LONDON, June 26 - Britain has outlined a package of proposed changes to the listing rules that govern investment trusts, aiming to strengthen protections for minority investors and reduce conflicts of interest that have come to the fore after a spate of activist investor activity.
The Financial Conduct Authority said the measures are intended to better manage situations where substantial shareholders nominate directors to trust boards and where large shareholders who also act as managers vote on material changes to an investment trust's policies. The regulator said activist involvement in the investment trust sector has risen over the past two years.
Those developments include a campaign earlier this year in which a US activist investor succeeded in removing the board of Edinburgh Worldwide Investment Trust and replacing it with nominees of the activist in April. The FCA did not name the activist in its announcement on Friday. The activist investor was not immediately available for comment.
Edinburgh Worldwide's then chairman, Jonathan Simpson-Dent, had earlier criticised the existing regulatory framework, arguing it deserved closer examination because a 30% stake could be sufficient to remove a board. The activist has defended its actions as necessary to tackle underperformance by British investment trusts.
In March the FCA referred to the broader debate around its role in relation to investment trusts and said it would accelerate a planned review of the listing rules. On Friday the regulator published its proposals and opened them for consultation, with feedback invited until August 16.
Among the specific changes set out, the FCA said it would address conflicts where directors are nominated by a substantial shareholder and ensure minority shareholders have safeguards when large shareholders who are also managers vote on significant changes to investment policies. "Strong shareholder rights and minimal conflicts of interest are crucial to well-functioning markets, including for investment trusts," said Jon Relleen, director of infrastructure and exchanges at the FCA.
The Association of Investment Companies, which represents investment trusts, welcomed the FCA's proposals. "These proposals would strengthen investor protection, particularly when a substantial shareholder like Saba Capital seeks to replace the board and become the manager," said Richard Stone, chief executive of the AIC.
Market data on Edinburgh Worldwide included in the FCA announcement showed the trust trading down, with a quoted change of -2.00% for EWI and -0.3% for BRW at the time of reporting. The consultation aims to address the narrow circumstances that have prompted calls for regulatory clarification and to protect minority investors where voting and nomination arrangements can create conflicts.
Readers and stakeholders have until August 16 to submit their views on the proposed changes to the listing rules. The FCA's consultation is focused on balancing shareholder rights and reducing conflicts within the investment trust structure, while the precise impact of any final rule changes will depend on the responses received during the consultation period.