VENTURE CAPITAL AND PRIVATE EQUITY FIRMS by ltm66165

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									       VENTURE CAPITAL AND PRIVATE EQUITY FIRMS & THE CRD


Executive Summary
  ·   The Capital Requirements directive (CRD) is a new directive which changes the way
      in which firms have to calculate and provide capital.


  ·   Venture capital firms (including private equity firms) will be subject to the
      requirements of the Capital Requirements directive (CRD) from 1 January 2007 if
      they are subject to the requirements of the Investment Services directive (ISD).


  ·   The Markets in Financial Instruments directive (MiFID), which comes into force on 1
      November 2007 and will replace the ISD, is wider in scope than the ISD and includes,
      in particular, investment advice as a "core" investment service. This service may be
      relevant to the activities of venture capital firms. We do not expect that the other new
      investment service of placing without a firm commitment basis will be relevant for
      most venture capital or private equity activities, though this new service may be
      subject to further interpretation by the European Commission and / or CESR which
      may have bearing on its scope.


  ·   MiFID will therefore be relevant to a firm's CRD status from 1 November 2007. If a
      venture capital firm is currently outside the scope of the ISD, it should consider
      whether these changes bring it within the scope of MiFID and the CRD. If a firm is
      already within the scope of the ISD, it should also consider whether the different
      scope of MiFID will affect its status under the CRD from 1 November 2007.


  ·   Many venture capital firms are likely to be exempt from MiFID for either all or part
      of their business as a result of the exemption in article 2(1)(h) of MiFID for collective
      investment undertakings and their depositaries and managers. A similar exemption
      currently exists in the ISD.


  ·   Where a venture capital firm is an operator of a collective investment scheme, in our
      view its activities conducted in its capacity as an operator are excluded from the scope




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    of MiFID, even if it is subject to MiFID for other reasons, for example because it
    provides investment services to third parties.


·   Another MiFID exemption which may be relevant for some "captive" venture capital
    firms is the exemption in article 2(1)(b), provided they only provide investment
    services exclusively for their parent undertakings, subsidiaries or subsidiaries of their
    parents.


·   The Treasury intends to give effect to the optional exemption for firms falling within
    article 3 MiFID – this exemption may be relevant for a small number of purely
    advisory venture capital firms whose only MiFID investment service is investment
    advice and which do not hold client money or securities.


·   If a venture capital firm is exempt from MIFID for all of its business, it will not be
    subject to the CRD and capital requirements under existing IPRU(INV) rules will
    remain unchanged.


·   Where a venture capital firm is subject to MiFID requirements for all or part of its
    business (i.e. it is a MiFID investment firm, which will include venture capital firms
    currently subject to the ISD), it will only be subject to the prudential requirements of
    the CRD in a limited way if it satisfies the criteria of an exempt CAD firm, i.e. only
    the base capital requirements of the CRD will apply to its business. Alternatively,
    these requirements can be met by exempt CAD firms using professional indemnity
    insurance (PII) or a mixture of capital and PII.


·   If a venture capital firm which is a MiFID investment firm wishes to be an exempt
    CAD firm, generally speaking it will need to apply for a variation of permission before
    August 2007 (see Tables 2 and 4).


·   Where a venture capital firm which is a MiFID investment firm does not meet the
    criteria for an exempt CAD firm, it will either be a BIPRU 50K firm or a BIPRU 125K
    firm or a BIPRU 730K firm. In addition to considering their base capital
    requirements, these venture capital firms will need to consider their capital resource



                                                                                                2
         requirements and whether to apply for a variation of permission in order to become a
         limited licence firm or a limited activity firm, in which case they should do so
         immediately.


Background
    1.    The purpose of this note is to help venture capital firms decide their prudential
          category and capital requirements, as part of implementation of the CRD. This is a
          working document which does not constitute formal FSA guidance at this stage. It is
          a firm’s responsibility to determine which prudential category applies to it and
          understand the regulatory implications.


    2.    Our revised financial rules which implement the CRD will come into effect for
          certain types of investment firms from 1 January 2007. The new rules are included
          in the General Prudential Sourcebook (GENPRU) and the Banks, Building Societies
          and Investment Firms Sourcebook (BIPRU). However, you can take advantage of
          the transitional rules that allow continued use of certain IPRU (INV) rules during
          2007. For further implementation details, including Handbook links and important
          information about timing, see:
          http://www.fsa.gov.uk/pages/About/What/International/basel/info/details.shtml


    3.    We have deliberately used the same technical terms in this note that we use in our
          Handbook because venture capital firms will need to be familiar with them.


