Shearman & Sterling LLP | FinReg | UK Conduct Regulator Finalizes Rules for Funds Investing in Illiquid Assets
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  • UK Conduct Regulator Finalizes Rules for Funds Investing in Illiquid Assets

    The U.K. Financial Conduct Authority has finalized new rules governing certain types of open-ended funds that invest in inherently illiquid assets. The rules include:
    • A new category of “funds investing in inherently illiquid assets” that are subject to additional requirements including enhanced depositary oversight and increased disclosure of liquidity management processes;
    • Mandatory suspension of dealing by non-undertakings for collective investment in transferable securities retail schemes (known as “NURSs”), where there is material uncertainty about the valuation of at least 20% of the scheme property;
    • New requirements for relevant funds to produce contingency plans dealing with liquidity risks; and
    • Additional disclosure requirements so that funds must include details of their liquidity risk management strategies in prospectuses and standard risk warnings in financial promotions.
    The new rules will take effect from September 2020, although the FCA has suggested that fund managers and depositaries may wish to consider adopting some of the measures early, including increased disclosure. Operators of relevant funds, ancillary service providers, intermediaries and investors with exposure to relevant funds should take particular note of the changes.

    The new rules follow the FCA’s 2018 consultation paper on illiquid assets and open-ended funds, which was prompted after dealing in a number of property funds was suspended following the U.K.’s decision in 2016 to leave the EU. The FCA’s Policy Statement contains the new rules and guidance to be adopted in light of its consultation. The new rules will be brought into force by the Non-UCITS Retail Schemes Investing in Illiquid Assets Instrument 2019, which makes changes to the Financial Services and Markets Act 2000, the Open-Ended Investment Companies Regulations 2001 and the Conduct of Business and Collective Investment Schemes sourcebooks of the FCA Handbook.

    Following the suspension of dealing of the LF Woodford Equity Income Fund, which is a UCITS fund and so not currently caught by the FCA’s new rules, the FCA is contemplating applying its amended regime more widely than NURSs. The FCA has confirmed that it will launch a public consultation in the usual way if it decides to move forward with any such proposals.

    View the FCA's Policy Statement on Illiquid assets and open-ended funds.

    View the Non-UCITS Retail Schemes Investing in Illiquid Assets Instrument 2019.

    View details of the FCA's Consultation Paper.
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    TOPIC: Funds