The Specialist Fund Market and the Investment Entities Listing Review new listing regimes for investment entities. slaughter and may.

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1 The Specialist Fund Market and the Investment Entities Listing Review new listing regimes for investment entities slaughter and may July 2007

2 1. introduction On 12 July 2007 the London Stock Exchange (the LSE ) announced the launch of the Specialist Fund Market (the SFM ), dedicated for issuers of specialist funds. 1 This will allow the listing of specialist vehicles such as single strategy hedge funds and private equity funds. The LSE has also published Guidance for Admission to Trading for New Applicants to the SFM (the LSE Guidance ). 2 The market will be open for new admissions from November the current position The launch of the SFM should be considered in the light of the review by the Financial Services Authority (the FSA ) of the investment entities listing regime which commenced in The FSA has published several consultation papers and a statement during the course of this review and most recently outlined a proposed new regime for investment entities under the Listing Rules (the LR ). 3 Currently, an investment entity seeking to list on the Main Market of the LSE (but not AIM) is obliged to follow the requirements of Chapter 15 of the LR. Among other obligations, an investment entity is not permitted to control, seek to control, or be involved in the management of the companies in which it invests. 4 This restriction, and the strict requirement for an independent board, 5 were among the factors which led to the listing of private equity managed vehicles on Euronext, the rules of which are less restrictive than on the London Main Market. 6 However, overseas companies (those incorporated outside the United Kingdom) are currently permitted to list on the LSE Main Market under the provisions of Chapter 14 of the LR. 7 Such entities are not required to have a primary listing of securities anywhere or to comply with Chapter 15 and are only subject to the minimum obligations under the Consolidated Admissions and Reporting Directive (referred to as directive-minimum requirements, which are much less onerous than those of Chapter 15). 8 1 See the LSE press release available at htm. 2 Available on the LSE website at SpecialistFundMarketGuidanceforadmissionJuly2007.pdf. 3 The first policy document published by the FSA was CP06/4: (March 2006) Implementation of the Transparency Directive Investment Entities Listing Review (FSA publications are available from the FSA website: shtml). This was followed by CP06/21: (December 2006) Investment Entities Listing Review Further consultation and feedback on Part 2 of CP06/4, and a Statement: (4 April 2007) Update on the Investment Entities Listing Review. The most recent publication, in which the new regime is outlined, is CP07/12: (June 2007) Investment Entities Listing Review Further consultation, feedback on CP06/21, policy statement on CP06/4 and CP06/21 and final Handbook text. 4 LR (3). 5 LR LR Examples of this include KKR Private Equity Investors L.P. and AP Alternative Assets L.P. (managed by Apollo). 7 A recent example of this is the listing of European Capital Limited. 8 Directive 2001/34/EC. At the time of the listing of KKR Private Equity Investors L.P. and AP Alternative Assets L.P. the FSA took the stance that secondary listing of investment entities was prohibited under the LR. See CP06/21, pp slaugh ter and may

3 3. the proposed new listing regime under the lr CP07/12 contains: > new text for Chapter 15 (relating to Closed-Ended Investment Funds) and Chapter 16 (relating to Open-Ended Investment Companies) of the LR effective from 28 September 2007; and > a proposal for a unitary listing regime for all listed closed-ended funds, irrespective of domicile, effective from March The FSA will, subject to the consultation process, change Chapter 14 to prohibit directive-minimum listings together with further modifications to Chapter 15. It will still be possible to list before March 2008 under the directive-minimum requirements and companies doing so will be grandfathered. (A) September 2007 Changes The substantive changes taking effect from September 2007 include: > removal of the prohibition on taking controlling positions (subject to certain safeguards in relation to cross-financing); > a requirement to take into account the cumulative effect of any non-material changes to an entity s investment policy (which, as under the existing LR, 9 continue to be permitted without prior consent of shareholders); > a requirement to publish an investment policy with information (including quantitative information), relating to asset allocation, risk diversification, gearing and maximum exposures; > removal of the restriction that no more than 20% of assets may be lent to or invested in any one company or group 10 (protection from over-exposure is provided in the more general requirement to have as the investment objective the spread of investment risk); > removal of additional rules for property funds, which will be subject to the same restrictions as other funds; and > removal of super-equivalent rules for regulated open-ended funds. 9 LR Currently contained in LR (3). 2 slaugh ter and may

