term Investment Funds Regulation (ELTIF Regulation).
As part of its work on shadow banking and investment funds, the European Commission identified a number of concerns about money market funds (MMFs). These concerns led to the publication of a legislative proposal for a Regulation on money market funds (MMF Regulation), which is currently with the European Parliament and the Council of the EU for negotiation and adoption. If adopted, the MMF Regulation will introduce a general framework of requirements to enhance the liquidity and stability of MMF funds.
For more information about the MMF Regulation, see Practice note, Hot topics: Money Market Funds Regulation (MMF Regulation).
The Commission published a legislative proposal for a Regulation on reporting and transparency of securities financing transactions (SFT Regulation) in January 2014. The reforms in the SFT Regulation will apply to AIFMs. The three main strands in the SFT Regulation include increased transparency for fund investors on the use of SFTs and increased transparency of rehypothecation.
For more information about the SFT Regulation, see Practice note, Hot topics: SFT Regulation (www.practicallaw.com/1-590-4125).
EU legislation in force
There are a number of pieces of EU legislation that have had an impact on hedge fund managers. These are summarised in the section below, along with links to more detailed content on the legislation.
The Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) was implemented in EU member states in July 2013. It introduced a harmonised (albeit controversial) regulatory framework for EU-established managers of AIFs, including requirements relating to authorisation, administration, remuneration, marketing and depositaries. In a nutshell, it is the Directive that governs how AIFs operate in the EU.
For more information about the AIFMD, including links to primary source material and a list of next steps, see Practice note, Hot topics: AIFMD (www.practicallaw.com/1-503-3820).
For an overview of how the AIFMD has been implemented in the UK, see Practice note, UK implementation of the AIFMD (www.practicallaw.com/8-518-5527). We also have a podcast that examines the UK authorisation process and marketing issues.
For a guide to particular aspects of the AIFMD, see the following practice notes and articles:
EMIR (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories (Regulation 648/2012)) imposes a number of requirements on counterparties to derivative contracts, central counterparties and trade repositories. AIFs that have authorised or registered AIFMs under the AIFMD are financial counterparties under EMIR, which triggers certain obligations.
EMIR came into force on 16 August 2012, although some of its requirements, in particular relating to clearing and risk mitigation techniques have yet to come into effect.
For more information about EMIR, see Practice note, Hot topics: EMIR.
Short Selling Regulation
The Regulation on short selling and certain aspects of credit default swaps (Regulation 236/2012) (the Short Selling Regulation) came into force on 1 November 2012. It imposes restrictions on the short selling of certain EU equity financial instruments and sovereign debt, and prohibits entry into uncovered sovereign credit default swaps (CDS). It also requires investors to disclose to the relevant regulator any net short positions in EU sovereign debt and equities traded on EU trading venues.
For more information about the Short Selling Regulation, see Practice note, Short Selling Regulation: an overview.
CRD IV (also referred to as CRD 4 or CRD4) is a major package of reforms to the EU's capital requirements regime for credit institutions and investment firms (which includes hedge fund managers). A key part of these reforms was the adoption of the CRD IV Directive (2013/36/EU) and the Capital Requirements Regulation (Regulation 575/2013) (CRR), which replaced the Capital Requirements Directive (2006/48/EC and 2006/49/EC) (CRD). It implemented the main Basel III reforms in the EU as well as introducing certain EU-specific reforms.
For more information about CRD IV, see Practice note, Hot topics: CRD IV.
The European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (EuSEF Regulation) contains a marketing passport to allow fund managers to market qualifying social entrepreneurship funds to EU investors using the EuSEF designation.
For more information about the EuSEF Regulation, see Practice note, European Social Entrepreneurship Funds (EuSEF) Regulation (www.practicallaw.com/4-517-2697).
The European Venture Capital Funds Regulation (Regulation 345/2013) (EuVECA Regulation) sets out a marketing passport to allow fund managers to market qualifying venture capital funds (VCFs) to EU investors using the EuVECA designation.
For more information about the EuVECA Regulation, see Practice note, European Venture Capital Funds (EuVECA) Regulation (www.practicallaw.com/6-507-2022).
Asset management columns
Monica Gogna, a partner in the Investment Management & Financial Regulation team at Ropes & Gray LLP, shares her thoughts with Practical Law Financial Services subscribers on topical developments concerning the asset management sector on a regular basis. See Monica Gogna's (Ropes & Gray) asset management columns for more information.