The investment trust industry has been thrown a lifeline by officials in Brussels, who have said it is unlikely that stringent new regulation will be applied to investment trust companies.
Investment companies had been under threat from highly controversial proposals by the European Commission aimed at curtailing hedge funds and private equity funds.
Daniel Godfrey, director general of the Association of Investment Companies, warned that the proposals in their present form were “life-threatening” to the investment trust industry, which manages £76bn of investor assets.
The directive has already prompted some of Britain’s biggest hedge funds to warn they could be forced to leave the country unless the proposals are changed.
The European Commission proposals seek to regulate alternative investment fund managers, which include managers of hedge funds, private equity and also investment trusts.
Of particular concern to the AIC was a proposal that made the investment manager responsible for decisions over the fund rather than, as is the case with an investment trust, the board, which is elected by shareholders.
Another issue was with a proposal that only authorised fund managers should be allowed to issue new shares – with investment trusts, this is the board’s responsibility.
Yet another problem concerned the proposal that funds should be able to offer redemptions on demand to investors, which would not have worked with a closed-ended structure, where investors have the ability to sell their shares on the open market.
But Mr Godfrey told the Financial Times he was given assurances in Brussels this week that investment trusts would be exempt from the most crippling rules.
“We are less worried that the final outcome could be life-threatening,” he said.
“What I feel now is that some of the dangers that were possibly there owing to the language of the draft are not the intention of the people who held the pen when it was being drafted.”
However, the AIC will continue lobbying to get the rules changed.
“There are still very significant potential commercial restrictions that may make life less profitable, which would be detrimental to our shareholders,” Mr Godfrey warned.
The AIC wants all investment trust companies that already trade on regulated exchanges to be outside the scope of the directive, arguing that they are already subject to European regulation protecting consumers.
The AIC is also going to seek to find common ground with other organisations in Europe on the issue, such as stock exchanges or other hedge fund and private equity bodies.
The proposals are now in a consultation period. If political approval is reached by the end of the year, the directive is expected to come into force by 2011.
