The Financial Conduct Authority has opened a consultation into rules that would allow UCITS and non-UCITS retail schemes to side pocket assets affected by the Russian invasion of Ukraine and associated sanctions.
This consultation is seeking feedback on the processes that would allow funds to carve out Russian, Belarusian and Ukrainian assets from the main investment pool, allowing existing investors to sell the unaffected assets, if desired, and allowing new investors to enter the funds without gaining exposure to these hard-to-value assets.
As part of the process to create a side pocket, the regulator has laid out that the authorised fund manager must consider all options, including whether a fund suspension would be in the best interest of investors over a side pocket.
41 Luxembourg-domiciled funds suspended due to Russia exposure
While it acknowledges that the current rules would mean a relatively lengthy process for the AFM to initiate the side pocket, with the manager required to present its case to the regulator, the FCA believes that in the interest of transparency, this should not be waived.
AFMs would also be required to updated the prospectus for the fund, as the regulator believes no UK authorised retail fund currently makes provisions for side pockets.
However, while such changes would usually require the AFM to hold a unitholder meeting and offer a vote on the proposals, given there is unlikely to be any viable alternative to the side pocket at such a meeting, the FCA will not require the meeting to occur.
Managers would not be prevented from charging an annual management fee on the side pocket, but any fee charged should not exceed "what is reasonable to cover the necessary costs of the AFM and to reward the amount of work entailed in seeking opportunities to dispose of the affected assets in an orderly way".
It added that this fee would be expected to be lower than that of the regular fund.
