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28 November 2014

MiFID II Update

MiFID II would have adverse implications under ESMA's proposals for classifying shares in quoted investment companies as automatically complex products and so not available on execution-only platforms. Victoria Younghusband focuses on listed private equity but the points apply equally to any quoted investment company.

After the AIFMD, one of the next regulatory headaches is the MiFID II Directive and the Markets in Financial Instruments Regulation (MiFIR) which came into force on 2 July 2014, with member states being required to adopt and publish the measures transposing MiFID II into national law by 3 July 2016 and to implement them from 3 January 2017.

An unwelcome development is that on one reading of the MiFID II Directive, shares in collective investment undertakings that are not UCITS will be deemed complex instruments and so not available for execution-only business, even though the general rule under MiFID II is that shares admitted to trading on a regulated market or equivalent third country market or a MTF are non-complex and can be included on execution-only platforms.

For this purpose, listed private equity investment companies are collective investment undertakings that are not UCITS.

In ESMA's MiFID/MiFIR consultation paper (CP) 2014/549 in which ESMA proposed draft technical advice, ESMA stated that it should not be possible for shares in non-UCITS collective investment undertakings (AIFs) to be labelled non-complex.

In their response to the CP, EFAMA and a number of national trade associations have voiced strong disagreement with ESMA's assessment that shares in AIFs should be automatically excluded from execution-only.

This is clearly an important point for quoted investment companies as they seek wider distribution since ESMA's interpretation would mean that shares in listed AIFs could only be distributed to advised or discretionary retail clients, with the wealth manager or other investment adviser having to carry out an enhanced assessment of suitability and appropriateness on a client by client basis.

Retail clients would not be able to deal in shares in LPEQ member companies on an execution-only basis.

Responses to ESMA's CP were due on 1 August 2014. ESMA will finalise the draft technical advice for submission to the Commission by 2 January 2015 and it remains to be seen whether ESMA will step back and recommend that shares in listed AIFs that meet certain defined criteria to be labelled non-complex. The final decision will lie with the Commission.

Amongst this bad news, there is some comfort for onshore directors of offshore incorporated investment companies in the Finance Act 2014, which amended the Taxation (International and Other Provisions) Act 2010.

These amendments enable an offshore incorporated investment company that has appointed a UK investment manager to hold its board meetings in the UK and/or have a majority of UK resident directors and not be considered tax resident in the UK (unless it intentionally wishes to be considered tax resident in the UK as an investment trust and applies to HMRC for such status).

Reproduced from LPEQ's Listed Private Equity Briefing September 2014

This article was written by Victoria Younghusband. For more information please contact Victoria on +44 (0)20 7427 6707 or