Authorised investment funds (AIFs): genuine diversity of ownership condition (GDO): criteria required to meet the GDO
In order for an authorised investment fund (AIF) to meet the genuine diversity of ownership condition (GDO) under regulation 9A SI2006/964 (as inserted by SI 2009/2036), it must meet Conditions A to C (which are explained below), throughout the whole accounting period.
Criteria required to meet the GDO
Condition A: The fund documents (Regulation 9A(3) SI2006/964)
The purpose of Condition A is to ensure that the fund has undertaken, in a manner which is public and binding, a commitment to target the categories of investor specified, which includes an express undertaking to market and make available the fund to the target categories of investor. The statements contained in the fund documentation should achieve the effect of condition A. A fund may have one or more categories of investor and reference to categories is meant to be widely drawn but some typical examples may include one or more of:
- General retail investors - individual investors, who may be tax exempt ISA investors, with no requirements as to wealth levels.
- High net worth investors - individual investors, where there is a significant minimum investment level.
- Tax exempt investors - this may include individuals or institutional investors.
- Gross payment investors - investors entitled to receive interest distributions without deduction of tax at source.
- Institutional investors - investors such as pension funds, corporate investors such as insurance companies.
Specifying in the fund documentation that the fund will be marketed and made available to a target market, which includes a large number of unconnected persons will always meet the requirements of this condition. For example:
‘The target investors for this fund include all corporate and institutional investors with a minimum of £10,000 to invest. It is intended that units in the fund will be marketed and made available to corporate and other institutional investors meeting this requirement’
Connected persons in this context takes its meaning from ICTA88/S839.
While there is no objection to fund documentation covering possible future extension to its target market, such hypothetical extensions will not be taken into account in determining whether Condition B is met. Provided that all originally targeted investors remain within the target market, then any later extension to the target market cannot then cause a fund to fail Condition B.
Condition B: Terms and conditions of the fund (Regulation 9A(4) & (5) SI2006/964)
The purpose of Condition B is to exclude funds which are ‘private’ or only available to specific individual or corporate investors, whether such a limitation is achieved by a specific rule set out in the fund documentation or by the imposition of terms and conditions that would have the effect of deterring investors outside such a limited group.
It follows that the terms and conditions of the fund should not be set in such a way as to limit investment to a select group within the stated categories of investors by deterring a reasonable investor within the target market from investing in the fund. For example, Condition B may not be met where charges differ according to categories of investors and the charges for one or more categories are such that it could not reasonably be expected that a potential investor within a target category, acting rationally, would choose to invest. The condition is not intended to prohibit normal commercial variations in charges. It is aimed at situations where the target market is stated to include a particular category of investor but either the charges or the minimum investment applying to that type of investor then effectively exclude them.
Condition C: Marketing requirements, providing information and selling units (Regulation 9A(6) SI2006/964)
The purpose of Condition C is to allow the exclusion of any fund that, despite meeting Conditions A and B, then (contrary to the statements in its own documentation) fails to act in a way that supports the statements it has made as to the intended categories of investor.
‘Marketing’ for this purpose includes any activity at all that is designed to bring the fund to the attention of investors within the target market.
Where there are, in fact, a substantial body of unconnected investors in a fund then HMRC will generally assume, without further enquiries, that this condition must have been met in practice, in order to achieve that result.
Generic marketing may include (but is not limited to):
- Advertisements in UK national, consumer and/or trade press publications, or via various ‘outdoor’ media (for example posters), specifically mentioning the fund.
- As above, but where the publication is via a UK website or other online or digital media. For example, banner advertisements.
- Direct mail packs, specifically mentioning and promoting the fund, sent to the target market and/or their advisers, for example authorised independent financial advisers (IFAs).
- Events for intended categories of investors and/or their advisers featuring content relating the fund. For example, IFA road show events or presentations to high net worth investors.
- Pro-active PR releases issued to UK publications relating to the fund.
- Active representation to IFA firms and/or other distributors to add one or more individual funds/sub-funds to their fund panels or available fund links.
