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

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.”