AIC outlines recommended changes to listing rules

The Association of Investment Companies (AIC) has put forward a series of recommended changes to the UK listing rules in light of actions taken by Saba Capital relating to investment trusts’ boards of directors.

The Financial Conduct Authority (FCA) is reviewing the listing rules and how they relate to investment entities, including investment trusts, focusing on board independence and conflicts of interest.

US-based hedge fund firm Saba Capital has been attempting to replace directors on the boards of several UK-listed investment trusts where it is a shareholder, including Edinburgh Worldwide and Impax Environmental Markets.

The AIC is therefore looking to encourage debate on how the legislation could be changed to address potential conflicts of interest, amend rules around the independence of board directors, and prevent investment managers that are also ‘substantial’ shareholders from voting on changes to a trust’s policies.

“Saba’s admission this week that it wants to replace Baillie Gifford and become the investment manager for Edinburgh Worldwide highlights a potential conflict of interest that the current listing rules are not designed to tackle,” said AIC chief executive, Richard Stone.

“The current rules for investment companies consider potential conflicts between a board and its manager, but do not cover situations where a substantial shareholder may be using its influence to replace the board and become the manager.

“Saba’s intention to gain control by replacing all the directors also raises urgent questions about the nature of board independence.”

The AIC urged the FCA to consider amending the related party rules so any proposal for a substantial stakeholder to become the asset manager was subject to a vote, with the shareholder itself to be excluded from that vote.

It also called on the regulator to consider strengthening the independence requirements for directors of investment companies to ensure they cannot be beholden to any large shareholder or the investment manager.

Finally, it argued that investment managers that were also substantial shareholders should be prevented from voting on changes to a trust’s policies.

“The current listing rules need amending to ensure shareholder activism remains a positive influence in corporate culture, not a route to riches at the expense of other shareholders,” Stone stated.

“Our priority is to prevent potential conflicts of interest and better protect the rights of all shareholders.”

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