The FCA announced earlier this month that it would bring forward its planned review of UK Listing rules, but it has become worried that shareholders may be confused over their rights and protections, according to Simon Walls, interim executive director of markets at the FCA.
In a blog published on the FCA’s website last Friday (27 March), entitled Investment trust votes, conflicts of interest, and our role, Walls wrote: “There has been substantial debate over our role in relation to investment trusts, including calls for us to ‘get to grips’ with voting rules ‘that allow a minority shareholder to repeatedly attack an investment trust’.
“Much of this debate suggests there are misunderstandings about how investment trusts are governed and where responsibilities sit. We’re concerned this may confuse investors in these trusts.”
Walls added some calls to action have “lacked clear proposals or been based on future hypothetical scenarios for which protections often exist”.
“In recent weeks, some of the language used by boards and managers has implied that certain requisitions for votes are vexatious or not in the best interest of shareholders,” Walls said.
See also: EWI: FCA ‘misses the central issue’ on Saba controversy
However, he argued the Companies Act already anticipated this and gives boards the ability to set aside resolutions in these circumstances.
“To date, we haven’t seen this used by investment trusts,” Wall said.
“As investors and shareholders themselves, most industry participants should be well acquainted with these long-standing rights and powers.”
However, James Carthew, head of investment companies at QuotedData, criticised this suggestion from the FCA, calling it a “dead end” for shutting down Saba.
“A couple of times now, the FCA has suggested that trusts treat repeated requisitions by Saba as ‘vexatious’,” he said. However, he noted that based on existing writing, vexatious actions aim to disrupt, annoy or harass the target and need to be proven to be without merit.
“It feels to me as though if Saba disputed whether its actions were vexatious, there is a good chance that a judge would side with them.
“That implies that the trust might incur substantial legal fees for no ultimate benefit, and it would be no use running crying to the FCA that it was all its idea,” Carthew concluded.
These legal shareholder rights have underpinned recent FCA reform, according to Walls. “We’ve reduced prescriptions regarding significant transactions and capital raisings because informed shareholders can push for change or sell out if a company moves in a direction they do not support.”
Under the existing legal structure, there are provisions about director independence, including a “fiduciary duty to exercise independent judgment”.
The FCA’s own rules require trusts entering transactions with related parties (major shareholders) to receive written confirmation from independent sponsors that the terms are fair and reasonable.
For these rights to be effective, shareholders need to be engaged and informed, so it has been encouraging that recent turnout has been over 80% in some votes, Walls said
However, with a handful of trusts having carried out two requisition votes or more in recent months, Wall said there may be more platforms and companies can do to increase awareness.
“Against this background, we’re worried that some of the confused messaging could risk having a detrimental impact on engagement,” the FCA director of markets said. “It may give a misleading impression that these votes might be prevented without boards using their legal powers.”
The FCA is focused “specifically on whether we need to amend the rules to make it clear that our related party and board independence rules apply to prospective investment managers and directors”.
“We want to ensure that – whatever the route – minority shareholders have the right protections against conflicts of interest in the terms under which investment managers are appointed.”
See also: FCA reveals regulatory priorities for asset managers
Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), noted that the FCA’s response had provoked a “heated reaction”.
The AIC urged the FCA to publish its proposals for listing reforms swiftly, which will be an “essential next step to help prevent many of the issues highlighted by the Saba attacks”.
“We agree with the FCA that the focus of the review should be on strengthening the independence requirements of investment trust directors and managing conflicts of interest when a minority shareholder has an outsized influence on a company,” Brodie-Smith said.
“We need to make sure any gaps in the rules are addressed and all shareholders are protected.”
