In February this year, our Law-Now
article described the UK Listing Authority’s proposals to
change the listing rules that apply to listed investment entities
on the UK Official List. These reflected the UKLA’s
wish to take into account “concerns about the relative
attractiveness of the UK regime for certain closed-ended investment
funds” and the “dynamic, multi-jurisdictional capital
market landscape” in which the City operates.
Since then the changes have continued, driven by conflicting views
of how the market should develop. Below we look at the most
recent changes and consider how the market is developing.
Where were we in February
February 2007 saw us in the middle of the UKLA’s second
consultation on investment entities. It had carried out its
first consultation in March 2006, but then surprised almost
everyone in October that year when it announced that overseas
investment companies would be able to list under a directive
minimum regime, with virtually none of the restrictions and other
rules that apply to UK listed funds. This was in response to
a number of funds listing under the same directive minimum regime
on Euronext Amsterdam, and concerns that the London markets risked
being left behind.
The proposals also included several areas of deregulation for UK
investment companies, many of which were aimed at permitting a
wider range of investment strategies. These included:
- removing most investment restrictions so long as the
fund’s investment policy has the objective of spreading
investment risk - this should permit most hedge fund or private
equity type strategies
- allowing a fund to control entities that it has invested in -
crucial for private equity style investment strategies
- removing all restrictions on investments that property funds
could make (for example, on concentration or leverage), so they
would only be bound by their investment policies
- some “feeder funds” (i.e. funds created with the
specific policy of investing into another, typically unlisted,
fund) would now be permitted, although generally it was thought
these relaxations didn’t go far enough to permit a
traditional master/feeder hedge fund structure
- changes to what information has to be regularly disclosed by
Although all of these changes were
welcomed, it was the directive minimum proposal that attracted the
most excitement. BH Macro - feeding Brevan Howard’s
global macro fund - was launched in February to take advantage of
the new rules, and interest was high.
What has changed
While the directive minimum proposal was strongly supported in many
parts of the City, opposition to the new proposals became more
vocal. The Association of Investment Companies led a lobbying
campaign against the proposal, gaining support from the Consumers
Association, MP John McFall, chairman of the Treasury select
committee, and investor groups. John McFall told the UKLA it
was opening a “gaping hole” in investor protection,
while the AIC suggested that the UKLA had abandoned its consumer
protection obligations, pointing out that directive minimum
listings disapplied 120 pages of protections applied to traditional
In April 2007, the UKLA announced that it would not continue with
its proposal to allow funds to take up a directive minimum listing
- making it clear that a “very clear majority” of
responses to its consultation had opposed the idea of a two-tier
system of regulation.
That decision has driven much of what has happened since...
Withdrawal of directive minimum listing
The UKLA has confirmed that overseas funds will not be able to take
up a directive minimum listing after March 2008 - although any
funds that have listed before then will be able to stay within the
old regime. After that time, any fund (UK or overseas) which
wants a full listing in the UK will need to comply with the full
investment company rules.
It is clear though that the UKLA does not entirely agree with this
position or the consumer protection benefits that are claimed for
it - pointing out that “issuers already have other practical
options outside the ambit of the listing regime in the form of
regulated markets in other EU jurisdictions and the AIM market in
the UK” or even new regulated markets in the UK. They
also make clear that they have no power to prevent these shares
being sold to UK investors.
Further deregulation of
the UK investment company regime
One of the key suggestions was that a separate, directive minimum
regime wasn’t necessary because instead the full UK regime
should be made more flexible to allow all types of funds to have a
The UKLA’s June 2007
consultation has confirmed that virtually all of the
deregulatory proposals already consulted on will come into force in
September 2007, making the regime much more principles-based.
It has also suggested some further deregulatory steps,
- new rules on regular portfolio disclosures, reducing the amount
of information that needs to be disclosed
- further relaxation of rules on the manager’s experience
and board make-up
- increased flexibility which will permit feeder funds
- discussion of whether to stop treating investment managers as
related parties of the funds they manage
However there remains scepticism about whether
these go far enough to satisfy alternative funds - particularly
hedge funds - and whether they will accept the burdens of a full
LSE announces its new
Specialist Fund Market
In mid-July, the LSE announced that it would launch a new market
for large hedge funds, private equity funds, and certain emerging
market and specialist property funds seeking admission to a public
market in London, with effect from 1 November 2007.
The market will be a “regulated market” for the
EU’s Prospectus Directive and other regulations (like the UK
Official List but unlike AIM) but will not require a full listing
on the UK Official List. The requirements for admission to
trading will effectively offer once again a “directive
minimum” option for investment funds. For example the
listing rules on shareholder approval for transactions and related
party transactions, compliance with the Combined Code, independence
of the board and changes to investment policy would not apply to
any SFM-traded funds.
The LSE states the new market is being launched to meet market
demand, and is aimed at professional and institutional investors
only. But despite prominent badging to say it is “not
intended as an admission route to a regulated market for investment
entities that are intending to make a retail offering”, the
AIC has attacked the new market and said that funds should be
encouraged to list on the main market instead. Claiming that
retail investors would find their way to the new market regardless
of how the LSE described it, the AIC have suggested renaming it the
“Unlisted Investment Companies Market” to make clear to
investors that they were not gaining the protection of a
fully-listed investment trust.
How the new market will be used is difficult to predict.
Since a prospectus will be needed as part of the admission process
onto the SFM, funds will be in a prime position to market shares to
retail investors if they choose to do so. But the LSE may
come under pressure from the AIC and others to prevent SFM traded
shares from being widely offered to retail investors in practice,
and so this may turn out not to be an easy option.
Despite the controversy and uncertainty, the new market is likely
to be a welcome addition to the options available for funds.
For more details see the LSE’s website at http://www.londonstockexchange.com/specialistfundmarket
or contact us and we will be happy to discuss admission to the new
market with you.
The market position keeps changing, so it is difficult to know
where things will go next. What is clear though is that the
LSE - which was a strong supporter of the UKLA’s previous
proposal to allow directive minimum listings - is focused on
ensuring it can continue to compete with Euronext Amsterdam and
other markets and offer a full range of options to funds looking
for a route to market.
Only time will tell whether the Specialist Fund Market will be a
success but given AIM’s current popularity, it would be a
bold person who would write it off.