August 28, To: Department for Business, Innovation and Skills

Transcription

1 August 28, 2014 To: Department for Business, Innovation and Skills Re: Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business: Government Response of April 2014 published by the Department for Business, Innovation & Skills; and Schedule 3 to the Small Business, Enterprise and Employment Bill Dear Sir or Madam, 1. Introduction Managed Funds Association 1 ("MFA") welcomes the opportunity to provide comments to the Department for Business, Innovation and Skills ("BIS") in relation to: (a) certain aspects of the Government's response of April 2014 (the "Response Paper") published by BIS in relation to its Discussion Paper on Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business published in July 2013; and (b) Schedule 3 to (and certain provisions of Part 8 of) the Small Business, Enterprise and Employment Bill, as introduced to the House of Commons on 25 June 2014 (the "Bill"). MFA supports the objectives of seeking greater transparency in order to facilitate a reduction in illicit activity and deficiencies in corporate governance. In certain respects, however, MFA is of the view that certain of the requirements of the Bill and certain of the intentions of the Government as indicated in the Response Paper, as they 1 Managed Funds Association represents the global alternative investment industry and its investors by advocating for sound industry practices and public policies that foster efficient, transparent and fair capital markets. MFA, based in Washington, DC, is an advocacy, education and communications organization established to enable hedge fund and managed futures firms in the alternative investment industry to participate in public policy discourse, share best practices, learn from peers and communicate the industry's contributions to the global economy. MFA members help pension plans, university endowments, charitable organizations, qualified individuals and other institutional investors to diversify their investments, manage risk and generate attractive returns. MFA has cultivated a global membership and actively engages with regulators and policy makers in Asia, Europe, the Americas, Australia and many other regions where MFA members are market participants.

2 Page 2 of 8 will apply to members of MFA, are unduly burdensome and disproportionate in the context of the concerns they are seeking to address, and when weighed against other key issues such as confidentiality, privacy, cost, flexibility and the attractiveness of the United Kingdom ("UK") as a place to invest and carry on business and the Government's stated commitment to reduce regulation. In particular, MFA is concerned about: (A) the PSC (person with significant control) requirements, including: (i) privacy issues relating to the relevant beneficial ownership information being made publicly available; and (ii) the need of its members, as regulated entities generally - i.e., as investment advisers/managers already subject to the regulation and information requirements of the UK Financial Conduct Authority (the "FCA") and/or the US Securities and Exchange Commission ("SEC") or other regulators globally - to comply with further duplicative reporting requirements in relation to beneficial ownership information; and (B) the potential prohibition of corporate members of limited liability partnerships ("LLPs"). 2. Impact of proposals on a typical investment management structure Although MFA's members may be headquartered in the US, Europe or Asia, for ease of reference we wish to bring the BIS's attention to a very common corporate structure featuring a US parent and a UK subsidiary, broadly along the lines set out in the diagram in the Schedule to this letter. In such a structure, typically, a US incorporated investment adviser (the "US Adviser") directly or indirectly holds all, or substantially all, of the equity interest in a UK entity, which acts as a sub-adviser to the US Adviser (the "UK Sub-Adviser" and, together with the US Adviser, the "Advisers"). 2 The US Adviser is registered with the SEC under the US Investment Advisers Act of 1940 and the UK Sub-Adviser is, in most cases, regulated by the FCA under the Financial Services and Markets Act 2000 (the "FSMA"). The US Adviser is the principal investment adviser to a hedge fund (e.g., established in the Cayman Islands) under an investment advisory agreement and the UK Sub- Adviser is appointed by the US Adviser either: (i) to trade the fund's assets on a discretionary basis; or (ii) simply to provide investment advice to the investment adviser (which may then decide whether to act on that advice). The UK Sub-Adviser is often incorporated as an LLP (although it is sometimes incorporated as a UK private limited company). As the BIS is aware, LLPs are regularly used in the financial services industry in order to facilitate a private 2 As a matter of terminology, please note that the term "investment adviser" under US law is the equivalent of an "investment manager" under the FSMA, in that a US investment adviser does not merely give investment advice but has discretionary investment management authority in relation to the relevant investment fund's assets.

