Trusts face tougher listing requirements

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Investing in Investment Trusts

Independence of the board – Can it dismiss the manager?

In November 2015 the UKLA published a technical note on investment management agreements and the independence of boards.

The UKLA revealed a consultation on amending rules relating to the fact the board of a premium-listed, closed-ended investment fund “must 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” had highlighted some issues.

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It stated: “Traditionally, the board ultimately had the ability to terminate the management agreement and appoint a new manager if the performance of the existing manager was found to be unacceptable.

“However, we have seen new applicants with investment management agreements that:

• Only allow the fund’s board to terminate the agreement if the fund is wound up at the same time;

• Continue in perpetuity or for a period of time that is unusually long compared to other funds with similar investment policies;

• Have termination fees or other significant termination penalties that are essentially prohibitive.

“Clearly, the challenge provided by an independent board will only lead to the dismissal of an investment manager in the most extreme cases.”

In spite of the findings, the UKLA confirmed the technical note “does not prescribe specific provisions for investment management agreements; generally, we would not seek to involve ourselves in what we regard as essentially a commercial contract that needs to be appropriate for a particular fund”.

However, it did add: “Boards should be mindful of whether the terms of an agreement are such that their ability to act independently and provide appropriate challenge could be fettered. In the case of a new applicant, we would expect the fund’s sponsor to be able to articulate how the board is able to meet the requirements of [the listing rules] in light of termination provisions in the investment management agreement that are particularly onerous or unusual in the context of the fund’s investment policy.”

UKLA guidance invites the fund’s independent board to consider whether such terms restrict its ability to act independently and provide appropriate challenge. In such cases, the fund’s proposed sponsor can also expect to have to engage in discussions with the UKLA.

The London Stock Exchange (LSE) has made changes to the Aim Rules for Companies and Note for Investing Companies.

An applicant seeking admission as an investing company must raise at least £6m in cash (increased from £3m) via an equity fundraising on, or immediately before, admission. This must usually be satisfied by independent fundraising and not by funds raised from related parties.