Europe: FCA Consults on Permitting Side Pockets for UK Retail Funds Affected by Conflict in Ukraine

By: Andrew Massey and Robert Lloyd

On 28 April 2022, the FCA published consultation paper 22/8 on proposals to protect investors in UK authorised funds by allowing authorised fund managers (AFMs) to create side pockets in the form of separate unit classes for funds affected by the conflict in Ukraine.

The proposals are novel for UK authorised funds in at least two respects. Firstly, they would allow side pockets to be created without requiring a shareholder extraordinary resolution or at least 60 days’ prior notice. Secondly, the AFM would be able to suspend dealings in the unit class formed to create the side pocket without having to suspend dealing in the entire fund.

However, the side pockets could only be created for funds holding investments affected by Russia’s invasion of Ukraine, including investments subject to sanctions. In addition to sanctioned investments, the concept of “affected investment” extends to certain investments with exposure to Ukraine, Russia or Belarus since, as the FCA notes, certain securities have been suspended, or become illiquid or untradeable, and determining accurate and reliable valuations for certain assets has become challenging.

If implemented, AFMs would be able to separate affected investments from the fund’s other investments. Investors would be issued with units in one or more new “side pocket” unit classes whose value would be determined only by reference to the affected investments. The FCA’s stated intention is to allow:

• new investors to enter the fund without sharing in the exposure to the affected investments;
• existing investors to sell the units which relate to assets that are not affected investments; and
• some funds to end their current suspension of dealing.

The FCA has requested feedback on its proposals by 16 May 2022, and is aiming to publish a final policy statement and final Handbook rules and guidance as soon as possible.