4 (B) March 2008 Changes The proposals to come into effect in March 2008 (subject to consultation), are: > replacing the requirement for an investment entity to have sufficient experience available to it with guidance that the board is responsible to ensure that the directors and the investment manager have sufficient and appropriate expertise; > an independent chairman and a simple majority of independent directors will suffice to meet the criteria for board independence; > feeder funds will be permitted to list provided the board of directors is satisfied that the policies of the master and feeder fund have consistent objectives and the master fund diversifies risk; > revised requirements relating to disclosure including an obligation to disclose on a quarterly basis details of any investment representing more than 10% of an issuer s portfolio; and > new related parties provisions (for example exempting co-investment by the listed entity and the investment manager in an investee company, and clarifying that other clients of the investment manager are not related parties). The continuing obligations requirements of the LR will continue to apply to entities listed under Chapter the sfm As a result of the proposed changes, the SFM is being launched in a context where directiveminimum listings will no longer be permitted on the LSE Main Market after March Such listings will only be possible in London on the SFM after this date. 11 The LR will not apply to an entity listed on the SFM. The SFM is intended for institutional, professional and highly knowledgeable investors. However issuers and advisers are informed that the SFM is not intended as an admission route to a regulated market for investment entities that are intending to make a retail offering. 12 Entities listed on the SFM will not be eligible for admission to the FSA s Official List and therefore will be excluded from certain investment mandates with a specific requirement for listed securities and for the FTSE UK Series of indices. 11 Listings on the SFM will in fact be subject to fewer restrictions than is currently the case under Chapter 14. There is no requirement for a minimum market capitalisation of 700,000 nor a requirement for 25% of shares to be in public hands. 12 LSE Guidance, p.3. 3 slaugh ter and may

5 (A) Admission to Trading Admission to trading on the SFM will require approval of a prospectus by an EEA competent authority 13 and application to the LSE for admission to trading on the SFM. Prospectuses can be passported into the UK in accordance with the Prospectus Directive. 14 Securities will need to be transferable and freely negotiable in accordance with the Markets in Financial Instruments Directive. 15 (B) Continuing Obligations The SFM will be a regulated market operated in accordance with EU Directives. Entities listed on the SFM must comply with the LSE Stock Exchange Admission and Disclosure Standards. 16 These include notification requirements in relation to corporate actions. An annual information update will need to be produced which includes or refers to all information required to be filed by law and that has been disclosed through a Regulated Information Service. Issuers with securities admitted to trading on the SFM will be required to prepare and disclose consolidated annual and half-yearly financial reports and interim management statements in accordance with IFRS (or equivalent standards in the case of non-eea issuers). Regulated information must be disseminated in a fast, non-discriminatory manner, on a pan- European basis. Inside information must be disclosed as soon as possible, and insider lists must be maintained. Persons discharging managerial responsibility and their connected persons will be required to disclose details of their personal deals in shares of an SFM listed entity and related derivatives. (C) Transfers from other Markets Entities seeking to transfer from AIM will generally be required to produce a prospectus in line with the jurisdiction of the relevant home EEA competent authority (which if not the UK will need to be passported). Entities seeking to transfer from the Main Market, or other regulated markets, will be required to comply with the delisting requirements of the relevant market and may also be required to produce a prospectus. 13 In the UK, the United Kingdom Listing Authority. 14 Directive 2003/71/EC. 15 Directive 2004/39/EC. 16 Available on the LSE website: 4 slaugh ter and may

6 5. conclusion The introduction of the SFM will allow London to continue to compete with markets of other jurisdictions for the listing of investment entities, particularly once directive-minimum listings under Chapter 14 are no longer permitted. The introduction of the SFM and the imminent completion of the changes to the LR will substantially alter the UK investment entity listing regime. Issuers seeking to list will have clear options as to the most suitable listing venue on the London market and investors will have a choice of regime. The fact that SFM listed entities will not be included in the Official List or in the FTSE indices may cause some issuers to decide to seek a listing in an alternative jurisdiction. Furthermore, the SFM is designed for investment entities rather than their management companies, which may continue to list on other markets. 17 However, the proposed Chapter 15 regime should not necessarily be dismissed. Further information This briefing paper is not intended to provide legal advice, which should be sought on particular matters. If you have any queries about the topics covered in this briefing paper, please call: Robin Ogle T: +44 (0) E: robin.ogle@slaughterandmay.com Sanjev Warna-kula-suriya T: +44 (0) E: sanjevwks@slaughterandmay.com or your usual contact at Slaughter and May. 17 The LSE Guidance describes an investment entity as an entity whose primary object is investing and managing its assets with a view to spreading investment risk. This makes the SFM unsuitable for management companies of private equity funds. LSE Guidance p.4. 5 slaugh ter and may

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