A key focus for many listed investment funds at this time of year is finalising their annual report and annual general meeting. This briefing aims to pull together the key developments over the last twelve months which may impact on the 2013 annual report and AGM.
 
There are no compulsory changes this year in relation to the AGM and only two changes in relation to the annual report for investment funds with financial years ending before 30 September 2013.

There are however a number of significant developments which are expected to impact on or after 1 October 2013, which investment funds will need to start preparing for and may wish to adopt early, where possible.
 
In this briefing, references to:

• listed funds are to funds listed on the Main Market, AIM and SFM; and
• quoted funds are to funds listed on the Official List, officially listed in an EEA State or admitted to dealing on the New York Stock Exchange or Nasdaq only.
 
AGMs: 2013 resolutions and impact of future changes
There are no new resolutions which listed funds are required to put to their shareholders for the first time at their 2013 AGM. However, changes are on the horizon which will require certain new resolutions to be put to shareholders at the 2014 AGM.
Directors’ remuneration (UK-incorporated quoted funds only)                                                        
In response to the increasing concerns over directors’ remuneration, the Government has proposed that the regulation of remuneration of quoted company directors should be radically reformed. Its proposals focus on increasing both shareholder voting power and transparency in relation to directors’ pay. To this end the Government has proposed to split the directors’ remuneration report into two separate reports: a policy report at least every three years detailing the future remuneration policy for the company’s directors and an implementation report on how the remuneration policy has been applied over the last financial year.

Subject to the final regulations (which have not been published yet), it is expected that all UK-incorporated quoted companies with a financial year-end on or after 30 September 2013 will be required to put the following resolutions to their shareholders at the AGM they hold at the end of 2013/early 2014:1. A binding ordinary resolution to approve the directors’ remuneration policy report. This resolution has been proposed by introducing changes to the Companies Act 2006 through the Enterprise and Regulatory Reform Bill, which is currently before Parliament.

2. An advisory ordinary resolution to approve an implementation report. This change will be made by amendments to Schedule 8 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008. These regulations set out the content requirements of annual reports for quoted companies.

It is anticipated that the statutory provisions and regulations setting out the reforms will be published in final form in spring 2013. The new measures will affect the remuneration policy for both executive and non-executive directors. Historically the level of directors’ remuneration in investment companies has not raised concern amongst shareholders or created irrational incentives in relation to risk or an escalation of directors fees. Most investment companies appoint external fund managers to deliver day-to-day activities. Such companies frequently have a board composed exclusively of non-executive directors and therefore do not adopt remuneration structures which have roused the concerns over directors’ pay reported in the press. The Government’s measures on directors’ remuneration may therefore be an unnecessary burden for many quoted funds.

The AIC has raised similar concerns in their response to the Government’s measures, arguing that investment companies should not have to publish a policy report or implementation report. Many investment companies have robust controls on directors’ pay through a limit on the aggregate level of their pay in the articles of association. The AIC recommends that where a company’s articles of association contain a limit on the aggregate annual pay of directors, they should be exempt from holding regular shareholder votes on their remuneration policy.

• For further details on the Government’s proposals on directors’ remuneration, please see Investment Funds briefing published in July 2012.
 
Controlling shareholders (quoted funds only)

In October 2012, the Financial Services Authority (FSA) published a consultation paper on enhancing the effectiveness of the Listing Regime  (CP12/25) which considered whether the Listing Rules should give investors in premium listed companies greater protection, in particular where the independent shareholders are in a minority. One of the proposals in relation to premium listed companies with a controlling shareholder (i.e., one with a 30% plus holding) is that the appointment of independent directors should be voted on by the independent shareholders (a controlling shareholder not being independent), as well as separately by the shareholders as a whole. As a result, premium listed funds with a controlling shareholder may be required to put new resolutions in relation to independent directors to their AGMs from late 2013/early 2014.
The consultation paper closed for comment in January this year. It is not clear when any changes to the Listing Rules will be brought into effect but the FSA is expected to publish its feedback paper in spring 2013.

• For further details on the consultation paper, please see Corporate briefing published in October 2012.

