Regulation, licensing and registration

Principal regulatory bodies

What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?

ELPs are not in and of themselves regulated entities. Instead, the focus of UK fund regulation is on the fund manager. As noted in question 9, UK-based fund managers that provide portfolio and risk management functions to AIFs are required to be authorised by the FCA as AIFMs. The AIFMD imposes substantive regulatory obligations on AIFMs, including rules relating to internal capital adequacy requirements, regulatory and investor reporting, ensuring that each AIF it manages appoints a depositary and restrictions on remuneration of employees of the AIFM, among others. As FCA authorised and regulated entities, UK AIFMs are subject to the FCA’s conduct of business rules and general FCA principles of business, including the requirement to deal with the FCA in an open and cooperative manner.

There is a lighter AIFMD regulatory regime for sub-threshold AIFMs, meaning AIFMs that manage portfolios of AIFs which, in aggregate, do not exceed €100 million or, in the case of AIFs that are unleveraged and have no redemption rights exercisable within the first five years of the AIF (ie, typical private equity funds), €500 million. To the extent an AIFM manages assets on behalf of AIFs that combine both these types of AIF, the aggregate threshold of €100 million should be applied when determining whether an AIFM can be classified as a sub-threshold AIFM. While sub-threshold AIFMs do benefit from a lighter touch regulatory regime under the AIFMD, they are not able to take advantage of the AIFMD marketing passport, meaning that they have to comply with the individual national private placement regime (NPPRs) of each EEA member state. NPPRs are not uniformed across the EEA member states and are particularly onerous in some of them. For this reason, many sub-threshold AIFMs have decided to ‘opt up’ to full-scope AIFM status.

AIFMs that operate individual managed accounts and provide related services such as investment advice will need additional permissions from the FCA for these activities and are subject to additional regulatory requirements (derived from MiFID II) in connection with these activities. Depending on the AIFM’s regulatory classification, additional regulatory requirements under MiFID II potentially include requirements to comply with provisions on transaction reporting, transaction recording, product governance, trade transparency and client classification rules.

The FCA relies heavily on authorised firms to provide information to it but reserves the right to visit, inspect and evaluate the compliance of authorised firms, typically through thematic reviews (which focus on specific industries, for instance, asset management or retail banking), or as part of its general supervisory remit. The FCA is also able to take action at a firm-specific level where it has specific concerns about a particular regulated entity. Some larger or higher risk firms (or both) are also proactively supervised by the FCA on a ‘relationship managed’ basis.

While the FCA is the primary regulator of UK-based fund managers, other regulators such as the Prudential Regulation Authority (PRA) may have regulatory oversight of certain large investment firms that pose prudential risks to the economy. AIFMs that are part of the same group as these entities or banks may be subject to prudential supervision on a consolidated basis by the PRA.

Governmental requirements

What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?

An FCA authorised AIFM must notify the FCA of its intention to market an ELP to investors domiciled or with a registered office in the UK. If such AIFM wishes to market an ELP on a cross-border basis into other EEA member states under the AIFMD marketing passport, the AIFM must notify the competent authority of the EEA member states into which the AIFM wishes to ‘passport’ the ELP and the FCA will in turn transmit this information to the competent authorities of the relevant EEA member states. The AIFMD marketing passport is not available to FCA authorised AIFMs that manage AIFs that are not registered in an EEA member state (for instance, a Cayman exempted limited partnership). In this circumstance, the FCA authorised AIFM will need to comply with each relevant EEA member state’s NPPR (where available) in the same way that an AIFM not based in an EEA member state would be required to.

Registration of investment adviser

Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?

UK-based entities providing portfolio and risk management to AIFs are required to be authorised and regulated by the FCA as AIFMs (see question 10). Authorisation as an AIFM incorporates permission for the provision of investment advice in connection with the AIFs for which the manager carries on portfolio and risk management functions. Provision of investment advice in connection with investments other than AIFs managed by the AIFM is a separate regulated activity, as is the management of individual portfolio accounts. Entities carrying on portfolio management, providing investment advice in relation to investments other than AIFs managed by them, or arranging deals in investments (including funds) other than in connection with AIFs, must be authorised by the FCA to provide these services and regulated by the FCA on an ongoing basis, in compliance with the rules appli­cable under MiFID II.

