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The Financial Services Authority on Thursday embraced the growing numbers of activist hedge funds but warned them not to conspire to mislead the market.
The regulator has issued guidelines for the first time to shareholder activists on what it would view as market abuse in response to calls from some of the most prominent hedge fund activists for clarification of the FSA’s views.
Concerns have been prompted by a sharp rise in aggressive stakebuilding by a number of hedge funds and specialist investment funds whose objective is to force change on companies.
The power of these activist investors has been underlined by the Children’s Investment Fund, which sparked the battle for control of ABN Amro when it announced plans to call for a sale or break-up of the Dutch bank at its annual meeting. TCI’s success has prompted speculation about other activist investors targeting other companies such as Prudential, the UK insurance group.
An FSA spokesman said: “We are as concerned to clarify what is permissible as much as what is not. We do not object to activism in principle.”
Mark Anson, chief executive of Hermes, one of the UK’s longest-established activist managers, said: “The FSA is trying to be helpful by providing additional guidance that allows activist investors to get a better understanding of the rules of the game.”
One prominent hedge fund manager said on Thursday: “We brought up a number of grey areas where the FSA could help by clarifying. The guidance is very helpful.”
The FSA specified practices of which it approved and others which it said might constitute market abuse.
It said: “We don’t think our market abuse powers should be relevant where market professionals are looking to take advantage of their own expert analysis of otherwise publicly available information.”
But the regulator warned it would take a dim view if several investors bought stakes in a target company to help one investor avoid making a public disclosure of a large holding. FSA rules require investors declare any holding exceeding 3 per cent.
The FSA also said if an investor bought shares in a group knowing that another activist fund was building a stake, that might also be construed as market abuse. So, too, might a fund manager who deliberately set out to generate a false rumour or expectation of corporate action in order to provoke a short-term move in share prices.
The regulator said: “We expect market participants to take reasonable care to ensure that any announcement or informal comment does not give rise to false or . . . deceptive signals about their intentions”.
Meanwhile, the FSA moved to clarify its position on block trades, the sale of a large slab of shares on behalf of a corporate client or institutional investor, reminding banks that they were obliged to report any suspicious trading.
Additional reporting by Peter Thal-Larsen and Chris Hughes