Guidance Note - Trading Platforms and Investor Declarations for Specialist, Qualifying and Experienced Investor Funds

Guidance Note - Trading Platforms and investor declarations for Specialist, Qualifying and Experienced Investor Funds March 2016 TRADING PLATFORMS THE SCENARIO Financial advisers are increasingly utilising trading platforms when servicing customers. This paper establishes a new process for investor declarations when a UK Regulated Financial Adviser is arranging customer investments into qualifying, specialist and experienced investor funds through a UK Regulated Trading Platform. A typical arrangement through trading platforms – The UK Regulated Financial Adviser (“RFA”) advises the customer (and undertakes normal customer due diligence including suitability, status of the customer and Anti￾Money Laundering) and the customer agrees to proceed. – The deal is placed through the external automated platform (for the purposes of this paper this is restricted to UK FSA Regulated Trading Platforms (“RP”). – The platform aggregates deals and makes the investment with the fund. – The platform has no involvement with the customer.

 Access to RP to view the portfolio etc
 Invests on pooled basis in platform’s name  Holds assets platform to on client’s account  Provides advice  Undertakes customer due diligence  Puts client on to the RP  Activates deals  Receives commission/fee from the RP  Makes payment to the RP (direct from payment from client’s bank or from RFA’s client account)  Aggregates deals  Invests in the fund on a pooled basis  Recorded on the fund’s share register  Processes application  Maintains funds records The issue This scenario does not fit with the standard regulatory requirements for sign offs in qualifying, specialist and experienced investor funds. The platform is dealing on an “automated basis” on the instruction of the RFA and has no direct contact with the client (see the diagram above). As such neither party can give a part 2 declaration that the underlying client meets the definition for a qualifying/ specialist fund. The solution A standard modification has been approved whereby normal application signoffs can be replaced providing both the RFA and the Trading Platform are regulated in the UK. This modification is as follows:

1. Terms of Business with the Trading Platform
   The trading platform (UK REGULATED) must enter into terms of business with the fund (it is placing investments on behalf of investors who are advised by their UK Regulated IFA’s). This terms of business confirmation must include the following -

“I/we confirm that ―
(a) I am/we are a qualifying/specialist investor as defined on page [ ] of the offering document of [name of fund] dated [ ]; and (b) I am/we are sufficiently experienced to understand the features and risks associated with an unauthorised and unapproved fund of this type; and (c) I/we have read and fully understood the offering document, including in particular the information on the risks associated with the fund (contained on pages [X – X] of the offering document); and (d) I am/we are investing in the qualifying/ specialist fund on behalf of another person/ other persons under instructions from a UK Regulated Financial Adviser / UK Regulated Financial Advisers appointed to act on behalf of that person/ those persons; and (e) When making investments into the fund we will confirm the name and contact details of the UK Regulated Financial Adviser that is responsible for advising the underlying investor on this investment. [Signed ] [Dated]”.
2. Confirmation of Regulated Financial Advisers associated with the aggregated
investment
For each deal placed, the platform must provide the [manager/ administrator] of the fund with details for each Regulated Financial Adviser associated with the aggregated application including:
 Name of the Firm
 Contact at the Firm
 Address / email
These details must be prefaced with the statement:
“The UK Regulated Financial Adviser(s) who has/ have given instructions relating to this application are as follows:”
3. Regulated Financial Adviser procedural confirmation
Each Regulated Financial Adviser must have entered into terms of business with the fund’s [manager/ administrator] which includes the following procedural confirmation:
“We confirm that when advising a client to make an investment in an unregulated fund via a trading platform ― (a) we have procedures and controls in place to ensure that –

(i) the client meets the UK Financial Services Authority’s requirements to be able to invest in an unregulated collective investment scheme; (ii) the client has confirmed in a separate document that the firm can promote unregulated schemes to them; (ii) the client has had the opportunity to read the offering documents for funds of this nature, where they wish to do so, and as such has information about and accepts the levels of risks associated with this type of investment; and (iv) the client, where necessary, meets the minimum criteria of a class of investor in a fund of this nature; and (b) no investment in this type of fund is made without obtaining a signed investor confirmation from the relevant investor in the following form; “Investor Declaration - the [ ] fund, a qualifying/specialist investor fund. I/we confirm that ― (a) I am/we are a qualifying / specialist investor as defined on page [ ] of the offering document of [name of fund] dated [ ]; and (b) I am/we are sufficiently experienced to understand the features and risks associated with an unauthorised and unapproved fund of this type; and (c) I/we have read and fully understood the offering document, including in particular the information on the risks associated with the fund (contained on pages [X – X] of the offering document), before deciding to invest in the fund; and (d) I/we confirm that, where appropriate, I/we have taken independent advice on the suitability of this investment within my/our overall investment portfolio; and (e) I/we personally accept all the risks associated with this investment and particularly that my/our investment in the [name of fund] involves risks that could result in a loss of a significant proportion or all of the sum invested. [Signed ] [Dated]” and (c) we will provide a copy of the Investor Declaration signed by each investor to the fund’s [manager/administrator]. [Signed] [Dated] [Business name] [Regulated status]”

4. Action where a Regulated Financial Adviser procedural confirmation is not held
   Where an application is received which was instructed by a UK Regulated Financial Adviser who has not entered into the required terms of business – the procedural confirmation and Investor Declaration must be obtained or the investment must be reversed out.
5. Periodic update of the platform’s terms of business and Regulated Financial
   Advisers’ confirmations
   The fund’s [manager/administrator] must refresh their records at least annually to ensure that the platform’s terms of business and RFA’s confirmations remain current.
6. Applying for the standard modification to apply to a fund
   Where a fund wishes to avail itself of the modification it should make a request to the Commission. If this is approved the Commission will apply the modification by way of a direction to the fund.

Diagram representing the application / signoff process above

1. Provides confirmation to the RFA that it
   meets UK FSA requirements to invest in unregulated schemes and signs an investor declaration for the fund  Assessed by the RFA as meeting the requirements to be a qualifying/ specialist investor  Considers and accepts the scheme and its risks as a qualifying/ specialist investor
2. Provides confirmation to the fund in relation
   to its systems and procedures for sales of unregulated schemes (see 3) Ensures that all clients advised in relation to the fund meet the criteria and that the fund is suitable for them
3. Completes terms of business with the fund at
   the outset (see 1 above)
   For each deal confirms the name and contact details for the RFAs whose clients are associated with the deal (see 2)
4. Has terms of business with the RP
   (periodically refreshed)
   Receives RFA confirmations for each RFA advising clients to invest in the fund via the platform (refreshed periodically)
5. Processes application and ensure sign-offs
   complete, including - o Terms of Business with the RP (see 1 above) o Confirmation of RFAs by RP when deals placed (see 2 above) o RFA procedural confirmations in place (see 3 above)  If any of the above missing must obtain them or reverse the deal (see 4)  Confirmations from the RP and RFA are refreshed periodically (see 5 above)

• Cash - via RFA or
  direct to the RP
  The Customer
  The UK Regulated
  Platform “RP”
  The Manager/
  Administrator
  The UK Regulated
  Adviser “RFA”
  Cash
  Cash
  The Fund

Status of Guidance: The Isle of Man Financial Services Authority issues guidance for various purposes, including to illustrate best practice, to assist licenceholders to comply with legislation and to provide examples or illustrations. Guidance is, by its nature, not law, however it is persuasive. Where a person follows guidance this would tend to indicate compliance with the legislative provisions, and vice versa.