    4.    A venture capital firm’s prudential category and capital requirement is determined
          primarily by whether it is subject to the requirements of the re-cast Capital Adequacy
          directive1 or the CRD for short2. As at 1 January 2007, a venture capital firm will
          only be subject to the CRD if it is subject to the requirements of the ISD. From 1
          November 2007, a firm will be subject to the CRD only if it is subject to the
          requirements of MiFID (i.e. it is a MiFID investment firm) for all or part of its
          business.


1
 http://eur-lex.europa.eu/LexUriServ/site/en/oj/2006/l_177/l_17720060630en02010255.pdf.
2
 Strictly speaking, the CRD refers to the Banking Consolidation directive (Directive 2006/48/EC) and the re-
cast Capital Adequacy directive. We use the term in this paper to refer to the re-cast Capital Adequacy
directive.


                                                                                                               3
    5.   For a venture capital firm to be subject to MiFID, it needs to carry on one or more
         investment services and activities relating to financial instruments, as defined by
         MiFID. A venture capital firm will fall outside MiFID, however, if all of its business
         falls within an exemption under the directive. So an understanding of MiFID and its
         extended scope in relation to the ISD is essential to understanding how venture
         capital firms are affected by CRD. Accordingly, this note is divided into four
         sections:
            ·   MiFID investment services and activities
            ·   MiFID exemptions
            ·   CRD firm categories
            ·   Do we need to vary our permission?


    6.   This note does not deal with all MiFID investment services and exemptions but
         instead focuses on those key elements relevant to venture capital firms. There are
         also some flowcharts and tables designed to help firms determine their prudential
         category using their permission as a starting point.


    7.   Readers can find a fuller guide to MiFID and CRD in our draft perimeter guidance
         text (PERG 13)3, for which the consultation period has recently closed. We are
         currently working through the responses to the consultation, prior to finalising the
         guidance. We refer below to various Q&A in the draft PERG text.


    8.   Although MiFID and the CRD set out most of the key provisions and definitions
         relating to scope, some provisions may be subject to further legislation by the
         European Commission. MiFID's scope provisions may also be the subject of
         guidance or communications by the European Commission or the Committee of
         European Securities Regulators (CESR). Similarly, CRD provisions may be the
         subject of guidance or communications by the European Commission or the
         Committee of European Banking Supervisors (CEBS). Firms should therefore
         remain alert to any future developments at a European level.




3
 See CP 06/09 “Organisational Systems and controls – Common platform for firms”
http://www.fsa.gov.uk/pages/Library/Policy/CP/2006/06_09.shtml.


                                                                                                4
         A. MiFID Investment services and activities
         Reception and transmission of orders in relation to one or more financial instruments
         (PERG 13 Q15)
    9.       In our view, this service (as in the case of the corresponding ISD service4) equates
             broadly to the permitted activity of arranging (bringing about) deals in investments
             in relation to MiFID financial instruments5 as part of firm's MiFID (i.e. non-exempt)
             business.


    10.      As is the case with the ISD, reception and transmission of orders under MiFID also
             includes the bringing together of two or more investors thereby bringing about a
             transaction between those investors. This could include, for example, where a
             venture capital firm invests in a target company and arranges for a third party
             investor to do likewise thereby bringing about a transaction between two or more
             investors (i.e. the third party investor and the vendor of the target company).


         Execution of orders on behalf of clients (PERG 13 Q17)
    11.      This may be relevant to firms with a dealing in investments as agent permission in
             relation to MiFID financial instruments who execute orders as part of their MiFID
             business. You will only be executing an order if you participate in its execution (i.e.
             enter into it) on behalf of your client, as opposed simply to arranging the deal.


         Dealing on own account (PERG 13 Q18)
    12.      This may be relevant to venture capital firms with a dealing in investments as
             principal permission in relation to MiFID financial instruments, but only where they
             buy and sell securities on a regular basis using their own funds, as part of their
             MiFID business. We do not think this will be particularly relevant for most venture
             capital or private equity activity.


         Portfolio management (PERG 13 Q19)



4
 See Annex to the ISD, Section A, 1(a)
5
 See PERG 13 Annex 2, Table 2 for a comparison of MiFID financial instruments with specified investments in
Part IV permissions.


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    13.    This will be relevant to venture capital firms who provide investment management
           services in relation to MiFID financial instruments on a discretionary basis to clients
           other than the funds they operate, for example, if they provide investment
           management services for particular investor clients outside of a collective investment
           structure, or firms who manage the assets of a fund without being the fund operator.


      Investment advice (PERG 13 Q20-22)
    14.    This will be relevant to firms with an advising on investments permission in relation
           to MiFID financial instruments who provide advice to clients as part of their MiFID
           business. Investment advice is not a core investment service under ISD but it is an
           investment service under MiFID.


