Regulation, licensing and registration
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
The UK rules and regulations governing fund management focus on the regulation of the entity responsible for the management, rather than the funds themselves. Fund managers established in the United Kingdom that provide portfolio and risk management services to funds (alternative investment fund managers (AIFMs)) are required to be authorised and regulated by the Financial Conduct Authority (FCA) pursuant to the UK laws, rules and regulations implementing Directive 2011/61/EU (Alternative Investment Fund Managers Directive) (AIFMD) and associated regulations.
Post-Brexit, the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 have been issued, under which the United Kingdom continues to apply the substantive requirements of the AIFMD, but with adjustments necessary to apply that law in the United Kingdom as a sovereign state independent of the European Union. It is possible that, in time, UK domestic law will diverge from EU law but for now the AIFMD (as adjusted as referred to above) continues to apply.
Powers of supervision and intervention of the FCA in relation to AIFMs include the powers to:
- access any document in any form and to receive a copy of it;
- require information from any person related to the activities of the AIFM or the alternative investment fund (AIF) and if necessary to summon and question a person;
- carry out on-site inspections with or without prior announcements; and
- require existing telephone and existing data traffic records.
In addition, under the AIFMD, AIFMs are subject to extensive reporting requirements that broadly fall into the following categories:
- pre-investment investor disclosures pursuant to a prescribed list of topics prior to their investment in the AIF;
- annual reporting both to investors in the AIF and the FCA containing audited financial statements, information about any material changes to the pre-investment disclosure and information about the AIFM’s remuneration;
- periodic (otherwise known as Annex IV) reporting to the FCA on the matters set out in a prescribed template; and
- notifications to the FCA and other stakeholders in the event that an AIF managed by the AIFM acquires certain holdings or control of non-listed companies that have their registered offices in the United Kingdom.
However, AIFMs that manage AIFs whose assets do not exceed, on an aggregated basis, €100 million (or €500 million for closed-ended unleveraged AIFs) will be subject to a lighter regulatory regime, which does not, for example, require compliance with the majority of the reporting obligations referred to above.
Governmental requirements
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
The AIFMD is intended to regulate the manager of the fund (ie, the AIFM), rather than the fund. Private equity funds that do not make an offering to the general public are not required to be licensed or registered in the United Kingdom. However, an AIFM must seek approval from the FCA in respect of each new fund under management, which must be accompanied by a copy of the governing documentation for the fund and the prescribed pre-investment disclosures. The FCA has one month to review such an application.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
A firm that carries on the regulated activity of managing an AIF as the AIFM is required to be authorised by the FCA. The application process is detailed, and the FCA aims to process an application for authorisation within six months of receiving a complete application. Additional regulatory permissions may be required to the extent that a firm is managing arrangements that are not AIFs, such as separate managed accounts.
The obligations imposed on authorised AIFMs (other than AIFMs that manage AIFs whose assets do not exceed, on an aggregated basis, €100 million (or €500 million for closed-ended unleveraged AIFs)) are extensive and include, among others, capital adequacy requirements, rules governing how employees of the AIFM may be compensated, a requirement to appoint a depositary in respect of the assets of each AIF managed by the AIFM and disclosure and reporting requirements, both to investors and the FCA.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
An authorised AIFM is required to hold minimum capital. The amount of capital depends on whether the AIFs it manages are internally or externally managed and whether the AIFM decides to hold capital for professional indemnity liability or has separate professional indemnity insurance. Private equity funds are normally externally managed. An external AIFM is currently required to have an initial capital of €125,000. Where the value of the portfolios of AIFs managed by the AIFM exceeds €250 million, the AIFM must have an additional amount of own funds equal to 0.02 per cent of the amount by which the value of the portfolios of the AIFM exceeds €250 million, but the required total of the initial capital and the additional amount is capped at €10 million. Where a UK AIFM is authorised to also carry out additional regulated activities (including advising), it would be subject to additional capital rules in respect of its business relating to these additional regulated activities under the UK’s new Investment Firms Prudential rules, which are broadly in line with the EU’s Investment Firms Regulation and Directive.
As part of the authorisation process, the FCA must be satisfied that the persons who effectively conduct the business of the AIFM are of sufficiently good repute and are sufficiently experienced in relation to the investment strategies to be pursued by the AIFs managed by the AIFM, but there is no specific qualification that must be attained to serve as an officer, director or control person.
The United Kingdom operates a senior managers and certification regime (SM&CR), which applies to firms authorised by the FCA. The FCA has designated particular functions as senior manager functions (SMFs). SMFs include the chief executive function, executive director function, compliance oversight, and money-laundering reporting officer. Anyone who performs an SMF within an authorised AIFM needs to be approved by the FCA before they can perform their role. In addition, the SM&CR requires firms to confirm and certify at least annually that persons performing certain functions that are not SMFs, but which can have a significant impact on customers, the firm or market integrity, are competent to do their job. Persons engaged in investor relations would typically be certification staff.
Political contributions
Describe any rules – or policies of public pension plans or other governmental entities – in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
There are no specific rules in the United Kingdom that would require a private equity fund sponsor to disclose political contributions made by it or its employees outside the UK regimes in respect of political contributions generally, which require UK companies to obtain shareholder approval prior to the making of political donations or expenditure in excess of £5,000 in any 12-month period, and also require political donations or expenditure in excess of £2,000 in any financial year to be included in the directors’ reports. In addition, political bodies and candidates may be required to report donations they receive in excess of certain de minimis thresholds to the UK Electoral Commission. Any political contribution made with an intent to secure an advantage may be a criminal offence under the UK Bribery Act 2010.
Use of intermediaries and lobbyist registration
Describe any rules – or policies of public pension plans or other governmental entities – in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
There are no UK rules that restrict or require such disclosure by a private equity sponsor, although it is typical for the private placement memorandum of a private equity fund to disclose if a placement agent has been appointed in respect of the fund.
Bank participation
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
Directive 2013/36/EU (Capital Requirements Directive IV) (CRD IV) and Regulation (EU) No. 575/2013 (the Capital Requirements Regulation) (CRR) were adopted following the global financial crisis to address the perceived shortcomings of financial institutions. The CRD IV and CRR implement the Basel III agreement, which is designed to improve the amount and quality of capital that banks are required to hold to cover the risks to which they are exposed. This includes enhanced requirements for both quality and quantity of capital, strengthened liquidity and leverage requirements, rules relating to counterparty risk and other macroprudential standards such as countercyclical buffers.
Post-Brexit, the United Kingdom has implemented the Capital Requirements (Amendment) (EU Exit) Regulations 2018, under which the United Kingdom continues to apply the substantive requirements of the CRD IV and CRR. It is possible that, in time, UK domestic law will diverge from EU law, but for now CRD IV and CRR (subject to certain adjustments) continue to apply.
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