Specialist marketing activities: It is recognised by HMRC that marketing to institutional and sophisticated investors may be more narrowly targeted than the marketing required for a retail fund, especially where a qualified investor scheme (QIS) is aimed at a particular type of institutional investor, for example life insurance companies. Any activity designed to attract the specified category of investor will constitute marketing for this purpose, for example, presentations to or meetings with institutional or high net worth investors or their consultants or direct contact or advertisements in specialist or financial publications to attract sophisticated investors or their advisers. In these circumstances, HMRC would expect that the fund manager would retain and, if requested, make available to HMRC records to show that such activity had taken place.
Marketing activity that may not be continuous: HMRC also recognises that marketing is not necessarily a continuous activity and, for example:
- may not begin immediately on launch of a fund because, for example, there is a need to establish a short term performance record; or
- where the fund’s marketing strategy may be more active when initially launched and then decline as the fund reaches maturity or decline stage; or
- while marketing activities have been undertaken, for instance in the form of meetings to high net worth individuals, there may be a period of no meetings because of a fall in the markets.
Hence, where the marketing activity is not continuous, it is important to note that the marketing activity will depend on the overall lifecycle of a fund and external factors that may impact on the fund’s overall strategy.
However, where there is no continuous marketing activity then there must be a clear and continuing intention to make the fund available to its target market (or wind it up if the fund is found at the initial stages to be unsuccessful). A marketing plan that is documented or recorded may help to satisfy condition C in these instances. HMRC would not seek to exclude a case where a fund starts out being seeded by a single corporate investor such as a single life insurer, as long as there is a clear and continuing intention at later stages to market and make available the fund to all categories of investors specified in the target market, as the purpose of the GDO is to ensure that a fund is not ‘privately owned’ by a few individual or corporate investors.
Instances where there is no generic or specialist marketing activities: It may be the case for specialist funds that active marketing is not required to gain the investors identified in the target market, for instance because of the reputation of the fund manager. If this situation occurs then HMRC will accept that condition C is met where the information about the fund is made available to all investors within the target market and is made accessible to them on request. In these circumstances, HMRC would examine the list of investors and, as long as there was no evidence of a ‘privately owned AIF’ and there were a number of unconnected investors in the fund, then condition C will be considered as met.
Temporary circumstances where Condition C will still be met (Regulation 9A(7) SI2006/964)
With Condition C it is recognised that there will be times where a fund reaches a limit on its capacity to absorb further investments, in which case it will be treated as meeting these conditions even though the scheme may not be marketed or made available temporarily, until there is further capacity to do so. (Regulation 9A(7) SI2006/964.)
This derogation from Condition C will not apply if a fund limits investment to pre-determined investors who buy all or substantially all of the units in the fund at, or shortly after, the fund’s launch which denies the opportunity for other investors in the target market to obtain information and buy units in the fund. (Regulation 9A(7)(b) SI2006/964.) This is not intended to prevent pre-launch marketing of a fund but in such circumstances the fund should retain evidence that a range of investors in the target market have had the opportunity to invest.
HMRC also recognises that the manager of the fund may not be able to accept investment for regulatory or legal reasons, for example having been unable to complete customer due diligence under the money laundering regulations or because in the case of a QIS the intending investor does not meet the ‘Eligible Investor’ test. Exclusion of an investor in such circumstances will not cause condition C to be failed.
Property AIFs and associated unit trust schemes (Regulation 9A(8) SI2006/964)
The (optional) provision allows HMRC to take into account the intended categories of investors in an associated unit trust scheme of a Property AIF (see CTM48817), described as a feeder fund, in establishing whether the GDO is met. However, to do so, the feeder fund and the fund must have the same manager. Therefore, HMRC would not seek to exclude a Property AIF where the only beneficial investor was a unit trust scheme (feeder fund) providing that the unit trust scheme would, itself or together with the Property AIF, satisfy the GDO and the two entities have the same manager.
The optional provision for feeder funds applies only to Property AIFs. Where a fund is a Property AIF and meets the GDO by relying on the feeder fund then it will only continue to meet the GDO for any other purposes as long as it remains a Property AIF.