    15.    This increase in scope may be of relevance to certain venture capital firms, for
           example firms who operate funds but also provide advice to third party funds or
           other investors and are currently not subject to the ISD. Where these firms provide
           investment advice to clients outside of their fund operation activities in the form of a
           “personal recommendation” to buy or sell specific investments6, e.g. shares in XYZ
           company, they are potentially subject to MiFID and therefore CRD unless they can
           rely on an exemption (see section B below).


      Underwriting of financial instruments and/or placing of financial instruments on a firm
      commitment basis and placing without a firm commitment basis (PERG Q24 - Q25)
    16.    We associate underwriting and placing of financial instruments with situations where
           a company or other business vehicle wishes to raise capital for commercial purposes,
           and in particular with primary market activity. We do not expect that they will be
           relevant for most venture capital or private equity activity such as fund raising – in
           our view they will be more relevant to corporate finance activities. However, the
           scope of the new service of placing without a firm commitment may be subject to
           further interpretation or guidance from the European Commission or CESR which
           may differ from our interpretation of its scope. Venture capital firms should remain
           alert to any future developments at the European level concerning the scope of this
           activity.


6
    See PERG 13, Q21.


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7
  B. Exemptions
17.   A number of venture capital firms may be able to rely on a MiFID exemption and so
      fall outside MiFID and the CRD.


18.   The exemption in article 2(1)(h) of MiFID for collective investment undertakings
      and their depositaries and managers is likely to be relevant for venture capital firms
      who operate funds. We interpret the "manager" to be the operator of the fund and
      not to a person who is just managing the assets of the undertaking (unless that person
      is also the operator).


19.   It is important to note that the firm will only benefit from the exemption in respect of
      any investment services or activities it carries on as the operator of the fund –
      investment services or activities it may carry on in a different capacity, for example
      providing investment advice to or receiving and transmitting orders for a third party
      such as a separate fund, will fall outside the exemption. A firm will therefore fall
      within MiFID and the CRD in respect of its business which is not covered by the
      exemption if that business involves the provision of investment services and
      activities in MiFID financial instruments on a professional basis.


20.   "Captive" venture capital firms (i.e. venture capital firms who are part of wider
      financial groups) may be able to take advantage of the exemption in article 2(1)(b) of
      MiFID if they only provide investment services exclusively to their parent
      undertakings, subsidiaries or subsidiaries of their parents.


21.   In our view, it is possible to combine the exemption in article 2(1)(b) with the
      exemption in article 2(1)(h). So, a captive venture capital firm which operates a fund
      (and is thus exempt for this part of its business under article 2(1)(h)) and which also
      provides other investment services exclusively to its parent, subsidiaries or
      subsidiaries of its parent will be able to rely on the exemption in 2(1)(b), and will fall
      outside of MiFID and the CRD. However, if the firm also provides investment
      services to other third parties (such as the clients of its parent) it will fall outside of
      the exemption in article 2(1)(b).




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    22.   Article 3 of MiFID, which the Treasury plans to give effect to in domestic
          legislation, creates an exemption for firms, which:
             ·   do not hold client money or securities;
             ·   do not provide any MiFID investment service other than reception and
                 transmission of orders or investment advice, or both, in relation to transferable
                 securities and units in collective investment undertakings; and
             ·   if they transmit orders, only do so to certain permitted persons.


    23.   This exemption may be relevant for venture capital firms which only provide
          investment advice. A venture capital firm which receives and transmits orders by
          bringing together one of its clients (for example a fund it does not operate) with
          another investor and thereby brings about a transaction, will often find itself
          transmitting an order to an unauthorised firm or fund. If so, it will generally be
          transmitting orders to a person falling outside the category of permitted persons for
          the purpose of this MiFID exemption7.


    24.   We do not believe it is possible to combine the exemptions in article 2 with the
          exemption in article 3. So, a firm which both operates a fund and provides
          investment advice to third party funds or investors for example will not be able to
          rely on the article 3 exemption. The exemption will only be relevant for pure
          advisory venture capital firms provided that they meet the criteria outlined in
          paragraph 22 above.


    25.   Pure advisory venture capital firms should note that the Treasury have proposed
          creating a mechanism whereby firms that meet the conditions of the article 3 MiFID
          exemption can nevertheless notify us that they wish to “opt into” MiFID regulation8.
          This possibility may be relevant to those firms wishing to exercise passporting rights
          under MiFID. Firms opting into MiFID in this way will become exempt CAD firms
          (see Section C below) for prudential purposes.




7
  See third bullet in the preceding paragraph above and the list of permitted persons set out in PERG 13 Q53.
8
  See the Treasury consultation document – “UK Implementation of the EU Markets in Financial Instruments
Directive (Directive 2004/39/EC) December 2005 http://www.hm-
treasury.gov.uk/media/2E0/CA/ukimplementationeumarkets151205.pdf.


