This article was first produced in partnership with the Financial Services practice module of Lexis PSL.
INTRODUCTION TO OEICS AND DEPOSITORIES
An open-ended investment company (OEIC) is an investment fund in corporate form, as defined in section 236 of the Financial Services and Markets Act 2000 (FSMA 2000). OEICs aim to spread investment risk and give investors the benefit of the management of the investments.
OEICs are subject to the Open Ended Investment Company Regulations 2001 (SI 2001/1228) (OEIC Regulations), pursuant to which they are required to have a depositary (regulation 15), responsible for the safekeeping and day-to-day administration of the fund's assets.
Open Ended Investment Company Regulations (SI 2001/1228), reg 15
There is guidance provided in the Financial Conduct Authority's (FCA) handbook relating to the role of the depositary and, specifically, COLL 6.5 deals with the appointment and replacement of the depositary.
WHY DO DEPOSITORY CHANGES OCCUR?
Changes to the depositary of an OEIC typically occur as a result of commercial considerations of the authorised corporate director (ACD), but may also arise out of a change in ownership of the depositary or the ACD, which causes a breach of the requirement in Regulation 15(8)(f) of OEIC Regulations that the depositary be independent from the company and its directors.
Pursuant to Regulation 26, the FCA may also apply to the court for the removal and replacement of a depositary.
SI 2001/1228, reg 26
PRELIMINARY CONSIDERATIONS WHEN CHANGING A DEPOSITORY
Review the instrument of incorporation of the OEIC
Although not standard practice, the OEIC's instrument of incorporation may contain specific provisions as to the procedure for changing its depositary.
Review the depositary agreement
Similarly, the agreement with the depositary may contain specific provisions, particularly relating to notice periods and compensation for loss of office.
Choose the new depositary
A new depositary must be selected, which complies with the requirements in Regulation 15 of the OEIC Regulations.
SI 2001/1228, reg 15
Consider depositary disclosure requirements
Pursuant to paragraph 5, Schedule 1 of the OEIC Regulations, a depositary is entitled on its removal to submit a statement of any circumstances, which it believes should be brought to the attention of the OEIC's shareholders or creditors. Such a statement must be sent to the shareholders or creditors within 14 days of its receipt and a copy must also be filed with the FCA, unless the OEIC wishes to challenge the statement in court. In respect of UCITS and NURS funds, the new depositary must be informed of any circumstances which the retiring depositary has notified to the FCA (COLL 6.5.10(R)(2)).
SI 2001/1228, Sch 1, para 5
Consider change categorisation under COLL
The ACD must consider whether the change of depositary is a 'fundamental', 'significant' or 'notifiable' change under COLL. Generally, the FCA's guidance at COLL 4.3.9(G)(2) suggests a change of depositary will be a notifiable change.
Review operational implications and plan handover
There will be operational considerations in the change of depositary in relation to the custody and registration of assets, settlement of transactions, income collection, exercise of voting rights and income distribution.
Prepare communication plan
A detailed communication plan will be necessary to inform all those involved with the day-to-day operation of the OEIC, which takes into consideration which entities require prior notification, same day notification or subsequent notification.
PROCEDURE AND TIMINGS FOR CHANGING THE DEPOSITORY OF AN OEIC
Notifications to the FCA
One month's prior notification must be given in writing to the FCA in respect of any proposed change to the OEIC's depositary (Regulation 21(1)(f)). The proposal must not be given effect before the FCA's approval or the lapse of one month from the date of notice being given to the FCA where a warning notice, if approval is to be refused, has not been received by the OEIC.
SI 2001/1228, reg 21(1)(f)
This requires the OEIC to provide confirmation of the categorisation under COLL of the proposed change as well as a revised draft of the prospectus and, where applicable, key investor information documentation.
Board meeting of the OEIC
Unless not required by the OEIC's instrument of incorporation, a board meeting must be held approving the change of depositary and the necessary documentation to effect the change.
Disclosure of circumstances
For UCITS and NURS funds, COLL 6.5.10(R) requires that the retiring depositary inform the new depositary of any circumstances which have been informed to the FCA.
Documentation effecting the change of depositary
Typically, the following documents will be entered into in respect of the change:
- deed of retirement and appointment
- deed of indemnity (in relation to any liabilities arising before the change of depositary and entered into by the retiring depositary and the new depositary); and
- new depositary agreement
Revision of OEIC documentation
The OEIC's prospectus will have to be revised and submitted to the FCA for approval. In addition, key investor information documents, disclosure documents pursuant to Article 23 of the AIFMD (for QIS and NURS funds) and any relevant marketing materials must also be revised.
Implement operational transition plan and communications plan
The relevant arrangements as regards the custody and registration of assets, settlement of transactions, income collection, exercise of voting rights and income distribution must be implemented and will be achieved through considerable co-operation between the retiring depositary and the new depositary.
Statement of circumstances
The retiring depositary may submit to the OEIC a statement confirming either the matters which it feels should be brought to the attention of the shareholders or that there are none.
This must be provided to shareholders within 14 days, with a copy sent to the FCA, unless the OEIC otherwise applies to court.
Notification on Form FN must be provided by the ACD within 14 days of the change of depositary.
Notification to shareholders
As noted above, a change in depositary is likely to be categorised under COLL as a notifiable change, and as such should be communicated to shareholders in an appropriate manner and timescale.