A legal expert has warned "investors will see the value of their investment plummet" as a result of the Woodford Equity Income fund's suspension of dealing, leaving Woodford Investment Management open to legal challenges from clients.
Woodford Equity Income confirmed it suspended dealing on Monday (3 June) as a result of high levels of redemptions, but Investment Week can confirm it has not suspended the valuation of the fund's assets.
A spokesperson for Woodford Investment Management confirmed that the suspension only applies to "buying and selling", while "daily pricing continues and income payments made in normal way".
Investors will see the value of their investment plummet but not be able to withdraw while the suspension remains in place"
Partner at law firm Howard Kennedy James Kaufmann said this decision means "investors will 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 explained: "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."
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" when "it is necessary to protect all the investors in a fund".
The regulator, which does not approve suspensions, but is notified of them, added that 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 said: "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."
A version of this article was first published by Investment Week, a sister title to International Investment.