Julian Smith 21/11/2019 Honorary Treasurers Forum Charity Authorised Investment Funds (CAIFs)
History or if you’d like a slide • Common Investment Funds – deemed to be charities o To overcome breach of trust on inter-mingling trust property for investment purposes o To overcome 1961 Act (or other) limited investment powers o Governed by Charity Commission scheme • Anxiety of Charity Commission as regulator of ‘unauthorized’ investment funds • Go slow on new registrations • VAT considerations • Statutory restrictions • BUT CIFs still exist, and do not have to convert 2
What is a CAIF? • An FCA authorised fund and a registered charity • Taxed as a charity • ‘Special investment fund’ hence no VAT on management fees • Dual regulation by the FCA and the Charity Commission o FCA authorisation o FCA rules and oversight o Charity Commission registration o Charities Act 2011 and Charity law • Full range of FCA vehicles available (in theory) o AUT, OEIC and Authorised Contractual Scheme o NURS, UCITS or QIS • The Charity Commission has currently accepted an authorised unit trust can be a CAIF 3
Particular optional features of the CAIF • Advisory Committee o Consultative function o Not approved persons or charity trustees o Independent of the Manager and Trustee o Principal function is to represent the interest of unitholders and consult with the Manager and Trustee in carrying out that function o Role to be set out in constitutional documents and may include • Right to be consulted on certain matters including ‒ investment objective and policy, distribution policy, and fees and charges ‒ other matters as specified in the Trust Deed • Preparation of a statement to be included in the annual report • Right to call a unitholder meeting, which must be called by the Manager or Trustee on receipt of notice 4
Particular optional features of the CAIF • Advisory Committee o Additional provisions be set out in constitutional documents • The Manager to provide the relevant information to the Advisory Committee • Advisory Committee can be paid out of the scheme property an annual fee plus reasonable costs and expenses • The Manager to provide a report once a year to the Advisory Committee on matters which the Committee is mandated to consider • The Manager to attend at meetings with the Advisory Committee • Indemnity from the Manager 5
Particular optional features of the CAIF • Income Reserve Account o FCA rules allow for this for the CAIF o Conditions are that The purpose is to avoid fluctuations in income for allocation or distribution Limit of 15% can be transferred to the income reserve account in any one accounting period • Total Return Approach o Allows a CAIF to return capital as well as income as distributions o Permitted if used for the purpose of meeting a pre determined target return which is consistent with the investment objective and policy of the CAIF • Umbrella Structure 6
More recent developments • Charity Commission decision that all CAIFs must also be established as a common investment fund by a Charity Commission Order • This has the effect that CAIFs are subject to the provisions of sections 96-99 of the Charities Act 2011 • No property can be held by a CAIF under the model trust deed until the making of the Charity Commission Order • CAIF Trust Deed will need to refer to the relevant provisions of the Charities Act 2011 • Section 98(1) of the Charities Act 2011 sets out certain provisions which may be included in the governing documents o In our view these are enabling provisions o On interpretation where express provision is included then section 98(1) then a narrow interpretation should be followed o Example is Section 98(1)(d) which allows temporary borrowing • Two charities in support will be needed on final registration of the CAIF • Scottish and NI charities are eligible investors (drafting updated) (but not ‘foreign’ charities) • First CAIF registered on 12 December 2007 7
Creation of a new CAIF • https://www.theia.org/industry-policy/guidelines/industry-guidance • Charity Commission Pre Application o Draft CAIF documents, including Trust Deed and Prospectus o Charity Commission application form o Evidence of joint approach on conflicts management as between the Trustee and the Manager o Minded to approve letter • FCA normal fund application process o Form 242 o Supporting documents o FCA fee • Date Trust Deed • FCA authorisation order and FCA registration number issued • Charity Commission order and charity registration number issued • Apply to HMRC for recognition as a charity 8
Conversion of traditional CIFs to CAIFs • Additional issues to consider o Name – fund manager can be included in the name of a CAIF but does not have to be o Conversion process likely to require changes to the Scheme and Scheme Particulars of the CIF o Scheme of arrangement requires a 75% majority • https://www.farrer.co.uk/news-and-insights/the-charity- authorised-investment-fund-caif---the-authorised-fund-vehicle- specific-to-the-charity-sector/ 9
Contacts Grania Baird, partner Julian Smith, partner 020 3373 7443 020 3373 7432 grania.baird@farrer.co.uk julian.smith@farrer.co.uk 10
Farrer & Co LLP 66 Lincoln’s Inn Fields London WC2A 3LH +44(0)20 3375 7000 enquiries@farrer.co.uk www.farrer.co.uk 11
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