LEGAL CONCEPTS – FSMA 2000 Principles of FSMA 2000€¦ · equity, venture capital and real...
Transcript of LEGAL CONCEPTS – FSMA 2000 Principles of FSMA 2000€¦ · equity, venture capital and real...
20 THE TAX JOURNAL Monday, 6 July 2009
LEGAL CONCEPTS – FSMA 2000
corporate transactions – these often
involve communications to shareholders
regarding the tax consequences of the
holding, sale, and/or disposal of their
investments.
Regulated activitiesFSMA, s 19 sets out the general prohibition
that no person may carry on a regulated
activity in the UK unless he is an authorised
or an exempt person.
‘Regulated activity‘ is defi ned in FSMA,
s 22 as being ‘activity of a specifi ed kind
carried out by way of business in relation
to investments of a specifi ed kind’.
The FSMA (Regulated Activities)
Order 2001 (RAO) specifi es those activities
which will be regulated activities. It is
wide-ranging and covers buying, selling
or subscribing for investments as principal
(Article 14), making arrangements for
another person to buy, sell or subscribe for a
particular investment (Article 25), managing
investments in circumstances which involve
the exercise of discretion (Article 37) and
advising on buying, selling or subscribing
for a particular investment (Article 53).
Financial promotionFSMA, s 21 stipulates that a person
must not, in the course of business,
communicate an inducement to engage
in investment activities unless that person
is an authorised person or the content
of the communication is approved by
an authorised person. This prohibition
covers communications made or directed
from the UK to recipients in the UK, and
communications made or directed from
overseas into the UK if they are capable
of having effect in the UK.
A number of important exceptions to
the prohibition on fi nancial promotion
are provided by the FSMA (Financial
Promotion) Order 2005 (FPO).
Employee share schemesWhile the RAO, Articles 14 and 25 provide
that dealing in securities as principal and
making arrangements for another person to
deal in securities are regulated activities, a
specifi c exemption is made in the RAO for
employee share schemes.
Article 71 provides that a company,
a group company or a ‘relevant trustee’
(broadly, any person who holds shares as
trustee for the purposes of an employee
share scheme) does not carry on a regulated
activity where the transaction is to enable
or facilitate transactions in shares issued
by the company for the benefi t of bona
fide employees, former employees of a
group company, or their spouses, civil
partners or dependants. The FPO, Article 60
provides a similarly worded exemption for
communications made by a company, group
company or relevant trustee for the purposes
of an employee share scheme.
Figure 1 illustrates the scope of the
defi nition of a ‘group company’. There are
limitations to the scope of the employee
share schemes exemptions both under the
RAO and the FPO, where participation
is extended to a non-executive director or
other non-employees, or options are granted
over existing shares held by shareholders
other than an employee benefi t trust. As
a consequence, careful analysis may be
required where participation is extended or
options granted in these ways.
Prin cip le s o f FSMA 2000
Continuing our Legal Concepts series, Natalie Smith and Nick Thody, Osborne Clarke, consider the main provisions of the Financial Services and Markets Act 2000 (FSMA) and their relevance to tax practitioners
The FSMA is the primary source of
legislation governing fi nancial and
investment services in the UK. It
confers statutory and regulatory powers
upon the Financial Services Authority
(FSA) and is supplemented by an extensive
body of secondary regulations, together with
the rules of the FSA.
The FSMA provides a wide range of
rule-making, investigatory and enforcement
powers in order to meet its four statutory
objectives, which are to:
maintain confidence in the financial
system
promote public understanding of the
fi nancial system
secure the appropriate degree of
protection for consumers and
reduce fi nancial crime.
With these objectives in mind, the
most important components of the FSMA
include:
a general prohibition on the carrying out
of regulated activities (which are described
in the FSMA) in the UK except by an
authorised or exempt person
an authorisation regime to enable
fi rms and individuals to carry on regulated
activities
a requirement that certain individuals
within authorised fi rms must be approved
by the FSA
a regime governing the making of
fi nancial promotions and
a civil offence of market abuse.
C ompliance with the FSMA and its
regulatory regime is essential; sanctions for
contravention include civil penalties and a
criminal conviction.
Tax practitioners are most likely to
encounter the FSMA in the context of:
employee share schemes – the FSMA’s
broad scope means that the establishment
and operation of share schemes may fall
within the defi nition of regulated activities
and communications regarding these could
be fi nancial promotions
collective investment schemes –
certain fund-based arrangements can fall
within the FSMA defi nition of a collective
investment scheme and so require FSMA
compliance and
LEG A L C O N C EP T S
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Monday, 6 July 2009 THE TAX JOURNAL 21
LEGAL CONCEPTS – FSMA 2000
For transactions with non-employees,
the following exemptions may be helpful:
the RAO, Art icle 28 exempts
arrangements for a transaction to which
the arranger is a party, either as principal or
as agent for another person
the FPO, Article 28 exempts one-off
communications which are made only
to one recipient or group of recipients in
the expectation that they would engage
in any investment activity jointly, relate
to a product or service which has been
determined having regard to the particular
circumstances of the recipients, and are not
part of an organised marketing campaign
and
in addition, the exemptions for fi nancial
promotions to ‘sophisticated investors’
and ‘high net worth individuals’ might be
applicable (see Figure 2).
Where individual shareholders agree to
grant options over their shares, the RAO,
Article 15 exempts a person who enters into
any transaction relating to a security where
he does not hold himself out as willing to
deal, or engaging in the business of buying
investments with a view to selling them, or
does not regularly solicit members of the
public to induce them to deal.
C ollective investment schemesThe ROA, Article 51 provides that the
establishing, operating or winding up of a
collective investment scheme is a regulated
activity.
