Don't get MiFID

Of the raft of EU legislative initiatives affecting private equity and venture capital firms, the Alternative Investment Fund Managers Directive and the proposed Regulation on Venture Capital Funds tend to receive top billing. 

Firms should not, however, overlook the European Commission’s recent proposals to update the Markets in Financial Instruments Directive (MiFID) and introduce a new Markets in Financial Instruments Regulation (MiFIR). Whilst many private equity managers are not subject to MiFID, the MiFID Review will have a direct impact on advisor/arranger firms in particular. It will also have less direct effects, including on private equity firms strictly outside its scope. 

Imogen Garner

The MiFID Review is wide-ranging, and includes several conduct of business proposals arising out of the Commission’s investor protection agenda. Advisor/arranger firms, and any MiFID-scope managers, would no longer be able to accept fees, commissions or monetary benefits from third parties (such as portfolio companies). Advisor/arrangers might also be subject to requirements to “assess a sufficiently large… [and] diversified” range of financial instruments when recommending deals, which makes little sense in a private equity context.

Perhaps the most controversial aspect of the proposals relates to the treatment of non-EU firms, whose access to EU business is currently governed by each Member State’s national rules. Following a four year transitional period, the Review proposes radical changes to this position.

Non-EU private equity firms may be required to establish a branch in the EU before they can access EU investor capital. This will depend on how fundraising activities are structured, and on whether the non-EU firm is the overall “operator” of the funds in question. Similarly, EU private equity firms investing outside the EU may be unable to appoint local advisors or intermediaries that do not have an EU branch or registration. 

In each case, the non-EU entity would also need to be locally regulated and subject to requirements having “equivalent effect” to those under MiFID and MiFIR. An exclusion, probably of limited application and usefulness, has been proposed where services are provided exclusively at the initiative of the client (i.e. with no solicitation, promotion or advertising of those services in the EU). 

Private equity firms seeking representation on the boards of MiFID-scope investees should also note proposals limiting the number of directorships that can be held by members of an investment firm’s management body. It appears that (without a specific exemption from the investee’s regulator) a director may not combine more than one of:

• four non-executive directorships; or
• one executive directorship with two non-executive directorships,

where the directorships are held within different groups.

Lastly, when it comes to national implementation of the reforms, domestic regulators may not always distinguish between firms that are subject to MiFID and those that are not. Where this is the case, the new rules may represent a “baseline” standard to which non-MiFID private equity managers are also held.  

Imogen Garner is a senior associate in the London office of international law firm Norton Rose.