FCA proposes abstain rule for investment trust manager votes

The Financial Conduct Authority launched a consultation on Friday proposing that major shareholders who would become the investment manager of a listed closed-ended investment trust must abstain from votes to appoint themselves.

The requirement would apply where a significant shareholder and its associates seek a mandate to manage a listed closed-ended fund. The regulator stated the aim is to reduce conflicts of interest by preventing parties with a direct financial stake in becoming manager from influencing the vote on that appointment.

The consultation follows activist campaigns earlier this year in which a US hedge fund built large minority stakes in several London-listed investment trusts and replaced the boards of Edinburgh Worldwide Investment Trust and Impax Environmental Markets. The new directors are expected to review those trusts’ investment management arrangements, and the activist or affiliated firms are among potential candidates to be considered for mandates.

The Association of Investment Companies welcomed the proposals, calling them additional safeguards where a shareholder seeks both board control and management of a trust’s assets. Industry advisers said the draft changes aim to close an obvious governance gap while preserving investors’ ability to challenge boards.

Some legal observers warned that sophisticated activists might use alternative structures to achieve similar outcomes under the revised rules. The hedge fund plans to continue pursuing opportunities across the sector and has criticised entrenched boards and persistent discounts, which it argues harm shareholders.

Responses to the consultation are open until 14 August and the FCA expects to publish final rules before the end of the year. The regulator stated the objective is to strengthen conflict management while maintaining a balance between investor protection and shareholder democracy.