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  C. CRD firm categories
26.   The purpose of this section is to summarise briefly how a venture capital firm might
      be impacted by CRD by outlining:
         (i) the various categories of firm for the purposes of FSA’s base capital
             requirements; and
         (ii) the calculation of their capital resources requirement.


27.   The question of whether a venture capital firm is subject to MiFID and CRD will
      depend upon what a firm does in practice. We recognise that a typical venture
      capital firm may have a broad range of different permissions, many of which it will
      only use as part of its exempt activities, such as the activities it may conduct as the
      operator of a fund. If part of the firm's business is exempt, but part of it is within
      the scope of MiFID, only the MiFID investment services and activities it
      conducts as part of its MiFID (i.e. non-exempt) business should be taken into
      account for the purposes of determining its CRD category.


  (i) Base capital requirements
28.   Where it is a MiFID investment firm, a venture capital firm's base capital
      requirements will depend on whether it is an exempt CAD firm, a BIPRU 50K firm, a
      BIPRU 125K firm or a BIPRU 730K firm.


  Exempt CAD firm (PERG 13 Q62-63)
29.   This category may be relevant to a firm outside the article 3 MiFID exemption which
      advises on investments or arranges deals in investments in relation to MiFID
      financial instruments as part of its MiFID business. A venture capital firm can be an
      exempt CAD firm if:
         ·   it is not authorised to hold client money in relation to activities it may conduct
             as part of its MiFID business;
         ·   it does not have a safeguarding and administering investments (without
             arranging) permission in relation to its MiFID business; and
         ·   has a requirement on its permission so (i) that the only MiFID investment
             services and activities it can perform on a regular basis are reception and
             transmission of orders and investment advice (see Table 4, New Standard



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                  Requirement IV), and (ii) if it is authorised to hold client money and / or has a
                  safeguarding and administering investments (without arranging) permission, it
                  is only able to hold client money or safeguard and administer investments in
                  relation to its non-MiFID business (see Table 4, New Standard Requirement
                  VI).


    30.   A venture capital firm with an arranging deals in investments permission in relation
          to MIFID financial instruments which it uses as part of its MiFID business will, in
          principle, be able to place financial instruments without a firm commitment basis.
          Unless therefore it has the requirements on its permission described in the previous
          paragraph, it will not be an exempt CAD firm. These are not currently requirements
          on venture capital firms’ permissions.


    31.   If a venture capital firm is an exempt CAD firm, from a CRD perspective it will only
          be subject to a base capital requirement. It will, however, be subject to almost all of
          the new "common platform" systems and controls requirements applying to firms
          subject to the “common platform”9. So far as the relevant base capital requirement is
          concerned, broadly speaking this will either be €25,000 or €50,000 depending on
          whether the venture capital firm carries on insurance mediation activity. For further
          details of the relevant requirements, including options to meet the requirement by
          providing professional indemnity insurance (PII) or a combination of base capital
          and PII, see PERG 13, Q62-63, plus the consultation proposals in CP06/1410.


      BIPRU 50K firm
    32.   A BIPRU 50K firm is subject to a base capital requirement of €50,000. This
          category will be relevant to a venture capital firm that is not an exempt CAD firm
          with one or more of the following permissions in relation to MiFID financial
          instruments which it uses as part of its MiFID business:


9
   See Policy Statement 06/13: "Organisational systems and controls: common platform for firms":
http://www.fsa.gov.uk/pubs/policy/ps06_13.pdf
10
   “Implementing MiFID for Firms and Markets: Addendum – Capital/Professional Insurance (PII)
requirements” – see Annex B: Amendments to the Interim Prudential Sourcebook for Investment Businesses.
This also contains a proposal that for those exempt CAD firms conducting non-MiFID scope activities within
the scope of FSA regulation, they meet a financial resources requirement that is the higher of the requirement set
out in the directive and the requirement applied by the section of IPRU(INV) that covers the other activities of
that firm. We are currently considering the responses to our consultation.


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          ·   arranging deals in investments;
          ·   dealing in investments as agent; or
          ·   managing investments,


       provided that it is not authorised to
          ·   hold client money or safeguard and administer (without arranging) MiFID
              financial instruments as part of its MiFID business; or
          ·   deal on own account in, or underwrite on a firm commitment basis issues of
              MiFID financial instruments as part of its MiFID business (if it has a dealing
              in investments as principal permission in relation to MiFID financial
              instruments, it will need a limitation on its permission to this effect).


33.     We have created a new standard limitation with this effect (see Section D below,
        Table 4) for those firms which wish to apply for such a variation of permission. If a
        firm which holds client money or safeguards and administers investments (without
        arranging) for its non-MiFID business wishes to be a BIPRU 50k firm, it will also
        need the new Standard Requirement VI on its permission.


   BIPRU 125K firm
34.     A BIPRU 125K firm is subject to a base capital requirement of €125,000. This
        category may be relevant to a venture capital firm which would have been a BIPRU
        50K firm but for the fact that it is entitled to hold client money or hold MiFID
        financial instruments in relation to its MiFID business.


