PRINT THIS PAGE The MiFID directive and its impact on Finnish PE funds25/06/2008. Source: Borenius & Kemppinen. Paulus Hidén
The implementation of the Markets in Financial Instruments Directive (MiFID) in Finland took place on 1 November 2007. The aim of MiFID is to integrate the European financial markets by introducing a system in which an operating license granted in one home member state would be valid throughout the European Economic Area. In connection with the Finnish implementation of MiFID, several Finnish Acts were amended or totally revised, such as the Act on Investment Firms (revised in its entirety), the Securities Markets Act, the Act on Trading in Standardised Options and Futures, the Act on Mutual Funds and a number of other acts relating to the financial markets, according to Paulus Hidén of Finnish law firm Borenius & Kemppinen. Scope of MiFID
Perhaps the most notable revision – or at least the one that caught the attention of private equity firms – was the adoption of the new Act on Investment Firms (922/2007). One of the most central amendments was to include investment advisory services under the definition of investment services, which means that a license granted by the Finnish Financial Supervision Authority (the “FIN-FSA”) is required in order to provide such services.
Investment advice is defined as the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments. The definition corresponds to the definition in the MiFID. According to the Act on Investment Firm and the recent guidelines issued by the FIN-FSA, a license will be required when the following elements are fulfilled:
- the investment advice takes into consideration the specific circumstances relating to the client;
- the advice concerns the selling, buying, subscribing, trading, redeeming or keeping of a financial instrument; and
- the advice is given upon the request by the client or at the initiative of the investment firm.
Conversely no investment firm licence is required if the company:
- gives general recommendations i.a. relating to a specific asset class;
- gives recommendations to a larger group of people through the use of mass media (e.g. newspaper, internet, radio or television);
- markets its (financial) products;
- advice is given occasionally in connection with the providing of other services, such as legal or accounting services;
- the subject of the investment advice is not a financial instrument but, for example, art (it should be noted, however, that the shares in unlisted companies are considered as financial instruments).
The implementation of MiFID also introduced new structures on client categorization. Clients are now categorized as professionals and non-professionals and, in certain cases, as eligible counterparties. In addition, securities intermediaries are obliged to make more extensive inquiries about their clients’ financial position and investment experience, and other important matters concerning client protection. At the same time, the obligation of securities intermediaries to provide information is also more specific. The new Act on Investment Firms also includes provisions on how to deal with conflicts of interest and clients’ assets.
The most material amendment to the Securities Markets Act relates to the division of public trading into trading on official list and other public trading. The stock exchange is now able to decide itself whether to keep an official list on the securities that are traded publicly. The provisions encourage trading in publicly traded securities in parallel trading systems. Publicly traded securities can, for example, be admitted to multilateral trading facilities organized by securities intermediaries or traded on another regulated market in the European Economic Area.
In connection with the implementation of MiFID, some minor amendments to the Finnish tax system were made. The liability to pay 1.6 per cent transfer tax on share transactions made on alternative multilateral market places outside the stock exchange (e.g. on the First North) was abolished in order to promote trading on such markets.
Effects on Private Equity firms
For the Finnish private equity and venture capital industry, the main concern in connection with the implementation of the MiFID has been uncertainty concerning the impacts MiFID will have on the industry. As noted above, perhaps the most significant change introduced by MiFID is that the providing of investment advice has become an investment service subject to permission of the FIN-FSA.
After the implementation of MiFID, the Finnish Venture Capital Association requested the FINFSA to issue an interpretation regarding the impacts MiFID will have on advisory relationships between private equity funds and their managers/advisors. As with any closed-end funds, Finnish fund structures nowadays often include a general partner company advised by separate operative advisory / management companies. Some firms also provide fund-related services to institutional investors.
On 24 January 2008 the FIN-FSA issued its interpretation (the “Interpretation”) in which it evaluates the advisory relationships within private equity fund industry in the light of the “investment advise” premise in the new Act on Investment Firms.
The Interpretation sets out that advisory services provided in connection with private equity activities (which includes also fund of funds activities), which fulfil the exemption parameters set out in MiFID Article 2, Paragraph 1 Subsection h, are not subject to FIN-FSA permission. FIN-FSA is of the opinion that providing services to a management company (or general partner) or to the fund(s) managed by the manager within the same group of companies as the advisor is not “providing of investment advice” subject to permission of the FIN-FSA. The FIN-FSA points out, however, that the exemption does not apply when an advisory company provides advisory services to a management company that is not a member of the same group of companies as the advisor (or to funds managed by such management company or directly to investors) or directly to investors. The exemption also applies to advisory services provided directly to a fund managed by a manager within the same group as the advisor although the fund and the advisory company may not technically be a part of the same group of companies. The result is that most of the Finnish private equity firms are not affected by the implementation of the directive but those that provide direct advice to institutional investors (instead of or in addition to managing their own closed-end funds) may have to consider in more detail whether the services that they provide fall within the scope of the new Act.
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