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Regulating Collective Investment Schemes

The Financial Supervision Act 1988 ("FSA"), which came into operation on 1 November 1988, contains the statutory framework for the regulation of Isle of Man of Collective Investment Schemes, more commonly known as unit trusts, mutual funds or open-ended investment companies. The FSA provides for the regulation of 3 classes of Collective Investment Scheme:-

Authorised Schemes

Any Collective Investment Scheme established in the Island which is to be promoted to the general public in the Island (or the UK by virtue of the Island's designated territory status) must be authorised by the Commission under Section 3 of the FSA. Authorised Schemes are subject to detailed regulation concerning their structure and operation. The principal Regulations governing Authorised Schemes are:-

Financial Supervision (Authorised Collective Investment Schemes) Regulations 2005

These Regulations provide for all aspects of the operation of an Authorised Scheme. These include such matters as the powers and duties of Managers and Trustees (in the case of an open-ended investment company scheme, its directors), the distribution of income, valuation of Scheme property, the cancellation and creation as well as the sale and repurchase of units, expenses, investment and borrowing powers and restrictions upon them, the contents of reports to unit-holders and share-holders, the requirements for meetings of unit-holders and share-holders, and the termination of Schemes.

Authorised Collective Investment Schemes (Compensation) Regulations 1988

These Regulations provide for the establishment of a Compensation Fund for investors if a Manager or a Trustee, of an Authorised Scheme becomes insolvent.

Every Authorised Scheme is required to have in the Island a Manager licensed under Section 3 of the Investment Business Act 1991 and a separate trustee, which must be a banking institution licensed under Section 6 of the Banking Act 1998.

Authorised Collective Investment Schemes (Scheme Particulars) Regulations 1988

These regulations provide for the matters which must be included in the Scheme Particulars document eg. details of the manager, trustee, investment adviser, investment objectives and restrictions, dealing procedures, nature of expenses.

International Schemes

Any Collective Investment Scheme established in or operated from the Isle of Man which is not an Authorised Scheme is regarded as an International Scheme, and therefore subject to the provisions of Section 11 of the FSA. International Schemes may not be promoted to the general public in the Isle of Man (or the UK).

The principal Regulations governing International Schemes are:-

Financial Supervision (International Schemes) Regulations 1990

These Regulations prescribe what matters shall be provided for in the documents constituting an International Scheme. The Regulations do not seek to be prescriptive as to how those matters must be dealt with. The intention of the Regulations is to ensure all material particulars relating to a scheme and its operation are disclosed to potential investors.

Financial Supervision (International Schemes) (Advertising & Scheme Particulars) Regulations 1995

These regulations require the operators of International schemes to produce scheme particulars which contain the information specified in the regulations such as details of the manager, trustee, investment adviser fees and expenses, constitution and investment objectives, investment, hedging and borrowing powers, limits and restrictions, valuation, pricing and dealing procedures. Whilst the regulatory regime governing International Schemes does not impose the same detailed prescriptive regulations as apply to Authorised Schemes, the regulations are designed to provide certain minimum investor protection safeguards and to ensure strict disclosure of all material matters to potential investors. Every International Scheme is required to have in the Island a manager licensed under Section 3 of the Investment Business Act 1991 as well as an independent trustee which must be either a banking institution licensed under Section 3 of the Banking Act 1998, or an Authorised Trustee in another jurisdiction which has been approved by the Commission.

Professional Investor Fund

The Professional Investor Fund (PIF) is a sub-category of International scheme which is available only to professional investors who are generally market professionals and who have net assets in excess of $1 million. The minimum investment in a PIF is $100,000.

A PIF is not specifically required to have a manager or trustee but the day to day operation of a PIF must be carried out in the Island by an approved person specifically licensed to carry out this activity.

A PIF is not subject to specific documentation regulation. It is not subject to any regulatory restrictions on its investment and borrowing powers. The Offering Document must contain sufficient information to enable an informed investment decision and must contain mandatory risk warnings.

Experienced Investor Fund

The Experienced Investor fund (EIF) is a further sub- category of International scheme and is subject to a form of regulation that is aimed at the “Experienced Investor”. An “Experienced Investor” is defined as “a person who, in relation to any EIF, is sufficiently experienced to understand the risks associated with an investment in that fund”.

