Changing the authorised corporate director of an open-ended investment company
This article was first produced in partnership with the Financial Services practice module of Lexis PSL.
Background to OEICS and ACDS
An open-ended investment company (OEIC) is an investment fund in corporate form, as defined in section 236 of the Financial Services and Markets Act 2000 (FSMA 2000). OEICs aim to spread investment risk and give investors the benefit of the management of the investments. In the UK an OEIC can only be incorporated if it is also authorised by the Financial conduct Authority (FCA) as a UCITS fund, a Non-UCITS Retail Scheme (NURS), or a Qualified Investor Scheme (QIS).
An OEIC is constituted by way of an instrument of incorporation. There is a standard form instrument agreed between the Investment Association and the FCA which is invariably used.
Pursuant to Regulation 15 of the Open Ended Investment Company Regulations 2001 (SI 2001/1228) (OEIC Regulations), OEICs must have at least one director. Where the OEIC only has one director, then the sole director must be a body corporate with permission from the FCA to act as the manager of a UCITS of the manager of an Alternative Investment Fund. In practice, most OEICs will have a sole corporate director, referred to as the authorised corporate director (ACD). The ACD is appointed by way of a service agreement which sets out its role as a director and as manager of the OEIC.
SI 2001/1228, reg 15
The OEIC Regulations contain provisions concerning a change of the ACD and this is supplemented by guidance in the FCA's Collective Investment Schemes sourcebook (COLL). Additionally, the OEIC's instrument of incorporation may contain specific provisions dealing with the event of a change of ACD.
Under what circumstances would a change of ACD occur?
In practice, most changes to the ACD occur voluntarily and involuntary changes are rare. COLL 6.5.3(R)(4) provides that an ACD must not voluntarily terminate its appointment unless the termination is effective at the same time as the commencement of the appointment of its successor. Any change to the ACD must be approved by the FCA. An ACD may voluntarily retire where for example it is selling its business to another fund manager or where it is ceasing to carry on fund management business.
There are a number of circumstances under which an involuntary change of ACD may arise:
- The FCA has the power under Regulation 26 of the OEIC Regulations to apply to court for the removal of the ACD and to replace it with a nominated person.
SI 2001/1228, reg 26
- The shareholders may also remove the ACD. COLL 3.2.6 requires the instrument constituting a UCITS or NURS to contain a provision for the shareholders to remove a director of an OEIC by way of ordinary resolution. Regulation 34(2) of the OEIC Regulations allows the shareholders to appoint a director by passing an ordinary resolution. A similar approach applies to a QIS.
SI 2001/1228, reg 34(2)
- Pursuant to COLL 6.5.4(R)(2), the depositary of a UCITS or NURS may give notice of termination of the appointment of the ACD and the OEIC if any of the following events occurs:
- the calling of a meeting to consider a resolution for the winding-up of the ACD
- an application being made to dissolve the ACD or to strike it off the Register of Companies
- the presentation of a petition for the winding-up of the ACD
- the making of, or any proposals for the making of, a composition or arrangement with any one or more of the ACD's creditors
- the appointment of a receiver to the ACD (whether an administrative receiver or a receiver appointed over particular property); or
- anything equivalent to the five points stated above occurring in respect of the ACD in a jurisdiction outside the United Kingdom
- For UCITS or NURS where the OEIC has more than one director, the board may remove the ACD by giving notice under COLL 6.5.4(R)(2) and ensuring that there is a person willing and qualified to act as a replacement ACD
Where the ACD is to removed by an application being made to dissolve the ACD or to strike it off the Register of Companies, then the prior approval of the FCA must be obtained under Regulation 21 of the OEIC Regulations.
Practical considerations for the removal of the ACD
Review the instrument of incorporation of the OEIC and the ACD agreement
The instrument constituting the OEIC may contain specific provisions relating to the removal and replacement of a director which will need to be followed.
The ACD Services Agreement may also contain specific provisions relating to termination of the appointment for example on notice periods and entitlement to compensation for loss of office. A side letter may be required to waive any notice period or provision in relation to loss of office in the event of a voluntary change.
Review all contracts with the retiring ACD and the new ACD
Consideration needs to be given as to whether any other contracts are affected by a change in the ACD. These may include:
- sub-investment management agreements or advisory agreements where the ACD has delegated part or all of the investment management or investment advice in relation to the OEIC
- administration agreements; and
- fund platform agreements and other distribution agreements
The change to the ACD may mean that agreements have to be assigned or novated or partially terminated in relation to the affected fund. Some of the affected contracts may contain advance notification requirements which may be greater than the 60-day notice period referred to in COLL 4.3.6R, or may even require approval from the third party.