   BIPRU 730K firm
35.     A BIPRU 730K firm is subject to a base capital requirement of €730,000. This will
        be relevant to venture capital firm with a dealing in investments as principal
        permission in relation to MIFID financial instruments which enables it to deal on
        own account in, or underwrite on a firm commitment basis, issues of MIFID
        financial instruments (which, for example, will be the case if that permission is not
        subject to the limitation described in paragraph 33 above).


(ii)   Capital resources requirement



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 36.     The capital resources requirements applicable to a firm under the CRD depend on
         how it is categorised under that directive11.


 BIPRU limited licence firms (PERG 13 Q68)
 37.     A limited licence firm is not authorised to provide the MiFID investment services of:
        ·   dealing on own account; and
        ·   underwriting and/or placing financial instruments on a firm commitment basis.


        You can be a limited licence firm if you are either a BIPRU 50K firm or a BIPRU
        125K firm. The minimum capital resources requirements will be calculated as the
        higher of the base requirement or the sum of credit and market risk requirements or
        the fixed overheads requirement (FOR). (This represents a change from the current
        additive approach.)


 BIPRU limited activity firms (PERG 13 Q69)
 38.     A limited activity firm is a BIPRU 730K firm which deals on own account for the
         purpose of:
              ·   fulfilling or executing a client order; or
              ·   gaining entrance to a clearing and settlement system or a recognised
                  exchange when acting in an agency capacity or executing a client order.


        A BIPRU 730K firm which wishes to be a limited activity firm will need to apply for a
        variation of permission reflecting these conditions (see Section D below).


        For BIPRU limited activity firms, the minimum capital resources requirements will be
        calculated as the higher of the base requirement or the sum of the credit, market risk
        and FOR.


 Full scope BIPRU investment firms (PERG 13 Q70)
 39.     If you are a venture capital firm which is a MiFID investment firm and not an exempt
         CAD firm, limited licence firm or a limited activity firm, you will be a BIPRU full
         scope firm. For full scope BIPRU investment firms, the minimum capital resources
11
  Exempt CAD firms are not be subject to capital resources requirements under the CRD (see paragraph 31
above)


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      requirement will be calculated as the higher of the base requirement or the sum of
      the credit, market and operational risk requirements.


40.   Where a firm is part of a wider group, the consolidated capital resource requirements
      applicable to the group will depend on the nature of the firms which constitute the
      group (see BIPRU 8.7). Therefore, all firms within the group should be considered
      in order to determine the consolidated capital resources requirements.




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D. Do we need to vary our permission?

 41.   This section identifies some standard limitations and requirements you may find
       helpful if you are applying for a variation of permission (Tables 1-5). The analysis
       assumes that firms are acting in conformity with the limitations and requirements on
       their permission. It also assumes, following the approach of the CRD, that a venture
       capital firm can and does carry on all MiFID investment services and activities
       which fall within the scope of its permission.


 42.   A venture capital firm which is a MiFID investment firm will need to apply for a
       variation of permission, for example:
             ·   if it wishes to be an exempt CAD firm;
             ·   if it has a dealing in investments as principal permission, enabling it to
                 carry on MiFID investment services and activities and wishes to be either a
                 limited licence firm or a limited activity firm.


 43.   Unless it is a firm to which the following paragraph applies, an ISD venture capital
       firm which wishes to be an exempt CAD firm should apply for new Standard
       Requirement IV, and, if it holds client money or safeguards and administers
       investments (without arranging) in relation to its non-MiFID business, it should also
       apply for Standard Requirement VI. These requirements will need to take effect
       from 1 November 2007. It should therefore apply for these requirements before 1
       August 2007.


 44.   If an ISD venture capital firm has a dealing in investments as principal permission
       which enables it to deal on own account in, or underwrite on a firm commitment
       basis issues of MiFID financial instruments and wishes to be an exempt CAD firm it
       should apply for new Standard Requirement IV, and, if relevant, new Standard
       Requirement VI, immediately to take effect as soon as possible.


 45.   An ISD venture capital firm which has a dealing in investments as principal
       permission which enables it to deal on own account in, or underwrite on a firm
       commitment basis issues of MiFID financial instruments which wishes to either be a
       limited licence firm or a limited activity firm should apply for new Standard


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      Limitation I (if it wishes to be a limited licence firm) or Standard Limitation II (if it
      wishes to be a limited activity firm) immediately to take effect as soon as possible.


46.   A venture capital firm which is not currently subject to the ISD but will be subject to
      MiFID, and which wishes to be an exempt CAD firm, needs to apply for the new
      Standard Requirement IV, and, if relevant, new Standard Requirement VI, by 1
      August 2007 to take effect from 1 November 2007.




