On Thursday 24 May we welcomed over 70 investment managers to our annual investment management conference. We covered a broad range of topical legal and regulatory issues. Below is a summary from some of the sessions.
Julian Jessop, Chief Economist and Head of the Brexit Unit at the IEA opened the conference with an interesting talk looking at possible short, medium and long term effects on the British economy from Brexit. He discussed the threats and opportunities, particularly for the City in a post-Brexit environment and whether the UK Government has the willingness to take advantage of any opportunities that Brexit may present.
Private funds update
Chris Good, Partner, Investment management
Samuel Brooks, Partner, Investment management
2017 was an incredibly benign fundraising environment (the best ever for private equity, judging by the figures) and managers seemed to raise record amounts across a whole range of asset classes and strategies. Beyond the typical (and cyclical) dynamic of GPs flexing their muscles on contractual terms, it's been interesting to see a bit more flexibility on topics such as:
- economics – and in particular what investors are asking for beyond the perennial pressure on headline fee rates, such as tiered management fee rates to deal with different investor circumstances and greater variations in carry structuring to improve the alignment between manager and investor;
- structuring flexibilities – managers are more willing to create (and administer) feeder and parallel vehicles and currency sleeves, or funds in different jurisdictions, for the investor; and in return investors accept that managers need to avoid being tied down in their fund documents when structuring deals and using "alternative investment vehicles"; and
- governance and cultural issues – managers accept the ever-increasing emphasis on transparency and reporting, as well as data protection and cyber security issues, and are staffing up appropriately. Managers are also much more aware of brand management and ensuring that their wider team is on message with the cultures and values of their firm.
Paul Ellison, Partner, Financial services
The start of 2018 has seen significant regulatory implementation milestones:
- the PRIIPs requirements came into force on 1 January;
- the MiFID II implementation deadline was 3 January; and
- firms have been required to meet the first reporting deadline for RTS 28 on best execution requirements (30 April 2018).
Whilst firms are still bedding in these requirements they are faced with the need to prepare to implement other key regulatory developments, including the SM&CR (which will formally come into force in the second half of 2019) and the European Commission's proposals on prudential requirements for MiFID investment firms (which, if adopted, are likely to come into force in 2020). On top of this, the regulator is increasingly devoting resource to Brexit preparations and expects firms to be undertaking their own Brexit planning, identifying the extent to which they rely on European regulatory passporting rights. Regulators both in the UK and internationally are now also turning their attention to the regulation of cryptocurrencies and initial coin offerings. All-in-all the regulatory environment is busy with much for firms' legal and compliance teams to keep up with.
Market Abuse and Insider Dealing Investigations
Dan Lavender, Partner, Litigation
The last year has seen a significant increase in the number of FCA investigations (up 160 per cent on the previous year). A large percentage of the new investigations focus on market abuse and insider dealing. The FCA has said that its approach to opening investigations has changed. Investigations will now be used as a 'diagnostic tool' and will be opened where the FCA is seeking to establish the core facts. The opening of an investigation does not, therefore, mean that it is inevitable that there will be a regulatory punishment/finding at the conclusion.
The law in relation to market abuse and insider dealing has now been settled for some time. The criminal offences of insider dealing are contained in s.52 of the Criminal Justice Act 1993 (Dealing, Encouraging and Disclosing Offences). The civil offences are set out in the Market Abuse Regulation (Dealing, Disclosure and Market Manipulation).
The FCA's approach is to prosecute both in the criminal and civil context. The FCA now has a vast number of sources of information including other regulators, market participants, target companies, advisors/corporate brokers and asset managers.
Given the increased regulatory focus on this area, it is important that clients have good internal practices in relation to insider lists, and information handling. It is particularly important that high standards are observed in practice. One of the main challenges in dealing with an FCA investigation in this area is that it will often be necessary for a firm to 'prove a negative' in that it will have to show that any gap in its systems was not the cause of the underlying misconduct.
Derivatives and trading update: current risk issues in legal documents
Will Sykes, Partner, Derivatives and Trading
Chris Acton, Partner, Derivatives and Trading
This session looked at two current concerns - Brexit's impact on trading documents, and the changes being proposed by EMIR 2. In relation to Brexit, the key issues for trading documents (assuming we leave the single market) were discussed, namely:
- Whether trade lifecycle events will lead to derivatives having to be terminated for illegality / impossibility / force majeure, if the sell-side entity can no longer provide services into the buy-side entity's jurisdiction.
- What will happen to choice of law and choice of jurisdiction clauses?
- Will there be any trade level disruption events?
- What will happen as regards BRRD, cross-border insolvency, EMIR and other EU regulations that impact swaps?
As regards EMIR 2, Chris Acton updated the audience with the current progress of the draft legislation through the European legislative system, and explained how the new proposals would affect the asset management industry. In particular, the creation of a new small FC category that would only be subject to mandatory clearing if it hit the clearing threshold, the expansion of the FC category to catch all European AIFS, regardless of where their AUFM is located and tweaks to the reporting regime, to ease the burden for non-financial counterparties.
Investing in and deploying AI
Mike Rebeiro, Senior Adviser and Head of Digital and Innovation
AI and Big Data analytics have the potential to radically change the asset management industry. However, the use of AI requires trust and transparency to be established by all market participants - this may run contrary to the nature and type of AI being utilised. Moreover AI's ability to learn from data sets and live interactions as well as its ability to make decisions independently raises serious ethical, legal and compliance issue for any firm seeking to deploy AI. Firms must undertake risk assessments with respect to the use of AI and build such use into their existing risk management frameworks. Some firms are already establishing AI ethic committees to undertake this work.