3 Page 3 of 8 partnership structure (which, among other things, allows management's interests to be more aligned with the business) with limited liability. When constituted as an LLP, the US Adviser will often structure its participation in the LLP through a UK private limited company as a corporate member of the LLP alongside other members who will generally be part of the UK management and/or investment team. The proposals in the Bill and/or the Response Paper are likely to affect MFA members in the following two key respects: (a) PSC requirements the incremental extension of information to be obtained, maintained and placed into the public domain in respect of individuals (in this case, in respect of a PSC) exacerbates the existing concerns of members relating to data protection and privacy matters and duplicates reporting requirements for regulated Advisers and investment managers in respect of controllers; and (b) the potential prohibition on corporate members of LLPs such a prohibition would give rise to the need to restructure existing businesses of investment managers/advisers in the UK (including existing UK Sub-Advisers) and potentially cause US Advisers to find other jurisdictions in which to incorporate their European sub-advisers. The UK risks becoming a less attractive place of business for investment managers/advisers. 3. PSC requirements privacy concerns and exemptions for regulated entities Paragraph 58 of the Response Paper states that views on, and additional exemptions from, the beneficial ownership requirements would be welcomed. Privacy concerns MFA members are concerned regarding the extension of information in relation to individuals to be obtained and made publicly available. Members have several reasons for these concerns, including as summarised below. (a) Different countries have different requirements relating to privacy and data protection. The PSC information requested may not ordinarily be disclosable in the jurisdiction where the PSC resides and such jurisdiction may have an equivalent or more stringent regime for privacy and data protection and could, therefore, give rise to a conflicts of law issue. (b) In particular, members are concerned that the required PSC information could be misused for criminal purposes and that more should be done to combat the risks of cybercrime. Accordingly, MFA notes with approval that the residential address of PSCs will not be publicly available and submits that only the year of birth should be publicly available. MFA is strongly of the view that, if regulated entities are not generally excluded from the PSC proposals in the Bill and the Response Paper, the requirement to publish date of birth information should be limited to the year only either generally or at least in the case of regulated entities as referred to below, which is consistent with

4 Page 4 of 8 similar SEC disclosure rules. As mentioned above, this information could still be available to certain regulatory bodies and law enforcement agencies. Whilst MFA is supportive of the main policy objectives behind the PSC aspects of the Proposals and the Bill (namely, to help law enforcement and tax authorities identify and sanction the individuals responsible for misusing UK companies to facilitate a range of criminal activities and to facilitate better corporate governance) and has no objection to providing relevant information to the FCA (or other government agencies for legitimate law enforcement purposes) on a confidential basis, it submits that: (i) (ii) (iii) the FCA already has all relevant beneficial ownership information in relation to MFA members operating through entities in the UK; a convincing public policy case has not been articulated for such information (primarily the month of date of birth) to be made publicly available, particularly when weighed against the significant privacy and data protection concerns referable to any such availability; and in the case of FCA regulated entities (such as the UK Advisers), the main policy objectives behind the PSC aspects of the Proposals and the Bill can be achieved without making the PSC information publicly available (i.e., MFA would be supportive of the PSC information held by the Company or the FCA being accessible on a confidential basis by law enforcement and tax authorities). Regulated entities The UK Sub-Adviser is in most cases regulated by the FCA. 3 For these purposes, the UK Sub-Adviser will have provided very detailed information to the FCA of all of its "controllers". 4 The information submitted to the FCA which includes date of birth, current and previous addresses, whether the person has committed any offences, etc. would more than cover the information requirements in respect of PSCs. 5 The US Adviser (i.e., the parent undertaking / controller of the UK Sub-Adviser), will also be registered with the SEC under the US Investment Advisers Act of For these purposes, detailed information regarding beneficial owners 6 (including full 3 In certain limited cases, the UK Sub-Adviser is able to remain unregulated on the basis that it provides investment advice solely to a group entity (the US Adviser) and thus is able to rely upon an exclusion available to group entities. 4 The definition of "controller" is set out in section 422 of the FSMA; in summary, a person is a controller if they: (a) hold 10% or more of the shares in a UK authorised person (A) or a parent undertaking (P) of A; or (b) hold 10% or more of the voting power in A or P; or (c) hold shares or voting power in A or P as a result of which he is able to exercise significant influence over the management of A. 5 Please see for an indication of the kinds of information required to be submitted by controllers of UK regulated firms. 6 For direct beneficial owners, the threshold is 5%. For indirect beneficial owners, the threshold is 25% of any direct beneficial owner.