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                                       Table 1




     A.Is all of your venture capital business exempt from MiFID? [See Table 4
     Standard Requirement V]

                     Yes
                                                  No

 B. You are not subject to the re-
 cast CAD


  C. As part of your MiFID business do you:
   (i) advise on investments or
  (ii) arrange (bring about) deals in investments or make arrangements with
  a view to transactions in investments
  but do not deal in investments as principal or agent or manage investments
  in relation to MiFID financial instruments?


            Yes                                    No


D. Go to Table 2           E. Are you authorised to:
                           -deal in investments as principal; or
                           -deal in investments as agent; or
                           -manage investments
                            in relation to MiFID financial instruments?


                                                       Yes

                                          F. Go to Table 3




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                                      Table 2
              Overview of CRD impact on venture capital firms who
              arrange and / or advise as part of their MiFID business


                              A. Do you hold client money or safeguard and
                              administer (without arranging) MiFID financial
                              instruments in relation to your MiFID business? [See
                              Table 4 Standard Requirement VI and Table 5].


                                                              No
                                                                                            Yes
                                            B. Do you meet the other
                                            conditions of the article 3
                                            MiFID exemption, as
                                            implemented in the UK? (See
                                            paras 22 – 25)
                                                                                     I. Do you have permission to
                                       No                                            arrange in relation to MiFID
C. Do you have a
requirement on your                                         Yes                      instruments? (See Note 2)
permission which prevents
you from carrying on any
MiFID investment service or                   E. Do you wish to opt into                   Yes
activity on a regular basis                                                                                           No
besides reception and
                                              MiFID regulation under the
transmission and investment                   Treasury regulations? (The
advice? (See Note 1)                          draft Treasury regulations             J. You are a
                                              implementing MiFID                                             K. You are
                                              provide a mechanism for
                                                                                     BIPRU 125k              a BIPRU
                                              firms meeting the                      firm and a              730K firm
                                 Yes          conditions of the Article 3            limited licence         and a
                                              MiFID exemption to opt                 firm                    limited
                                              into MIFID regulation, for                                     licence
                                              example if they wish to                                        firm (See
         No                                   benefit from passporting                                       Note 3)
                                              rights provided by MIFID.)



                                                                Yes                        No


 D. You are                            F. You are an exempt CAD firm. Do you
                                       have an insurance intermediary                             L. You are not subject
 a BIPRU                                                                                          to MiFID or the re-cast
                                       permission?
 50k firm                                                                                         CAD
 and a
 limited                                                                             Yes
                                              No
 licence
 firm
                                                                             H. Article 8 re-cast
                                  G. Article 7 re-cast
                                                                             CAD applies
                                  CAD applies
                                  (€50K/PII) (see note                       (€25K/PII) (Note 5)
                                  4)




                                                                                                          18
Note 1
You may wish to apply for this requirement if you do not provide the service of placing
without a firm commitment basis on a regular basis as part of your MiFID business.


Note 2
Arranging comprises the investment services of reception and transmission and placing of
financial instruments without a firm commitment basis.


Note 3
This box is unlikely to be of relevance to venture capital firms in practice. It is only relevant
to those who have an advising on investments but not an arranging permission in relation to
MiFID financial investments and who hold client money or securities as part of their MiFID
business. If such a firm wishes to benefit from a lower base capital treatment (e.g. €125,000),
it may wish to consider applying to add an arranging element to its permission in relation to
the appropriate MiFID financial instruments.


Note 4
The rules transposing article 7 re-cast CAD are currently being finalised12.


Note 5
The rules transposing article 8 re-cast CAD are currently being finalised13. Note that a firm
to which article 8 re-cast CAD applies will also need additionally to meet the PII
requirements imposed by the IMD.




12
   See CP06/14: “Implementing MiFID for Firms and Markets: Addendum – Capital/Professional Insurance
(PII) requirements”. The consultation period has now closed and we are currently considering responses to the
consultation.
13
   See n.12 above.


                                                                                                           19
                                   Table 3
Overview of CRD impact for venture capital firms who deal as principal or agent or
              manage investments as part of their MiFID business

             A. Are you authorised to deal in investments as principal in relation to MIFID
             financial instruments for the purposes of your MiFID business?

                                                          Yes                          No

                                                                 Yes       I. Do you hold client money or
B. Is your dealing in investments as principal permission                  safeguard and administer(without
subject to a box management limitation or requirement? (see                arranging) MiFID financial instruments
Table 4: Standard Limitation IV – box management)                          as part of your MiFID business (see
                                                                           Table 4 Standard Requirement VI and
                                                                           Table 5: client money requirements)?
                               No

       C. Do you have a limitation or requirement on your                              No                    Yes
       permission which prevents you on a regular basis from:
       (i) dealing on own account in relation to MiFID                    K. You are a              L. You are a
                                                                          BIPRU 50K firm            BIPRU 125K firm
       financial instruments; and                                                                   and a limited
                                                                          and a limited
       (ii) underwriting and/or placing of financial instruments                                    licence firm
                                                                          licence firm
       on a firm commitment basis? (See Table 4: standard
       limitation I and Note 6.)

