Firstly, the FCA’s Primary Market Bulletin No 12 of November 2015 (the “FCA Bulletin”) provides an update on the six draft UKLA Technical Notes relating to listed closed-ended investment funds that were covered by our previous briefing. Next, the London Stock Exchange has consulted on amendments to its Admission and Disclosure Standards (“Standards”), including those applicable to the (to be) renamed Specialist Fund Segment. Changes were made early this year to the AIM Rule that apply to investing companies.
UKLA/TN/405.1 - Investment management agreements and independence of the board
In our previous briefing, we commented on proposed amendments to sections of LR 15 that require the Board of a premium listed closed-ended investment fund to be able to effectively monitor and manage the performance of its key service providers, such as the investment manager, both at admission and on an ongoing basis (LR 15.2.19R and LR 15.4.7AR). The UKLA had given the view that an unusually onerous IMA could adversely affect the Board’s ability to terminate its arrangement with the investment manager and therefore challenge the fund’s key service provider.
In response to concerns raised by respondents to the consultation, the UKLA has clarified the circumstances in which unusual termination provisions in a new applicant’s IMA may be a cause of concern for the UKLA. The UKLA has noted that it is not seeking to be prescriptive as to the terms in an IMA that it considers would make a fund ineligible. In particular, the UKLA has acknowledged that investment companies with different investment policies will have different norms when it comes to the terms of the relevant IMA.
The UKLA has also clarified that the prospectus should describe any onerous or unusual provisions relating to termination of the IMA, including the potential impact on the fund but notes that disclosure is not of itself sufficient to satisfy eligibility concerns.
UKLA/TN/407.1 – Closed-ended investment funds with multiple share classes
In the final version of this note, the UKLA has clarified that separate investment limits are not normally necessary where convertible shares, such as C shares or Subscription Shares, are issued and invested in a separate pool of assets, usually on a relatively short-term basis pending conversion into ordinary shares.
Any investment funds with permanent share classes that invest in discrete pools of assets should have an investment policy that enables investors to assess the investment opportunity and identify how the objective of risk spreading is achieved in that share class.
UKLA/TN/408.1 – Eligibility of closed-ended investment funds
The consultation draft of the Technical Note eligibility criteria for new premium-listed funds received generally positive responses. The Technical Note is specifically “designed to be asset class and strategy neutral” and it does not include an exhaustive list of factors since these will vary depending on the circumstances. The guidance is intended to make the UKLA’s thinking process “more transparent in the less obvious eligibility cases”.
One aspect of the Technical Note addresses financing arrangements and whether these undermine the diversity of a portfolio. Since the consultation draft there has been an acknowledgement by the UKLA of the longstanding practice in real estate funds regarding secured pools, which have not traditionally been regarded as creating a concentration of risk. The UKLA does not propose to alter this practice.
Following some questions relating to statements made in the draft Technical Note relating to overdraft arrangements (which the UKLA thought were more typically associated with commercial, rather than investment, companies), the UKLA has rowed back slightly and acknowledged that there justified uses of an overdraft in the context of a fund. However, it will wish to engage with the sponsor to ensure that the UKLA fully understands the proposed overdraft arrangements. Since overdraft arrangements are, in our experience, relatively common in investment trusts (for example to provide liquidity for the purposes of share buyback arrangements), this softening of the stance represented in the consultation draft is to be welcomed.
The UKLA’s approach to financing arrangements otherwise remains as detailed in our previous briefing.
UKLA/TN/409.1 – Master-feeder structures
The UKLA has made some minor amendments to the draft Technical Note, including an acknowledgement that when the UKLA considers the eligibility of a new applicant feeder-fund, it will expect the sponsor to be able to demonstrate that there is a genuine master-feeder relationship, as distinct from a fund that holds investments through subsidiaries or other controlled special purpose vehicles.
If an applicant holds 100% of the proposed master fund it is doubtful that the UKLA will consider it a master-feeder fund.
UKLA/TN/406.1 – Application of related party rules to funds investing in highly illiquid asset classes
As detailed in the previous briefing, this draft Technical Note dealt with the circumstances in which the UKLA may treat acquisitions by an infrastructure or renewable infrastructure fund of investments from an investment manger’s group as not falling within the related party rules in LR 11.
The UKLA has received extensive feedback on the draft Technical Note which has highlighted different circumstances in which the UKLA has previously treated acquisitions by an investment fund from a related party as ordinary course and therefore outside the scope of the related party rules. As a result, the UKLA has made amendments to the draft Technical Note and is re-consulting on the redrafted form.
