International Funds: A practical guide (Securities Institute Global Capital Markets)

241 Pages·2004·0.77 MB·English

by  Catherine Turner

International Funds: A Practical Guide to Their
Establishment and Operation
This Page Intentionally Left Blank
International Funds: A
Practical Guide to Their
Establishment and
Operation
Catherine Turner
AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD
PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO
Elsevier Limited
First published 2004
Copyright © 2004, Catherine Turner. All rights reserved
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Contents
Introduction ix
Part 1 Principles of Fund Management 1
1 The concept of collective investment schemes 3
1.1 What is a FUND? 3
1.2 Capital structures 7
1.3 Legal structures 8
1.4 The size of the funds universe 8
1.5 Origins: the first collective investment vehicles and the
emergence of a funds industry 9
1.6 Purposes, advantages and disadvantages of collective
investment schemes 11
1.7 The market for funds – institutional, retail, specialist 16
1.8 The role of funds as a node between the investing public and
the capital markets 17
1.9 Listed funds 20
1.10 Fund categorizations 24
1.11 Matching investors’ objectives 25
2 Different fund structures 39
2.1 The different capital structures: open- vs. closed-ended schemes 39
2.2 Legal structures: corporate, trust-based, partnership and
contractual vehicles 43
2.3 ‘Onshore’ vs. ‘offshore’ vs. ‘international’ 49
2.4 ‘Umbrella fund’ structures 50
2.5 Protected Cell Companies 51
2.6 Feeder funds 52
2.7 Funds-of-funds 55
2.8 Exchange traded funds 56
3 The regulatory environment 58
3.1 Recap: the regulatory definition of a fund 58
3.2 Regulation of schemes, and applicable exemptions 59
3.3 Regime for functionaries, and applicable exemptions 61
3.4 Compensation schemes 62
3.5 Advantages and disadvantages of regulated status 63
3.6 Applying for a license, and applicable exemptions 65
3.7 ‘Fit and proper’ status – sponsors, service providers 67
3.8 Ongoing supervision 69
3.9 Investor due diligence requirements 70
3.10 Recognition regimes for foreign schemes 74
vi Contents
3.11 The rationale for investment restrictions 75
3.12 Typical restrictions on securities funds 76
3.13 Typical restrictions on money market funds 80
3.14 Restrictions on feeder funds 80
3.15 Restrictions on funds-of-funds 81
3.16 Restrictions on futures and options funds (FOFs) 81
3.17 Restrictions on geared futures and options funds (GFOFs) 82
3.18 Restrictions on property funds 82
3.19 Umbrella funds 83
3.20 Investment trusts 83
3.21 ‘Offshore funds’ 87
3.22 Hedge funds 88
Part 2 Practical Aspects of Fund Management 91
4 Overview of the operation of a fund 93
4.1 The fund sponsor 93
4.2 The fund manager 94
4.3 Managed managers 97
4.4 The Authorized Corporate Director 98
4.5 The investment adviser or manager 99
4.6 The directors of the fund company (OEICs and investment
trusts, not unit trusts) 100
4.7 Fund administrators 101
4.8 Registrar 103
4.9 The trustee (unit trusts) 103
4.10 The custodian (OEICs, investment trusts, not unit trusts) 107
4.11 The regulator 108
4.12 Distributors 109
4.13 Auditors 109
4.14 Legal adviser 111
4.15 Brokers 111
4.16 Insurers 112
4.17 Putting it all together 113
4.18 Tax considerations and the allocation of responsibilities 114
5 Valuations and pricing 116
5.1 Open-ended schemes – first principles of pricing 116
5.2 Why are valuations carried out? 117
5.3 What are the various elements of a valuation? 117
5.4 Recap: the basis of NAV-based pricing 118
5.5 Typical dual pricing models 119
5.6 Simple practical example of a dual pricing valuation 121
5.7 Dual priced funds and ‘spreads’ 121
5.8 Calculating yields 122
5.9 Adjustments to the spread on dual priced funds: pricing on a
‘Bid’ or an ‘Offer’ basis 122
Contents vii
5.10 Typical offshore pricing models 124
5.11 Simple practical example of an offshore fund 126
5.12 Adjustments to single prices: dilution levy (also known
as ‘Dealing Charge’) 127
5.13 Valuation checks 128
5.14 Consequences of over- and under-pricing 129
5.15 Forward and historic pricing 130