                                     Yes

    D. Do you:
    (i) deal in investments as agent ; or
    (ii) manage investments; or                                          No
    (iii) execute client orders by dealing in investments as
    principal
    in relation to MiFID financial instruments as part of
    your MiFID business?
                                                                          M. Do you have a limitation or
                                                                          requirement for a limited
                                                                          activity firm (see Table 4:
                                                     Yes
                       No                                                 Standard Limitation II)?

                                          F. Go to
             E. Do you advise
                                          Box I                                No                      Yes
             or arrange as part
             of your MiFID
             business
                                                                N. You are a BIPRU           O. You are a
                                        Yes                     730K firm and a full         BIPRU 730k firm
                                                                scope BIPRU                  and a limited
                     No                                         investment firm              activity firm


       G. You are not a              H. Go to Table 2
       BiPRU                         Box A
       investment firm




                                                                                                     20
Note 6
If you have a dealing in investments as principal permission subject to limitations or
requirements which only permit you to carry on exempt MIFID business, e.g. activities
carried out as an operator of a collective investment scheme, in principle you would be
prevented from dealing on own account in relation to MiFID financial instruments or
underwriting and placing financial instruments on a firm commitment basis.


In many cases, however, the activities (including dealing in investments as principal) which
make up a firm’s permission may also be subject to several other limitations, some of which
will permit a firm to carry on MiFID business. For instance, where a firm currently has a
limitation or requirement on its permission restricting its activities to venture capital business,
corporate finance business or investment management, this could permit the firm to carry on
MiFID business.


We have predicted firms’ prudential categorisations accordingly. So where, for example, a
firm has a dealing in investments as principal permission which is limited (i) to operating a
collective investment scheme but also to (ii) to venture capital business or corporate finance
business, it would not be prevented from carrying on the activities in Box C of Table 3.




                                                                                                21
Standard limitations/requirements and their effects

The tables are designed to be read in conjunction with Tables 1-3 above. The purpose of
Tables 4 and 5 is to identify some standard limitations and requirements to help you if you
are thinking about applying for a variation of permission. For instance, they set out new
standard limitations that are relevant if you wish to be a limited licence firm or a limited
activity firm or an exempt CAD firm.


Table 5 also provides a short guide to the effect of some standard client money requirements.




                                                                                           22
                                        Table 4
                        New standard limitations and requirements

What limitations apply?                        What is the effect?


I. Limited licence firms

Current Standard Limitation
No prior equivalent limitation exists.

New Standard Limitation (in relation to        Firm becomes a limited licence firm.
the activity of dealing in investments as
principal)                                     Firm becomes a BIPRU 125k firm if it is able
Unable on a regular basis to                   to hold client money and/or safeguard and
(i) deal on own account in relation to MiFID   administer assets (without arranging) (in
financial instruments and                      relation to MiFID financial instruments) as part
(ii) underwrite MiFID financial instruments    of its MiFID business; otherwise, the firm
and/or place MiFID financial instruments on    becomes a BIPRU 50k firm.
a firm commitment basis.



II. Limited activity firms

Current Standard Limitation
No prior equivalent limitation exists.

New Standard Limitation (in relation to Firm becomes a BIPRU 730k firm and a limited
the activity of dealing in investments as activity firm.
principal)
“May only deal on own account in MiFID
financial instruments for the purpose of (i)
fulfilling or executing a client order or (ii)
gaining entrance to a clearing and settlement
system or a recognised exchange when acting
in an agency capacity or executing a client
order.”

III. Box management

Current Standard Limitation                    Firm becomes limited licence firm (without the
- Limited to unregulated cis box operations    need to apply for Standard Limitation I).

New Standard Limitation                        This is based on the assumption that the firm’s
No new standard limitation envisaged           permission is not subject to other limitations
                                               and requirements which permit it to carry on
                                               the relevant MiFID investment services and
                                               activities, namely dealing on own account or



                                                                                          23
                                                underwriting of financial instruments and/or
                                                placing of financial instruments on a firm
                                                commitment basis.

                                                For example, if a firm’s dealing in investments
                                                as principal permission also enables it to carry
                                                on venture capital business or corporate
                                                finance business because of a separate
                                                limitation to this effect, it will not
                                                automatically follow that the firm will be a
                                                limited licence firm.

