Cicero Policy Briefer

Issue 18, November 2007

Where next for private placement rules?

By Mark Twigg

It has been argued by some that the lack of European private placement regime creates barriers to cross-border transactions between sophisticated investors. In April 2007 the Commissioner for financial services, Charlie McCreevy, posed the question: is there a Single Market failure here?

When this question was first being raised a couple of years ago under the UCITS review—largely, it must be said, by financial institutions in the UK-the privately held, and at that time rather dismissive, view seemed to be that calls for private placement rules represented yet more special pleading from the City of London for an issue which raised few eyebrows elsewhere in the European Union. Nonetheless, the asset management White Paper (IP/06/1569) committed the Commission to at least undertake an analysis of any potential barriers to the single market as a result of fragmented private placement rules.

The recent call to evidence might suggest that this is still a niche interest. While is it positive to see plenty of responses came from outside the UK, it was disappointing that so few national regulators saw fit to involve themselves in this debate. As the Commission accepts, public authorities and supervisors have “yet to engage with this work in a meaningful way”. More generally however, with only 38 responses it could also be suggested that private placement has failed to set the collective imagination on fire.

However, to focus on the limited number of respondents would be to miss the point. To ensure European capital markets remain competitive it is imperative that capital is able to flow cost-effectively across borders, within the EU, without any unnecessary barriers: as the Commission acknowledges, the private placement rules in their current guise could help to inflate legal and advisory costs on intra-EU transactions. Of course, it also generates legal uncertainty, not to mention an unlevel playing field when compared with other securities captured by the Prospectus Directive and MiFID.

The Investment Management Association (IMA) highlighted in its response to the Commission that where member firms have a fund range which goes beyond UCITS, they have to undertake extensive legal advice before entering into discussions with professional advisors in different European jurisdictions-including an annual review of the varying European private placement regimes which can cost member firms in the region of £200,000-£300,000 each year1. However, the IMA also cites less quantifiable, though potentially far greater opportunity costs, including the cost to firms from not entering new markets and the lost investment opportunities to Europe’s investors who will be faced with more limited investment choices within their local market as a result.

And that’s potentially bad news for Europe. It seems inconceivable, then, that some form of action won’t be forthcoming.

The Commission’s call to evidence revealed a number of important themes. Certainly at present, further progress is required on how best to construct a European private placement regime. Divergent views abound on how best to determine the eligibility of third country providers, as well as what types of public offer rules should be relaxed under such a framework. In particular there are still widely divergent views on how to define eligible investors. Certainly, the monetary threshold applied in the exemption under the Prospectus Directive may seem somewhat on the low side, particularly for the consumer groups keen to make sure any relaxation in investor protection, in the form of UCITS information requirements, is not allowed to leak into retail markets.

However, such problems are hardly intractable when the prize to Europe is actually quite sizeable. Equally, there are plenty of areas where common ground could easily be sought. Given that many of the products in question are specifically designed and aimed at institutional investors (in particular if one thinks of private equity, where deals will involve a lengthy due diligence process in any event), the need to provide equivalent investor protections as currently applied to retail investors in terms of conduct of business requirements, the need for product authorisation and disclosure requirements, is surely an area where common sense should prevail and deregulation should follow. And deregulation is the key: a simple safe harbour or exemption should be the optimal approach-introducing new and unnecessarily onerous rules would potentially represent an even bigger market failure than simply doing nothing but maintaining the status quo.

1. The IMA response to the Call for Evidence regarding Private Placement Regime in the EU, June 2007

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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