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OEICS

made easy!

LEGAL NOTE

H M Treasury
January 1997

This booklet is designed help you set up and operate an oeic and outlines the main steps in the authorisation process. When you have read this booklet you will be able to get cracking. Oeics are simple, honest!

A full glossary of terms can be found in the Treasury's latest consultation document, The Next Generation.

What is an oeic?

"OEIC" stands for "open-ended investment company". Essentially an oeic is a pooled investment fund of variable size in corporate form. It owns investment assets, for example stocks and shares, gilts, bonds and certain other financial instruments. The size of an oeic varies reflecting the market value of its underlying investments. It will also fluctuate as investors buy and sell shares as the oeic has more or less property to invest. It is in this sense that it is open-ended.

An oeic's investors own shares in the company rather than units as in a unit trust. The shareholders have the right to sell their shares back to the oeic on any dealing day when trading has not been suspended. Unlike a unit trust however, an oeic's shareholders have no rights to the underlying assets; but they do have rights to participate in the income which can be paid as dividends or reinvested, and/or profits arising from the management of and transactions in the scheme property.

Every oiec must be authorised by the Securities and Investments Board (SIB). See pages 5 & 6 for details.

The Regulations

The Treasury's regulations, the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996, were made on 11 November 1996 and came into force on 6 January 1997. These are often referred to as the ECA Regulations (since they were made under the European Communities Act 1972). Copies of these Regulations are available from The Stationery Office (tel: 0171 873 9090). When ordering a copy you will need to quote the statutory instrument number, SI 1996 No. 2827.

These Regulations provide for the incorporation in Great Britain of oeics that fall within the scope of the UCITS directive. This means they can invest only in transferable securities (eg listed securities, other collective investment schemes, certificates of deposit). The regulations for oeics incorporated in Northern Ireland will be known as the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations (Northern Ireland) 1997 and will be issued shortly.

The SIB regulations, the Financial Services (Open-Ended Investment Companies) Regulations 1997, were approved by the SIB Board on 16 January 1997 and came into effect as from that date. These regulations will initially only apply to GB oeics until the Northern Ireland regulations come into force when the SIB regulations will be amended accordingly.

The tax regulations for oeics, including regulations on stamp duty, are expected to come into force shortly. These regulations cover oeics incorporated in the UK.

So how do you get your oeic up and running?

Directors and the Board

Your oeic must have a board to govern its affairs. The board may consist of only one director. But if there is only one, that director must be a body corporate authorised under the Financial Services Act 1986 (FSA) (authorised corporate director (see below)). SIB's initial regulations require that however many directors an oeic may have, one of them must be an authorised corporate firm. SIB could in the future prescribe other forms of board structure although at the date of this booklet there are no plans to do so.

All your oeic's directors must be approved by SIB as fit and proper, and the board must have appropriate expertise. The directors will be accountable to your oeic's shareholders for the way in which they discharge their respective functions.

If you propose to replace a director, appoint an additional director or decrease the number of directors on your oeic's board, you must notify SIB in writing. You may not make these changes unless SIB has either approved the change or three months have passed since you notified SIB.

The authorised corporate director (ACD)

The responsibilities of your oeic's ACD are set out in ECA Regulation 28(4) and in Part 6 of SIB's regulations. These include dealing with the day to day operation of the company. So your oeic's ACD manages the company's investments, buys and sells its own shares on demand, and ensures accurate pricing of shares at net asset value.

If your firm has not operated a GB oeic before, it will need approval from the SRO of which it is a member in order to act as an ACD. This will extend the scope of its permitted business.

Additional directors

Where your oeic has directors additional to the ACD, these directors have a general duty of oversight of the company's affairs, including checking that the ACD is fulfilling its duties in a competent manner. The additional directors will be responsible for taking steps to improve matters if they feel that the ACD is deficient. In extreme cases they can and should replace the ACD. The duties of the additional directors also include non-compliance matters such as strategy and marketing policy, although these functions can be delegated to, for example, the ACD.

