Fund suspensions like the Woodford Equity Income Fund (WEIF) could become increasingly commonplace as the Financial Conduct Authority (FCA) looks to tighten the rules on funds investing in “inherently illiquid assets”.

The new rules were announced at the end of September and require fund operators to give investors clear information about the circumstances under which their access to their funds might be restricted, as well as “clear and prominent information” about any illiquidity risks.

A new category – Funds Investing in Inherently Illiquid Assets (FIIA) – has also been created, and additional requirements placed on such funds.

These extra demands include:

  • More information about how the fund manages liquidity.
  • Standardised warnings of risk included in financial promotions.
  • Extra depositary oversight.
  • Contingency plans to deal with illiquidity risks.

Funds are exempt from these additional requirements if their share dealing frequency is aligned with the liquidity of their assets.

Call the NURS

It’s worth noting that these new tighter rules apply specifically to non-UCITS retail schemes, also known by the acronym NURS, and not to UCITS schemes which is what WEIF was.

But the FCA explained that UCITS already face similar restrictions on their assets and that the suspension of WEIF highlighted the importance of a more general approach to effective management of liquidity in open-ended funds.

Crucially, the rules also place a parameter on when a NURS must suspend dealing in the face of an increase in illiquidity among its assets:

“NURSs investing in inherently illiquid assets must suspend dealing where the independent valuer determines there is material uncertainty regarding the value of more than 20% of the fund’s assets.”

This potentially raises the likelihood of suspensions among NURS schemes – although the FCA says it will consider whether to allow dealing to continue on a case-by-case basis, depending on what is thought to be best for investors.

Building better bridges

Following the announcement of the new rules, FCA chair Charles Randell gave a speech to the Investment Association annual dinner at Mansion House on October 10th.

He told the assembled investment managers: “The illiquidity and concentration risk in private markets need to be managed well.

“It’s a challenge to ensure that retail investors have a safe way of participating in these opportunities and the right information and expectations about liquidity.”

He added that investment funds are bridges – between businesses and people’s investments; between working life and retirement; and between current investors and future generations.

“Let’s work together to build a truly world-leading investment industry around the outcomes customers need,” he said. “Let’s work together to build better bridges.”

Divorcing the WEIF

Just five days later on October 15th, investors in the suspended WEIF were told that it will not be reopening to future dealing, but will instead be wound up according to a schedule that works in the best interests of its investors.

The assets held by the fund are being split into two categories – the more liquid listed assets, and the unlisted and high illiquidity assets.

Assets in the first category will be sold off and investors’ cash returned “as soon as possible once the fund begins the winding up process” on January 17th 2020.

This date is because of the mandatory three-month notice period required under EU law, and WEIF operators Link Fund Solutions expect the first pay-outs to be made by the end of January.

In order to avoid a below-value fire sale, the less liquid assets will be sold off gradually, in an attempt to raise as much as possible to cover costs and return to investors.

While this means it is impossible to predict how long the winding up process may take, it should also mean that investors do not suffer unduly from a loss of value similar to those that occurred immediately before its suspension.

As part of the winding up process – and in recognition that the fund is no longer actively trading under the stewardship of Neil Woodford – the WEIF is changing its name to LF Equity Income Fund.

For investors with money trapped in the fund, 2020 could be a case of waiting for payments while hoping that they do not get left to cover the divorce bill.

https://www.fca.org.uk/news/press-releases/fca-confirms-new-rules-certain-open-ended-funds-investing-inherently-illiquid-assets

https://www.fca.org.uk/news/speeches/building-better-bridges-world-leading-investment-industry-around-outcomes-customers-need

https://equityincome.linkfundsolutions.co.uk/investor-communications/tuesday-15th-october-2019-investor-letter-regarding-the-winding-up-of-the-lf-woodford-equity-income-fund/

https://equityincome.linkfundsolutions.co.uk/media/yr2dbqm2/15th-october-2019-investor-letter-regarding-the-winding-up-of-the-lf-woodford-equity-income-fund.pdf

Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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