How do EU rules governing equity fund managers affect Scotland?

and Simmons Private Equity.

So what are the rules and what do they mean in practice?

Put simply, in return for a pan European marketing passport giving them the ability to market their private equity funds freely across Europe (to the right kind of professional investors – these funds are not for retail customers) UK based private equity fund managers must:

Become authorised by the Financial Conduct Authority (the FCA), the relevant UK regulator under the new regime;

Get the FCA’s prior approval for marketing materials used to market funds;

Comply with certain capital adequacy requirements which require the managers to have between Euro 125,000 and Euro 10 million depending on big they are;

Comply with transparency requirements including the making available of annual reports in relation to funds managed by them (all designed to keep investors fully up to date with what is going on and to avoid the type of smoke and mirrors that apparently prevailed in relation to Madoff);

Appoint a depositary to oversee the operation of the funds and, importantly, to check that the investments that they say are there are SCANDAL: Bernie Madoff was jailed for fraud in 2009 really there (again, this was something where the Madoff scheme fell down); and

Abide by some significant new rules designed to restrict asset stripping of smaller private companies (private equity funds are often criticised as investors if they are seen to asset strip valuable items from companies in which they invest to the detriment or perceived detriment of the employees of those companies).

It is still very early days. July 22 was barely a month ago and we are seeing private equity fund managers evolve their practices to comply with the new regime.

What is interesting, however, is after initial scepticism about the feasibility of operating under this regime there has been a realisation that it perhaps won’t be so bad after all. When the first drafts of the European directive appeared around 2010 there was consternation throughout the industry and some very elaborate schemes were set up to structure funds offshore (for UK based managers, principally in the Channel Islands) to try to avoid the impact of AIFMD. However, more recently we have seen a definite shift to funds being brought back onshore and being managed and marketed in accordance with the new rules. Most notable has been the news that a number of major US fund houses have opted to become authorised in the UK (and so undertake to comply with AIFMD) to allow them to market their funds freely throughout Europe, with Boston based HarbourVest an example.

But having embraced the new regime there may be further change on the horizon for Scottish based managers. If there were to be a Yes vote in the independence referendum Scotland would need a new financial services regulator with responsibility for implementing a regime here. There is currently no guidance about how such a new regulator would go about its business.

In addition, a separate Scottish state would need to be a member of the EU or the EEA to benefit from the European passporting offered by AIFMD.

Again, if there were a yes vote, negotiations as to EU membership would need to be concluded quickly to maintain stability. Alan Soppitt is a partner of Burness Paull