The process for becoming authorised by the FCA, either as an AIFM or an asset manager, is a lengthy and resource-intensive exercise. FCA authorised entities are subject to a significant volume of rules, including the FCA Principles for Businesses and the FCA’s Conduct of Business rules. The FCA requires that persons proposing to carry out controlled functions on behalf of an FCA authorised firm have to be ‘fit’ and ‘proper’ to carry out such functions. Such functions include acting as a chief executive, director or partner, money laundering reporting officer and chief compliance officer of an FCA authorised firm. Such persons must be approved by the FCA to perform the controlled functions in question and are subject on an ongoing basis to the FCA’s Code of Conduct for Approved Persons and the Statement of Principles for Approved Persons. The FCA needs to be satisfied that persons proposing to carry out controlled functions on behalf of an FCA authorised firm have adequate knowledge and experience to carry out such functions. In recent years, the FCA has placed special emphasis on the integrity and honesty of persons carrying out controlled functions within the financial services industry, in a bid to improve the culture of regulated firms generally. This has resulted in the implementation of new rules for senior management and other key staff within banks and it is anticipated that similar reforms will be implemented for AIFMs and other investment firms from 2019.

Fund manager requirements

Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?

See questions 10 and 12.

Political contributions

Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.

There are no UK rules or regulations (other than rules applicable generally in the UK in relation to political donations, (as well as general UK anti-bribery laws)) that oblige a private equity fund’s manager or investment adviser to disclose political contributions made by it.

Use of intermediaries and lobbyist registration

Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.

There are no UK rules that restrict or oblige a private equity fund’s manager or investment adviser to disclose the engagement of placement agents, lobbyists or other intermediaries in the marketing of a private equity fund to public pension plans and other governmental entities, although the FCA may require details of placement agents and marketing activity as part of its supervisory remit. In addition, where an AIFM seeks to market an AIF to UK investors, the FCA’s notification form for this purpose requires disclosure to the FCA of the identity of any placement agents engaged to market the fund to UK investors. In addition, article 23 AIFMD requires EEA authorised AIFMs or non-EEA AIFMs marketing to EEA investors to disclose certain information prior to closing, including the identity of service providers, which may include an appointed placement agent. Such disclosures are typically included in the private placement memorandum. Even when these requirements do not apply, the fact that a placement agent has been engaged (and the placement agent’s identity) is usually disclosed in the private placement memorandum of the relevant fund or separately disclosed to investors in responses to due diligence questionnaires. These more detailed responses increasingly include detailed disclosure of the basis on which the placement agent or lobbyist is remunerated.

Bank participation

Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.

Since the financial crisis there have been a high number of legal and regulatory developments that may directly or indirectly affect banks’ ability or appetite for sponsoring or investing in private equity funds. The EU prudential framework under the Capital Requirements Directive and Capital Requirements Regulation (CRD IV) contains capital and liquidity requirements associated with fund investments, which are potentially of direct relevance.

CRD IV, the fourth iteration of the EU’s prudential framework rules, was adopted in July 2013 and has applied since January 2014. CRD IV aims to implement Basel III within the EU, as well as EU-specific reforms on remuneration and governance. The rules under CRD IV governing capital treatment of private equity investments are highly complex and depend upon (among others) the extent of the bank’s participation in a particular fund and in funds generally, as well as the type of fund. The starting position is that private equity investments must be deducted from capital, although this is subject to some limitations and more favourable capital treatment may in some cases be available for certain venture capital investments above certain participation thresholds. Private equity investments that are not deducted from capital must generally be risk weighted at 150 per cent under the ‘Standardised Approach’ (for less sophisticated banks) or at 370 per cent or (for sufficiently diversified funds) 190 per cent under the ‘Internal Ratings Based’ approach (for more sophisticated banks). Recent proposals from the EU authorities published in November 2016 indicate that the future capital treatment of risk-weighted fund investments will depend increasingly on the types of underlying fund investments and the level of transparency for banks on the underlying investments.

CRD IV also introduced quantitative requirements on liquidity, which will impose a liquidity cost on banks’ holdings in funds for which commitments may be called within 30 days or less. Future changes to CRD IV will also result in the implementation of quantitative requirements on leverage and stable funding (anticipated to become effective from 2019), which may also result in increased costs associated with private equity investments.

A further issue for banks and the funds in which they invest is the potential for banks’ liabilities (which could include liabilities to funds) to be ‘bailed in’ in the event that the bank becomes subject to a statutory resolution process under the Bank Recovery and Resolution Directive (BRRD). This may include the write down or conversion into equity of banks’ unsecured liabilities. Article 55 of the BRRD requires that liabilities within the scope of the BRRD’s bail-in powers, but governed by the law of a third country, include a contractual term stating that the liability may be subject to write-down and conversion powers of the relevant resolution authority (in this case the Bank of England). Carve-outs may apply, however, for some liabilities where certain criteria (including impracticability) are met.