Review of 2016: Nowhere to hide

A year of seismic political and regulatory tremors ended with the biggest shock of all. While it’s still too early to say exactly what Donald Trump’s election as US president will mean for the private funds industry, few expect regulators to loosen their hold anytime soon in 2017.

If anything Trump’s election adds to uncertainty, observers say, after a difficult year for fund managers in which everything from offshore domiciles to data protection came under scrutiny.

The leak of more than 11 million confidential documents from Panamanian law firm Mossack Fonseca in April caused ripples that are still being felt across the private funds industry.

Offshore domiciles scrambled to distance themselves, after the so-called Panama Papers led to claims of widespread tax avoidance and money laundering. The repeated use of the words “tax haven” and “shell company” risked serious reputational damage to other offshore domiciles.

At the time one fund administrator highlighted the distinction between “reputable”, widely-used fund domiciles and others that could be more questionable, saying LPs might “raise eyebrows” if a fund is domiciled in a jurisdiction they don’t see regularly.

Guernsey Finance, a body established to promote the island’s finance industry internationally, issued a statement pointing to its “highly effective” anti-money laundering and anti-terror financing regime.

Also in April European lawmakers agreed to delay by one year the entry into force of the second Markets in Financial Instruments Directive. It will now apply from January 2018, but must be written into national laws by mid-2017. The Directive will only affect some private equity firms, but those that carry out MiFID activities, such as advising or portfolio management conducted by AIFMs, are advised to keep an eye on proceedings. The delay was welcomed by stakeholders across the bloc, as the technical requirements to comply with the Directive are extensive.

The UK’s vote to leave the European Union on 23 June generated further uncertainty for the funds industry. In the run-up to the referendum many asset managers said they were holding off on investment decisions until after the vote, but in the end the result seemed to generate more questions than it answered.

While the UK government’s negotiating position remains unclear, the comments so far suggest the UK may leave the single market – which will have implications for alternative asset managers that wish to continue to market their funds to EU investors. Elsewhere there were a bevy of other regulatory changes that have consequences for private fund management.

In July, both houses of the Indian parliament passed the Insolvency and Bankruptcy Code 2016, which focuses on how creditors can best recover claims from a company in financial distress. It consolidates a number of existing insolvency laws into a single piece of legislation, which would cover all entities, from companies to limited partnerships and individuals. A fundamental feature of the code is that it forces troubled companies to complete bankruptcy proceedings within 180 days – a process which typically takes up to four years to resolve in India – or to face liquidation.

In September, a new bill imposing more requirements on California-based public pensions to disclose private equity-related fees and expenses passed into law. Citing parts of the California Constitution that call for retirement boards to demonstrate fiduciary responsibility, the bill mandates the “public pension or retirement system to require private equity fund managers, partnerships, portfolio companies, and affiliates to make specified disclosures regarding fees and expenses in connection with limited partner agreements on a form prescribed by the system.” That information would then be disclosed at least once a year at a public meeting.

This bill applies to new contracts for partnerships in alternative investment vehicles entered into on or after 1 January 2017, and to existing contracts with new capital commitment made on or after that date. However, it also suggests the pensions make “reasonable efforts” to have similar information on fees and expenses for contracts and commitments made before that date.

Cybercrime was another big story across the globe for much of the year. In the US, the Securities and Exchange Commission doled out multi-million dollar fines to asset managers which failed to properly protect customer data. The agency views cybercrime as the biggest threat to the financial services sector. Sweeping new regulation in Europe, the Global Data Protection Regulation, was also passed and firms have until 2018 to ensure they comply.

In November, China jumped on the cybercrime bandwagon, passing laws that include contentious requirements for security reviews and server data.

The controversial law will take effect in June 2017. Its aim is to counter growing threats such as hacking and terrorism, but it has triggered concerns among foreign business and rights groups. Provisions in the bill include requirements for “critical information infrastructure operators” to store personal information and important business data in China, and to provide unspecified “technical support” to security agencies.

The regulation also says agencies and enterprises must improve their ability to defend against network intrusions, while demanding security reviews for equipment and data in “strategic sectors.” A long list of sectors is defined as strategic, including financial services.

Dealing with the Trump card

Donald Trump’s election victory has raised prospects of a tax overhaul in the US. David Larsen, managing director at Duff & Phelps, said evaluating the full impact of a Trump administration on funds will take time: “One of the key points fund managers will keep a close eye on will be any continued rhetoric around taxation of carried interest, which although limited in fiscal revenue has proven to have populist support across party lines.”