Prohibition on selling units/shares in certain Funds to Russian persons after 12 April 2022

Funds and Fund Service Providers (Firms) will have been grappling with the impact of new restrictive measures/sanctions obligations which have been issuing at pace in response to the Ukraine crisis.  

One aspect of the EU Regulations, that issued on 25 February 2022, will bring new challenges. The Regulations introduce (among other things) a prohibition on selling units in certain funds to a broad section of Russian related investors, including many that are not named on sanction lists.

In detail, the Regulations prohibit the sale of euro denominated transferable securities issued after 12 April 2022 or units in collective investment undertakings providing exposure to such securities, to any Russian national or natural person residing in Russia or any legal person, entity or body established in Russia. The prohibition does not apply to nationals of a Member State or natural persons having a temporary or permanent residence permit in a Member State.

This prohibition will present significant new operational challenges for impacted Firms. Firms will already have systems in place to regularly screen investors (including investor's beneficial owners) and all relevant parties and transactions, against both EU and UN sanctions lists. 

However this new provision does not add persons to a sanctions list but rather requires screening on the basis of nationality, residence and place of establishment. Firms may not have captured this information, for example, where an investment is made via an intermediary and may need to undertake fresh due diligence to demonstrate compliance with the obligations.

The new restriction applies separately to:

  • euro denominated share classes in any Fund issued after 12 April 2022 (irrespective of what the Fund invests in) and 
  • units/shares in collective investment undertakings (irrespective of the currency class of the unit/share) providing exposure to any euro denominated transferable securities issued after 12 April 2022

The term "transferable securities" is broadly defined for the purpose of the Regulations.

The restriction will impact both new investment by such Russian persons or entities and top-up or additional investments by existing Russian related persons or entities, including the reinvestment of dividends for new shares.

It is worth noting that the broad class of Russian nationals and natural persons residing in Russia or any legal persons, entities or bodies established in Russia are not being designated as sanctioned persons/entities whose assets are to be frozen (unless the individual or entity is separately on the sanctions list). Accordingly, redemptions by such persons or entities after 12 April 2022 are allowed.

Funds and Fund Service Providers are separately dealing with the impact of sanctions on the valuation of funds, liquidity management, dealing arrangements, screening of investments as well as screening of investors, counterparties and beneficial owners (which should occur at the time of investor on boarding and at regular intervals thereafter).

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For more information on this please contact Michael Barr, Partner or any member of our Asset Management and Investment Funds team.

Date published: 22 March 2022