Similarly the new ACD should review its third-party contracts in order to add the new fund to the existing stable (assuming that it has one).
Consider related changes
Any changes in connection with the change of ACD, such as its name, must be considered. Regulation 15(9) of the OEIC Regulations provides that the name of the OEIC must not be undesirable or misleading. A name of an OEIC which refers to someone other than the ACD will be considered misleading by the FCA (COLL 6.9.6(2) and 8.2.4(G)) and therefore a change of name may be necessary. It is possible that a change in ACD may also trigger a change in investment policy or a change to fees. The former will be a fundamental change requiring a special resolution. The latter may be fundamental or significant depending on the nature of the change.
Change categorisation under COLL
Consideration must be given to whether the change of ACD is a 'fundamental', 'significant' or 'notifiable' change under COLL 4.3. Generally, a change of ACD will be considered a significant change, requiring a minimum notice period of 60 days to investors. However, if the ACD is being removed, this may be a fundamental change requiring approval by special resolution of the shareholders, depending on the circumstances.
For a UCITS where the ACD proposes to retire under COLL 6.5.8(R) and the new manager is based in a different EEA member state, this is treated as a significant change (COLL 4.3.6A(R)).
Where the ACD is replaced under COLL 6.5.7(R) without prior written notice and the new ACD is based in a different EEA member state, shareholders of a UCITS must be notified by the trustee (COLL 4.3.10(1)) and the new ACD must immediately notify shareholders of its appointment in an appropriate manner (COLL 4.3.10(2)).
Prepare communication plan
A detailed communication plan will be necessary to inform all those involved with the day-to-day operation of the OEIC, which takes into consideration which entities require prior notification, same day notification or subsequent notification.
Procedure and timings for changing the ACD of an OEIC
Notification to FCA
One month's prior notification must be given in writing to the FCA in respect of any proposed change of ACD (Regulation 21(1)(e)). The proposal must not be given effect before the FCA's approval or the lapse of one month from the date of notice being given to the FCA where a warning notice, if approval is to be refused, has not been received by the OEIC.
This requires the OEIC to provide confirmation of the categorisation under COLL of the proposed change (fundamental or significant) as well as a revised draft of the prospectus and, where applicable, key investor information documentation.
Notifications to shareholders
Notification must be given to shareholders (or consent obtained) in accordance with the principles discussed at COLL 4.3
Board meetings of the OEIC, the retiring ACD and the new ACD
Board meetings must be held for each of the OEIC, the retiring ACD and the new ACD formally considering and approving the change in the ACD.
Where the OEIC does not hold annual general meetings, the directors of the company may appoint a person to act as director (Regulation 34(2) of the OEIC Regulations).
SI 2001/1228, reg 34(2)
However, where the OEIC does hold annual general meetings, the outgoing ACD may call a shareholder meeting to effect the replacement of the ACD, or the board of directors may appoint the new ACD and have this ratified at an AGM held within the next 12 months. Most OEICs have dispensed with AGMs.
Documentation effecting the change of ACD
The retiring ACD will need to be served notice of his removal. The new ACD will need to enter into an ACD Service Agreement with the OEIC setting out its powers and obligations as ACD.
Revision of OEIC documentation
The OEIC's prospectus will have to be revised and submitted to the FCA for approval. In addition, key investor information documents and any relevant marketing materials must also be revised.
Implement operational transition plan and communications plan
The relevant arrangements as regards administration, the custody and registration of assets, settlement of transactions, income collection, exercise of voting rights and income distribution must be implemented and will be achieved through considerable co-operation between the retiring depositary and the new depositary.
Post event notification
Notification on Form FN must be provided by the new ACD (within 14 days for UCITS and NURS) that the change has occurred.
- Obtain depositary agreement to the change.
- Review of all contracts entered into by the ACD which relate to the affected AUT and assess notification/approval requirements.
- Amend instrument of incorporation, ACD Service Agreement, prospectus and other affected documentation.
- Notify FCA and wait one month for approval.
- Notify shareholders in accordance with fundamental or significant change process set out in COLL 4.
- Effect retirement and appointment.
- Confirm change to the FCA within 14 days of the effective date.
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