As the title indicates, CP0712 is not the FSA's first set of proposals in this area. Indeed, it contains the third set of proposals since March 2006 when CP064 was issued. The fact that in some areas the FSA has rejected what was proposed in CP0621 and gone back to its original proposals in CP064 would appear to indicate that it has found it difficult to make up its mind as to the right approach to be adopted for listing of investment entities in London.
The main change to FSA's policy is that it has decided, as a result of comment from respondents to a previous consultation, to withdraw its proposal to allow listing of investment funds under chapter 14 of the Listing Rules (secondary listings of overseas companies). That proposal had been prompted by the success of Euronext Amsterdam in attracting floats of substantial overseas investment funds in the course of 2006, such as KKR Private Equity Investors, MW Tops and AP Alternative Assets. These issuers were required to comply only with the minimum obligations that the relevant underlying European directive – the Consolidated Admissions and Reporting Directive ('CARD') – imposed, which had obvious advantages for themwhen compared to the more inflexible and onerous requirements on offer in other jurisdictions (such as the UK). The FSA concluded that to prohibit 'directive minimum' listing of these funds in the UK, and effectively to force such funds, if they wished a London listing, to comply with the 'directive super-equivalent' requirements of chapter 15 of the Listing Rules would not be effective as a means of investor protection. The funds concerned would simply list elsewhere in the EU, and the securities concerned would be readily accessible to investors in the UK. The result would be that UK regulated markets would be at a disadvantage to their competitors. All these points would seem to be well made. Yet a clear majority of respondents expressed strong opposition to what the FSA had proposed, principally among the investment trust community. The particular grounds of opposition were:
On the basis of this opposition, and despite a substantial minority arguing that 'two-tier' listing of investment funds could be made to work provided that its scope was extended to UK issuers (hedge fund voices among them), the FSA is now proposing that all listed closed-end investment funds, whether domiciled in the UK or not, should be required to be listed under chapter 15 (as amended by the proposals in CP064 and 0621, and as further modified by the proposals contained in CP0712). Consequently, chapter 14 of the Listing Rules will be modified to prohibit directive-minimum listings of investment entities. Assuming that there is no further re-think of the policy as a result of consultation responses, this regime will take effect in the first quarter of 2008.However, the FSA is also proposing that any investment entity that lists in the UK under the directive-minimum provisions of chapter 14 of the Listing Rules before the new FSA regime is introduced will continue to be able to do so, although a mechanism will exist under which it may elect to move to the chapter 15 regime. Although this is from one perspective a pragmatic approach, it rather undermines the argument that, going forward, a single listing regime is required to protect investors and avoid confusion. It would perhaps have been more consistent to have given chapter 14 listed entities a period of grace after which they would have the choice of complying with the new chapter 15 requirements, or ceasing to be listed. The removal of the directive minimum approach under chapter 14 does not augur well for the level playing field among stock exchanges, now tilted heavily against the UK (but see below re the SFM). Hedge and private equity fund promoters will find some of the proposed chapter 15 rules unpalatable, for example having to give voting rights to investors when these are not required by Euronext.
From September 2007, there will be in place what the FSA calls an 'interim regime', which is the regime as it currently stands as amended by various modernising and simplification changes. The FSA believes that there is a clear benefit in making these changes without further delay, given the benefits to stakeholders and the widespread support they command. These changes include:
As noted above, the FSA is proposing further changes to chapter 15 of the Listing Rules which are intended to come into force in the first quarter of 2008. These include:
Nature abhors a vacuum and therefore in order to preserve its competitive edge, and not least given the vacillation of the FSA described above, the London Stock Exchange (LSE) recently announced that it will launch a dedicated new market for the issuers of specialised investment funds known as the Specialist Fund Market (SFM) as from 1 November 2007. The SFM will impose (and benefit from) the directive minimum standards shunned by the FSA. The SFM will be available only to issuers of "Specialised Investment Funds" (SIFs) targeted at institutional, professional and highly knowledgeable investors. Both UK and non-UK domiciled investment entities are eligible to seek admission to the SFM. The SFM will be a regulated market as defined in the Markets in Financial Instruments Directive (MiFID), and as a result MiFID organisational and procedural provisions will apply to it. It will also be a regulated market for the purposes of the UCITS Directive, which means that UCITS funds will be able to invest in SFM securities, subject to the usual UCITS spread restrictions.A SIF is defined by the LSE to include, among other things, single strategy funds, feeder funds, specialist sector funds, limited partnership structures, specialist geographic funds and funds with specialist corporate governance structures and therefore clearly encompasses hedge funds. Issuers that wish to market such funds to a wider audience, including retail investors, will continue to have access to the Main Market which offers the potential for inclusion in index tracker funds, and to the Alternative Investment Market (AIM), which has been very successful in attracting investment entities, primarily property funds or other conventional investment funds. In order to be eligible for listing on the SFM an applicant will be required to follow the initial and ongoing obligations as laid down in the LSE's Admission and Disclosure Standards and the FSA Conduct of Business Rules, which broadly will require that any applicant to the SFM, among other things, needs to do the following:
The SFM will accept a variety of sophisticated legal structures including limited partnership interests and non-voting share structures allowing the flexibility to create structures that can comply with home country tax or securities laws whilst also allowing access to permanent capital.
To be admitted to trading, SFM securities must be eligible for electronic settlement through CREST. (Other Central Securities Depositaries will also be considered, upon request.) The LSE must also be informed at the time of application of any settlement restrictions that will apply to the securities that are to be considered for admission. Liquidity in SFM securities will be facilitated by the LSE world class trading platform, TradElect. SFM securities will be traded on dedicated segments of either the SETS or SETSqx services depending on their anticipated trading pattern and size.
It is possible for investment entities that are currently admitted to AIM, or listed on the Main Market or other regulated markets, to transfer to the SFM. Such entities will generally be required to produce a prospectus in accordance with the rules of their competent authority (unless an applicable exemption applies); in the case of those entities for whom the FSA is not the competent authority, that prospectus must be approved by the relevant home state competent authority and passported into the UK before a request is made to the LSE for admission to trading. In the case of transfers from the Main Market or other regulated markets, investment entities will also generally need to comply with any applicable delisting requirements (for example, in the case of delisting from the Main Market, the requirements of chapter 5 [suspending, cancelling and restoring listing] of the Listing Rules). It will be interesting to see whether any such transfers actually occur. Given that a transfer would not be without cost to the issuer, and that funds currently admitted to AIM or to the Main Market benefit from the ability to be marketed more widely than will be possible for a SFM fund, one wonders whether this mechanism is of theoretical value only.
The FSA has indicated that CP 0712 is far from being the last chapter in this particular story. In view of the ongoing debate about the structure and quality of the UK's listed markets, the rights of participants in them, and their relation to other markets both in the UK and overseas, the FSA will be holding further discussions with stakeholders, with a view to publishing either a discussion or consultation paper later in 2007. That paper also looks likely to contain the FSA's updated thinking on listing categories, a proposition which appears to have received sufficient support to be adopted in general terms, but where the details (such as the descriptions of the categories) require further consideration. Against such a fluid background, one thing seems certain: investment entities and their advisers can expect more changes before the regime is finally settled. As for the SFM, targeted at private equity and hedge fund promoters, it remains to be seen whether it will take the challenge to Euronext when it opens for business in November.