The depositary

Your oeic must have a depositary. The depositary must be a firm (usually a bank) authorised under the FSA (typically through membership of IMRO). It must be independent of the oeic and of the persons appointed as directors of the oeic..

Your oeic's investment property is held by its depositary which has legal title to the investments. The depositary may appoint sub-custodians to take custody of the assets but it will remain ultimately responsible. The depositary has responsibility for checking that your oeic complies with the key regulatory requirements. In many ways the role of the depositary resembles that of a unit trust trustee.

You must notify SIB in writing if you propose to replace the depositary of your oeic. You may not make these changes unless SIB has either approved the change or three months have passed since you notified SIB.

Summary of documentation for authorisation of funds and umbrellas (full details available from SIB)

• completed and signed application form with the appropriate fee (currently expected to be the same as for authorised unit trusts);

• proposed instrument of incorporation with a certificate signed by your solicitor confirming that the instrument complies with Schedule 3 to the ECA Regulations (Schedule 3 deals with the contents and treatment of the instrument) and the relevant provisions of SIB regulations. You may find that use of the model instrument of incorporation speeds up your application process both for yourselves and for SIB;

• proposed prospectus (see Part 3 of SIB regulations);

• draft Key Features document (as required by PIA);

• 3 year (or longer if necessary) plan setting out the fund's/each subfund's investment policy until it reaches a viable size;

• information required by the registrar; and

• any other information you or SIB feel is necessary to support your application.

SIB needs to satisfy itself that the authorisation criteria in ECA Regulation 10 will be satisfied for the oeic when the authorisation order comes into effect. Such criteria include: site of your oeic's head office; oeic has at least one director; one director is authorised; directors are fit and proper persons; depositary is an authorised person independent of your oeic and its directors (including the ACD); depositary has a place of business in UK; name of your oeic is not undesirable or misleading; aims of your oeic are capable of being achieved.

Management and Operation of an oeic

Oeics may issue registered or bearer shares or both. The register of shareholders must be updated daily and include the shareholdings of the ACD (both registered and bearer) and those held in the box (if there is one) as well as those of the investors. In addition to the registered shares, the share register must also include a monthly statement of the total number of bearer shares in issue excluding those held by the ACD (as these have been counted above). For the purposes of the SIB regulations, the shares in the box belong to the box manager which must be named in the instrument of incorporation. Current SIB regulations require it to be the ACD.

Shares in any given class (see below) may be issued in two sizes - larger and smaller denomination shares. The proportion of smaller denomination shares to larger denomination shares is decided by the promoter of the oeic and must be stated in the instrument of incorporation. Both denominations are whole shares but you may find it easier to think of the smaller denomination shares as if they are fractions of the larger denomination shares.

Share classes

Your oeic may have a number of share classes in a particular fund or subfund. These classes may be differentiated by, for example, charges (amount, structure) or currency.

If the fund is part of an umbrella fund ie a subfund, SIB regulations require the necessary share classes to be available to allow any investor in the umbrella to switch between any of the subfunds in that umbrella.

See SIB regulations Part 2 for further information on share classes and Part 11 for umbrella funds. Details on charges are set out in SIB regulations Part 7.

Issue and redemption of shares

Shares may be issued or redeemed at net asset value on each dealing day in accordance with the SIB regulations. See Part 4 of SIB regulations.

Pricing

Your oeic's shares should be priced at net asset value to reflect the market value of its investments. Details on the calculation of prices are set out in SIB regulations Part 4.

SIB regulations do not cover the procedure for valuation of assets. AUTIF has included a standard valuation procedure (used for oeics offshore) in its model instrument of incorporation. If you wish to use a different valuation procedure, you may want to include a list of the differences between the procedures in the documents which you send to SIB for authorisation of the oeic.

General meetings

Your oeic must hold an annual general meeting each year. However, if it holds its first meeting within 18 months of the date of the authorisation order, the oeic need not hold a further AGM in the first two years following its incorporation. Not more than 15 months may elapse between AGMs. SIB regulations Part 10 cover the arrangements for general meetings.

