FSA yesterday finalised new rules for investment companies, including Split Capital Investment Trusts, which will increase the information and protection available to investors in such companies.
Michael Foot, FSA Managing Director, said:
"These new rules aim to reduce still further the risk that retail investors will buy shares in an investment company without understanding the main risks of that investment. The changes will ensure clearer warnings for investors about the nature of these products and associated key risks and will also place limits on the investment practices that accelerated the collapse of some splits.
"We have also considered carefully the issues surrounding the governance of investment companies and will be making changes to our rules that enhance the independence of the investment company from its manager. The provision of relevant information to shareholders will place them in a position from which they should be better placed to protect their interests.
"The responses we received to CP164 were largely supportive of the measures we proposed. However, having listened to the views expressed by our respondents, we have modified three of our initial proposals that relate to investment company cross-holdings, portfolio disclosure and the independence of the board."
The key safeguards being introduced into the Listing Rules are:
Limit on cross-holdings - Under our new rules listed investment companies may not invest more than 10% of their gross assets in fellow UK listed investment companies unless those companies have a stated policy that allows them to invest no more than 15% of their assets in other UK listed investment companies. This will allow the continued operation of main-line "funds of funds" while curbing the cross-holdings that facilitated a downward spiral in the prices of some investment companies during the bear market.
Risk factors in all listing documents - Listed investment companies will be required to include an explanation in the prospectus of the risk factors specific to the issuer, its industry, its investment policy and securities it proposes to issue;
Increased portfolio disclosure - Listed investment companies must disclose on a monthly basis their holdings in other listed investment companies which do not have a stated policy of investing no more than 15% of their assets in other listed investment companies. They will also be required to disclose on a quarterly basis at least the top 10 investments plus other investments greater than 5% in their investment portfolio;
New Conduct of Business risk warnings - There will be a requirement to include risk warnings to investors proposing to invest in listed investment companies that are highly geared or companies who propose to invest in other highly geared investment companies;
Increased board independence - Rules will be introduced defining an independent director as one who is a director of only one other company with the same investment manager. These rules will also limit to one the number of investment manager associates who can be appointed to an investment company's board, subject to annual re-election by shareholders. This will ensure the independence of the investment company's corporate governance from the investment manager;
Changes to investment policy - We are introducing changes to require prior shareholder approval of any material change to the stated investment policy of an investment company at any time during its life.
Model Code
We are also making new rules extending the Listing Rules' Model Code for Directors Dealings to a broad range of synthetic instruments including contracts for difference and spread betting.
Michael Foot, said:
"We have introduced changes to the Model Code for Directors Dealings to ensure that the controls on directors' dealings in shares keep up with market developments. These changes will ensure that consumers can have confidence that the UK continues to operate orderly and clean financial markets."
