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UPDATE 3-Frozen Woodford fund breaches regulatory cap after Guernsey delistings

Carolyn Cohn and Simon Jessop

delistings@

* Sabina Estates remains listed on Guernsey exchange

* Exchange concerned about reputational damage -sources

* Fund has six months to return below cap

* Woodford's listed fund hits record lows for third day (Adds Ombu delisting, background, FCA comment, updates shares)

LONDON, July 31 (Reuters) - Neil Woodford's suspended Equity Income Fund has breached a 10% cap on unlisted stocks after three of its holdings stopped trading on the Guernsey exchange, though a spokesman said it was taking action to remedy the situation.

British asset manager Woodford is facing the wrath of regulators, lawmakers and investors after his eponymous 3.7 billion pound ($4.5 billion) flagship fund was frozen on June 3 because it could not meet client redemption requests.

Woodford is trying to adjust his portfolio by selling illiquid assets to raise cash to reopen the fund, which its administrator said this week is likely to remain shut until early December.

The retail-targeted fund has been criticized by Britain's markets watchdog for "sailing close to the wind" with its heavy investment in illiquid stocks, including companies which are listed on the Guernsey exchange but not traded.

The Guernsey exchange - TISE - said late on Wednesday it was delisting Ombu Group, effective Aug. 1.

This followed statements by IH Holdings and BenevolentAI on Tuesday via TISE that they were canceling their shares, thereby causing Woodford's fund to breach the 10% rule.

"Following the inadvertent passive breach, action to bring the fund back into compliance is already underway," the Woodford spokesman said in an emailed statement, adding that the delistings "will have no impact in how the assets are managed within the fund."

Two sources familiar with the matter said TISE was concerned about the reputational damage of allowing the stocks, which have never traded, to remain on the exchange, and offered the companies the choice of delisting themselves or being delisted.

A fourth Woodford holding, Sabina Estates, is still listed on TISE.

The Financial Conduct Authority (FCA) allows funds six months to move portfolios back into compliance if they breach the cap, although previous breaches by the fund were settled more quickly, within a time frame agreed with the regulator.

The FCA said it was "well aware of the issue and has been liaising with all parties."

In addition to 10% of its holdings in unlisted stocks, Woodford had around another 10% in the Guernsey-listed firms, which did not technically breach the rules.

Woodford, which is no longer publishing holdings data, had 4.5% of its portfolio in BenevolentAI, 2.5% in IH Group and 0.8% in Ombu Group at the end of April, previous filings show.

Shares in Woodford's only listed fund, Woodford Patient Capital Trust, fell 3.8% to hit a record closing low for a third successive day. WPCT, which also holds a high proportion of illiquid assets, said on Monday it may fire Neil Woodford as its manager. ($1 = 0.8218 pounds) (Additional reporting by Huw Jones, editing by Alexander Smith and Jane Merriman)