09 September 2013

EVCA response to ESMA consultation on MiFID holdings

In its reply to ESMA's consultation, EVCA includes a number of general comments as to how the RTS could best be applied to private equity and venture capital fund structures, as well as specific responses to the questions raised within the RTS.

Private equity and venture capital firms and their funds may in the course of their activity acquire interests in or control of regulated entities such as investment firms. However, due to the fund management structures, such acquisitions may often face a difficult analysis and overly complex set of documents. In EVCA's view this creates unnecessary costs and burdens for the firms and their investors, for the investment firms in question and for the regulators themselves. This complexity has prohibited the development of a harmonised approach to fund structures across the EU and the EVCA believes that in many cases the competent authorities have been presented with unnecessarily complex and detailed application packs, only certain elements of which were likely to be relevant and useful. As such, 

With that in mind, the EVCA would argue that the RTS present an opportunity to use the newly enacted concepts of “alternative investment fund” (“AIF”) and “alternative investment fund manager” (“AIFM”), as derived from the Alternative Investment Fund Managers Directive (“AIFMD”), so as to ensure that regulators receive the most relevant information while also simplifying filings for private equity firms. In particular EVCA would like to suggest the following:

• ESMA may confirm explicitly in the RTS that where an AIF or series of AIFs managed by the same AIFM may acquire control over an investment firm, the AIF(s) ought to be treated as either the acquirer (or where the acquiring entity sits below the AIF(s)), the ultimate parent of the acquirer. However, given the essentially passive nature of investors‟ interests in the AIFs EVCA thinks it is important that this approach is complemented with a number of key clarifications in order to avoid unnecessarily complex filings that would create unnecessary costs for the ultimate investors in the AIFs and result in overly complex and/or irrelevant materials being presented to the regulators tasked with assessing the applications.
• As the active decision-maker behind the AIF will be its AIFM, EVCA would consider that where an AIF is managed by a regulated AIFM that the relevant AIF(s) should be treated as EU regulated entities for the purposes of the short-form disclosures under Article 11.
• Assuming that it is determined that the AIF or AIFs should be treated as the acquirer or its ultimate parent, EVCA would welcome further clarifications in the RTS. Such clarifications could be provided to reflect their status and simplify the necessary disclosures so that competent authorities are only required to consider relevant materials. In particular:
  • It could be stated explicitly that any AIF may be treated as the „legal person‟ to whom the RTS applies (notwithstanding the fact that in some jurisdictions some AIFs may not have legal personality from their investors).
  • Article 3(2)(e) should be disapplied in respect of AIFs. It would be disproportionate to require disclosure of all beneficial owners in an AIF. This would require AIFs and their AIFMs to prepare application packs listing potentially hundreds of different investing entities and may require them to confer with or seek the consent of those investors to the disclosures. Ultimately, competent authorities would be presented with unnecessarily detailed information which is of little or no relevance as the underlying investors are entirely passive. Consideration should be given to requiring disclosure only where the relevant investor holds a significant amount of the relevant AIF or has the ability to significant influence over its day-to-day operations.
  • For similar reasons EVCA also considers that Article 4(2)(f) would be potentially unduly onerous for AIFs if it was construed so as to require disclosure of their underlying investors. However, a clarification that an investor that has no day to day control over the AIF should not be treated as having a significant influence over it should be sufficient to avoid this scenario.
  • Articles 4(2) (d) and (e) are unnecessary and overly burdensome. Many structures which invest in investment firms directly or indirectly may have interests in hundreds of undertakings throughout the world. It is impractical to provide information on potential conflicts of interest in such situations. The proposed RTS, if read too broadly, might require an expensive due diligence exercise ensuring that no existing investee companies held by the AIF (or potentially other AIFs that it manages) have any relationships with or conflicts with the target company. This process would be time consuming and impractical. It could also create major confidentiality issues, particularly in bid situations. Ultimately regulators may find themselves presented with over-cautious disclosures noting numerous conceivable conflicts, which in practice would be highly unlikely to affect the target company as each company within the portfolios would be managed separately (to the extent that the companies have been acquired as part of a broader consolidation strategy, this fact would be required to be disclosed elsewhere in the application). EVCA is therefore particularly concerned that these provisions should not be applied to AIFMs or AIFs as currently drafted. At the least some form of materiality threshold should be considered.

Full response

Original ESMA consultation: Draft RTS on information requirements for assessment of acquisitions and increases in holdings in investment firms (MiFID), 8.7.13

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