The side pocket gives authorized fund managers the option to segregate investments that are difficult to evaluate or sell from other key investments in the fund, which are subject to financial sanctions with respect to Russia by the UK, other G7 countries and the European Union. .
The FCA said the decision to discuss the move was prompted by a “challenge” faced by fund managers in the context of widespread global sanctions and disruptions affecting Russian and Belarusian assets. The short consultation period ends on Monday, May 16, 2022.
The side pocket allows new investors to enter the fund without exposure to Russian assets and allows existing investors to repay the remaining investments, while keeping illiquid Russian assets segregated. Assets held in side pockets are often marked as zero, but existing investors retain the right to their final value.
Side pockets provide an authorized fund manager with the ability to separate the affected investments from other planned assets in the fund. Existing stock classes do not contain any affected investment values and new stocks will be created whose values are based on the affected investment values. The existing unit holder at the time the side pocket is created receives a unit of the side pocket class. The intent of the FCA is to allow new investors to enter the Fund and expose them to the investments that are affected. Funds available to end current trading suspension for existing investors to sell shares related to unaffected assets.
The regulatory body’s side proposals are limited to assets that have become illiquid as a result of Russia’s invasion of Ukraine, and their use by authorized fund managers is optional. Managers must ensure that assets are valued fairly and accurately and that subscriptions and redemptions are made at fair prices.
Elizabeth Budd, investment fund expert at Pinsent Masons, described the proposal as “very unusual in the context of approved funds.”
“The FCA’s focus on side pocketing for UK UCITS to address the impact of the Ukraine conflict on these funds helps to provide greater certainty, following announcements by European regulators, including Luxembourg’s CSSF. is. specific criteria. The Central Bank of Ireland is now considering its position on Ireland.”
“Introducing a side pocket without amending the FCA’s COLL rulebook is likely to be a fundamental change that requires a shareholder vote or at least 60 days advance notice. The proposal would potentially allow approved fund managers to meet certain very detailed conditions that could treat the introduction of a side pocket as a material change without the need for 60 days’ notice. Through this, managers will be able to implement it relatively quickly once the government comes into power,” he said.
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