The Financial Conduct Authority's (FCA) proposed overhaul of listing rules for closed-ended investment funds has sparked debate within the industry, aiming to curb the power wielded by investment trust boards and safeguard smaller investors' interests. A key battleground is the conflict of interest arising when a board member is nominated by a significant shareholder. The FCA seeks to address this issue head-on with a proposed rule change that would prohibit such board members from voting on decisions related to their nominating shareholder, strengthening existing requirements for independent decision-making.
The regulator's proposals also target fee and investment policy changes. A revised definition of 'related party' would include incoming investment managers, triggering existing fee-protection rules and requiring market announcements, board approval, and expert verification for new fees exceeding 0.25 per cent of the fund's size. For arrangements over five per cent, a full shareholder vote would be mandated, with related parties excluded from voting. This move aims to prevent potential overcharging and ensure reasonable management fees for shareholders.
Stricter controls on investment policy changes are also planned, requiring FCA and shareholder approval for significant alterations to published strategies. Crucially, the proposals suggest excluding substantial shareholders appointed as investment managers – along with their associates – from voting on such material changes. This is intended to prevent large shareholders pushing through strategic shifts that primarily benefit themselves at the expense of others.
The FCA's proposed rules follow criticism of its handling of activist hedge fund Saba Capital, which has been actively campaigning against several UK investment trusts. Industry concerns about aggressive tactics and inadequate investor protection have led to calls for increased regulation and oversight. The regulator is, however, open to feedback on these proposals, including alternative options such as a 20 per cent vote cap.
Jonathan Simpson-Dent, former chair of Edinburgh Worldwide Investment Trust (EWIT), has been vocal about the need for more robust investor protection measures. His concerns have highlighted the FCA's perceived failure to act decisively in the face of aggressive activist tactics. The proposed rule changes aim to address these issues and strengthen investor safeguards, but their implementation will be closely watched by industry stakeholders.