Focus Report on Regulation - Going through a seismic shift - Ogier

More documents

Recommendations

Info

II <strong>Focus</strong> report: Regulation September 24, 2012 Frontiers Come Down in New World Order Recent years have witnessed the emergence of several significant pieces of regulation with potentially seismic implications for the private equity industry. Yet with certain key provisions still being debated, managers are struggling to prepare themselves, writes Solomon Teague At times it must feel like an earthquake, so much does the regulatory ground beneath the feet of private equity managers move. In the five years since the credit markets first froze, regulators have been shoring up regimes in a process of almost continuous discussion and change. And though the source of the crisis was undoubtedly in banking, the alternative investment fund industry has been at the heart of regulatory change. “The problem is regulation is such a moving target,” said Iain Bannatyne, a Partner at KPMG. “Things are changing all the time and there is a lack of clarity still with much of what is coming out. It is a major jolt for the industry, having come out of a comparatively benign period for regulation, to have to deal with the avalanche of regulation we have now.” Mike Newell, Partner at law firm Norton Rose, added: “Only a hard-core minority disagree with the principles of regulation outlined at the G20 level, but the U.S. and E.U. have moved to achieve those goals independently and that has not been helpful.” With private equity houses becoming increasingly institutionalised and global, in terms of investment and capital raising, it is almost impossible for big funds to avoid regulation concocted in either the U.S. or Europe, regardless of where they are based, Mr. Newell said. Disparate Approaches The approaches of regulators in the U.S. and Europe “are too disparate for them to achieve any unity of purpose within any reasonable time frame,” added Mr. Newell. “But the industry will make it work more efficiently over time. Industry bodies and advisers will come up with ways to satisfy all regulations, and will fill in any gaps themselves with best practice.” In Europe the new regulation of private equity has taken the form of the Alternative Regulation is such a moving target… things are changing all the time and there is a lack of clarity with much of what is coming out Iain Bannatyne, KPMG Investment Fund Managers Directive. Despite the first draft having been published in 2009, there are still clauses of the Directive being amended and haggled over. The Directive officially came into force on July 21, 2011 and member states have until July 22, 2013 to implement it into national law. A year later managers need to be authorised under the Directive by their home state regulator. Stage Three of the process, when national regulators interpret and implement the Directive in their own territories, will be decisive, giving industry answers to many of the remaining questions. But there are doubts as to whether the Stage Three target will be hit on time, with rumours currently circulating that the September deadline for the latest draft will be missed. Industry sources continue to protest that the rules appear to have been drafted without due regard for the mechanics of the private equity – or hedge fund – industries. AIFMD requires all alternative funds use a depository, for example, despite this being more relevant for hedge funds than private equity funds. “The feeling is this requirement does not address the real underlying risk and is disproportionate,” said Mr. Bannatyne. “It is a huge administrative challenge and an extra cost, and it is not clear how the depositories themselves will manage the risk.” AIFMD requires private equity funds to
September 24, 2012 <strong>Focus</strong> report: Regulation III Flying the flag: the U.S. in particular has gone global with the scope of its regulations the SEC’s investment rulebook, bringing private equity funds into the same sphere as U.S. retail funds, with an associated compliance cost. Managers are now preparing to meet the SEC’s new Form PF filing deadline, which requires a level of detail that many advisers believe is unprecedented, with roughly 1,600 data points, according to KPMG. Arguably even more extraterritorial in its scope than the AIFMD is FATCA, the U.S. tax rule that demands all funds disclose details about transactions with U.S. investors to the Internal Revenue Service. Entities that decline to provide such details will be subject to a 30% withholding tax – essentially a penalty. This will be levied on their interests in U.S. companies, both on ongoing payments, such as dividends, and on gross proceeds at the point of sale. Evolving regulation will also impact the European insurance and pension industries hold capital against their investments, even though such funds do not take proprietary risk, meaning funds will need to set aside at least a quarter of their fixed overhead costs, said Jon Wilson, Director of Project Consulting at The IMS Group, a regulatory consultancy firm. Even more contentious are rules governing remuneration, particularly deferred payments. There are questions as to how this can be applied to private equity, where payment is already deferred to the point at which portfolio companies are sold and profit realised. Exactly how regulators will judge how much business needs to be done onshore or offshore to qualify for different tax treatment also remains ambiguous, as do the specifics around a host of exemptions, on holding companies, joint ventures, family office vehicles, insurance contracts and securitisation special purposes entities. Until the details on AIFMD in particular are finalised it will be impossible for managers to take key decisions that will determine the future shape of their business, such as whether entities and management teams need to be relocated, and whether to continue accepting investors from certain jurisdictions, said Newell. Managers must also be aware of various other initiatives, for example the Financial Conglomerates Directive, known as FiCOD, which has been around for years but has been updated to bring private equity funds within its purview. The industry has also been caught within the scope of Dodd Frank and the Foreign Account Tax Compliance Act, a U.S. measure designed to compel non-U.S. financial institutions to provide information on any U.S. client which has $50,000 or more invested, with potentially enormous compliance implications. Going Beyond Jurisdictions Regulators are in no mood to confine their attentions within their own borders, with the latest wave of regulations notable for the impact they will have beyond the reaches of their home jurisdictions. AIFMD prevents non-E.U. based asset managers from marketing their products in the E.U. unless they comply with E.U. rules and will be felt acutely by many managers themselves not operating in Europe. Dodd Frank is lighter touch outside the U.S., with most mid-market and leveraged buyout funds outside the country classified as Exempt <strong>Report</strong>ing Advisers, with only partial SEC supervision. In practise such funds are required to make fairly detailed disclosures, but without too big an impact on the operational side of the business. Registered Investment Advisers, on the other hand, comprising most U.S. funds and the largest foreign funds, must comply with Only a hard-core minority disagree with the principles of regulation outlined at the G20 level, but the U.S. and E.U. have moved to achieve those goals independently Mike Newell, Norton Rose – both with heavy historical commitments to private equity. Solvency II, a European initiative setting out the solvency requirements of insurance companies, is also set to have a significant impact on all private equity funds, said Mr. Bannatyne. “Discussions continue on the risk classification which will be attributable to private equity investments which will determine the capital requirements set against such investments, potentially discouraging allocations,” he said. With all this regulation taken together, matters are complicated by the fact that different legal advisers are reaching different conclusions about what private equity funds must do to comply, said Mr. Wilson. “I hope that even if AIFMD does cause some pain at the implementation stage, in terms of ongoing costs it will be manageable, and will not interfere significantly with fund operations,” said Mr. Bannatyne. “I think there is much more uncertainty in the U.S. for RIAs in terms of ongoing compliance costs and how U.S. rules might impact how they manage their business.”
Page 1: Focus Repo
Page 5 and 6: September 24, 2012 Focus</s

Focus Report on Regulation - Going through a seismic shift - Ogier

Create successful ePaper yourself

Delete template?

Save as template?