FSA Consults Further On Listing Reviews For Investment Entities

by Robin Pilgrim, LawAndTax-News.com, London

03 July 2007

The UK's Financial Services Authority (FSA) on Friday published a combined consultation and feedback paper on the Investment Entities Listing Review.

The FSA in April announced its intention to proceed on the basis of a unitary listing regime for all listed investment entities, in the light of feedback received. This further consultation sets out some additional, targeted, changes designed to create a modern, flexible unitary regime, to be in place by the end of the first quarter of 2008.

Many of the key modernisation proposals made in the Investment Entities Listing Review project to date have already been well received by respondents, particularly those changes aimed at allowing issuers more flexibility in the way that they spread the investment risk in their funds. The FSA will therefore implement those changes from September 2007.

Hector Sants, FSA Wholesale and Institutional Managing Director, announced that:

"This is an important reform and part of ensuring the UK continues to be Europe's recognised centre of financial innovation."

"Respondents to our second consultation agreed with our basic objective – making UK listed markets more attractive to a wider range of investment strategies whilst maintaining appropriate standards of investor protection. We now plan to pursue this goal through a single regime, based on the high standards of our existing super equivalent regime, modified through further deregulation."

"Underpinning our proposed unitary regime is the key principle that shareholders of investment entities can look to an independent board to represent their interests, particularly in relation to overseeing any external fund manager. The amendments are intended to ensure the detail in the rulebook delivers on the principle without undue additional prescription."

In the light of feedback from earlier consultation on the matter, and further detailed discussion with representatives of less traditional funds, the FSA is proposing some further targeted changes to Chapter 15 of the Listing Rules. All are deregulatory, and are intended to be implemented in the first quarter of 2008.

At the same time, further listings of closed-ended funds under Chapter 14 of the Listing Rules will be prohibited.

The new proposals entail:

• Modifying board independence arrangements - such 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. Currently an investment manager is limited to one representative on a board;
• Making it easier for feeder funds to list – feeder funds, common among hedge funds, concentrate their capital in a larger, private "master" fund. These structures will be permitted provided the feeder fund can still demonstrate that it spreads investment risk;
• Removal of quarterly portfolio disclosure – instead relying on the existing FSA Disclosure and Transparency Rules and a new over-riding requirement to disclose (on a quarterly basis) details of significant holdings representing 10% or more by value of an issuer's overall portfolio;
• Removal of the requirement that, as a condition for listing, a listed investment fund must have sufficient investment management experience; and
• Modifying the related parties rules – a new exemption within the related party rules will facilitate co-investment by listed investment funds with other funds managed by the same manager.

Stakeholders' views on whether the listing rules should deem an investment manager a related party are also sought in the consultation.

The policy statement section of the document deals with the feedback the FSA received on the two earlier consultation papers CP06/4 and CP06/21. The majority of the proposals within these papers were well received by respondents. The FSA therefore intends to implement most of these changes to the Listing Rules in September 2007.

The September rule changes are designed to tie in with the accompanying proposals for further reform in 2008. This will mean that listed investment entities have the benefit of those elements of modernisation and simplification, which participants supported in the earlier consultations, without waiting until 2008.

The changes that will come into force include:

• Permitting a flexible, more principles-based approach to investment strategies – this will 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;
• Removal of prescriptive additional rules for property funds – for example UK REITs structured as closed-ended investment funds will be subject to the same investment restrictions and governance requirements as other funds; and
• Removal of most super-equivalent rules for regulated open ended funds – this group – which includes most exchange traded funds (ETFs) – are subject to detailed authorisation requirements and therefore the imposition of extra listing rules is duplicative.

The combined consultation paper and policy statement CP07/12 - 'Investment Entities Listing Review - Further consultation, feedback on CP06/21, policy statement on CP06/4 and CP06/21 and final Handbook text', is available on the FSA website. The consultation period ends on 30 September 2007.

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