Five by Five is a summary of the key developments that we have been discussing with our fund clients and contacts over the last few months.
This edition covers:
- Sanctions against Russia
- Review of the UK funds regime: a call for input - Summary of responses
- Proposed changes to the UK's Appointed Representative regime
- Financial promotion exemptions for high net worth individuals and sophisticated investors
- Enhancing climate-related disclosures by asset managers – final FCA rules
- Aligning changes to the research and inducement rules for collective portfolio managers
- ESMA guidance on the EU's tied agency regime
- ATAD III
- Recent SEC proposals
- Digital Assets
Fieldfisher's response to the conflict in Ukraine | Fieldfisher
Sanctions against Russia
With the rapid expansion of UK, EU and US sanctions on Russia and Belarus over the last few weeks - and with more in the regulatory pipeline – we set out the latest measures (updated on a rolling basis) and set out a 5-step checklist for assessing how your activities may be affected here.
We are particularly well placed to assist funds and their managers with their specific issues relating to the sanctions. Our derivatives team has been particularly busy helping clients manage their trades with counterparties directly or indirectly affected by the sanctions.
We are also closely monitoring the rapid progress of the Economic Crime (Transparency and Enforcement) Bill, which is expected to become law in March/April 2022. The draft bill can be found here, together with a fact sheet on The Register of Overseas Entities (which would be introduced by the new law) and a fact sheet on unexplained wealth order reforms.
Economic Crime Act seeks to boost meagre use of Unexplained Wealth Orders | Fieldfisher
Review of the UK funds regime: a call for input - Summary of responses (HMT February 2022)
HM Treasury released the original call for input in January 2021 and the publication was summarised in the Spring 2021 edition of Five by Five.
This document summarises the responses to the call for input, sets out the Government responses and next steps/proposals and asks further questions.
The industry has for a number of years been asking the government to expand the range of investment products available in the UK to include a new type of fund structure – an unauthorised fund aimed at professional investors. The government noted that, of the three proposed unauthorised fund structures (limited partnership, corporate, contractual), the unauthorised contractual scheme was the highest priority among respondents (effectively because of questions over the VAT treatment of management fees). The government stated that it would "conduct further work to explore options to include unauthorised contractual schemes in the UK’s funds offering". The proposed unauthorised contractual scheme (whose name will most likely include "Professional" and "United Kingdom" but not "Unauthorised") would be unauthorised and would not be subject to any "light-touch" regulation. This is a start - at the very least.
The UK will not see any “fast-track” authorisation process for the proposed unauthorised contractual schemes (or any other UK fund) any time soon.
There will also be a consultation on options to simplify the VAT treatment of fund management fees. The government will consider the case for unauthorised limited partnership and unauthorised corporate schemes again following this consultation.
The document also notes the planned FCA consultation on potentially changing the restrictions on the promotion of LTAFs to allow distribution to a broader range of retail investors.
Potential improvements to the UK's limited partnership were not considered to be high priory.
Proposed changes to the UK's Appointed Representative regime
The publication of our article "The regulatory hosting model in the UK: Current challenges and potential developments" in edition 218 of the AIMA Journal proved to be quite timely.
Three days afterwards, on 3 December 2021, HM Treasury published a call for evidence on how market participants use the UK's appointed representatives regime; how effectively the regime works in practice; potential challenges to the safe operation of the regime; and possible future reforms.
On the same day, the FCA published CP21/34: Improving the Appointed Representatives regime.
Both consultations closed on 3 March 2022.
The CP does not directly deal with the regulatory hosting/umbrella model for fund management in the UK that is described in the first paragraph of our AIMA journal article (i.e. arrangements involving people at Appointed Representatives (ARs) being seconded to the principal) but it is clear that there is much more to come on this from the both FCA and HMT.
The CP does of course have a few implications to note for the AR piece of the hosting/umbrella model, although prospective users of the regulatory hosting/umbrella model should carefully consider whether the AR piece is actually required in the circumstances.
Please see our more detailed consideration of the call for evidence and the CP here: The FCA's proposals for improving the Appointed Representatives regime: implications for fund manage | Fieldfisher
Financial promotion exemptions for high net worth individuals and sophisticated investors
In December 2021, HMT issued a consultation paper on the financial promotion exemptions for (a) certified high net worth individuals (Article 48 of the Financial Promotion Order (FPO)), (b) sophisticated investors (Article 50 of the FPO) and (c) self-certified sophisticated investors (Article 50A of the FPO).
The government is proposing: (i) increasing the financial thresholds for high net worth individuals (raising the net income threshold from £100,000 to £150,000 and the net asset threshold from £250,000 to £385,000); (ii) amending the criteria for self-certified sophisticated investors (amongst other things, making more than one investment in an unlisted company in the previous two years will no longer cut it); (iii) placing a greater degree of responsibility on firms to ensure individuals meet the criteria to be deemed high net worth or sophisticated (firms should have a reasonable belief that an individual meets the criteria, not simply that they have signed the required statement); (iv) updating the high net worth individual and self-certified sophisticated investor statements; and (v) updating the name of the "certified high net worth individual" exemption to the "high net worth individual" exemption.
The consultation closed on 9 March 2022 and the government is minded to move forward with all of these proposals.
Enhancing climate-related disclosures by asset managers – final FCA rules
The FCA have now published their Policy Statement and made rules for a new ESG Sourcebook in PS 21/24 published late in December 2021.
FCA-regulated asset managers and asset owners - including life insurers and pension providers - will have to disclose how they take climate-related risks and opportunities into account in managing investments. They’ll also have to make disclosures about the climate-related attributes of their products. The rules came into effect from 1 January 2022. Asset managers and asset owners will have a phased implementation, with the rules initially applying to the largest firms and coming into effect for smaller firms one year later.
