By guest author, Simon Webber, director of StypersonPOPE.
"How can a non-MiFID firm of IFAs promote units in anWhat is the effect of MiFID on firms providing investment services related to a UCIS?
unregulated collective investment scheme to a UK client?"
UK firms are required to follow the Europe-wide rules laid out in the Markets in Financial
Instruments Directive ("MiFID”) if they carry on an 'Investment Service' and if no exemption applies.
Investment Services include, inter alia:
- Reception and Transmission of orders; and
Whilst these two activities are usually associated with the promotion of an unregulated collective
investment scheme ("UCIS”) by IFAs, the UK Treasury has opted to implement the 'Article 3
Exemption' to MiFID.
This exemption applies to firms which meet the following conditions:
• they do not hold clients' funds or securities;
• they do not provide any investment service other than reception and transmission of orders
or investment advice, or both, in relation to transferable securities and units in collective
investment undertakings; and
• they transmit orders only to a MiFID investment firm (among other types of firm not
relevant to this purpose).
[Note 1] As long as the firm to which orders will be transmitted is a
What is the effect of MiFID on firms promoting a UCIS?
MiFID investment firm, IFAs otherwise enjoying the Article 3 exemption
will continue to be able to do so when providing investment advice
and receiving and transmitting orders in relation to a UCIS.
The promotion of a UCIS is subject to the restriction in §238 of the Financial Services & Markets Act
("FSMA”). Essentially, no firm can promote a UCIS to "the general public” but both the Treasury
(through the 'CIS Exemption Order') and the FSA (through 'COBS 4.12') are empowered to create
exemptions to this prohibition. MiFID does not affect the categories of exempt investor but it does
affect the tests applied to the marketing statements and documents ("financial promotions”) which
may be used.
For a non-MiFID firm, the promotion of a CIS will always be for non-MiFID business. However, a
MiFID firm must consider whether the promotion is for MiFID business or not.
If it is not MiFID business, and a firm uses a CIS Exemption Order exemption, the full financial
promotion rules do not apply (but the general rules relating to communications with clients still do,
including the "fair, clear and not-misleading” rule). If it is not MiFID business, and a firm uses a COBS
4.12 exemption, then the financial promotion rules in COBS 4 apply as they are relevant to that
financial promotion (some only apply to MiFID business, others only to retail clients).
For firms carrying on MiFID business, the relevant MiFID-derived rules in COBS 4 will always apply to
that firm (even if the exemption to §238 on which they are relying is one in the CIS Exemption
Order). MiFID firms should also bear in mind that they are responsible for establishing that UCIS
promotional material complies with the financial promotion rules.
[Note 2] If the financial promotion describing a UCIS is compliant withExemptions to the FSMA §238 Restriction
the financial promotion rules, any firm (whether carrying on MiFID
business or not) will be able to use it in promoting that UCIS to an
investor exempt from the FSMA §238 Restriction.
The restriction provides that "An authorised person must not communicate an invitation or
inducement to participate in a collective investment scheme”. This does not apply to an authorised
or recognised schemes but does apply to a UCIS. There are a number of exemptions to this
restriction which fall into two parts, those created by the Treasury (the 'CIS Exemption Order') and
those created by the FSA ('COBS 4.12').
CIS Exemption Order
Under section 238 (6), the Treasury have defined a number of further categories of investor to
whom a UCIS can be promoted without breaching the restriction in FSMA. These are similar (but
not identical) to the exemptions under section 21 which apply to unauthorised persons. Like those
exemptions, the investor must qualify for inclusion in the relevant category before the promotion is
made. The categories are:
- Existing investors in the scheme;
- Investment Professionals, being
◦ authorised persons,
◦ exempt persons (not including Appointed Representatives but including some
◦ investors whose 'ordinary activity' involves investing in unregulated schemes,
◦ Governments, local authorities, and international organisations,
- Certified Sophisticated Investors whose certificate is in respect of a UCIS and has been signed by an authorised person other than the scheme's operator;
- High Net Worth Companies or Unicorporated Associations; or
- an association made up predominantly or wholly of HNW Companies and Sophisticated Investors
For a UCIS that invests wholly or predominantly in the shares or debentures of unlisted companies,
there are further categories of investor who are exempt from the restriction. This exemption is
limited to promotions made by authorised firms. These are:
- Certified High Net Worth Investors (who can self-certify); and
- Self-Certified Sophisticated investors.
By these rules, the FSA have defined eight categories of investor to whom a UCIS can be promoted
without breaching the restriction in FSMA. Unlike the exemptions which are provided for under
Section 238 (6) (above), the promotion can be made, not only to investors who are known to fall into
one of the eight categories, but also when made:
"in a way that may reasonably be regarded as designed to reduce, so far as possible,
the risk of participation in the collective investment scheme by persons who are not in
The promotion should, of course, be made only to people whom the promoter believes will meet
the criteria and the document should dissuade those who do not meet the criteria from applying.
[Note 3] Ultimately, if COBS 4.12 is being relied upon, an authorised
firm (eg the operator or promoter) must have processes and procedures
in place to ensure that both promotions and applications are appropriately
filtered and that any investors who do not meet the criteria are
prevented from becoming participants.
The eight categories created by COBS 4.12 can be summarised as including investors who are:
1. already participants in a scheme which is 'substantially similar' in risk profile and assets;
2. judged as 'suitable' by an authorised person of which they are a client; *
3. eligible to invest in a scheme under the Church Funds or Charities Act legislation;
4. eligible employees of the firm;
5. members of the Society of Lloyds (in respect of underwriting insurance business);
6. exempt from the General Prohibition on carrying out regulated activities (in respect of a
scheme which relates to the subject of their exemption), not including Appointed
7. eligible counterparties or professional clients; ** or
8. subjects of an 'adequate assessment' of their expertise, experience, and knowledge. ***
In the vast majority of cases, the most useful categories above will be 2, 7 or 8:
* For category 2, investors will be judged 'suitable' typically by an IFA or other authorised firm with
whom, they have a relationship and who will have to take into account their knowledge, financial
situation, and investment objectives. The scheme's operator will probably seek an undertaking from
the firm in question that such a judgement has been reached.
** For category 7, firms may use the non-MiFID client categorisation regime even if the firm will be
within the scope of MiFID when it makes the promotion.
*** For category 8, an 'adequate assessment' can be carried out by an authorised firm which will
request information from the prospective investor in order to gain:
"reasonable assurance, in light of the nature of the transactions or services envisaged,
that the person is capable of making his own investment decisions and understanding
the risks involved”.
This information will usually be gathered by way of an assessment questionnaire which, once
completed and returned, will be analysed by the assessing firm according to criteria designed to
ascertain the expertise, experience and knowledge of the prospective investor. This will result in a
positive or negative assessment and the investor's subscription application will be accepted or
Please note that this paper does not constitute legal advice and due to its limited scope and summary
form, is intended only to be an introduction to the subject matter.
Posted by Tony Sanchez on 11/02/2011 @ 08:32:02