The FSA has published a further consultation paper on its Listing Review for Investment Entities which includes feedback to its consultation paper 06/21 "Investment Entities Listing Review" published in December 2006.

In light of the feedback received to CP06/21, the FSA is proposing some further targeted changes to Chapter 15 as a consequence of its decision to withdraw the Chapter 14 secondary listing regime for investment funds. The changes will be deregulatory and the new unitary listing regime is proposed to be in place in Q1 2008, at which point Chapter 14 will cease to be available for new applicants.

Those funds then listed under Chapter 14 could remain so listed unless they choose to move to a Chapter 15 listing. The new proposals include the following:

  • Removal of the requirement that, as a condition of listing, a listed investment fund must have sufficient investment management experience available to it. This becomes a matter of guidance that it is the board's responsibility to ensure that the fund has sufficient and appropriate expertise available to it.
  • Modifying board independence arrangements - at present, an investment manager is limited to one representative on a board. The FSA proposes that a simple majority of independent directors plus an independent chairman will be sufficient for a board to be independent of its manager under the Listing Rules.
  • Easier listing for feeder funds - "feeder" funds concentrate their capital in a larger "master" fund. 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.
  • Removal of quarterly portfolio disclosure - instead, reliance will be placed on the existing FSA Disclosure and Transparency Rules and a new overriding requirement to disclose details, on a quarterly basis, of significant holdings representing 10% or more by value of an issuer's overall portfolio.
  • Modifying the related parties rules - the FSA is proposing a new exemption within the related party rules which will facilitate co-investment by listed investment funds with other funds managed by the same manager. The FSA is also seeking views on whether the Listing Rules should deem an investment manager a related party at all.

September 2007 Listing Rule changes 

The other proposed changes to Chapter 15, aimed at creating a more flexible principles-based regime and proposed in CPs 06/4 and 06/21, were well received by respondents and will therefore be implemented in September 2007. These changes include:

  • Permitting a flexible, more principles-based approach to investment policies - in order to allow firms to pursue a wider range of strategies to spread their investment risk, including appropriate long/short strategies used by hedge funds and the taking of controlling stakes by funds such as private equity funds. Moreover, it is now proposed that non-material changes to investment policies may be made without shareholder approval. Guidance will be provided on materiality.
  • Removal of prescriptive additional rules for property funds - UK Real Estate Investment Trusts (REITs) structured as closed-ended investment funds will be subject to the same investment restrictions and governance requirements as other funds.
  • Removal of most super-equivalent rules for regulated open-ended funds - the imposition of extra listing rules to this group (which includes most exchange traded funds (ETFs)) would be duplicative as the group is already subject to detailed authorisation requirements.

The FSA's proposals may appear to place the unitary regime closer to Chapter 15 than Chapter 14 on the regulatory dial inasmuch as they preserve much of the existing regime. However, if they are implemented as envisaged, many of the concerns which make the current super-equivalent primary listing requirements unattractive or unachievable for fund sponsors would be removed. In particular, the proposed relaxation of the requirements on management experience, which would apply, for example, to managers with satisfactory credentials but, for whatever reason, without FSA or EEA State authorisation or a three year track record is welcome.

Similarly, the removal of quarterly portfolio disclosure, which was of particular concern to private equity and hedge fund managers, will surely increase the attractiveness of a London listing.

One must still ask whether the proposed changes go far enough to convince any fund sponsors who currently consider only a Prospectus Directive minimum regime to be attractive that, going forward, the benefits of being listed and traded in London outweigh the burden of meeting the requirements of Chapter 15. If the answer to that question is no, then Euronext and AIM remain the only viable alternatives.

In our view, the related party and substantial transaction regime still pose unnecessary obstacles for those funds which contemplate, from the outset, that their manager should acquire and warehouse assets in advance of a fund raising by the listed entity or that the fund should grow by portfolio acquisition. Surely disclosure in the initial prospectus and a combination of independent valuation and independent director approval would be sufficient for such transactions to be regarded as being in the ordinary course such that there should be no requirement to obtain independent shareholder approval?

Comments on this further consultation are invited by 28 September 2007.