By Patricia Volhard, Debevoise & Plimpton
With less than one month to go before MiFID II becomes effective, private equity fund managers should take a moment to reconsider whether they are fully prepared. While MiFID II directly regulates only investment firms and other firms providing MiFID services – for example, those involved in the reception and transmission of orders for financial instruments, and those giving investment advice – it may also have an immediate impact on European, and even non-European, PE fund managers.
Fund managers (AIFMs) in most of the European Union are not covered by MiFID II directly. However, the UK has implemented the new rules such that significant parts also apply – at least to some extent – to UK AIFMs. In addition, all fund managers (even if based outside the EU) could be impacted indirectly if they use the services of a MiFID regulated firm that is assisting the manager in deal sourcing and providing investment advisory services, or if that EU MiFID firm is assisting the sponsor in marketing the fund. Such MiFID firms will themselves have to comply with the new rules, and that will require the cooperation of the PE fund manager: at the very least, the manager will have to provide the adviser with the information it needs to discharge its obligations.
MiFID II has attracted more attention from the PE industry in the UK than in other EU countries. That is because in many other European countries private equity advisory and marketing activities are not seen as MiFID regulated activities (investment advice and reception and transmission of orders) or, even if they are, many firms rely on the “group privilege”, which exempts firms from MiFID rules if they only provide services within the group. In the UK, however, adviser affiliates would typically be MiFID regulated firms.
MiFID II imposes some important new rules on MiFID regulated firms, including product governance rules (which require firms to define their investor target market), enhanced marketing communication requirements (including regulation of the way information about past performance can be presented, and mandatory disclosure of costs and charges) as well as requirements to tape some telephone calls and record certain other communications. PE managers that use the services of MiFID firms will have to provide information about, for example, their EU target investor base, expected performance and risk profile, and the cost structure. Advisers providing advice about certain investments will need to comply with taping and recording requirements; however, some exemptions are available and in the UK there are helpful carve-outs for private equity investments.
Finally, MiFID II changes the professional client definition so that local public authorities and municipalities have been reclassified as non-professional clients by default. This is particularly relevant for UK Local Government Pension Schemes (LGPS) who now need to request that they are “opted-up” to professional client status before they can be treated as professional clients. The opt up – which has been facilitated by templates available on the Local Government Pension Scheme Advisory Board website – is important for managers marketing in Europe because the marketing passport typically only applies in relation to professional investors.