There will be three new categories of investment entity and different Listing Rules will apply to each category. The categories are the “European core standard,” the “Open-ended fund standard” and the “Closed-ended fund standard.”
What is the European core standard?
Historically, overseas entities with a listing on another investment exchange were permitted to have a secondary listing on the London Stock Exchange under a lighter touch regime that absolved them from compliance with the detailed Listing Rules applicable to companies whose primary listing was on the Official List. These requirements were set out in Chapter 14 of the Listing Rules and those companies were often referred to as “Chapter 14 companies.” Following the implementation of the Prospectus Directive, it became unnecessary for an overseas entity seeking a secondary listing on the Official List to have a primary listing (or any other form of listing) on any other investment exchange. However, the point was not widely recognised at the time.
The rules contained in Chapter 15 of the Listing Rules applying to investment entities listing on the Official List (particularly the rule prohibiting investment entities from controlling the companies in which they invest) were considered too restrictive for a number of investment funds. These funds, which included some very large private equity funds, therefore sought admission to listing on other investment exchanges, particularly Euronext. This prompted the FSA to issue clarification confirming that overseas entities could seek a secondary listing on the Official List without having a primary listing and thereby avoiding the need to comply with the more onerous Chapter 15 requirements. As many investment entities are incorporated outside the UK, and as investment entities have significant flexibility in choosing where to be incorporated, this made the “secondary” listing route under Chapter 14 very attractive.
The FSA is now seeking to clarify the rules relating to overseas companies and, instead of being referred to, inappropriately, as having a “secondary listing,” these companies will be referred to as “European core standard” companies, to highlight the fact that they are required to comply only with the minimum standards for listing set out in the Consolidated Admissions and Reporting Directive (CARD) and not with the more detailed rules discussed elsewhere in this briefing.
Investment entities seeking to list under those Listing Rules that go beyond the minimum standard laid down by the CARD will list under the “Closed-ended fund standard” or “Open-ended fund standard.” Closed-ended investment entities established in the UK cannot currently list under the European core standard, although the FSA has indicated that it may review this.
What is the Open-ended fund standard?
The Open-ended fund standard applies to the securities of a UK authorised open-ended investment company (OEIC) or of an overseas collective investment scheme that is a recognised scheme in the UK. It will therefore generally only apply to authorised investment funds. The FSA takes the view that, as these entities are already subject to prescriptive regulation in their home states (such as the FSA’s new Collective Investment Scheme Sourcebook for OEICs), there is no need for them to be subject to further detailed regulation under the Listing Rules.
Will an unrecognised collective investment scheme be able to be listed on the Official List?
The FSA takes the view that unrecognised schemes will have considerable difficulty in complying with the requirements for seeking admission to the Official List without breaching the restrictions on promotion of such schemes4. The references in the Listing Rules to unrecognised schemes are not, however, to be deleted, as originally proposed in CP 06/04, as a small number of unrecognised collective investment schemes are already listed on the Official List.
How else does the Consultation Paper affect investment funds?
CP 06/21 summarises other important rule changes that will affect entities to be listed under the Closed-ended fund standard (Closed-ended Investment Funds).
Will investment entities be able to switch between categories?
Yes, provided certain procedures are followed. In particular, an issuer will have to show that it is eligible for listing under those Listing Rules applicable to its proposed new category and will also have to appoint a sponsor, if one is required under those Listing Rules. Twenty days’ notice (by announcement to the market) will be required and, in certain circumstances, shareholder approval will be required.
Can investment entities listed under Chapter 15 of the current Listing Rules switch to a listing under Chapter 14?
Yes, provided they are eligible for listing under Chapter 14. This involves, principally, being incorporated overseas. The FSA will require shareholder approval to be obtained. UK companies wishing to switch to a Chapter 14 listing may be able to migrate to an overseas jurisdiction, using a scheme of reconstruction or other method. We have already advised one investment company on its re-categorisation as a Chapter 14 company.
When will shareholder approval be required for re-categorisation?
As shareholder approval is required for a material change to the investment policy of a Closed-ended Investment Fund5, the FSA believes it will be appropriate for an investment entity to seek shareholder approval when adopting a formal investment policy for the first time (ie, when re-categorising as a Closed-ended Investment Fund) or when dispensing with its investment policy or adopting it on a voluntary basis (ie, when it ceases to be categorised as a Closed-ended Investment Fund). Therefore shareholder approval will be required when an investment entity becomes or ceases to be a Closed-ended Investment Fund. Again, UK incorporated Closed-ended Investment Funds are not eligible to be listed under the European core standard.
What will be the impact of these changes?
At this stage, it is difficult to see why an investment entity wishing to list on the Official List would choose to be incorporated in the UK, since, by doing so, it forgoes the flexibility to choose which regime it wishes to list under and will not have the ability to switch between categories. While taxation considerations and local legal and regulatory requirements will be relevant to the choice of domicile, there are very few other considerations which would need to be considered in choosing where to be domiciled. This can be contrasted with the position for trading companies, which may have premises, operations and employees based in the UK.
Signs so far are that, although the market is willing to accept that investment entities should be able to make investments which confer control, investors will still expect high standards of corporate governance from companies listed on the Official List, whether under the European core standard or the Closed-ended fund standard. Since, under the proposed new rules, Closed-ended Investment Funds will be able to make investments which confer control, it is other considerations, such as the requirement for an independent Board, that will cause most discussion.
Even if the market does continue to demand high corporate governance standards, an investment entity might still find it preferable to list under the European core standard and give itself the flexibility to choose whether or not to comply with some or all of the super-equivalent rules applicable under the Closed-ended fund standard.
Finally, a number of the super-equivalent Listing Rules arose out of market demand following the split capital investment fund crisis of the early 2000s. The introduction of those rules was intended to enhance market transparency to reduce the risk of such a situation occurring again. Voluntary compliance with corporate governance requirements may prove less effective than mandatory compliance in maintaining market transparency.
It would be interesting if, mirroring the operation of the Combined Code, European core standard companies were required to explain the reason for non-compliance with the super-equivalent requirements. However, any such “comply or explain” practice would have to be market driven, since the FSA cannot impose such a requirement without breaching the CARD.
The ability for overseas companies to effectively choose whether to comply with the minimum standard rules (Chapter 14, to be known as the European core standard) or the super-equivalent rules (Chapter 15, to be known as the Closed-ended fund standard) is potentially significant.