The redrafted form includes specific circumstances which the UKLA confirms would support an argument that due to the nature of a fund’s asset class, new investments can only be acquired from an entity with which the fund has a long standing relationship (which may be the investment manager) and therefore such investment should be treated as ordinary course rather than a related party transaction:
- The investment fund can point to structural characteristics that make purchases from a related party the only viable way of enabling the fund to offer investors exposure to an asset class. The UKLA confirms that a “statement of intent to purchase from a related party - made by funds investing in sectors where fungible or near fungible investments can be sourced from other parties, and are readily available – will not be sufficient grounds for such purchases to be considered ‘ordinary course’”. In assessing such situations, the UKLA will look to understand the nature of the asset and the relationship between the investment manager and the asset, including how the asset originated and whether value has been added. It will also consider the relationship between the issuer and the related party, as well as how the related party provides the issuer with preferential access.
- The investment fund is able to demonstrate that it has arrangements in place to effectively process relevant purchases and manage any conflicts that arise. The UKLA has noted that it has previously found convincing arrangements to include strong buy-side committees that are independent of the related party (or at least its sell side) staffed by credible and experienced individuals.
Admission and Disclosure Standards: consultation on amendments to Admission and Disclosure Standards
Between 4 December 2015 and 8 January 2016, the LSE consulted on proposed amendments to the Standards that are designed to make them easier to use. It has not yet published the final revised version.
The Standards have been restructured to become a consolidated resource for all issuers and advisers by incorporating schedules that deal with the admission process for each of the LSE markets and segments (with the exception of AIM and London Stock Exchange Derivatives Market).
The proposed amendments to the Standards include renaming the Specialist Fund Market as the Specialist Fund Segment (“SFS”). This purpose of the renaming is to clarify that the SFS is a segment of the LSE’s regulated market rather than a separate listed market.
The LSE launched the Specialist Fund Market in 2007 as a market dedicated and tailored to the needs of investment funds and targeted for institutional, professional and highly knowledgeable sophisticated investors.
The SFS will remain an EU regulated market as defined in MiFID and a regulated market for the purposes of the UCITS Directive. However, as securities do not need to be approved for public notification on the Official List as a prerequisite for admission, the Specialist Fund Segment is an unlisted market. The amended Standards clarify that where the term “Main Market” is used throughout the Standards, this will include securities admitted to the SFS.
The amended Standards now include schedules that set out the admission conditions for each LSE market and segment. The following apply for admission to the SFS.
- The applicant must be a closed ended investment fund.
- The applicant must have published a prospectus approved by the FCA (or another relevant EEA competent authority). The prospectus and any RNS announcement published at admission should include a specific disclaimer to the effect that the SFS securities are not admitted to the Official List of the FCA and the company has not been required to satisfy the eligibility criteria for admission to listing on the Official List or to comply with the Listing Rules.
- The applicant must disclose post-issue free float as part of its submission. This is a proposed new condition.
- There must be a sufficient number of registered holders of the securities to be admitted to provide an orderly market in the securities following admission. This is another proposed new condition.
- The issuer must be duly incorporated or otherwise validly established and must operate in conformity with its constitution.
Alternative Investment Market: revised AIM Rules for Companies
On 22 December 2015, the LSE published AIM Notice 43 confirming changes to the AIM Rules for Companies and consequential changes to the AIM Note for Investing Companies.
The LSE has implemented the rule changes to the following AIM Rules and guidance:
- AIM Rule 8 (investing companies) has been amended to increase from £3 million to £6 million the amount in cash that an applicant seeking admission as an investing company must raise via an equity fundraising on, or immediately before, admission.
- AIM Rule 15 (fundamental changes of business) has been amended to remove the provision that deemed an AIM company which became a cash shell following a fundamental disposal to be an investing company under AIM Rule 15, and that required the AIM company to obtain shareholder approval for the disposal and its proposed investing policy, following which it had 12 months to either implement the investing policy or make an acquisition or acquisitions which constituted a reverse takeover under AIM Rule 14. Instead, an AIM company that becomes a cash shell following a fundamental disposal will be regarded as an “AIM Rule 15 cash shell” (rather than being automatically treated as an investing company).
- New guidance has also been introduced into the Guidance Notes on AIM Rule 15 to the effect that where there is any question as to whether an AIM company has become an AIM Rule 15 cash shell or the point at which it becomes an AIM Rule 15 cash shell, the Exchange must be consulted as soon as possible. Where an AIM Rule 15 cash shell does not intend or wish to undertake a reverse takeover in accordance with AIM Rule 15, the Exchange expects it to obtain shareholder approval to cancel its admission to AIM in accordance with AIM Rule 41, and to consider how best to return any remaining funds to shareholders.
- The AIM Note for Investing Companies has been amended to say: “The Exchange would expect the condition of admission to raise a minimum of £6 million in cash via an equity fundraising on, or immediately before, admission, referred to in Rule 8, to usually be satisfied by an independent fundraising and not be funds raised from related parties, unless the related party is a substantial shareholder only and an authorised person. Cash funds resulting from a fundamental disposal under Rule 15 will usually be considered independent for these purposes.”
The revised AIM Rules and AIM Note for Investing Companies (January 2016) are effective from 1 January 2016.