Authorised investment funds: qualified investor schemes: substantial QIS holding: ‘inadvertent breach’: example: rectified
Inadvertent breach holding reduced within time limit example
The qualified investor scheme (QIS) has reporting dates of 30 June and 31 December. Allunits in the QIS have equal rights to the net asset value.
Ms C (who is, as required by Financial Services Authority rules, a sophisticated investor)holds 6% of the units in QIS fund. On 1 March 2007 a major holder of units sells units tothe value of 40% of the entire fund which are immediately cancelled. This has the resultthat Ms C is left holding units representing exactly 10% of the remaining net asset valueof the fund at the end of 1 March 2007.
In this example the next reporting date of the fund following 1 March 2007 is 30 June2007. The second reporting date following 1 March 2007 is 31 December 2007.
Provided Ms C reduces her holding to below 10% of the net asset value of the fund before31 December 2007 (the second reporting date) then she does not need to treat her holdingas having been substantial at any time up to 31 December 2007.
If, on the other hand, Ms C chooses to retain her full holding then she must calculate herincome for tax purposes using the substantial QIS holding rules, with theholding becoming substantial on 1 March 2007. As an example the steps of her calculationare set out at CTM48755.
How will Ms C know that she has a holding of over 10% of the fund?
She can check this periodically by dividing the value of her own holding (afteraggregating this with those of any associates or connected persons) by the net asset valueof the fund at the same date. As the fund managers need to calculate the net asset valueof the fund as part of the process of calculating a unit price this should be availablefor any day on which a unit price is calculated.
She must in any event be automatically informed of these details following each reportingdate, as the fund will have to make a half-yearly report in order to comply with FinancialServices Authority regulations. As, in this example, there is a reporting date on 30 June2007 this means that she will be informed following this date of the details needed forher to check her position.
She then has until the next reporting date, in this example 31 December 2007, to reduceher holding.
Some fund managers may choose to offer a service to participants in a QIS whereby theywill undertake to check the position at regular intervals for them and inform them if aholding becomes substantial. However, it should be emphasised that the responsibility tocheck lies with the individual participant.
It should be noted that only the individual participant can know in full those who may beconnected or associated with them and it is the responsibility of the participant to checkthe position of those persons (in a similar way to shareholders in a potentially closecompany).