The FSA has published its second Primary Market Bulletin. The Bulletin states that the FSA is planning to completely re-launch its technical and procedural notes, (together the 'Notes') which provide guidance on the LPDT Rules. The reformatted Notes are currently available in draft form as the FSA has put them out for a short consultation. The consultation closes on 14 August 2012.
The FSA is also proposing to add various new notes (drafts of which are also available) providing guidance on areas previously not included in FSA guidance on the LPDT rules.
An index to the Notes is available on the FSA website.
Of most interest to the listed funds industry is the new guidance relating to block listings. The FSA has published the draft procedural note following discussions with investment funds industry bodies and market participants in relation to the use of block listings by investment companies as a means of facilitating tap issues into the market. Many investment companies make use of block listings in this way as a premium management tool, normally issuing a few hundred thousand pounds worth of shares at a time to market markers for onward distribution.
Under the FSA’s guidance to Listing Rule 3.5, a block listing can be used if the process of applying for admission of securities is likely to be very onerous due to the frequent or irregular nature of allotments and if no prospectus or listing particulars are required for the securities. Accordingly, market practice has developed to allow block listings to be used regularly by UK listed investment companies as a means of satisfying ad hoc demand for share issuance quickly and cost effectively.
Over the past year or so, the FSA has had an apparent change of practice on granting block listing applications and adopted the position that block listings should not be available to investment companies for the purpose of tap issues. In particular, the FSA appeared to take the view that placings of shares, involving some degree of marketing prior to the issue, should not be conducted pursuant to a block listing facility. We are aware that the UKLA rejected a number of block listing applications from investment companies where they felt that the normal application process should be used. However, the UKLA's position was not, prior to the publication of the new procedural note, entirely clear.
The publication of a procedural note is therefore a welcome development, as it should bring clarity to the position and also set out the parameters within which the FSA will approve block listing application applications (on a case-by-case basis). In the procedural note, the FSA makes the following points:
- Use of block listings by investment companies: The FSA acknowledges that block listings may be appropriate for investment companies in certain circumstances, for example issuers needing to issue shares to satisfy demand that cannot be met in the market. The FSA recognises that the ability to use a block listing in situations such as these can be a useful tool for investment companies to manage premium volatility, and that price discount and premium management is a legitimate activity.
The FSA will take these arguments into consideration where it receives clear evidence of: (i) a meaningful demand from third parties wishing to invest on a regular, if not almost daily basis; or (ii) where a meaningful time delay of having to make a one-off application would inhibit the ability to issue shares to investors etc.
- When to use a Block Listing: Although, the presumption is that a normal application is required, LR 3.5.2G provides that an applicant may apply for a block listing where the normal admission process is likely to be very onerous due to the frequent or irregular nature of allotments.
In practice, the ‘very onerous’ condition makes it unlikely that an issuer that is only contemplating infrequent allotments, is seeking flexibility ‘just in case’ for reasons of convenience, or is merely trying to limit fees would be in a position to justify a block listing.
Issuers must be entirely transparent when submitting the application as to the precise nature of the block listing and its intended use, in order for the FSA to be able to assess the appropriateness of the case and to establish that the regulatory risk has been suitably contained.
- Frequency: Frequency on its own is not the defining characteristic as to whether a block listing is warranted, and this question will vary depending on the circumstances relating to that particular application. Therefore, the FSA does not set a specific hurdle with regards to frequency of allotments.
- Details to include in an application: When issuers make representations to the FSA they should set out in as much detail as possible the circumstances suggesting a block listing would be appropriate, the intended use of the block listing, and the evidence necessary to support the submission. The decision as to whether a block listing is warranted will be based on the facts provided. Access to the block listing regime is intended only for issuers with a justifiable and demonstrable need. Therefore, the FSA expects that issuers and their advisers make only reasonable requests to the FSA for block listings and that due care and attention is taken when producing a submission.
Refusal: There are a number of circumstances in which the FSA will typically refuse to allow the use of a block listing. They include block listings that are put in place:
- as a matter of course;
- solely for the issuer's convenience;
- in anticipation of demand in the market, rather than to meet actual demand (we are aware that this has led to some blocks never having been used);
- for issuances that are likely to have very few allotments;
- solely for avoidance of certain fees; and
- for the purposes of carrying out placings.
The procedural note is helpful in clarifying the FSA's position. However, while the acknowledgement of the appropriateness of block listings for investment companies is welcome, there is still some ambiguity as to the exact circumstances in which a block listing application will be accepted. The Note suggests that only where an issuer has a consistently applied premium management program and can demonstrate actual demand for regular stock issuance will an application be accepted.
Whereas the guidance notes are currently grouped by rule book (with a number of additional notes), the FSA intends to replace these with over 80 Notes on individual topics. The FSA says that it has reviewed and updated the existing notes to remove superseded and out of date information. As there is no blackline against the existing notes, and the guidance is completely reformatted, it is difficult to tell to what extent the FSA is changing the guidance currently in the technical notes.
In addition to those Notes covering topics of a general nature, of particular relevance to our listed funds clients and their advisers will be the following Notes:
- Restrictions on transferability (Technical Note UKLA/TN/101.1, relating to LR 2.2.4R and LR 7.2.1R);
- Share buy-back programmes (Technical note UKLA/TN/201.1, relating to LR 12, LR 12.4.6R and LR1.4.7R);
- Share buybacks with mix and match facilities (Technical Note UKLA/TN/202.1, relating to LR 9.5.10R, LR 12.6 and LR 15.4.11R);
- Related party transactions – issuer's undertaking (newly proposed guidance) (Technical Note UKLA/TN/309.1, relating to LR 11);
- Acquiring assets during investment trust rollovers (Technical Note UKLA/TN/401.1, relating to LR 15.5.2R);
- Co-investments between closed-ended funds and their investment managers' employees (Technical Note UKLA/TN/402.1, relating to LR11 and LR 15);
- Alterations to investment management fees (Technical Note UKLA/TN/403.1, relating to LR 11 and LR15);
- Real Estate Investment Trusts (Technical Note UKLA/TN/421.1, relating to LR14, LR 15 and LR 2.2.4R);
- Open-ended investment companies (Technical Note/TN/423.1, relating to LR 16 and LR 4.2.3R);
- Disclosure of positions: Asset managers (Technical Note UKLA/TN/549.1, relating to DTR 5);
- Collective investment undertaking prospectuses – portfolio (Technical Note/TN/622.1, relating to PR Appendix 3 Annex 15 item 8.2); and
- Sponsors who are part of an investment management group (Technical Note UKLA/TN/707.1, relating to LR 8 and LR 11).
Once the FSA has finalised the Notes, there will be a new section on the FSA website called the "UKLA Knowledge Hub", where all of the Notes will be available.
Given the short consultation period, we would encourage those interested in working with the FSA to respond without delay so as to ensure that the new block listing guidance is as relevant as possible and reflects the needs of the investment funds' industry. If you would like any assistance in formulating a consultation response to the FSA or have any other queries, please get in touch with your usual Herbert smith contact.