Regulatory Questions To Be Asked As Woodford Investors' Capital Value Could 'plummet'

Investment Week reported recently that Woodford Investment Management could face legal action from investors as a result of its decision to suspend dealing while trading of the fund's assets continues.

Hedge funds up short positions against Woodford Patient Capital

Partner at law firm Howard Kennedy James Kaufmann explained this decision means "investors could see the value of their investment plummet but not be able to withdraw while the suspension remains in place", opening up the possibility of legal questions about the gating. 

He added: "This can lead investors to challenge the application, timing, validity and operation of the suspension, and possibly even to query whether the fund was entitled to pay out redemptions immediately prior to the suspension being declared."

A spokesperson for Woodford Investment Management confirmed the suspension only applies to "buying and selling", while "daily pricing continues and income payments are being made in the normal way".

Daniel Spendlove, partner at Signature Litigation, said "until dealing resumes it will be difficult to ascertain with any degree of clarity whether investors have suffered losses, and if so how much". 

He added: "It is therefore a case of 'wait and see'."

For its part, the FCA said its rules "provide for suspension in dealing in the units of open-ended funds where, due to exceptional circumstances… it is necessary to protect all the investors in a fund".

However, partner at Ropes & Gray Eve Ellis said while the FCA "has rules in place for liquidity management to protect investors" the Woodford suspension "will result in further work  by the regulator to review the existing rules".

She added: "The potential issue here is the mismatch between the liquid nature of the open-ended fund product and the illiquidity in some of the underlying investments. 

"If these investments do not perform or there are other concerns associated with the fund and there is a run on redemptions, this potential issue becomes a reality."

Elsewhere, the FCA itself has come under fire from chair of the Treasury Select Committee Nicky Morgan MP, who wrote an open letter to chief executive Andrew Bailey, calling for more transparency on the discussions concerning the suspension of the LF Woodford Equity Income fund.

Smaller investors

The FCA, which does not approve suspensions, but is notified of them, said gating of this kind "should seek to protect all the investors, those who remain invested as well as those seeking to redeem, by avoiding forced sales in the assets of the fund, which might be below current values".

It added: "We expect all firms involved to uphold their obligations to act in the best interests of all investors and to ensure the fund's assets are sold in an orderly manner. 

"A suspension should last no longer than necessary to allow the fund to build up sufficient liquidity to meet redemptions again."

However, legal questions have also been raised about the relative impact of the suspension on small and large clients, amid concerns more sophisticated investors may have first access to their capital when the suspension is lifted.

Howard Kennedy's Kaufmann explained some institutions "will automatically respond to a suspension by submitting a full redemption request in a bid to secure their position in the queue".