The FSA has published a policy statement on its Listing Review for Investment Entities which sets out feedback on its consultation paper 07/12 "Investment Entities Listing Review" published in June 2007.
The revisions to Chapter 15 of the Listing Rules are broadly in line with the proposals set out in CP07/12 and will take effect from 6 March 2008. The changes are designed to make the listing regime more attractive and competitive, particularly to issuers such as private equity and hedge funds that focus on alternative investment strategies. The key changes are:
- Investment entities to be prohibited from listing under LR14 – from 6 March 2008 overseas investment entities will no longer be able to apply for a secondary listing under Chapter 14. Those investment entities already listed under Chapter 14 prior to 6 March 2008 will not be affected and will remain subject to Chapter 14 for as long as they elect to do so. Transition from a Chapter 14 to a Chapter 15 listing is straightforward and the FSA has provided guidelines on this in its latest edition of List! (see below).
- Experience of the Investment Manager – as proposed, the FSA are removing the requirement for listing that a manager must have "sufficient and appropriate" experience. In addition, it has decided not to implement the proposed guidance which states that it is for boards of directors to assess the expertise of any investment manager, not the FSA. The Prospectus Directive already requires funds to include information on the experience of any manager it employs in its prospectus. This should provide adequate transparency and enable investors to make an informed decision without the need for additional requirements in the Listing Rules. In making the appointment the Directors are of course subject to fiduciary duties which would require them to consider such factors in any event.
- Board independence – the FSA will proceed with its proposal to allow more than one manager representative on the board of a listed investment entity. The general view appears to be that if the intended outcome is that the board is independent of the manager, then that outcome is met by a simple majority and an independent chairman.
- Feeder funds – the FSA has confirmed that, subject to some minor drafting alterations to the provisions set out in CP07/12, feeder funds will be permitted to apply for a listing under LR15. These structures will be permitted provided the feeder fund can still demonstrate, by reference to diversification at the master fund level, that it spreads investment risk. In considering the structure, a fund will also need to take account of the mechanism for withdrawing its funds in the event that the master fund ceases to invest or manage its funds in accordance with the rules.
- Quarterly portfolio disclosure – the FSA has adopted its proposal to remove the existing quarterly disclosure requirements, save for disclosure of cross holdings, and has decided not to adopt the proposed (super-equivalent) new requirement to disclose positions in excess of either 10% or 20% of gross assets in each quarter. The change will be welcomed by private equity and hedge fund managers who were concerned about the impact of additional disclosure on their competitive position.
- Transactions with related parties – the FSA has adopted the proposal for a new exemption to facilitate co-investment by listed investment entities and transactions with other clients of the investment manager. The investment manager will, however, remain a related party for the purposes of the Listing Rules. It remains to be seen whether the new rules will in practice permit shareholders to approve in an investment policy (either contained in a prospectus or approved in general meeting) a future waiver of all related party transactions in relation to, for example, a programme of warehousing assets by a manager until the listed company has sufficient funds to acquire them. If so, what conditions would shareholders attach to such waiver – merely a combination of independent valuation and independent director approval?
The relaxation of the rules provides welcome additional flexibility for the industry, in particular for private equity and hedge funds that pursue alternative investment strategies. The removal of some of the existing super-equivalent primary listing requirements helps to alleviate many of the concerns which make the current rules unattractive or unachievable for fund sponsors. In particular, the relaxation of the requirements on management experience and the removal of the quarterly disclosure plus the relaxation of the feeder fund regime should increase the attractiveness of a London listing.
There is still concern that a unitary regime will reduce choice and could damage competitiveness. However one would hope that the launch of the Specialist Fund Market on 1 November 2007 will help to mitigate these concerns. If not, then Euronext and AIM remain the only viable alternatives.
A full version of PS07/20 can be found at: http://www.fsa.gov.uk/pages/Library/Policy/Policy/2007/07_20.shtml.