Scope of COLL 7.8
COLL 7.8 applies to UCITS schemes and non-UCITS retail schemes, not to regulated money market funds. Its stated purpose is dealing with the consequences of the Russian invasion of Ukraine, and a sanctioned investment is defined by the financial sanctions regimes of the G7 countries plus the EU as they relate to Russia.
An affected investment eligible for a pocket is a sanctioned investment; a unit in a collective investment scheme or a share in an AIF within the relevant limb of the definition; or, failing both, one for which no accurate, reliable and regular prices exist.
Conditions for creating a side pocket class
COLL 7.8.4R permits creation only after consulting the depositary, and only where the instrument and prospectus already provide for side pocket units and the class terms. The manager must have determined that:
- creating the class will protect the interests of unitholders;
- the rights attaching to a side pocket unit will not be unfairly prejudicial to unitholders generally or to any other class;
- the issue will be in the best interests of unitholders, the authorised fund and the integrity of the market; and
- all unitholders in the fund will be treated fairly.
It must first consider each matter in COLL 7 Annex 1, and whether suspending dealing under COLL 7.2.1R would instead serve all unitholders. A file that never weighed suspension has skipped a step the rule names.
The split
Under COLL 7.8.5R the manager may issue units in a new class or convert an existing class into one or more new classes, pricing each class by reference to a valuation of the portions of capital and income property represented by the affected investments, or by the scheme property excluding them. At the date and time specified for the issue, the combined net asset value of the new and existing classes must equal that of the classes existing immediately before, and each unitholder's new holding must be proportionate to their previous one. COLL 7.8.6R requires the prospectus to limit further issue of side pocket units.
Costs and the manager's fee
A side pocket class should bear a proportionate share of costs incurred for the benefit of all unitholders, such as depositary expenses, audit fees and regulatory charges; unitholders with no interest in the affected investments should not cross-subsidise it. The governing body decides whether to accrue those costs until cash is available, waive some, or pay them from the manager's own resources, and whether the manager should be remunerated at all for a class valued largely by reference to affected investments. Any fee should be lower than the charge on the rest of the scheme property.
Prospectus warnings and the meeting relief
COLL 7.8.13R(4) adds three prospectus warnings: that there is no certainty any affected investment will recover its value to a significant extent, or at all, and that the manager may be unable to realise any material value for the class; where applicable, that costs may significantly erode whatever value is realised; and whether the manager has undertaken to bear those costs itself and, if not, the risk of the class going overdrawn, that the liability would fall against the other classes' scheme property, and the steps the manager would take so those unitholders do not bear it.
Under COLL 7.8.14R creation need not be treated as a fundamental change requiring prior approval by a unitholder meeting, where the manager is satisfied on reasonable grounds that foreseeable costs are not disproportionate to the benefits; COLL 7.8.16R makes prior written notice optional for a significant change. COLL 7.8.22R requires written notification in clear and plain language in a durable medium, with a statement of resulting holdings under COLL 7.8.24R.