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CIS 4.6 Dilution and SDRT provision

Application

CIS 4.6.1R

This section (CIS 4.6) applies to authorised fund managers.

Purpose

CIS 4.6.2G
  1. (1)
    1. (a)

      An ICVC or an AUT may suffer dilution (reduction) in the value of the scheme property as a result of the costs incurred in dealing in the underlying investments and of any spread between the buying and selling prices of those investments. In order to enable the authorised fund manager to decide what, if any, response to make to issues about dilution, an authorised fund manager is permitted to:

      1. (i)

        require the payment of a dilution levy, as an addition to (but not part of) the price of units when they are issued by the ICVC or the trustee or sold by the authorised fund manager, and as a deduction when they are cancelled by the ICVC or the trustee or redeemed by the authorised fund manager; or

      2. (ii)

        make a dilution adjustment in accordance with CIS 4.3.11 R (2)(d) (Price of a unit) so that the price of a unit is above or below that which would have resulted from a mid-market valuation; or

      3. (iii)

        decide not to require the payment of a dilution levy or make a dilution adjustment.

    2. (b)

      An authorised fund manager is not obliged by CIS to make any dilution levies or dilution adjustments.

    3. (c)

      The choice between (1)(a)(i), (ii) or (iii) will be governed by a statement in the prospectus, but only one can apply at any time.

  2. (2)

    Certain transactions in units can result in stamp duty reserve tax being paid out of the scheme property of an authorised fund. However, with a view to protecting investors from a resulting diminution in the value of their units, an authorised fund manager is permitted to require the payment of an SDRT provision as an addition to (but not as part of) the price of units when they are issued or sold, and as a deduction when they are cancelled (other than certain in specie cancellations) or redeemed.

  3. (3)

    Any dilution levy or SDRT provision paid or received by deduction is for the account of the authorised fund. However, there are provisions to prevent a dilution levy or SDRT provision being imposed twice on both the issue and subsequent sale of a unit, or on the redemption and subsequent cancellation of a unit.

  4. (4)

    For the purposes of (1) to (3) it does not matter whether the issue or cancellation is under CIS 4.3 (Issue and cancellations) or under CIS 4.5 (Issues and cancellations through the authorised fund manager and in specie redemptions).

  5. (5)

    CIS 4.6.3 R (3) (Dilution levy and SDRT provision) requires a dilution levy or SDRT provision to be imposed only in a manner that, so far as practicable, is fair to all holders and potential holders. However there are exceptions to this in respect of large deals. In addition, certain transactions (such as transactions in units within an individual pension account) are specifically excluded from a charge to stamp duty reserve tax.

  6. (6)

    Where there is more than one class of unit of an authorised fund, or in the case of an umbrella scheme, a sub-fund, the price of a unit of each class must be calculated separately under CIS 4.3.11 R (Price of a unit). Notwithstanding this, the FSA envisages that any dilution adjustment should in percentage terms affect the price of a unit of each class identically even if there were net issues of units of one class and net cancellations of the other.

  7. (7)

    It should be noted that, in determining the rate of any dilution levy or dilution adjustment, an authorised fund manager may, in order to reduce volatility in the rate, take account of:

    1. (a)

      the trend of the authorised fund or sub fund in question to expand or contract; and

    2. (b)

      the transactions in units at a particular valuation point.1

Dilution levy and SDRT provision

CIS 4.6.3R
  1. (1)

    The authorised fund manager may, in accordance with the prospectus, have the power to require any one or more of:

    1. (a)

      the payment of a dilution levy in respect of the issue or sale of units or any class of units;

    2. (b)

      the deduction of a dilution levy in respect of the redemption or the cancellation of units or any class of units;

    3. (c)

      the payment of an SDRT provision in respect of the issue or sale of units or any class of units;

    4. (d)

      the deduction of an SDRT provision in respect of the redemption or cancellation of units or of any class of units, other than a cancellation of units under CIS 4.5.4 R (In specie redemptions) resulting in a transfer of such part of each description of asset in the scheme property as is proportionate to, or as nearly as practicable proportionate to, the holder's share in the scheme property of the AUT or (as the case may be) share in the ICVC.

  2. (2)

    Any such payment or deduction becomes due at the same time as payment or transfer of property becomes due in respect of the issue, sale, redemption or cancellation.

  3. (3)

    A dilution levy or SDRT provision may be imposed only in a manner that is, so far as practicable, fair to all holders and potential holders. However:

    1. (a)

      the imposition of a dilution levy (or a higher dilution levy) or SDRT provision (or a higher SDRT provision) in respect of large deals in a manner described in the prospectus current at the time of the deal; or

    2. (b)

      the exclusion from an SDRT provision of any transaction in units where the units are so held that their redemption or cancellation is specifically excluded from a charge to stamp duty reserve tax;

    is not unfair.

  4. (4)

    If the authorised fund manager receives a dilution levy or SDRT provision in respect of any unit sold or to be sold by it, it must, immediately upon receipt of that dilution levy or SDRT provision, pay it to the depositary to become part of the scheme property, except to the extent that it has already been, or will be, paid by the authorised fund to the depositary on the issue of that unit.

  5. (5)

    If the authorised fund manager deducts a dilution levy or SDRT provision from the proceeds of a unit it redeemed, it must immediately pay it to the depositary to become part of the scheme property, except to the extent that it has already been, or will be, deducted from the depositary's payment to the authorised fund manager on cancellation of that unit.1

Dilution adjustment

CIS 4.6.4R
  1. (1)

    1The authorised fund manager may, in accordance with the prospectus, have the power to make a dilution adjustment but may only exercise this power:

    1. (a)

      for the purpose of reducing dilution in the fund; or

    2. (b)

      to recover any amount which it has already paid or reasonably expects to pay in the future in relation to the issue or cancellation of units (see CIS 4.6.2 G (7) (Purpose)).

  2. (2)

    Where the authorised fund manager decides not to make an adjustment, this decision must not be made for the purpose of creating a profit or avoiding a loss for the account of the authorised fund manager.

  3. (3)

    When by reference to any valuation point:

    1. (a)

      the aggregate value of the units of all classes of the authorised fund or sub-fund issued exceeds the aggregate value of units of all classes cancelled:

      1. (i)

        any adjustment must be upwards; and

      2. (ii)

        the dilution adjustment must not exceed the authorised fund manager's reasonable estimate of the difference between what the price would have been had the dilution adjustment not been taken into account and what the price would have been if the scheme property had been valued on the best available market offer basis plus dealing costs; or

    2. (b)

      the aggregate value of the units of all classes of the authorised fund or sub-fund cancelled exceeds the aggregate value of units of all classes issued:

      1. (i)

        any adjustment must be downwards; and

      2. (ii)

        the dilution adjustment must not exceed the authorised fund manager's reasonable estimate of the difference between what the price would have been had the dilution adjustment not been taken into account and what the price would have been if the scheme property had been valued on the best available market bid basis less dealing costs.

Dilution adjustment guidance

CIS 4.6.5G

1The effect of CIS 4.6.4 R (1) (Dilution adjustment) is to prohibit authorised fund managers from making a dilution adjustment for reasons or purposes other than set out in CIS 4.6.4 R (1)(a) or CIS 4.6.4 R (1)(b), for example, in order to create a profit or to avoid a loss for the account of the authorised fund manager.