5.16 Valuation patterns for funds with income and accumulation
units/shares 131
5.17 Pricing of closed-ended funds (e.g. investment trusts) 132
5.18 Publication of pricing data 132
6 Documentation 134
6.1 Introduction 134
6.2 Trust Deed (unit trusts only) 135
6.3 Declaration of trust 138
6.4 Memorandum and Articles of Association
(OEICs, not unit trusts) 139
6.5 Partnership agreement (funds established as partnerships) 141
6.6 The management agreement 141
6.7 Other agreements 142
6.8 The offering documents and scheme particulars 142
6.9 Key features document 144
6.10 The fund’s license/authorization 145
6.11 Application/registration details form 145
6.12 Contract note 147
6.13 Cancellation forms 147
6.14 Unit/share certificates 148
6.15 Form of renunciation 149
6.16 Report and accounts/financial statements 149
6.17 Income distribution voucher/warrant 152
6.18 Grant of probate 152
6.19 Power of attorney 153
7 The dealing desk 154
7.1 Communications with existing and prospective investors 154
7.2 Placing investor deals 155
7.3 Other dealing room activities 158
7.4 Registration 161
7.5 The manager’s box 162
7.6 Pricing errors 163
7.7 Large deals and their impact 164
7.8 Equalization and performance fees 166
8 Income distributions 170
8.1 Nature and source of income 170
8.2 Income distribution mechanics 171
8.3 Price of shares/units 171
viii Contents
8.4 Dividend/distribution re-investment 172
8.5 How often are distributions made? 172
8.6 Responsibility for the calculation and payment of distributions 172
8.7 Calculation of distributions 173
Part 3 Markets and Developments 175
9 Domestic funds regimes 177
9.1 The UK market 177
9.2 The US market 183
9.3 The European market 187
10 Distribution regimes: selling foreign schemes into
regulated jurisdictions 193
10.1 The regulatory environment: recognition of foreign schemes 193
10.2 Overseas schemes: regulatory distribution issues in the
United Kingdom 194
10.3 Facilities to be maintained by foreign schemes recognized in
the United Kingdom 197
10.4 The UK distributor status regime 198
11 A comparison of some international funds centres 200
11.1 Bermuda 200
11.2 The British Virgin Islands 203
11.3 Cayman 203
11.4 Dublin 204
11.5 Guernsey 205
11.6 Isle of Man 207
11.7 Luxembourg 210
12 Miscellaneous 212
12.1 Insurance issues: when things go wrong 212
12.2 Some useful checklists 214
Index 227
Introduction
The purpose of this book is primarily to give those new to fund management an
understanding of the operational issues with which they will need to be familiar –
whether as potential fund sponsors, new entrants to the third-party administration
industry, regulators, legal advisors or in any other capacity.
However, the book is also intended to serve as a more permanent reference manual
for those engaged in fund management and administration issues, especially where
they may be involved in a relatively specialized area such as fund accounting and
would benefit from a broader overview of the issues. It seeks to give an overview of
the practical issues to be taken into account for a broad range of aspects of fund man-
agement – from set-up and licensing to pricing, distribution, dealing and so on.
The first part of the text takes readers from the start-up phase – indeed, pre-start-up –
through to the selection of an appropriate jurisdiction, fund structure and team of advis-
ers and service providers. The second section deals with ongoing operational matters.
Italso deals with a range of problems which may arise, the risks that sponsors and opera-
tors may run, and what do to when things go wrong. The third and final section of the
book takes a look at some relatively recent developments, and compares the advantages
and disadvantages of certain jurisdictions.
The focus is intended to be on international funds, although reference is made to
various domestic regulatory and tax regimes. The range of jurisdictions is of necessity
not comprehensive, but aims to give readers a flavour of the material differences in
how funds can be operated in various territories, and to provide a roadmap for mak-
ing the right selection.