ESMA has recently issued a final report containing technical advice on the EuSEF and EuVECA regulations, including detailed guidance regarding the conflicts of interest policies which the managers of such funds should maintain, bringing them in line with full-scope AIFMs in this regard.
The final report issued by the European Securities and Markets Authority (ESMA) in February regarding the European Social Entrepreneurship Funds Regulation (EuSEF) and the European Venture Capital Funds Regulation (EuVECA) included recommendations to the European Commission regarding conflicts of interest policies for EuSEF and EuVECA managers. The suggestions would essentially bring such managers in line with the requirements applying to those subject to the Alternative Investment Fund Managers Directive (AIFMD), although ESMA recognises the need to apply these requirements proportionately and in a way which imposes minimal additional cost on the manager concerned. This comes at a time when, according to the Financial Times, UK fund managers believe managing conflicts of interest is the biggest challenge for their industry, with more than half of 650 UK fund managers and analysts polled saying that conflicts of interest are a challenge for the fund industry as a whole.
Suggested content for conflicts policy
Some of the issues which a robust conflicts policy should cover include:
- preventing the exchange of information between relevant persons where needed;
- separating the supervision of relevant persons whose interest may conflict;
- removing links in the remuneration of relevant persons engaged in different activities where a conflict may arise;
- measures to prevent a relevant person from exercising inappropriate influence over the management of the EuSEV/EuVECA;
- measures to prevent or control the involvement of a relevant person in difference activities where a conflict of interest may arise; and
- other alternative measures, where appropriate.
The extent to which individual managers will be affected by conflicts will depend on a number of factors, including the extent of their involvement with the companies in which their funds invest; their size and complexity; and the interests and work of individuals working for the manager. The report recognises that the managers of EuVECA funds are likely to be subject to more conflicts of interest than those managing EuSEF funds, given their level of involvement with the portfolio companies in which their funds invest, and suggests that EuVECA managers implement specific policies regarding their interaction with portfolio companies, including as to the exercise of voting rights.
The smaller the manager involved, the more difficult it may be in practice to implement some of these policies (for example, systems and space enabling the separation of individuals and restrictions on the exchange of information may be unavailable). ESMA recognises this, and that the manager’s policy should be appropriate to its size and the complexity of its business.