One seemingly small change under MiFID II that could have significant practical consequences for private equity is telephone taping requirements.
Under MiFID I, the taping of calls was generally not required by fund managers, although the FCA rules required discretionary portfolio managers and corporate finance firms to tape calls in certain circumstances. Private equity managers were normally able to rely on exemptions for discretionary investment managers from those recording obligations.
While the application of the taping rules depends on exactly what permissions are held by a fund manager, the FCA has been clear that it does not consider calls relating to day-to-day management subject to the recording requirement – which is welcome. Rather, the FCA correctly considers that the requirement applies to the transactional side of portfolio management.
In broad terms, article 16(7) of MiFID II extends the scope of telephone taping rules with an additional requirement to record telephone conversations that result in (or are intended to result in) transactions being concluded by firms.
In the UK, in accordance with the FCA’s recent Policy Statement, conversations and communications relating to a deal in which the terms are close to being agreed should now be recorded.
Preliminary conversations discussing more general terms will not come within the telephone taping requirements in the UK. As the focus of the recording requirement is on the end of the process, in practice the FCA considers that this is likely to be limited to communications in relation to key elements of the final intended transaction, such as price.
In our view this distinction is not likely to be practical as discussions about price pervade all aspects of transactions and one may not always know when a transaction is, or is not, likely to conclude!
For the record
One way of splitting up the two types of telephone conversations could be:
- initial and preliminary discussions being conducted on unrecorded lines, including on mobile phones
- discussions with a reasonable prospect of a deal being concluded being conducted with at least one of the firm’s representatives joining on a recorded line.
However, it appears many firms are concluding that all calls regarding transactions should be recorded due to the difficulty posed in trying to identify the point at which discussions can no longer be said to be preliminary.
It is also worth noting that the outcome of face-to-face meetings will also need to be minuted and all records of communications leading up to the execution of an order will need to be retained for at least five years.
In other jurisdictions across Europe the telephone taping requirement may be more widely applied. ESMA has indicated that conversations or communications carried out with a view to agreeing to provide services that may result in a deal, could be caught, meaning firms operating on a pan-European basis may (depending on the approach taken by local regulators) need to take a more stringent approach.
Firms are required to have in place policies and procedures to ensure that no relevant telephone conversations or electronic communications are carried out through systems that are not recorded.
Finally, a separate issue is the obligation under data protection law to notify individuals that a call is being recorded. This applies regardless of whether a person is a client of a firm, and also captures conversations with potential counterparties. Managers that are required to record calls should be thinking now not only about the technology they will use to tape but also about the policies they will implement around the taping obligation, as well as how they will ensure that appropriate notifications are made to those who are being recorded.
In summary, the changes to telephone and communication recording obligations set out in the new regulation are not without issue and do require a number of step changes that firms must think about now.
Tom Dolan is a partner of Reed Smith and Emily Cartwright is an associate.