UK authorised funds and Covid-19: putting investors’ interests first
The Financial Conduct Authority (FCA) has addressed some of these concerns directly, with the intention to publish further guidance as the situation develops.
In the meantime, we thought it might be helpful to share our thinking on some of these issues. In many cases, the only option for an AFM will be to take an approach that is reasonable and pragmatic in the circumstances. However, the key overarching message during this challenging period is that investors’ interests must always be: (i) at the heart of all decision making; and (ii) considered above the commercial interests of the AFM.
Is the FCA still processing fund applications during this period?
Yes. The FCA authorisations team is working remotely and is currently able to process applications within standard FCA timeframes.
The only noticeable change is that the FCA is expecting firms to provide responses to its questions within shorter timeframes than usual.
How do we sign FCA forms?
The FCA is accepting e-signatures on applications to authorise funds or approve changes to funds where it is not possible to obtain “wet ink” signatures from relevant authorised signatories. In all cases, the FCA needs to be satisfied that the signatory has seen and agreed with all the information in the application form.
We have decided to postpone, or not to implement, a change for which we had already received FCA approval. Should we inform the FCA?
If there are significant changes to anticipated timings previously approved by the FCA then, yes, we think updating the FCA would be appropriate.
In particular, if approval has been obtained for the termination of a fund, it may no longer be appropriate to proceed right now if terminating now would result in poor outcomes for investors – for example, due to concerns regarding the low valuation of the fund’s assets. In such circumstances, it may be preferable to postpone the termination, having first notified both the FCA and investors.
Extraordinary general meetings (EGMs)
Should we proceed with a fund change event that requires investor approval at an EGM?
Yes, if the change event is considered to be in the best interests of investors in the current market.
Given the uncertainties around how long the current situation may last, a change event considered to be in investors’ best interests should not be postponed purely on the basis that it would be operationally challenging to hold an EGM and to implement the change. For considerations around virtual EGMs, see “Can we hold a virtual EGM?” below.
Can we hold a virtual EGM?
Yes, we think it would be possible to hold a virtual EGM.
The FCA rules do not preclude holding virtual EGMs, and the FCA has confirmed that it does not have a supervisory concern with EGMs being held in a virtual format. However, fund constitutional documents are typically silent on this point. Provided nothing in the constitutional documents prevents a virtual EGM, and so long as the investor circular convening the EGM clearly sets out that the EGM will be held virtually, and includes the process for holding the meeting and how investors can attend (and vote) remotely, a virtual EGM should be possible.
However, the investor demographic is important here and must be considered carefully. If the investor base is retail, as opposed to institutional, there may be more procedural and operational factors to consider, and AFMs may conclude that a virtual EGM is not in the best interests of the fund’s investors.
How might a virtual EGM work?
We anticipate that various different audio/visual or online conferencing systems could be used to hold a virtual meeting, but broadly we think the meeting would proceed as follows:
- the circular convening the meeting specifies the chosen conferencing system as the “place” of the meeting and provides investors with the details necessary to join and participate (log in details, passwords/PINs etc.);
- the AFM and the depositary open the meeting using the chosen conferencing system;
- investors who choose to participate in the meeting in person (as opposed to by proxy) cast their votes by using the voting options built in to the conferencing system or perhaps by email to a specific inbox which is appropriately monitored; and
- investors who choose to participate by proxy submit their proxy forms ahead of the meeting by email.
Whichever technological solution an AFM uses, it would be well advised if possible to undertake a few rehearsals, to ensure the technology works as intended and any glitches are identified and fixed in advance. It may also be sensible to allow time before the start of the meeting for participants to flag any technical difficulties and have a technical support available to fix any issues.
Do we need to be monitoring our post?
Yes. Under the FCA rules, investors have the right to requisition an EGM by depositing a written notice at the head office of an OEIC or with the depositary of a unit trust. AFMs should therefore ensure that post delivered to these addresses is monitored, to avoid missing important communications from investors.
Fund document updates
Do we need to make any prospectus/instrument/trust deed updates?
