This article was first produced in partnership with the Financial Services practice module of Lexis PSL.
BACKGROUND TO CHANGING THE MANAGER OF AN AUT
An authorised unit trust (AUT) for regulatory purposes will be a UCITS fund complying with the UCITS Directive (2009/65/EC) as amended; or will be a Non-UCITS Retail Scheme (NURS); or a Qualified Investor Scheme (QIS). A NURS is a highly regulated UK fund which will fall under the Alternative Investment Fund Managers' Directive (2011/61/EU). QIS also fall under this Directive. The regulations and requirements for changing the manager of an authorised unit trust can be found in Chapter 6.5 of the FCA Sourcebook Collective Investment Schemes (COLL).
Changing the manager of an AUT, whether a UCITS, NURS or QIS, is usually voluntary, for example where the manager's business has been sold to another financial services firm or where the manager no longer intends to carry on business as an authorised fund manager. In these circumstances the manager retires as manager of the AUT and a new manager agrees to be appointed. Changing the manager can be involuntary, for example as a result of insolvency or the actions of the unitholders or where the Financial Conduct Authority (FCA), in limited circumstances, applies to court for the replacement of the manager, pursuant to section 258 of Financial Services and Markets Act 2000, but this is very rare. Even where the investors want to remove the manager it is generally the case that the manager will choose to retire rather than be forcibly removed.
The rules for implementing a change of manager are contained in FSMA 2000 and the FCA's COLL.
An authorised unit trust is created by a trust deed between the unit trust's trustee and the unit trust manager; there is no separate contract between the trust or trustee and the manager. This means that when a manager retires or is replaced the trust deed must be amended by way of a supplemental trust deed. There is a standard form trust deed drafted by the Investment Association and approved by the FCA which, although not compulsory to use, is nonetheless invariably used as the template. There is no industry approved standard for a supplemental deed of retirement and appointment but a standard approach has evolved over the years.
In addition to the supplemental trust deed there will be a deed of indemnity and any other contracts that the manager has entered into relating to the AUT will need to be reviewed to consider what action needs to be taken.
RETIREMENT OF AUT MANAGER
COLL 6.5.8(R) sets out that the manager of an AUT may retire in favour of another person who is eligible under FSMA 2000 to act as the manager of an AUT provided that the depositary (which will in fact be the trustee) has agreed in writing to the new manager and the FCA has given its prior approval to the proposed change. The trustee should be involved at an early stage to confirm that it is happy with the proposed new manager. Also, technically, it is the trustee who makes the application to the FCA for approval although the notification requires both the manager and the trustee's signatures.
REMOVAL OF AUT MANAGER
Although rare, the manager of an AUT can be removed and replaced.
COLL 6.5.7(R)(1) provides that the manager of an AUT may be removed by written notice from the trustee in the following instances:
- the calling of a meeting to consider a resolution for winding-up the authorised fund manager
- an application being made to dissolve the authorised fund manager or to strike it off the Register of Companies
- the presentation of a petition for the winding-up of the authorised fund manager
- the making of, or any proposals for the making of, a composition or arrangement with any one or more of the authorised fund manager's creditors
- the appointment of a receiver to the authorised fund manager (whether an administrative receiver or a receiver appointed over particular property)
- anything equivalent to the five grounds stated above occurring in respect of the authorised fund manager in a jurisdiction outside the United Kingdom
- the trustee forming the reasonable opinion, and stating in writing, that a change of authorised fund manager is desirable in the interest of unit holders
- a resolution of unit holders being passed to remove the authorised fund manager; or
- the unit holders of three quarters in value of all of the units then in issue (excluding units held or treated as held by the authorised fund manager or by any associate of the authorised fund manager) making a request in writing to the trustee that the authorised fund manager should be removed.
The trustee must appoint another person eligible to act, ensuring that the manager is independent from the trustee as per the requirement in section 243(4) of FSMA 2000. The appointment will be made by way of a supplemental deed.
FSMA 2000, s 243(4)
The existing manager ceases to be the AUT manager when it receives notice from the trustee of its removal (COLL 6.5.7(R)(2)). In order to give a valid notice the trustee needs to obtain prior approval of its action from the FCA.