The related consultation paper was discussed in the Summer 2021 edition of Five by Five.
A deeper dive into the new rules can be found here.
CP 22/4 Quarterly Consultation No 35 (changes to the research and inducement rules for collective portfolio managers)
As reported in the Winter 2021 edition of Five by Five, from 1 March 2022, (some!) asset managers and research firms are now able to exercise the options on exempting the following from the FCA's inducement rules on research: (i) research on SMEs below a market capitalisation of £200m, (ii) fixed income currencies and commodities (FICC) research, (iii) research provided by research providers who do not provide execution services and are not part of a group that includes a firm offering execution services and (iv) openly available research.
The FCA's policy intention was to make changes that ensured consistency across all the rules on research and inducements for investment firms and collective portfolio managers (CPMs). CPMs include UCITS management companies, full-scope UK Alternative Investment Fund Managers (AIFMs), small authorised UK AIFMs, residual Collective Investment Scheme operators and incoming European Economic Area AIFM branches. However, the FCA did not make all the necessary rule changes to achieve this outcome and CPMs were not able to use the new exemptions. CP22/4 contains rules to ensure that CPMs are subject to the same rules as other investment managers.
ESMA guidance on the EU's tied agency regime
Since Brexit, UK and other "third country" (i.e. non-EEA) firms have been looking for an efficient one-size-fits-all solution to the post-Brexit problem of doing business in the EEA. This is a particular issue for managers and distributors who wish to market fund products "on the ground" in the EEA.
Even before Brexit, the usefulness of the low substance "tied agency" solution was decreasing as certain key EEA regulators called into question its use by firms whose businesses were primarily outside the EEA. The EU's "tied agency" regime is similar to the UK's AR/hosting regime.
ESMA's supervisory briefing of 2 February 2022 effectively kills the low substance "tied agency" solution for third country firms:
"[EEA regulators] should carefully scrutinise the cases in which firms have a business model that mainly consists of (and their remuneration mainly comes from) appointing tied agents which are legal persons with close links to other entities, especially to third-country entities as such schemes may be used to access EU markets without the relevant MiFID authorisations.
ESMA considers that firms should avoid appointing a tied agent which is a legal person and whose employees involved in the provision of the activities on behalf of the firm (e.g., sale staff) are also at the disposal or under the control of other entities, including third-country entities. Such entities could exercise inappropriate influence over the way in which a tied agent carries out the activities on behalf of the firm or may prevent the firm from effectively monitoring the activities of their tied agent (e.g., cases in which the tied agent is a legal person and is owned or controlled or has close links with a third-country entity that is itself involved in activities concerning manufacturing or distribution of financial instruments). This includes instances in which natural persons are involved in the provision of the activities carried out by a tied agent on behalf of a firm as a result of arrangements with another entity such as staff sharing agreements or secondment. ESMA believes that allowing a tied agent to carry out activities on behalf of a firm by mainly using the resources of another entity, especially a third-country entity, constitutes a serious impediment to the firm’s compliance with Article 29(2) of MiFID II specifically the duty of the firm to monitor the activities of its tied agents so as to ensure that they continue to comply with MiFID II when acting through tied agents."
However, ESMA continues: "To this end, and also to ensure that the duty of exclusivity to which tied agents are bound (by virtue of Article 4(29) of MiFID II) is fulfilled, it is expected that tied agents have sufficient substance in the EU and do not mainly rely on resources based outside of the EU in the provision of activities on behalf of the appointing firm". This last sentence does still leave tied agency as a potential alternative to establishing an authorised EEA firm…if it is done right.
Our Belgian office has produced a good summary of the EU's draft Directive to tackle “shell entities”: ATAD III.
Recent SEC Proposals
Over the last few years, there have probably been more regulatory changes in the EU than the US. In the last few months, however, the SEC has issued numerous proposals that will affect private fund managers (particularly, hedge fund managers and private equity advisers). Some of the rules will affect SEC registered and non-registered managers. The proposals are:
- Amendments to Form PF and requirements to disclose certain events: Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers (sec.gov)
- The proposals published on 9 and 10 February 2022, which include proposals relating to:
- shortening the settlement cycle from T+2 to T+1 - Proposed rule: Shortening the Securities Transaction Settlement Cycle;
- regular reporting to investors and severely restricting the possibility of granting preferential treatment to an investor, charging certain fees and expenses to the fund and having indemnities/exclusions of liability in favour of the manager - Proposed rule: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews (sec.gov)
- amendments to beneficial ownership filings under Regulation 13D-G (including the expansion of reporting by reference to the underlying positions of certain derivatives) - Proposed rule: Modernization of Beneficial Ownership Reporting; Conformed to Federal Register version (sec.gov);
- cybersecurity risk management - Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies.
- The proposals relating to short position and short activity reporting by institutional investment managers - Short Position and Short Activity Reporting by Institutional Investment Managers (sec.gov). The principal proposed rule would require affected managers that meet or exceed a specified threshold to report monthly, using a new proposed form (Form SHO), specified short position data and short activity data for equity securities.
Blockchain, cryptocurrencies and NFTs are increasingly permeating our legal sectors and services. The following insights were published during this period:
State of play of the EU’s digital legal landscape | Fieldfisher
Digital Art and NFTs – An Overview and Lender Considerations | Fieldfisher
News concerning crypto assets: the Italian Ministry of Economy and Finance introduces the mandatory enrolment within the register held by OAM | Fieldfisher
Recent editions of Five by Five
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