The Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996

Explanatory Note

(This note is not part of the Regulations)

The Regulations make provision for the formation in Great Britain of a class of body corporate referred to in the Regulations as an investment company with variable capital. The Regulations also make provision for the authorisation of investment companies with variable capital and for their subsequent supervision.

An investment company with variable capital formed under the Regulations will be a collective investment scheme within the meaning of section 75 of the Financial Services Act 1986 (c. 60) the object of which is investment in a limited class of investments (referred to in the Regulations as “transferable securities”). It will also be an open-ended investment company within the meaning of section 75(8) of that Act. In addition an investment company with variable capital will be an undertaking for collective investment in transferable securities to which Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“the UCITS Directive”) applies. As such, it will be able to take advantage of the rights which that Directive confers in relation to the undertakings to which it applies to market their shares in other States of the European Economic Area. At present, the only undertakings formed in Great Britain which are able to take advantage of the rights conferred by the UCITS Directive are authorised unit trust schemes the object of which is investment in transferable securities.

Part I of the Regulations is general and contains definitions of certain of the terms used in the Regulations.

Part II of, and Schedules 1 to 3 to, the Regulations are concerned with the formation and the subsequent control and supervision of an investment company with variable capital. Regulations 3 and 4 and Schedule 1 concern the formation of a company and the registration of certain details relating to it with the registrar of companies. Regulation 5 and Schedule 2 are concerned with the custody of the company’s property and with the company’s depositary who is the person to whom the property will be entrusted for safekeeping. Regulation 6 extends certain legislative powers under the Financial Services Act 1986 so as to be exercisable in relation to investment companies with variable capital. The powers are vested in the Securities and Investments Board (“SIB”). (Regulation 73 makes provision as to SIB’s functions under the Regulations.)

Regulations 7 to 12 of the Regulations contain provisions as to the authorisation by SIB of an investment company with variable capital. Schedule 3 contains provisions concerning the contents of a company’s instrument of incorporation.

An application for authorisation will be required and SIB must be satisfied that the company will, if formed and authorised, meet certain criteria (set out in regulation 10). There is provision for representations to be made against any refusal to authorise a company and there is also provision for a company to be issued with a certificate which is a necessary prerequisite to it being able to enjoy the rights conferred by the UCITS Directive. Regulations 13 and 14 contain provisions relating to the name which may be used by an investment company with variable capital and regulation 15 contains provisions requiring a company to seek prior approval from SIB for certain changes, including changes to the company’s instrument of incorporation. Regulations 16 to 20 confer powers on SIB to intervene in the affairs of a company once it has been authorised. The powers in question are powers to revoke authorisation, to give directions and to make applications to the court. Regulat! ions 2 1 to 24 confer concurrent powers on the Secretary of State and SIB to appoint inspectors to investigate the affairs of an investment company with variable capital. Regulations 25 to 27 contain provisions as to the winding up and dissolution of an investment company with variable capital.

Part III of, and Schedules 4 to 7 to, the Regulations set out the corporate framework within which an investment company with variable capital will operate. This framework will be supplemented by regulations made by SIB under the provisions of regulation 6 of the Regulations. Regulations 28 to 30 contain provisions concerning the directors of an investment company with variable capital and the inspection of their service contracts. Regulation 31 makes provisions as to general meetings of the company and regulations 32 to 38 make provision as to the capacity of a company and the validity of certain transactions involving its directors. Regulations 39 to 46 contain provision about the nature of the shares that an investment company with variable capital may issue, about share certificates and (together with Schedule 5 to the Regulations) share transfers and about the maintenance, closure and rectification of a register of shareholders which an investment company with varia! ble capital will be required to keep in accordance with Schedule 4. By virtue of regulation 42, an investment company with variable capital will be able to issue bearer shares. Regulations 47 to 59 contain various provision s that are relevant to the operation of an investment company with variable capital. The provisions in question are ones about the powers which a company enjoys incidental to the carrying on of its business (regulation 47), the details which must be included in its correspondence (regulations 48 and 49), the execution and authentication of documents (regulations 50 to 54), liability and exemptions from liability (regulations 55 to 57), fraudulent trading (regulation 58) and the powers which the company has to make provision for its employees on the cessation or transfer of its business (regulation 59). Regulations 60 to 63 and Schedule 6 make provision as to reports containing accounts which must be prepared by an investment company with variable capital, as to the audit of the reports and as to auditors. Regulation 64 of, and Schedule 7 to, the Regulations contain provisions concerning the merger and division of investment companies with variable capital.

Part IV of the Regulations contains miscellaneous provisions, including provisions about notifications to the registrar of companies, prosecutions and service of documents. Part IV (regulation 74) also contains provisions extending the powers that SIB has under the Financial Services Act 1986 to raise fees in relation to the authorisation and supervision of authorised unit trust schemes so as to be exercisable for like purposes in relation to the authorisation and supervision of investment companies with variable capital. In addition, Part IV of and Schedule 8 to the Regulations make various minor and consequential amendments to other enactments including an amendment which has the effect that an investment company with variable capital will be an authorised person under the Financial Services Act 1986 (paragraph 11 of Schedule 8) and an amendment which excludes such a company from the provisions of section 716 of the Companies Act 1985 (paragraph 8 of Schedule 8).

A compliance cost assessment relating to the Regulations has been prepared and a copy may be obtained from Mrs Janet Robbins, Financial Services, HM Treasury, Parliament Street, London, SW1P 3AG. Tel: [phone]. Fax: [phone].