| Global Practice Guides | Chambers and Partners

Last Updated February 27, 2019

Law and Practice

Contributed By Travers Smith LLP

Authors

Travers Smith LLP investment funds group comprises four partners and 15 other dedicated fee earners, based in London. The group focuses on funds, investors and intermediaries in the private equity, infrastructure, debt, real estate and listed equities sectors. It has constantly been at the forefront of developing market practice and thought on relevant changes for the investment funds industry, including the European Alternative Investment Funds Managers Directive and, more recently, the potential impact of Brexit. The funds tax group advises on the structuring of investment funds to maximise their tax efficiency for investors and managers. The investment funds group sits alongside the firm’s market-leading private equity M&A practice, one of the largest transactional teams of private equity lawyers in the City. The funds finance practice combines expertise from the firm’s fund formation and finance practices to advise lenders that provide subscription line and other facilities to real estate funds. Travers Smith also advises real estate funds on the borrower side. The investment funds group is best known for private funds and closed-end listed funds.

3. Regulatory Environment

3.5 Investor-Protection Rules

As stated above, the two main investor categories in relation to the distribution of funds in the UK are "professional investors" and "retail investors". A "professional investor" means an investor which is considered to be a "professional client" (ie, a "per se professional client" or an "elective professional client", in each case within the meaning of MiFID).

An investor will be a "per se professional client" if it fulfils one of a number of objective criteria listed in MiFID. The list includes regulated financial entities, large undertakings, governments and public bodies and investors whose main activity is to invest in financial instruments.

Any investor which does not satisfy any of the "per se" criteria in MiFID, will be categorised as a "retail client", unless it can be treated as an "elective professional client". To be able to do this the AIFM must assess the expertise, experience and knowledge of the investor and whether this makes him or her capable of making his or her own investment decisions and understanding the risks involved (the "qualitative test"). The investor must further pass the "quantitative test", meaning that the investor has satisfied two out of the three following requirements:

having carried out transactions in significant size on the relevant market at an average frequency of ten per quarter over the previous four quarters;
having a financial instrument portfolio exceeding EUR500,000; and
working or having worked in the financial sector for at least one year in a professional position.

An investor satisfying the relevant qualitative and quantitative tests and wishing to opt up must be given a clear written warning of the protections and investor compensation rights he or she may lose and he or she must state in writing that he or she is aware of the consequences of losing these protections and wishes to be treated as a "professional client".

Open-ended funds can only be distributed to retail investors. Private closed-ended funds tend to be marketed only to non-retail investors. Listed closed-ended funds are available to both professional and retail investors.