MiFID II and the private equity and venture capital industry
MiFID II Many firms across both the private equity and venture capital industry fall within the scope of MiFID II, due to the regulated activities they undertake.
When discussing how EU regulation impacts private equity and venture capital firms, it is natural to refer to the Alternative Investment Fund Managers Directive (AIFMD) but the Markets in Financial Instruments Directive II (MiFID II) is also significant.
"The BVCA has been active in seeking to ensure that, as MiFID II was developed, its implementation reflected the nature of private equity and venture capital transactions."
Many firms across both the private equity and venture capital industry fall within the scope of MiFID II due to the regulated activities they undertake. Other UK firms are affected because the UK has decided to apply some parts of MiFID II to a wider group of financial services firms. The global nature of the UK’s private equity and venture capital industry, the second biggest hub after the US, means that a large number of UK private equity and venture capital firms will be affected by MiFID II. This is why the BVCA has been active in seeking to ensure that, as MiFID II was developed, its implementation reflected the distinct nature of private equity and venture capital transactions.
MiFID II comes into effect in January 2018. The BVCA’s Regulatory Committee, which includes a broad range of member firms, has represented industry concerns to the FCA throughout the implementation phase in the UK. Whilst many of MiFID II’s provisions will affect the industry, we focused on industry-specific matters covering classification of local government pension scheme (LGPS) investors, payment for research, best execution and record keeping.
Local Government Pension Scheme (LGPS)
LGPS investors invest in many private equity and venture capital funds and are an important source of funding. (which is more proportionate for institutional investors). The EU-level opt-up procedure on its own would have been difficult for LGPS investors to pass as it is not designed for local authorities running LGPS. The FCA has provided some helpful clarifications and the BVCA worked with the Local Government Association and other investment managers on a standardised opt-up template and process which can now be used by LGPS to help reduce the administrative burden of this re-classification.
"MiFID II re-classifies LGPS as retail clients unless firms can opt them up to a professional client status."
Firms will be required to price and account to their clients for execution and research services as separate items, and MiFID II imposes detailed requirements on how to do this. The draft rules were designed to address concerns in the market for trading listed equities. The FCA had proposed that they apply also to private equity and venture capital transactions and we raised concerns that these proposals would not work in this context. The FCA’s final rules now reflect the different structure of private equity and venture capital investment. Similarly, the rules on best execution - the obligation to execute clients’ transaction orders in the clients’ best interests – have been implemented more logically for our members’ activities.
MiFID II also requires firms to record telephone conversations and other communications that relate to transactions concluded by MiFID firms, the objective being to help the FCA monitor compliance with market abuse and conduct standards. Whilst this requirement is not new in the UK, the FCA had initially consulted on extending it to a broader range of firms including non-MiFID firms such as private equity and venture capital fund managers. The FCA has listened to our concerns about this extension and there is now an exclusion for non-MiFID firms when dealing in unlisted securities. This makes sense as these transactions take place over a longer period of time with a significant amount of diligence.
MiFID II is an extensive piece of legislation and firms are spending a substantial amount of time on its implementation. The FCA has re-stated its commitment to regulating in a proportionate, conduct-risk-based manner and the BVCA is currently working through the application of the detailed rules with the FCA and member firms.