5 Page 5 of 8 name, social security number and date of birth) must be provided to the SEC 7, although application may be made for such information to remain confidential. Given these existing layers of regulation (where "controller" information would already be available to enforcement agencies to tackle the illicit use of UK corporate entities), MFA is of the view that the requirement of further disclosure as contemplated by the Bill and the Response Paper is disproportionate and unnecessary. MFA notes, further, that the main exemption from the PSC requirements relates to interests in DTR5 issuers and that the information which is required to be disclosed in respect of investments in DTR5 issuers extends only to the holder of the voting rights itself; DTR5 does not necessarily require disclosure of PSCs in respect of the holder of the votes. Paragraph 56 of the Response Paper states that this exemption is because DTR5 issuers "are subject to generally higher levels of regulation and public scrutiny. We therefore judge that the risk of illicit activity is lower". MFA is of the view that this reasoning applies equally to UK Sub-Advisers, who are already subject to stringent FCA regulation and public scrutiny. MFA is strongly of the view that regulated entities (as referred to above) should therefore be generally excluded from the PSC requirements in the Bill (including in relation to any extension to LLPs as indicated in the Response Paper) Extension of prohibition of corporate directors to corporate members of LLPs Paragraph 169 of the Response Paper states that there could be a case for the inclusion of LLPs in the system of prohibition of corporate directors (presumably meaning that corporate members of LLPs should also be prohibited) and welcomes views on this point. MFA is strongly of the view that there should be no prohibition of corporate members of LLPs. As mentioned above, UK Sub-Advisers are often structured as UK LLPs, these LLPs will almost always have a UK company as a corporate member (to reflect the parent's "ownership" interest within the corporate group and to provide continuity for the group as individual members may leave) and they are almost always regulated by the FCA. There are also other commercial reasons why corporate members are used, including (for example) the holding of land and intellectual property. The corporate member could also be used by the group to provide supporting functions to the LLP as well as the wider group (e.g., accounting and payroll services). It is also relevant to note as follows: (a) the membership of an LLP combines the functions of directors and shareholders in the corporate context. Further, it should be noted and always borne in mind that, owing to the flexible nature of LLPs, the economic rights to profits, capital (in relation to which the rights may be different before and 7 See Form ADV at Note that only the name of the direct/indirect owner is available on the publicly accessible Form ADV. 8 It is noted that this could be achieved by subsequent regulation as envisaged by the new Section 790B(1)(b) proposed in the Bill. MFA would ask that the BIS conduct a consultation with respect to the exemptions and the draft regulations that the BIS proposes.

