UK listing reform: Overview of final rules for listed funds

Overview

On 11 July 2024 the FCA published PS24/6 (Primary Markets Effectiveness Review: Feedback to CP23/31 and final UK Listing Rules) confirming the final form of the changes to be made to the UK listing regime. The new rules will come into effect on 29 July 2024 (subject to certain transitional provisions).

The final rules for funds differ from the proposals set out in consultation (CP 23/31) (Consultation) and subsequent draft rules in their approach to significant and related party transactions.

Once the revised rules come into force, existing premium listed funds will be transferred to the new closed-ended investment funds category which is described further below.

For a discussion of the rules for commercial companies, please see our separate briefing UK listing reforms: Radical reset to take effect on 29 July 2024.

How will the new regime differ from the current rules?

The new regime is largely modelled on the current rules for premium listed funds. However, there are a number of differences to be aware of including:

• Transactions: The requirements around significant and related party transactions both differ from the current position as discussed in further detail below.
• Board independence: The rules on board independence have been amended to include new provisions in relation to alternative investment fund managers (AIFMs). These will (in summary) mean that notwithstanding an appointment to the board of more than one listed fund with the same AIFM (or another AIFM within the same group as the fund’s AIFM), a director can be considered independent where the AIFM is independent of the fund’s investment manager.
• C shares: Where a fund issues a new class of shares intended to convert into an existing class, under the new regime these can be listed either in the closed-ended funds category (if they carry voting rights prior to conversion) or in the new “non-equity and non-voting equity shares” category (if they do not).

Significant and related party transactions

An overview comparison of the new and existing rules for closed-ended funds is set out in the table below. As proposed in the Consultation the threshold at which a shareholder becomes a related party is being increased from 10% to 20% but the related party definition otherwise remains unchanged and continues to include the investment manager and members of its group.

It should be noted that the final rules differ materially from the position proposed by the FCA in the Consultation as shareholder approval will now only be required in respect of (a) reverse takeovers outside the scope of the investment policy and (b) certain transactions relating to the investment manager’s fees or other remuneration. The proposed requirement for a fund’s investment policy to enable an investor to identify whether related party transactions are within its scope has also been dropped.

For the avoidance of doubt, the requirement for funds to invest and manage their assets in accordance with their investment policy (and to obtain FCA and shareholder approval for material changes to the policy) will continue to apply as currently.

FTSE UK eligibility

FTSE Russell has confirmed that changes to the applicable index ground rules, and specifically the eligibility criteria, will be made in line with the projected updates previously indicated in March.

The new closed-ended investment funds and equity shares in commercial companies (ESCC) categories will become the eligible listing categories for inclusion in the FTSE UK Index Series, replacing the premium segment. As a result of the automatic mapping of companies to these categories there is not expected to be any immediate impact to the index composition on day one of the new regime.

Updated ground rules and associated documentation will be published on 26 July 2024, in advance of the new rules coming into effect on 29 July 2024.

Our thoughts

In the context of related party transactions (whether within the scope of the investment policy or not), it was always unclear to us why a divergence of approach between commercial companies and funds was merited. Although the final rules are not fully aligned between the funds and ESCC categories, there has been significant movement since the Consultation and, as such, we think the FCA has ultimately struck the balance in the right place.

Looking forward to other changes impacting the equity capital markets, the next significant development will be the FCA’s consultation on the new UK prospectus regime which is due to be published later this Summer. In this context, we expect a particular area of interest for listed funds will be the approach to prospectuses for further issues post-IPO and how significantly the FCA proposes to increase the current 20% annual threshold.