UK FCA consults on UKLR changes for closed-ended investment funds

The UK Financial Conduct Authority (FCA) has published consultation paper CP26/21 proposing targeted amendments to the UK Listing Rules (UKLR) for closed-ended investment funds (investment trusts). The consultation follows the FCA's targeted review of how the UKLRs applied to investment entities, which was announced in March as part of the FCA's ongoing work on the UKLR. During the review, the FCA considered how its rules support strong shareholder rights and effective management of conflicts of interest in a range of potential scenarios. The FCA carried out stress testing the rules' operation in different hypothetical situations to ensure they remain robust over time and as markets evolve.

The FCA proposes to:

• Strengthen board independence by introducing a rule to clarify governance requirements when appointing a new investment manager, including requiring directors who are not independent of the proposed investment manager to be excluded from the board's consideration of the transaction or arrangement for the appointment.
• Amend the FCA Handbook Glossary definition of "associate" for its application in the UKLR requirements applicable to closed-ended investment funds under UKLR 11 only, so that it: (i) applies to a proposed investment manager; and (ii) includes the association between a director and any substantial shareholder (or associate of that shareholder) that has proposed the director for their appointment.
• Bring proposed investment managers in scope of the relevant related third-party transaction rules by amending the definitions of a related party and a relevant related party transaction.
• Require independent shareholder votes in certain circumstances, by restricting voting rights where a substantial shareholder is also the investment manager of a closed-ended investment fund. The FCA proposes to do so by excluding such shareholders (and, in certain cases, their associates) from voting on material changes to an investment policy. However, the FCA also proposes three alternative approaches: (i) by applying a 20% limit so substantial shareholders would be able to vote up to 20% of the total voting rights; (ii) by applying the restriction only where (a) the substantial shareholder is the investment manager; and (b) a director or directors of the board are not independent of the substantial shareholder; (iii) by applying a double majority approach where a material change to investment policy would require both (y) a simple majority of all shareholders and (z) a simple majority of independent shareholders.

The deadline for comments is 14 August. Final rules are expected later in the year, with a four-week implementation period following publication of the policy statement. The FCA will also publish good practice guidance to help retail investors exercise their voting rights.

It will also continue its broader review of the UK listing regime, including which types of investment entities should be eligible to list in the UK. In particular, it is considering whether the requirement for listed closed-ended investment funds to manage their assets in a way that aligns with the objective of spreading investment risk, is proportionate. This work is ongoing and the FCA will publish its timeline for taking it forward later this year.

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