6 Page 6 of 8 during winding-up), voting and management arrangements between members of LLPs can be varied (e.g., a member with certain capital rights may not have rights to profit and/or the right to vote on all or any matters). As such, it is not appropriate to extend to "owners" or "partners" a provision aimed at company directors; (b) (c) (d) (e) (f) (g) to the extent that one of the objectives of the proposals relates to reducing tax avoidance, two points should be considered. First, LLPs are transparent for tax purposes (so tax is levied at the level of the members rather than the LLP). Every LLP is required to file an annual partnership tax return which, as a result of showing the allocation of the LLP's profit to members, effectively discloses to HM Revenue & Customs ("HMRC") a member's annual entitlement. Second, the general taxation of LLPs has recently been the subject of significant consultation and legislation (which MFA notes did not and does not suggest that corporate members of LLPs should be prohibited). The legislation, which has had significant compliance and cost implications for MFA members, is already focused on tackling perceived tax avoidance within an LLP structure; it is difficult to understand why commercial enterprises should not be able to manage their affairs through the corporate vehicles best suited to their legitimate commercial objectives (some of which are highlighted above); in the case of the corporate structures operated by MFA Members as referred above, it is essential that the corporate "owner" is able to reflect that ownership by being a corporate member; the UK corporate member of an LLP will already be subject to the PSC requirements and, if LLPs become subject to the PSC requirements, there will be a further layer of PSC regulation so to prohibit corporate members altogether would be disproportionate in the context of the stated objectives of the legislation; given the complexities of, and sensitivities relating to, cross-border taxation, the ability of a non-uk party to participate in a LLP through a UK corporate is of significant benefit and attraction. Participating indirectly through a UK corporate allows such non-uk party to manage both UK taxation and, more importantly, UK tax compliance; and to remove corporate members would negate the alignment of the LLP structure with that adopted in the US; the desire for alignment with available US corporate structures (and the resulting commensurate appeal of basing operations in the UK) was one of the main reasons for introducing LLPs. If implemented, the BIS proposal relating to the potential prohibition on corporate members of LLPs would: (i) give rise to the need to incur considerable time and cost in order to revert to company structures (including incurring tax charges and

7 Page 7 of 8 planning to minimize such charges and to create equivalent management incentive arrangements); (ii) (iii) give rise to the possible implementation of alternative structures using non-uk vehicles; and have a material adverse impact on the attractiveness of the UK as a jurisdiction in which to carry on business. Accordingly, MFA is strongly of the view that there should be no prohibition of corporate members of LLPs and that, if the Government wishes to continue with this proposal: (A) (B) (C) there should be a full consultation process (including so as to understand the costs and other adverse implications for legitimate commercial activities); consideration should be given to there being an exception in the case of regulated LLPs and to LLPs that form part of a larger group (which in paragraph 170 of the Response Paper the BIS suggests might be applied to corporate directors); and there will need to be a long transitional period. MFA would like to reiterate that it is supportive of the main policy objectives behind the relevant aspects of the Proposals and the Bill referred to above - namely, to help law enforcement and tax authorities identify and sanction the individuals responsible for misusing UK companies to facilitate a range of criminal activities and to facilitate better corporate governance. On the other hand, we are of the view that in certain respects a case for the proposed changes has not been sufficiently made out, particularly in the case of certain regulated entities and when weighed against legitimate concerns relating to privacy and cybercrime and, in the case of extending the abolition of corporate directors to LLPs, in the context of business efficacy, the time and cost of changing existing legitimate corporate structures and the potential adverse impact on the attractiveness of the UK as a place to carry on business (all as expressed in more detail above). * * * * MFA thanks the BIS for the opportunity to provide comments on the Response Paper and the Bill. We would welcome the opportunity to discuss our views in greater detail. Please do not hesitate to contact the undersigned at (202) with any questions which BIS may have regarding this letter. Respectfully submitted, Richard H. Baker President and CEO

8 Page 8 of 8 SCHEDULE Example MFA Member Corporate Structure Investors Various individual and corporate members Managing/ Managing Member Investment Advisory Agreement US incorporated LLC, registered under the US Investment Advisors Act 1940 and regulated by the SEC Funds Sub-advisory Agreement Sub-advisory Agreement UK company as member (wholly owned subsidiary) Manager Members Investee companies, including UK companies (some, but not all, being DTR5 Issuers) UK company as subadviser, regulated by the FCA (wholly owned subsidiary) UK LLP as sub-adviser, regulated by the FCA Note: the bold boxes indicate an alternative corporate structure. Funds will have investment management agreement with the UK Advisor [and/]or the US Adviser.