On Thursday, the FCA issued a consultation proposing new rules to allow authorised fund managers ("AFMs") to create separate unit classes (or "side pockets") for retail investment funds that have been affected by Russia's invasion of Ukraine. The consultation follows an earlier announcement by the FCA that it had begun discussions with stakeholders and would be consulting on this. 

The Russian invasion has resulted in some investments becoming illiquid or untradeable, for example, as a consequence of international sanctions on Russia or trading restrictions imposed by the Russian government. 

Since accurate, reliable and regulated prices for these affected investments are no longer available, it may not be possible for AFMs to produce an accurate unit price for the fund and therefore to treat investors fairly. This has resulted, in some funds suspending dealing.

The FCA is consulting on rules to give AFMs a way to deal with this situation, whereby AFMs will be able to use separate new unit classes to hold the affected investments. These side pockets would allow AFMs to separate affected investments from the fund's other investments. This would then enable:

  • new investors to enter into the fund without sharing the exposure to the affected investments;
  • existing investors to sell the units which relate to assets that are not affected investments; and
  • some funds to end their current suspension of dealing.

The AFM would manage the side pockets with the aim of terminating them as and when this can be done in the best interests of investors.

The new rules are being proposed as a limited emergency measure to deal with the impact of the Russian invasion and are not being considered for wider application.

The FCA is seeking feedback on its proposals by Monday 16th May 2022. The FCA then aims to publish a final policy statement as soon as possible.