Reports and accounts

The directors of your oeic must produce an annual and a half-yearly report every year. However, if the first annual accounting period is less than 12 months, a half-yearly report is not needed. The annual reports must be approved in general meeting.

Your oeic's annual report must include the company accounts which must be audited. The auditors' report and a compliance report from the depositary form part of the annual report.

Further details on auditors and the report and accounts can be found in ECA Regulations 60 to 63 and SIB regulations Part 9. IMRO will issue a Statement of Recommended Practice for oeics in due course.

Company documentation

The words investment company with variable capital must be included in all letters and documentation your oeic issues in the conduct of its business.

You will need to notify SIB in writing of any proposal to amend the instrument of incorporation and include a solicitor's certificate confirming that the changes proposed will not affect compliance with ECA Schedule 3 and the relevant provisions of SIB's regulations. You may not effect the proposals unless SIB has either approved the change or three months have passed since you notified SIB. Certain amendments also need shareholder approval. ECA Schedule 3 sets out those amendments which may be made to the instrument of incorporation and the approvals (if any) required to do so.

You will also need to notify SIB in writing of any proposed significant changes to the prospectus. Any such proposal may not be effected unless SIB has either approved the change or three months have passed since you notified SIB.

Amalgamating or Reconstructing an oeic

Under the ECA Regulations your oeic may be amalgamated or reconstructed in the following ways without the need for your oeic to be wound up:

• your oeic may merge with another oeic

• your oeic may merge with a public limited company (eg an investment trust company) to form another oeic (this cannot result in the combined product being an investment trust company since UCITS oeics can only reconstruct into another UCITS product)

• your oeic may split into two or more smaller oeics

You must notify SIB in writing if you propose to involve your oeic in a reconstruction or amalgamation.

Further details on amalgamations and reconstructions can be found in SIB regulations Part 12 section D.

Conversion of an aut to an oeic

Revisions to SIB's product regulations for authorised unit trusts will deal with the arrangements for converting an existing authorised unit trust into an oeic or into the subfund of an umbrella oeic. Conversion of a single authorised unit trust to a single oeic or to a single subfund of an umbrella oeic will be exempt from stamp duty.

Conversion may include the merger of several authorised unit trusts. The Inland Revenue have proposed a temporary stamp duty exemption until 30 June 1999 for a conversion involving the merger of two or more authorised unit trusts, and for a merger of authorised unit trusts which does not involve a conversion to an oeic.

Winding-up an oeic

An oeic may be wound-up by the court or, provided it is solvent, in accordance with Sections A -C of Part 12 of SIB regulations. SIB must be notified in writing of any proposal to wind-up your oeic whether or not through the court.

Winding-up by the court

Your oeic may be wound-up as an unregistered company in accordance with the provisions of the Insolvency Act 1986 subject to the modifications set out in ECA Regulation 25. This would normally occur should your oeic be insolvent.

The depositary may present a petition for winding up your oeic as part of its role as overseeing its operation. If petitions are presented by persons other than by SIB, a copy of the petition must be sent to SIB.

Once this process is started, your oeic will be dissolved three months after the registrar has received notice that the winding-up is complete unless it has been notified of any deferral of the date for dissolution.

Dissolution in other circumstances

You may also want to wind up a solvent oeic, for example if it has not been a commercial success. You can do this in accordance with SIB's regulations. Your oeic would be dissolved three months after the registrar is notified by the ACD of the completion of the winding-up unless a court order has deferred the date of dissolution.

If your oeic is being wound-up in accordance with SIB regulations, circumstances may arise to cause the winding-up to be completed by the court, for example if your oeic is found to be insolvent. In that case the winding-up will be taken to have commenced at the time SIB gave its approval to wind-up or, if three months have elapsed since the date of notification to SIB without SIB giving its express consent to the winding-up, the first day after the end of the three month period.

Further details on the procedure for winding-up oeics and the lodgement of money can be found in SIB regulations Part 12.

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