THE PROCESS FOR CHANGING THE MANAGER OF AN AUT
The new manager is appointed by deed. The deed of retirement and appointment (the 'deed') is supplemental to the trust deed which creates the AUT and is entered into between the retiring manager, the new manager and the trustee. The deed will evidence the timing of the retirement and appointment; it will discharge the retiring manager from its duties and obligations with effect from the designated effective time and confirm that the retiring manager is entitled to receive remuneration up to the effective time. The deed will also cover any name change necessary for the AUT as a result of the change to the manager. If there are any other amendments needed to the trust deed (for example because the trust deed has not been recently renewed) then these should be done at the same time. If the amendments are significant consideration should be taken of preparing an amendment and restating the trust deed to be executed immediately following the appointment of the new manager.
In addition to the deed of retirement and appointment, there is usually a deed of indemnity between the retiring manager, new manager and trustee with mutual indemnities between the parties. These indemnities cannot be contained in the deed of retirement and appointment as that is supplemental to the original trust deed and there are strict rules about what can be included in an AUT trust deed and mutual indemnities are not included.
As noted above the manager does not enter into a separate service agreement or investment management agreement with the trustee; its powers are set out in the trust deed and the FCA Handbook.
The trustee must obtain the FCA's prior approval of the proposed change of manager under section 251(3) of FSMA 2000. This is done by providing notification using Form 251. Effectively Form 251 is a joint notification by the manager and the trustee, which sets out the proposed changes and reason for making the changes as well as how the change has been classified under the COLL Rules.). Form 251 is submitted to the FCA along with the draft supplemental deed of retirement and appointment; solicitor's certificate confirming the trust deed is compliant with the FCA rules; revised drafts of the prospectus; key investor information documents; any proposed notification to unitholders. The FCA may approve or provide a warning notice (where approval is not granted) within one month of receipt of the notice of proposed change and if this period elapses, effect can be given to the proposal.
FSMA 2000, s 251(3)
Consideration must be given to whether the change of manager is a 'fundamental', 'significant' or 'notifiable' change under COLL. Generally, a change of manager will be considered a significant change, requiring a minimum notice period of 60 days to investors. However, if the manager is being removed, this may be a fundamental change requiring approval by special resolution of the unit holders, depending on the circumstances.
For a UCITS where the authorised fund manager 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 authorised fund manager is replaced under COLL 6.5.7(R) without prior written notice and the new manager is based in a different EEA member state, unit holders of a UCITS must be notified by the trustee (COLL 4.3.10(1)) and the new authorised fund manager must immediately notify unit holders of its appointment in an appropriate manner (COLL 4.3.10(2)).
It will be necessary to consider whether the name of the AUT requires changing. The FCA's guidance in COLL suggests that a name may be misleading where it bears reference to the former manager, which would be in breach of section 243(8) of FSMA 20000. Moreover, the former manager may require a change of the name of the AUT if this contains a reference to the former manager (COLL 6.5.7(R)(3)).
Board meetings should be held by the trustee, retiring manager and new manager, approving the retirement and appointment as appropriate.
The revised prospectus, the key investor information documents and other marketing material should be made available from the date on which the change of manager is effective. For further information on key investor information documents see Practice Note: Regulation of Key Investor Information Documents.
Finally, the new manager must confirm, using Form FN, when the change has actually occurred.
Consideration needs to be given as to whether any other contracts are affected by a change in the manager of the AUT. These may include:
- sub-investment management agreements or advisory agreements where the manager has delegated part or all of the investment management or investment advice in relation to the AUT
- where the new manager has not previously worked with the AUT's trustee it may be necessary to enter into new custody arrangements. Alternatively the existing trustee may retire in favour of the new manager's preferred trustee
- administration agreements; and
- fund platform agreements and other distribution agreements
The change to the manager 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, or may even require approval from the third party.
Similarly the new manager should review its third-party contracts in order to add the new fund to the existing stable (assuming that it has one).
A detailed communication plan will be necessary to inform all those involved with the day-to-day operation of the AUT, which takes into consideration which entities require prior notification, same day notification or subsequent notification.
The relevant arrangements as regards the administration of the AUT custody and registration of assets, settlement of transactions, income collection, exercise of voting rights and income distribution must be implemented between the new manager, the administrator and the trustee.
- Obtain trustee agreement to the change.
- Review of all contracts entered into by the manager which relate to the affected AUT and assess notification/approval requirements.
- Draft trust documentation, 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; and
- Confirm change to the FCA within 14 days of the effective date.