From non-professional to professional investor
Subject to certain requirements established through the adoption of the EU 2004 MiFID regulation (in Norway 2007), investors classified as “non-professional” may request to be treated, regulation wise, as “professional”. What are the requirements?
Through the introduction of MiFID (Markets in Financial Instruments), the EU aimed to ensure a level of investor’s protection appropriate for various categories of investors investing in financial instruments.
Under the directive, investors must be categorised as either professional or non-professional. Non-professional- or retail investors are granted a full range of protections in order to secure that they are not lured into investing in products they do not understand or which for other reasons are not deemed appropriate. This is good. The regulations may however also mean that they will be excluded from investing in products they do understand and which are suitable, and it is in these instances non-professional investors are tempted to examine whether or not they may be re-categorised as professionals.
MiFID allows professional investors to demand to be re-classified as non-professionals in order to obtain a greater protection (opting down), but the opposite is more common, non-professionals seek professional status (opting up). To be able to opt up, non-professional investors must meet at least two out of three following criteria:
- The investor has carried out transactions, of a significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters,
- The size of the investor’s financial instrument portfolio, cash deposits and financial instruments included, exceeds an amount equivalent to EUR 500 000,
- The investor works or has worked in the financial sector for at least one year, and in a professional position that requires knowledge of the transactions or services envisaged.
For investors in alternative investment funds, the first of the three criteria is impractical, almost no one has made 40 such investments in the span of one year. In practice, therefore, investors must have a EUR 500 000 portfolio and sufficient working experience from the financial sector.
By opting up, the investor accepts a lower level of investor protection. The regulated entities performing the investor classification is responsible for undertaking regular reviews and must pay attention to changing circumstances for the investor. The investor is likewise responsible to forward information which could affect current classification.
The AIFM Directive allowed each member state to set their own regulation for marketing alternative investment funds to non-professional investors. Many states introduced strict measures. In Norway you require an AIFM license and in Sweden the fund itself must also be a listed company. AIF Managers may be tempted to classify their investors as professional investors.
The regulatory agencies in the EEA countries are highly focused on securing that a sufficient assessment and documentation process is carried out, particularly when investors request to opt up. Documenting requirements are strict, “what is not documented is not considered done.”
Companies undertaking investor classification should be able to document that:
- investors have been classified in accordance with a written on-boarding routine, which includes the procedures of opting up, considered as a set of activities and assessment criteria to be followed.
- non-professional investors have received written information about the possibility of opting up and the consequences should they fulfil the criteria and be accepted as a professional investor.
- a control document of the evaluation has been issued in writing, and the conclusion signed off by the person in charge of investor classification.
- the opt-up investors have sign a note stating that they have been informed about the consequences of opting up, and also that they do understand the risks inherent in the product.
Permian may provide advice on how to handle investor classification correctly, assistance with providing the required management system procedures or to assist the fund managers in the assessment and documentation processes.
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