                                                Firm becomes a BIPRU 125k firm if they are
                                                able to hold client money and/or safeguard and
                                                administer assets (without arranging) in
                                                relation to MiFID financial instruments as part
                                                of their MiFID business; otherwise firm
                                                becomes a BIPRU 50k firm.

IV Exempt CAD firms
Current Standard Limitation/Requirement
No prior equivalent limitation or requirement
exists.
                                              Firm becomes an exempt CAD firm.
New Standard Requirement
“Unable to carry on any investment services
and activities (to which MiFID applies) on a
regular basis except reception and
transmission of orders in relation to one or
more financial instruments or investment
advice.”
V Exempt MiFID firm                           Firm is not subject to MiFID or CRD
Current Standard Limitation/Requirement requirements.
No prior equivalent limitation or requirement
exists.                                       A firm subject to this requirement can still
                                              carry on investment services and activities
New Standard Requirement                      which fall within a MiFID exemption, for
"Unable to carry on any investment services example arranging, dealing, managing or
and activities (to which MiFID applies) on a advisory activities carried on in its capacity as
regular basis."                               a CIS operator. It will not be able to conduct
                                              MiFID investment services and activities
                                              which are not covered by a relevant MiFID
                                              exemption
VI MiFID Client Money / Assets The firm will not be able to hold client money
Restriction                                   or safeguard and administer assets (without
Current Standard Limitation/Requirement arranging) in relation to its MiFID business.
No prior equivalent limitation or requirement
exists.                                       The firm will not be authorised to hold client
                                              money for the purposes of the CRD.
New Standard Requirement


                                                                                           24
"Unable to hold client money or safeguard      A firm subject to this requirement can still hold
and administer assets (without arranging) in   client money and safeguard and administer
relation to any investment services and        assets (without arranging) in relation to
activities (to which MiFID applies)."          investment services and activities which fall
                                               within a MiFID exemption, for example client
                                               money or assets it may hold in its capacity as a
                                               CIS operator.




                                                                                          25
                                               Table 5
                                      Client Money requirements

Present status of firm                              Effect

1. Firm has a requirement not to hold               Firm will not be authorised to hold client money
client money.                                       for purposes of CRD.

2. Firm has a requirement allowing it to            Firm will not be authorised to hold client money
control but not hold client money                   for purposes of CRD
3. Firm has a requirement as follows:               Firm will not be authorised to hold client money
                                                    for purposes of CRD.
"The general requirement not to hold or
control client money does not restrict the
firm from controlling client money if it
arises from an agreement under which the
firm effects settlement through a mandate
or otherwise."
4. The firm receives money from clients             Even if its permission contains a limitation of
under the 'opt-out' from the client money           the type in 1, 2 or 3 above, in a limited number
rules for intermediate customers and                of cases the firm’s base capital resources
market counterparties (see CASS 4.1.8 to            requirement may still be affected. This is
14).                                                because MiFID will prevent us from maintaining
                                                    the opt-out for MiFID related business after 31
                                                    October 2007.

                                                    This does not necessarily mean the firm will be
                                                    holding client money in the future, although it
                                                    may have this effect in some cases.

                                                    Firms should carefully consider the proposals in
                                                    consultation paper 'Implementing MiFID for
                                                    firms and markets' (CP06/14).14 From this, they
                                                    should ascertain whether the proposals will
                                                    affect their base capital and capital resources
                                                    requirements.

                                                    This issue will be of particular relevance to a
                                                    firm whose permission:
                                                        · does not allow it to hold client money or
                                                           safeguard and administer financial
                                                           instruments;
                                                        · enables it to carry on business with
                                                           professional customers; and

                                                         ·   which makes use of the opt-out from our
                                                             client money rules for intermediate

14
     http://www.fsa.gov.uk/Pages/Library/Policy/CP/2006/06_14.shtml


                                                                                                  26
                                                    customers and market counterparties.

                                             If the above applies to your firm and having
                                             reviewed our proposals your firm plans to hold
                                             client money after 31 October 2007, you should
                                             apply before then for a variation of permission.
                                             This application would be to remove the existing
                                             client money requirement from your permission
                                             so as to take effect as of 1 November 2007.

                                             You will be able to benefit from the client
                                             money 'opt out' regime until then, assuming you
                                             comply with the relevant Handbook provisions
                                             and FSMA requirements.
Firm has a requirement as follows:           Firm will be authorised to hold client money for
                                             purposes of CRD.
The general requirement not to hold or
control client money does not apply if the
client money arises from an agreement
under which commission is rebated to the
client.
Firm has a requirement to hold and           Firm will not be authorised to hold client money
control client money in respect of non-      for the purposes of the CRD.
investment insurance contracts (insurance
mediation activities only)
Firm has a requirement to hold and           Firm will not be authorised to hold client money
control client money in respect of           for the purposes of the CRD.
regulated mortgage contracts (regulated
mortgage activities only)




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