EIFs are exempted from certain of the legal and regulatory requirements that are generally applicable to International Schemes through the Financial Supervision (Experienced Investor Fund) (Exemption) Order 1999 (“the Order”) (link to the Order).

In accordance with Regulation 4 of the Order, an EIF must:-

1) Be operated in the Isle of Man by an approved person specifically licensed to carry out this activity;

2) Have a trustee or custodian which must be independent of the approved person and disclose the arrangements for the custody of the assets;

3) Have an offer document that has been approved by the approved person and which must contain all material information to enable an investor to make an informed judgement about the merits of investing in the EIF;

4) Include within its application form a statement that must be signed by the investor declaring that he/she is an “Experienced Investor” and that he/she understands and fully accepts the risks associated with an investment in such a scheme;

5) Have its annual reports and accounts audited;

6 ) Disclose prescribed risk warnings in the offer document (see below); and,

7) Within 14 days of an EIF’s launch, notify the Commission and forward to it a copy of the offer document.

The following disclosure statements must be included in an EIF’s offer document in accordance with Regulation 4(h) of the Order –

“An EIF is not subject to approval in the Isle of Man and investors in such funds are not protected by any statutory compensation arrangements in the event of the fund’s failure. The Financial Supervision Commission does not vouch for the financial soundness of the fund or for the correctness of any statements made or opinions expressed with regard to it”.

Whilst the EIF itself is not subject to regulation, the regulatory focus is on the approved person who must be licenced by this Commission to undertake this activity. The Commission has a strict licensing policy, details of which may be viewed on the Commission’s website. Once licensed, the approved person is subject to rigorous on-going regulatory and prudential supervision.

In accordance with paragraph 4(8)(e) of the Order, all material information in relation to an EIF must be disclosed in the offer document, so that the investor may make an informed judgement before investing into the fund.

The Commission is not responsible for approving the content of an EIF’s offer document. This is the responsibility of the directors of the fund (where the fund is established in corporate form) and the approved person. Also, except for licensing the approved person of an EIF, the Commission does not approve or vet the other functionaries of an EIF (e.g. promoter, investment manager, directors).

Before subscribing for shares in an EIF, the investor must complete the application form. This form requires the applicant to confirm that he is an Experienced Investor and understands the risks associated with the investment. The applicant must also warrant that he has read and understood the offer document.

Overseas Fund

The Overseas Fund is a further sub- category of “international scheme. Such schemes are unregulated schemes in that they are exempted from the legal and regulatory requirements that apply to other international schemes (including PIFs and EIFs).

The Financial Supervision (Overseas Funds) (Exemption) Order 2003 (Appendix C12) (“Overseas Funds Order”) came into operation on 1st May 2003 and provides an exemption from certain provisions of section 11 of the FSA for schemes which are constituted or incorporated outside the island and managed or administered from the Island, subject to certain conditions specified in the Overseas Funds Order.

The Overseas Fund Order provides a flexible regime in that Overseas Funds can either be subject to the legislation in place under section 11 of the FSA or not be subject to any of the legislation.

Although an Overseas Fund is not subject to approval or regulation by the Commission, the operator of an Overseas Fund must be specifically licensed to undertake this activity.

Overseas Funds are required only to be notified to the Commission. The Commission does not receive the offer document and does not approve or vet the functionaries of an Overseas Fund (e.g. promoter, investment manager, directors).

Exempt International Schemes

Exempt International schemes are not subject to the provisions of section 11 of the FSA. They must have less than 50 investors and their relevant constitutional documents should expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Such schemes are regarded as private arrangements and are not subject to regulation. The manager of more than one exempt scheme must be licensed.

Recognised Schemes

Collective Investment Schemes which are managed in or authorised under the law of another country or territory outside the Island may not be promoted to the general public in the Island unless they have been granted recognition by the Financial Supervision Commission under Sections 12 or 13 of the FSA. Schemes applying for recognition in the Island are required to comply with the following Regulations:-

Financial Supervision (Recognised Schemes) (Notification) Regulations 1988

These Regulations specify the information and documents that must be provided to the Commission when applying for recognition on behalf of a Scheme.

Financial Supervision (Recognised Schemes) (Facilities in the Island) Regulations 1988

These Regulations require the operator of a Recognised Scheme to maintain at an address in the Island specified facilities for the service of investors.

Further information about the regulation of collective investment schemes can be obtained in the Commission's Online Handbook.

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