UK Regulator Publishes Final Rules On FAIFs
Tuesday, March 02, 2010

The UK Financial Services Authority (FSA) has put in place rules allowing a new type of collective investment scheme to be marketed and distributed to retail investors, known as ‘Funds of Alternative Investment Funds’ or FAIFs.

A FAIF can invest up to 100% of its assets into other collective investment schemes. The new rules allow a FAIF greater flexibility as to the proportion of its assets invested in particular types of underlying scheme. For example, a FAIF could invest up to 100% of its assets in a selection of hedge funds based in non-EU countries.

When it takes advantage of this additional flexibility, the FAIF manager must carry out initial and ongoing due diligence on the underlying schemes it is investing in.

The new rules also allow ‘master/feeder’ structures. Here, the FAIF ‘feeds’ the majority of its assets into a master scheme, which in turn invests in a wider range of underlying schemes. The master scheme may be based in the UK or abroad. Where a master/feeder structure is used, the manager of the UK-authorized FAIF (the feeder) is responsible for ensuring the master scheme operates consistently with the FSA rules specifying the investment powers and borrowing limits for FAIFs.

As any underlying schemes a FAIF may invest in may have infrequent dealing periods, a FAIF may set up its redemption arrangements so that up to 185 days elapse between the acceptance of a redemption order and the payment to an investor of the redemption proceeds. The FAIF’s documentation will set out its unit/share issue and redemption arrangements.

The new regime, which comes into effect from March 6, 2010, has been welcomed by the Investment Management Association (IMA), the trade body for the UK's GBP3 trillion asset management industry, which has noted that the FSA has "taken on board IMA's earlier comments to allow for flexibility in fund structure alongside the necessary investor protection measures."

Julie Patterson, Director of Authorized Funds & Tax at the IMA, commented: "The introduction of FAIFs is good news for product innovation and investor choice because it enables investors to gain access to a wider range of investments. We also welcome the production by the FSA of a factsheet on FAIFs for intermediaries

Patterson added: "The new regime will enhance the UK's position as a domicile for a wider range of funds. Today's publication is the culmination of much hard work by the authorities and the Investment Management Association."