100780 – Financial Institutions: Investment Entities: Examples

The following examples illustrate the application of the tests described at AEIM101160.

  1. Investment Advisor – Advice Co Ltd provides advice on and discretionary management of securities held by some clients. The securities meet the definition of being Financial Assets. Almost 80% of the gross income of Advice Co Ltd for the last three years has come from providing such services. Advice Co Ltd primarily conducts a business of managing Financial Assets on behalf of clients and is, therefore, an investment entity.
  2. Entity Carrying on Business Managed by a Financial Institution – Investment Fund X primarily invests in equities on behalf of customers. Fund X is managed by Invest Co Ltd, a financial institution. Fund X was formed two years ago since when it has earned 90% of its income from these activities. Fund X is an investment entity because it primarily conducts as a business one or more of the relevant activities or operations for or on behalf of a customer. It is not relevant that it is managed by a financial institution as it is an Investment Entity by virtue of its business activities.
  3. Entity Managed by a Financial Institution – Investment Partnership LLP is a vehicle set up to invest its members’ contributions in Financial Assets, it invests in its own right and has no customers. The LLP is managed by Invest Co Ltd, a financial institution. The LLP has been investing for several years; its income is derived exclusively from its investment activities. As the LLP is managed by a Financial Institution and at least 50% of its revenues in the last three years is primarily attributable to investing, reinvesting or trading in Financial Assets it will be an Investment Entity.
  4. Entity Managed by a Foreign Financial Institution – the facts are the same as in example 3 except that Investment Partnership LLP is managed by Invest Co GmbH, a German financial institution. The fact that the LLP is managed by a financial institution resident in another jurisdiction does not alter its status. It will be an investment entity because it is managed by a financial institution, and more than 50% of its gross income is primarily attributable to investing, reinvesting or trading in Financial Assets.
  5. Property Fund Managed by a Financial Institution – Fund P is an investment fund that invests solely in non-debt direct interests in real property. Fund P is managed by Invest Co Ltd, a financial institution. Fund P has structured its holdings in property through a company, P Ltd, which has four wholly owned subsidiaries each of which has invested in a property. Fund P will not be an investment entity as although it is managed by a financial institution, none of its gross income is attributable to investing, reinvesting or trading in Financial Assets as the assets it holds are non-debt direct interests in real property.
  6. Entity Managed by an Individual – Ben, an individual, runs a business providing advice to clients on investments in Financial Assets and has discretionary authority to manage Financial Assets on behalf of clients. One of his clients is a company, Z Ltd that has earned more than 50% of its gross income in the last three years from investing, reinvesting and trading in Financial Assets. Ben primarily conducts investment-related activities on behalf of clients. Ben is not an investment entity because he is an individual. Z Ltd, however, is nonetheless an investment entity because it primarily conducts as a business one or more of the relevant activities or operations for or on behalf of a customer (note: in practice, it is unlikely that such an entity would appoint an individual to manage its assets).
  7. Family Trust Managed by an Individual -see Example 6 above: if Ben managed the assets of a family trust, the trust would not be an investment entity as it is neither primarily conducting as a business one or more of the relevant activities or operations for or on behalf of a customer, and although its gross income is primarily attributable to investing, reinvesting, or trading in Financial Assets, it is not an entity that is managed by a financial institution (because Ben, as an individual, cannot be a financial institution). (Note: in practice, a trust holding assets on behalf of a family arrangement will typically appoint a company or partnership to manage its assets but some family trusts may instead appoint a suitably qualified individual).
  8. Family Trust with a Corporate Trustee – The ABC family trust’s gross income is primarily attributable to investing, reinvesting or trading in Financial Assets. The trust was set up on the advice of a law firm, and that firm’s corporate trustee is the trustee of the trust. The corporate trustee acts for the law firm’s clients without itself charging any fees to the clients. Even though the corporate trustee does not charge, it is a Financial Institution as its related entity (the law firm) is charging the clients for these services, it therefore primarily conducts as a business for or on behalf of a customer the prescribed activities. This in turn means that the ABC family trust is also an Investment Entity.