The UK’s Financial Conduct Authority (FCA) has proposed targeted changes to the listing regime for closed-ended investment companies, seeking to address governance issues highlighted by activist campaigns led by US hedge fund Saba Capital, according to a report by the Financial Times
The consultation, launched on Friday, follows Saba’s successful efforts earlier this year to gain control of the boards of two London-listed investment trusts after building significant minority stakes and arguing that persistent discounts and weak performance warranted change.
Under the proposed amendments, substantial shareholders that also stand to benefit from becoming an investment trust’s investment manager would be prevented from voting on resolutions relating to their own appointment. The FCA said the measures are designed to strengthen the management of conflicts of interest while preserving shareholder rights and engagement.
The regulator described the proposals as a limited and proportionate response aimed at ensuring the UK’s listing framework remains fit for purpose as activist strategies evolve within the investment trust sector.
The move has been welcomed by industry participants, including the Association of Investment Companies (AIC), which has argued that recent activist campaigns exposed weaknesses in the current rules. The AIC said the changes would provide additional safeguards for investors where shareholders seek both board control and management of a trust’s assets.
The consultation comes after Saba replaced the boards of Edinburgh Worldwide Investment Trust and Impax Environmental Markets. The newly appointed directors are widely expected to review the trusts’ investment management arrangements, with market participants anticipating that Saba or one of its affiliated investment businesses could ultimately be considered for the mandates.
The FCA’s proposals would specifically apply in situations where a significant shareholder is also seeking to become the investment manager of a listed closed-ended fund, requiring that shareholder and its associates to abstain from voting on relevant resolutions.
Market participants broadly viewed the regulator’s approach as measured. Advisers noted that the proposals seek to close the most obvious governance gaps without undermining the ability of shareholders to challenge boards or pursue legitimate activist strategies. However, some legal observers questioned whether sophisticated activist investors may ultimately identify alternative structures that achieve similar outcomes within the revised framework.
Saba has pursued activist positions across a number of UK investment trusts and has consistently argued that entrenched boards and persistent discounts have failed shareholders. The firm has previously indicated that it intends to continue pursuing opportunities across the sector.
The FCA is accepting responses to its consultation until 14 August and expects to publish final rules before the end of the year. The regulator said the objective is to strengthen conflict management while maintaining an appropriate balance between investor protection and shareholder democracy.