Subject to certain exemptions, a
‘collective investment scheme’ (C IS)
is defi ned in FSMA, s 235 as a scheme
comprising arrangements:
with respect to property of any kind
(including cash or shares), the purpose or
effect of which is to enable the persons
taking part to participate in, or receive, profi ts
or income arising from the acquisition,
holding, management or disposal of the
property or sums paid out of such profi ts or
income
where the participants do not have day-
to-day control over the management of the
property and
which involve a pooling of investors’
contributions and profi ts/income and/or the
property being managed as a whole by, or
on behalf of, the scheme operator.
This could potentially include
arrangements commonly found in private
equity, venture capital and real estate funds
whereby executives become limited partners
in a ‘carried interest’ partner. If the fund is
successful, after investors’ contributions
have been returned and any priority profi t
share paid out, the carried interest partner
will participate in the balance of the profi ts.
Whether such an arrangement is a C IS
will depend on how the carried interest
scheme is structured. If it is a C IS, the
UK regulatory impact will depend on the
jurisdiction in which the carried interest
arrangement is managed and where its
participants are based. For example, if it is
managed in the UK it may be necessary for
an authorised person to be appointed as the
operator of the scheme in order to comply
with the FSMA.
C ommunications to participants in
carried interest arrangements may benefi t
from the exemptions in the FAO for
knowledgeable investors (see Figure 2).
C orporate transactionsC orporate transactions may require
communica t ions to be made to
shareholders and/or potential shareholders
of the parties concerned (and, in some
cases, participants in employee share
schemes) regarding the tax consequences
of the acquisition and/or disposal of
shares.
In addition to the exemptions already
discussed there are further exemptions
available from the prohibition on fi nancial
promotion in the context of corporate
transactions, which include:
the FPO, Ar t ic le 19 exempts
c o m m u n i c a t i o n s m a d e o n l y t o
recipients whom the person making the
communication believes on reasonable
grounds to be investment professionals,
or which may reasonably be regarded as
directed only at investment professionals
the FPO, Article 43 exempts certain
communications made by a company
where the communication relates only to
an investment issued or to be issued by
that company or by a member of the group
and is made to a creditor or member of the
group, or to a person who is entitled to a
relevant investment which is issued, or to
be issued, by the group
the FPO, Article 62 provides an
exemption for a communication by or on
behalf of any body or person where the
communication relates to an acquisition
or disposal of shares in a company, or is
entered into for the purposes of such an
acquisition or disposal – the transaction
N atalie S mith N ick T hody
The defi nition of ‘group’ for the purposes of the FSMA is found in FSMA, s 421 and includes not only parent and subsidiary undertakings but also any undertaking in which there is a ‘participating interest’.
FSMA, s 421A defi nes a ‘participating interest’ as ‘an interest held by one undertaking in another undertaking on a long-term basis for the purpose of securing a contribution to its activities by the exercise of control or infl uence’. A holding of 20% or more of the shares is presumed to be a participating interest unless the contrary is shown.
This wide defi nition of ‘group company’ extends the benefi t of the employee share scheme exemptions given under the RAO and FPO to a potentially broad group of companies.
Figure 1 – G roup companies
22 THE TAX JOURNAL Monday, 6 July 2009
LEGAL CONCEPTS – FSMA 2000
will qualify for the exemption where
either the shares to be sold carry at least
50% of the voting rights, or the object
of the transaction nevertheless can be
regarded as being the acquisition of day-
to-day control of the affairs of the target
company
the FPO, Article 67 exempts certain
communications which relate to the
securities permitted to be traded or dealt
on a relevant market and which are
required or permitted to be communicated
by the rules of, or a body which regulates,
that market.
M ark et ab useSeven types of behaviour are classed in
FSMA, s 118 as market abuse where they
relate to shares traded on a prescribed
market (such as the Main Market or AIM
market of the L ondon Stock E xchange).
These types of behaviour are:
insider dealing
improper disclosure of inside
information
misuse of information
manipulating transactions
manipulating devices
disseminating information likely to
give a false or misleading impression
market distortion.
Some acts could fall within more than
one class of behaviour. For example,
if a director is aware of an impending
announcement and discloses that
information to the person responsible
for granting options in order to infl uence
the timing of the option grant, this action
could be both an improper diclosure of
inside information and /or a misuse of
that information.
The FSA can take enforcement action
regarding market abuse and impose an
unlimited fine, although there are
several safe harbours, exceptions and
defences.
N a t a l i e S m i t h ( n a t a l i e . s m i t h @
osborneclarke.com and tel: 020 7105
7508 ) and N ick Thody (nick.thody@
osborneclarke.com and tel: 020 7105
7566) are professional support lawyers
at E uropean law firm Osborne C larke.
The FPO, Article 5 0 exempts communications to ‘sophisticated investors’. These are individuals who have been certifi ed by an authorised person as being suffi ciently knowledgeable to understand the risks associated with the investment (and who have signed a suitable declaration accepting that the communication may not have been approved by an authorised person). A further exemption in Article 5 0A relates to self-certifi ed sophisticated investors who have signed a statement in a specifi c form (set out in the FPO, Sch 5 ).
The FPO, Article 48 exempts communications made to an individual whom the person making the communication has reasonable grounds to believe was a certifi ed ‘high net worth individual’ (and that person must have signed a declaration of his or her high-net-worth status) and which relate only to investments falling within Article 48 , para 8 (broadly, unlisted companies). In practice this exemption is less restrictive than the one for ‘sophisticated investors’, which has detailed certifi cation req uirements.
Figure 2 – K now ledgeab le investors
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