We do not believe AFMs need to be making any general updates right now. However, specific tweaks may be needed in particular circumstances (for example, AFMs whose fund documents require, explicitly or implicitly, EGMs to be held physically may want to make amendments allowing virtual EGMs). Some AFMs are also looking to introduce pandemic-related risk factors, but typical market risk factors may well be sufficient to cover the types of Covid-19 issues funds are currently facing.
If there will be any operational changes as a result of the current situation (for example, changes to dealing procedures) then, after having considered whether FCA approval is required, we suggest such changes are implemented as follows:
- any proposed changes are discussed with the depositary and, where relevant, the administrator/transfer agent;
- updates are communicated at the outset via the AFM’s website;
- the transfer agent is fully briefed as to any changes that must be communicated to investors before they invest; and
- a “notes” cover page is added to the front to the prospectus as an interim measure to flag any particular changes to standard dealing arrangements.
What are the transfer agent’s business continuity plans during this period?
AFMs should engage with their transfer agents to ensure that there are no obstacles preventing them from acting on dealing requests in a timely fashion. For example, where deals would typically be placed by hard copy application form, is the transfer agent monitoring its PO Box to ensure it receives and processes those dealing applications?
Can we accept electronic dealing requests?
Yes, we think so – in our view, the FCA rules do not prevent email dealing. The key issues to consider are:
- the transfer agent’s ability to offer an email dealing service (including associated AML implications);
- whether FCA approval is required;
- updates to the prospectus to permit email dealing; and
- investor communications.
COLL 5 breaches
We are getting very close to breaching COLL investment and borrowing power restrictions. What should we do?
If redemptions are exhausting liquidity in the portfolio and starting to cause portfolio diversification issues – for example, if the “bucket” of unlisted transferable securities is approaching the 10% limit – it may be worth considering imposing “soft limits” on the investment and borrowing powers to try to control this. In this scenario, it may be prudent to run the unlisted bucket at 8%, rather than 10%, for example.
What liquidity management tools can we use?
Fund documents typically permit deferred redemption (and for some types of funds, limited redemption), and AFMs should consider these options before suspending the fund.
Typically, deferred redemption provisions for daily dealing funds are not particularly helpful, as they only allow the AFM to defer redemptions to the next dealing day (i.e. typically the next day). However if the deferred dealing threshold is reached repeatedly on consecutive days, it may, in theory, be possible to defer redemptions for longer than one dealing day. If the AFM is in this position and wishes to defer redemptions for more than one dealing day, care should be taken regarding communication of this position to investors – particularly where the investor base is predominantly retail.
Can dilution adjustments/levies help?
Yes, but they should only be imposed to cover the impact of dilution and should not be used as a tool to deter the submission of redemption requests.
Can we impose redemption charges?
Yes. A typical prospectus gives the AFM the power to charge redemption fees, but then states that the AFM has no intention to use the power, or that the current redemption fee is zero.
AFMs which currently do not exercise this power but want to start doing so would need to seek FCA approval (providing a full justification for why the application of the redemption charge is considered appropriate, and in what circumstances it would be applied) and provide 60 days’ notice (ideally) to investors. This means that there is potentially a three-month lead in time to introduce a redemption charge.
Can the publishing of annual and half-yearly reports and accounts be delayed?
Yes. The FCA is allowing temporary relief of an additional two months (so six months in total) from the end of year accounting date to publish annual reports and an additional one month (so three months in total) from the half-yearly accounting date to publish half-yearly reports, provided AFMs inform the FCA that they are using the extension.
However, if possible to do so within the usual time limits without compromising the quality of the reporting and in line with the current health guidelines, the FCA expects AFMs to publish reports on time.
Can the publishing of the AFM’s assessments of value be delayed?
Yes. If AFMs need to make use of the temporary reliefs outlined above they have six months from the end of the financial year to publish the statement of value.
While the FCA acknowledges the significant challenge presented to AFMs in the current environment, AFMs should be doing all they can to ensure business as usual for their investors. It is important to keep investors’ interests at the heart of decision-making and to communicate any consequential operational changes to investors as soon as possible.
We will continue to engage with the Investment Association and the FCA on these issues and will share our thoughts on any further guidance that they may publish.
This article was updated on 7 April 2020 to take into account the FCA’s expectations, published on 6 April 2020.