Permian | Regulation
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Regulation

REGULATION

These terms are explained from a general financial point of view, but also with a more particular relationship to the private equity fund industry.

AIF Depository

The EU directive regulating the operation of fund managers for alternative investment funds (AIFMD) has become law in most European countries. Under AIFMD, the fund manager is responsible for securing that there is a depository function appointed for each alternative investment fund.

 

The depository is a separate and independent control entity with focus on safekeeping of fund assets, liquidity management and forecasting and monitoring of the funds activities to secure that they are within the mandate of the fund and in line with fund agreements.

AIFMD - Alternative Investment Fund Managers Directive

AIFMD is an EU directive governing the operations of managers of alternative investment funds. The trigger was EU concern over an unregulated and very large hedge-fund industry, the end product is wide reaching European legislation regulating the activities of managers of all funds not previously regulated, large and small.

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The directive regulates the marketing of alternative investment funds to professional investors in EU countries. On the positive side, once a manager has been licensed in one country, marketing in another EU country is subject only to a simple notification procedure. This so called “passport of marketing” is available upon notification to the financial regulatory authority in the home country which in turn notifies the relevant authorities across Europe. As Norway has not fully implemented all aspects of the directive, Norwegian managers can not yet request the marketing passport, some EU states may deny access and require the Norwegian manager to follow the relevant National Private Placement Regulations.

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The directive was transformed into law in most European countries in July 2013. In Norway, the law was introduced with effect from 1 July 2014.

AML / KYC Anti Money Laundering Provisions / Know-Your-Client

AML/KYC is regulation in place to prevent transactions in which proceeds from crime are included in order to establish a legitimate origin for such funds (No. Hvitvaskingsloven).

 

The Norwegian Anti-Money Laundering Act was introduced in 2009. In accordance with law, firms are required to comply with a number of obligations:

 

  • Secure up to date certified proof of identity for new clients.
  • Customer information shall be retained and stored securely.
  • The reporting entities are required to undertake independent research and to report appropriate authorities if they uncover circumstances which may indicate a connection with criminal activity.
  • The reporting entities shall establish proper and functional internal control and communication procedures ensuring compliance.

 

The practical AML/KYC procedures adopted in various countries and industries are different but the essence is shown in the examples below:

 

Where a client/customer/investor is a Legal entity, it is identified by an up to date certified certificate of registration. The person(s) who have signatory rights must provide a certified copy of their passport and a proof of address, normally a utility bill is acceptable. Mobile phone bills, even if they contain an address, are normally not accepted.

 

The owners of the company are identified by a certified register of shareholders or equivalent document. If the company has a shareholder which is also a company and which holds more than 25 % of the shares, then this entity must provide a certified copy of its register of shareholders, and so on. The procedure is designed to identify the ultimate owners of the investment vehicle, often termed Beneficial Owners.

 

Shareholders who are private citizens must provide a certified copy of their passport and utility bill.

 

Various jurisdictions may have different requirements to the exact text of the certification.

Beneficial owner

The Beneficial Owners are the ones who benefit from the operation of the company. Most commonl, the Beneficial Owners will be private individuals, but it may also be an organization, thrust etc. Increasingly, financial institutions require visibility to the Beneficial Owners, and the ID process in a fund structure may be somewhat complex.

Compliance

The term compliance or to be in compliance, refers to the business organisation operating in adherence with formal laws and regulations. In companies with a separate compliance function, the compliance office will report directly and independently to the board of the company.

 

The International Compliance Association refers to a secondary level of compliance which is that the function shall also secure that the organization is operating in line with internally set systems of control which are self-imposed in order to secure compliance with formal laws and regulations. Often this second level controls may functionally be the responsibility of the Risk Management function.

ESMA - The European Securities and Markets Authority

ESMA is an independent EU authority working to safeguard the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence amongst securities regulators.

EuVECA – the European Venture Capital Fund Regulation

Introduced at the same time as AIFMD, EuVECA represents a less onerous regulation for fund managers investing in the SMB market (small and medium sized businesses). The regulation started with a narrower focus on the venture capital market, hence the name.

 

EuVECA is regulating the operation of managers of funds which invest in companies which at the time of investment have (1) less than 250 employees and (2) either an annual turnover of less than Euro 50 mill. or a balance sheet total which does not exceed EUR 43 million.

 

In Norway, EuVECA is expected to be included in its entirety as a regulation (forskrift) under the AIF law. While most European states introduced EuVECA at the same time as AIFMD, in Norway the introduction has been delayed. The reason is that the introduction of EuVECA requires Norway to accept a European institution as the final authority to resolve conflicts and this is in conflict with the Norwegian constitution.

EVCA - European Private Equity & Venture Capital Association

EVCA represents the private equity community across Europe. EVCA engages proactively with European and global policymakers to ensure the conditions are right to encourage the industry’s ability to transform businesses through patient capital. EVCA has developed a number of guidelines for the industry. These include the principles of good corporate governance, reporting and valuation. EVCA have endorsed the IPEV guidelines for Investor reporting and valuation.

 

On a national level EVCA have sister organizations that support the interests of the venture capital and private equity industry in each country: In Norway – NVCA, in Sweden – SVCA and in Denmark DVCA.

FATCA - Foreign Account Tax Compliance Act

FATCA is a US legislation that gives the United States a greater opportunity to find and tax US citizens and companies that are tax resident or domiciled in the United States. FATCA requires that non-US financial institutions must provide information on US account holders and beneficial owners to US tax authorities.

 

From inception, FATCA was meant to regulate the operation of foreign financial institutions operating in the US or which had US clients. In certain cases FATCA conflicted with the national laws outside the US and the result has become a number of Intergovernmental Agreements (IGA’s) between the United States and a number of countries. The consequence being that most countries have accepted FATCA reporting, some have introduced similar legislation in their own countries.

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The OECD, EU and G20 are working with an international agreement on automatic exchange of tax information. While FATCA applies only to Americans, the new agreement will cover a number of countries.

ILPA – Institutional Limited Partners Association

ILPA is a global, member-driven organization dedicated to advance the interests of private equity Limited Partners through industry-leading educational programs, independent research, best practices, networking opportunities and global collaborations. ILPA has established guidelines, the Private Equity Principles, which are commonly used in negotiations of partnerships agreements between Limited Partners and General Partners to align the interest of investors (Limited Partners) with those of the General Partner.

IPEV – International Private Equity and Venture Capital

The IPEV association provides high quality, uniform, globally acceptable, best practice guidance for Private Equity and Venture Capital valuation and reporting purposes. The IPEV guidelines are the recognized standard for valuation and reporting globally.

 

IPEV Valuation and Investor Reporting guidelines are endorsed by EVCA.

Risk management

Risk management is the process of identifying material risks, analysing and preparing for the possibility of such risks becoming a reality and upon an occurrence making sure that the company puts in motion the appropriate response.

 

Risk management is an iterative exercise in that new learning and experience should lead to changes in the operation of the business, particularly its control functions. Always present and material is the risk of breaking formal law and regulation (Compliance). Risk Management will however also address other material risks of the company, e.g. risks related to the quality of articles produces or services rendered.

 

In smaller companies, Risk Management and Compliance are often a combined function.