Fund Documentation

Overview

Funds are established under various types of constitutional documents.  Constitutional documents may be the Memorandum and Articles of Association of an open or closed-end company.  It may be a trust deed, contractual arrangement or partnership agreement.

Operating agreements would be entered between the trustees and manager or the fund and manager.  Agreements will be entered between the company and a custodian.  Third-party agreements will also be entered with investment managers, investment advisors and third-party administrators.

The other key agreements will include a custodian agreement if the fund is a company and an investment management or/advisory agreement if one is appointed, and an administration agreement if the manager does not carry out administration. There may be a registrar agreement if this function is delegated by the trustee or manager.

Unit Trusts

A unit trust is established by a trust deed.  This is usually made between the trustee and the manager.

The trust deed will set out the name of the fund and the category of fund to which it belongs.  It will contain a declaration of trust confirming the property of the fund is held by the trustees on trust for the investors in proportion to the relevant unit.

The fund will include a statement confirming that unit holders are not liable to make any further payment to the fund beyond their initial subscription.  A fund will set out basic matters such as the applicable law and currency.

Trust Deed

The trust deed will set out the duration of the scheme.  It may provide for the manager’s charges both initially and on exit.  It may provide for initial and periodic management fees.

The deed will set out the fund’s investment objective and policies.  These may be curtailed by regulatory requirements.

The deed will set out the funds’ investment powers.  It may provide for the issue of different types of units.  It may provide for the calculation of the net asset value.

The trust deed is likely to provide for the issue and redemption of units, distributions of income, accounting and audit requirements.

A provision for winding up in certain events may be provided. The trust will set out the order in which assets are to be applied.   The fund will define the order of entitlement and winding up.

The trust deed may provide that the fund is available only to certain types of investors.  It may exclude certain classes of persons for regulatory purposes. The trust deed may deal with restrictions on the fund and its investment. It may spell out the trustee’s duties and obligations.  It may provide for the appointment of substitute trustees.

Company Constitution

Where a fund is established as a company, the Memorandum and Articles of Association substitute for the trust deed and make up its constitution.  They deal with how the company deals with the outside world and govern internal arrangements, including the rights of investors/shareholders and the appointment of directors/managers.

Broadly the same matters as set out above, will be set out in the Memorandum and Articles of Association.  They will deal with issues such as classes of shares and their rights, shareholder’s meetings, director’s responsibility, management and the custodian.

It may provide for dealings in shares and the calculation of fund share value.  It is likely to provide for financial accounting, annual accounts and the appointment of fund auditors and directors.

Where the fund is constituted as a partnership, the partnership agreement takes the place of the Memorandum and Articles of Association or the trust deed.  It will deal with issues similar to those set out above.

Management Contract

A management contract is usually entered between the fund and the fund manager.  Where the fund is established as a trust, the trustee will be a party.  It sets out the powers, functions and duties of the manager.

The manager’s obligations will be set out.  They will include management of the assets, arrangement for subscriptions and redemptions with investors, calculation of fund values from time to time, liaison with trustee and custodians where it deals with settlements, for registration of shareholdings, payments of dividends, distributions, production of books of accounts, records.

It will make provision for the manager’s remuneration, including charges, exit fees, annual charges and performance-related fees.

Prospectus / Offering Documenet

A fund may be promoted to the public by way of an offering document.  In the case of a company, this will be a prospectus.  In the case of a unit trust or limited liability partnership, an information document, commonly referred to as scheme particulars, may be produced.

The purpose of the offering documentation is to give an investor appropriate information on the fund to enable him to make an informed decision.

The manager will prepare the offering document and update it from time to time.  The prospectus carries legal obligations for the directors and the fund.  The shares are offered on the basis of the prospectus.

The prospectus will usually include:

• basic details of the fund, including its legal form, name, regulatory status, and place of incorporation;
• provisions regarding meetings and shareholder’s information,
• particulars of entry, periodic and exit charges,
• details of charges and expenses;
• details of key service providers, including administrators, investment advisors, directors, and legal advisors;
• details of the fund’s objectives and investment policies;
• restrictions on investments,
• details on the issue and redemption of shares and units;
• details of dividends and distribution policy;
• valuation of shares,
• settlement
• purchases and redemptions;
• any thresholds required to invest, details of statutory compensation schemes,
• details of any statutory ombudsmen.

Prospectus/ Offering Issues

The offering document should be made available to investors and prospective investors without charge.  Regulated funds are not generally allowed to sell or offer units until the prospectus has been approved by the regulator and made available.  This may be relaxed in the case of dealings with regulated intermediaries.

Managers and other key individuals may be responsible by law for he accuracy of the document.  They must ensure that there are no false or misleading statements and no omissions of requisite information.  When they become aware that the offering documents are incorrect, they must inform the investors of the correct position and issue an amended document.

Some jurisdictions allow a key features document to be issued.  This is a summary of the key features of the funds or scheme that may be used for marketing purposes.

If a fund is regulated, it will need to be licensed by the appropriate regulator.  It may require to be regulated in more than one jurisdiction, if it is being marketed in them.  Under EU law, certain classes of funds may be marketed throughout the EU on the basis of regulation in one State under a common scheme.

Investors may subscribe by completing an application form with the information required by the fund.  This will include anti-money laundering documents and other obligations to the establishment of the subscriber’s identity.

The EU Savings Directive requires managers operating in non-EU countries to ensure they obtain sufficient information on the relevant particulars and addresses of investors.

Issue of Units etc.

Following the sale or purchase, the manager will issue a contract note setting out the details of the transaction.  This may be required by law.

In some circumstances, there may be a right to cancel the transaction within a certain time.  However, it may not be exercised to recoup an investment loss and in such event, there would be an adjustment to reflect any shortfall in value.

Funds may issue certificates but more commonly, the units are held electronically on a register.

Accounts & Reports

Regulatory and investors’ commercial requirements dictate that there be annual, semi-annual and other accounts and reports.  The manager is obliged to to prepare them, retaining the appropriate service providers.  The prospectus rules may make periodic and other reporting requirements in respect of the funds.

Regulation may prescribe the form and content of the financial statements. They may also require statements by the trustee and custodian confirming compliance with the fund’s terms and constitutional documents and confirmation from the auditor on compliance with regulations. The annual report and accounts allow the manager to communicate with investors, current and potential.

The annual report will include an auditor’s report.  This is a key part of the report and requires confirmation that the accounts give a true and fair view of the funds’ financial position.  The auditor may have obligations to the regulator to disclose noncompliance or failures of compliance.

The trustee/custodian’s report must confirm whether the manager has managed the fund in compliance with the applicable regulation as well as the fund’s constitutional documents.  It must set out what steps have been taken to deal with any failure.  The directors’ report must set out significant events taking place during the relevant period.

Financial statements must be prepared in accordance with appropriate accounting standards.  They must show a balance sheet, revenue account and capital account.

The first two accounts equate to standard financial accounts.  The capital account shows movement in the value of the fund’s assets.

The investment manager/advisor’s report sets out details in relation to performance, perhaps against benchmarks. It may comment generally on the relevant investment markets. Some managers produce shorter versions of the annual report with key information only.