 
Annual report: new disclosures in 2013 and impact of future changes
Auditor fees (UK-incorporated quoted funds only)             
Under the Companies Act 2006, a new mandatory disclosure which UK incorporated quoted funds must include in their 2013 annual report is to include information regarding the fees paid to their auditors for all services provided during the financial year. The Companies (Disclosure of Auditor Remuneration and Liability Agreement) (Amendment) Regulations 2011 detail the required disclosures. These regulations apply to financial years beginning on or after 1 October 2011. Accordingly, for a fund with a 31 December year-end therefore, the annual report for the financial year ended 31 December 2012 is the first in which disclosures in accordance with the 2011 Regulations are required.
Governance Code disclosures (UK-incorporated listed funds only)
The FRC published a revised version of the Governance Code in September 2012. Under the revised version, the new provisions to be complied with, or which will need to be explained, by listed funds in their annual report are:

• explanations of non-compliance to conform with new provisions in the introduction to the Governance Code;
• disclosures in relation to board diversity;
• where an external search consultancy is used, details of any other connection with the company;
• any external board facility or remuneration consultant used;
• statement that the annual report and accounts document is fair, balanced and understandable and provides the information necessary to assess the company’s performance, business model and strategy; and
• audit committee report to include new details specified in the Governance Code (e.g. details of any significant issues the committee considered and how the issues were resolved).

These disclosures apply to all UK-incorporated listed funds for accounting years beginning on or after 1 October 2012.
New narrative reporting requirements (UK-incorporated quoted funds only)
In October 2012 the Government published draft regulations which set out its proposed new narrative reporting structure.

• Under the draft regulations, companies (other than companies which qualify as small companies under section 382 of the Companies Act 2006) will be required to produce a Strategic Report, which will replace the current requirement to produce a Business Review, and which will be entirely separate from the Directors’ Report.

For the most part the disclosures required in the Strategic Report will be the same as in the Business Review but quoted companies will be required to include for the first time disclosures in relation to:

• gender metrics;
• human rights issues; and
• strategy and business model.

It is currently proposed that the draft regulations apply to UK-incorporated quoted funds with financial years ending on or after 1 October 2013. Therefore, for a 31 December year-end fund, the first annual report which must include the Strategic Report is the annual report for the financial year ending 31 December 2013.

• In its response to the new narrative reporting structure, the AIC agrees with the introduction of the Strategic Report but is concerned that it will contain information which is not of critical importance to shareholders of investment companies (such as financial information on gender diversity and disclosures on social, community, human rights and environmental matters).
• As an alternative, the AIC has supported an approach where shareholders receive a ‘Supplementary Report’ containing a high-level overview of what the company does, its objectives and priorities, how it has performed, and the rest of the content of the annual report. The AIC believes that such an approach would enable investors to more easily distinguish critical disclosures and new information from standard disclosures.

Directors’ remuneration report  (UK-incorporated quoted funds only)   
As noted above, UK-incorporated quoted companies with accounting periods beginning on or after 1 October 2013 will be required to include in their directors’ remuneration report a summary statement from the chairman, an implementation report and a policy report (see “AGMs: 2013 resolutions and impact of future changes” above for further details).
Greenhouse gas emissions disclosures  (UK-incorporated quoted funds only)   
In June 2012 the Department for Environment, Food and Rural Affairs (Defra) announced that the Government would produce new legislation to require mandatory reporting of greenhouse gas (GHG) emissions by quoted companies in their annual reports. Under the proposals which are still in draft form, all UK-incorporated companies will be required to provide the following information in the Directors’ Report:

• the annual quantity of the company’s GHG emissions; and
• an intensity ratio in relation to the company’s GHG emissions (e.g., volume of carbon dioxide emitted per unit of production).

The draft regulations were published for consultation in July 2012 and in that consultation Defra sought views on whether the new reporting requirement should come into force for financial years ending after 6 April 2013 or whether the effective date should be delayed until October 2013, which would tie in with the proposed implementation date for the revised narrative reporting framework.   The implementation date remains uncertain and a delayed start date of October 2013 could still be problematic for companies for whom the relevant first reporting yet has begun because there are no final details about how emissions are to be measured and reported.
It is not clear at this stage to what extent reporting requirements will extend beyond the listed vehicle and whether funds will be required to report on their underlying assets. If a look-through principle is applied, this may be a draconian task for many funds.

• The AIC  has responded to Defra’s July 2012 consultation on the proposed legislation arguing that investment companies will typically produce a low level of greenhouse gas emissions and recommends that a de minimis level be set below which a confirmation that emissions are below the relevant threshold would suffice instead of having to prepare full disclosure on greenhouse gas emissions.

For further details on the impact of the draft regulations on investment funds, please see

•  Investment Funds briefing in July 2012.

For further details on the changes affecting UK listed companies and trends from the 2012 AGM season, please

• Corporate briefing published in January 2013.