Navigating the Changes For Closed-Ended Investment Funds: The FCA's New Listing Rules Sourcebook

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Navigating the Changes For Closed-Ended Investment Funds: The FCA's New Listing Rules Sourcebook

Navigating the Changes For Closed-Ended Investment Funds: The FCA's New Listing Rules Sourcebook

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July 18, 2024

The FCA has now published the new Listing Rules Sourcebook (New UKLR), which will take effect from 29 July 2024.

Background

In December 2023, the FCA published consultation CP23/31 which detailed proposals to overhaul the Listing Rules. The aim was to create a simpler, more disclosure-based listing regime to help boost UK growth and competitiveness by making the UK listing regime more attractive to a wider range of companies.¹ In March 2024, the FCA published the second tranche of its proposed new rulebook, which included the draft rules applicable to closed-ended investment funds (the Draft Rules). A consultation process (Consultation Process) followed, resulting in the New UKLR.

The New UKLR broadly retains the current Listing Rule 15 eligibility and continuing obligations provisions for closed-ended investment funds (CEIFs), but there are some interesting changes made to the proposals set out in CP23/31 and the Draft Rules in response to representations made during the Consultation Process. We set out below an overview of the principal changes, as well as some additional points of interest.

Related party and significant transactions

In Chapter 11 of the New UKLR, the related party and significant transactions regimes for CEIFs have been aligned more closely with the regimes for commercial companies. As such, the New UKLR will require disclosure rather than shareholder approval (and a related shareholder circular) for the majority of such transactions.

Related party transactions (RPTs)

The current requirements for prior shareholder approval and an FCA-approved circular to an RPT where a percentage ratio on any of the class tests is 5% or more will fall away in most instances. These requirements will only apply to "relevant related party transactions" (being RPTs which relate to the fees or other remuneration payable by a CEIF to an investment manager or a member of the investment manager's group). Other RPTs with a percentage ratio of 5% or more will only require a sponsor's fair and reasonable opinion, board approval to the transaction, and an announcement as soon as possible after the terms of the transaction are agreed.

Where a percentage ratio is 0.25% or more (but less than 5%), the current requirement for a sponsor's fair and reasonable opinion and transaction announcement will only apply to relevant related party transactions.

We anticipate that UKLA Technical Note 403.2, which covers class testing changes to an investment management agreement (and therefore class testing of relevant related party transactions), will continue in force for the time being. However, the FCA has recognised that over time there may be some areas where revised or new Technical Note guidance may supplement the New UKLR with more practical examples and so this may change in the future.

In our article of 22 January 2024,² we noted that the current requirement for shareholder approval for a transaction with the investment manager which was within the scope of the CEIF's investment policy but not demonstrably in the ordinary course of business has been a source of frustration for the industry. The FCA's decision to focus shareholder approval on only "relevant related party transactions" means that this anomaly has been dealt with.

Whilst not just applicable to CEIFs, the New UKLR also increases the threshold at which a shareholder becomes a related party from 10% to 20%.

Significant transactions

The New UKLR has brought change to the provisions regarding significant transactions. Both CP23/31 and the Draft Rules provided that significant transactions (i.e. transactions where any percentage ratio on any of the class tests is 25% or more) executed outside the scope of a CEIF's published investment policy would continue to be subject to prior approval and an FCA-approved circular. However, the position was reversed following the Consultation Process, where there was broad consensus that the divergence between the commercial companies and CEIFs categories when it came to significant transactions was inappropriate. In particular, it was felt that, if CEIFs were not able to benefit from the changes being proposed to the commercial companies category in this regard, this would create an undesirable arbitrage between these categories.

As a result, Chapter 11 of the New UKLR is broadly aligned with the significant transactions regime for commercial companies, taking the disclosure-based approach at UKLR 7.3.

These changes from the Draft Rules are perhaps not as noteworthy as they may first appear. Any transaction which is executed within the scope of a CEIF's published investment policy is not considered a significant transaction. Significant transactions which are not executed in accordance with the scope of the investment policy are required to comply with the disclosure regime set out UKLR 7. However, this is all subject to the overarching principle that a CEIF must, at all times, invest and manage its assets in a way which is consistent with its object of spreading investment risk, and in accordance with its published investment policy.³ Anything done outwith the scope of the published investment policy will require a change to that investment policy. FCA and shareholder approval will need to be obtained for any material changes to the investment policy,⁴ as is currently the case.

Additional points to note

Board independence

As noted in our article of 22 January 2024,⁵ in order to enable new applicants to have a wide pool of experienced directors from whom to choose, the New UKLR has clarified that, notwithstanding an appointment to the board of more than one CEIF that has engaged the same independent alternative investment fund manager (AIFM), a director will be considered independent where the AIFM is independent of the CEIF's delegated investment manager. This expressly acknowledges the growing number of CEIFs (and investment managers launching new CEIFs) which choose to outsource the AIFM role to an independent third party, and is a welcome development.

FTSE indexation

FTSE Russell (which administers the FTSE UK Index Series) has confirmed that the ESCC and Closed Ended Investment Fund categories will become the eligible index universe for the FTSE UK Index Series, replacing the premium segment.