EMPEA Guidelines – 6

EMPEA Guidelines

6. Efficient, transparent and fair regulatory environment

Private equity tends to thrive in markets where the regulatory regime is clear, efficient, transparent, independent and fair. In such markets, there are minimal restrictions on allocations to private equity as an asset class and regulation of the asset class itself is linked to identifiable policy objectives, such as the encouragement of appropriate standards of behaviour in the financial sector, the maintenance of stable financial markets, the discouragement of anti-competitive behaviour and other internationally recognized policy objectives.

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A country’s regulatory regime can either facilitate an attractive investment environment or through lack of transparency and opportunities for arbitrary decision-making, create the conditions for an environment that limits growth and is conducive to corruption.

6.1 – Conformity with international accounting standards

  1. Countries should consider adopt International Accounting Standards (IAS) or Generally Accepted Accounting Principles (GAAP) in conformity with international standards.

6.2 – Minimal use of regulatory requirements to restrict foreign investment

  1. As with foreign ownership restrictions, restrictions of foreign private equity investment should be clearly defined and limited to majority control of those assets that are reasonably critical to a country’s national security.
  2. Where requirements for the disclosure of information by foreign investors are reasonably warranted for a country’s national security, such requirements should be transparent and clear to foreign investors.
  3. Investment treaty obligations should have the force of law and be applicable to all government departments in a country. Where applicable, countries should comply with agreed conditions in respect of the World Trade Organisation and other international bodies that serve as the framework for the international economy.

6.3 – Minimal restrictions on allocations by domestic investors to private equity funds

  1. Countries should not unduly restrict asset allocations to private equity or the ability of financial institutions to seed and/or sponsor private equity funds. Restrictions based on liquidity should be relative to the size of a given pool of investable assets and its liquidity constraints.

6.4 – Minimal restrictions on investment strategies

  1. Countries should avoid unduly onerous regulatory restraints on private equity investment strategies.  Any regulations applicable to investment strategies should:
            i. Allow for relative freedom of investment strategy for sophisticated investors; and,
            ii. Provide for appropriate valuation methodologies that take into account the illiquid nature of private equity assets.

6.5 – Competition and anti-trust rules

  1. Competition and anti-trust regulations should be efficient, transparent and fair and feature transaction approval processes that are efficiently dealt with by a body independent of politicians.
  2. Decision makers and their staff involved in approval processes should be adequately trained to deal with the complexity of competition and anti-trust matters.

6.6 – Minimal barriers to domestic credit markets

  1. Countries should minimise or remove formal or informal barriers to foreign investors' access to domestic sources of credit, including not only domestic commercial banks but also non-bank financial institutions and other alternative domestic sources of credit.

6.7 – Efficient, fair and transparent sector level regulations

  1. As a general matter, a country's regulatory framework for a given industry should be efficient, transparent and fair, with limited amounts of discretion exercisable by regulators and clear principles to guide the exercise of any discretion and appeals procedure. 
  2. In the financial sector, the regulatory framework should encourage appropriate standards of behaviour by participants in that sector, stable and liquid financial markets, and an appropriate balance between investor protections and business innovation and development.

6.8 – Open and transparent public appeals processes

  1. Public appeals processes should be efficient, transparent and fair.  The existence of processes for public appeals, and their effectiveness and transparency, may have a significant effect on the quality and openness of regulatory frameworks and decision-making processes. 
  2. Such processes may also result in regulatory, planning and licensing decisions relevant to an investment being subject to public challenge or review.

6.9 – Availability of financial information

  1. To assess the financial risk of an investment, investors require access to complete and accurate financial information.  Investors also seek monetary and fiscal regimes that are both transparent and predictable. Restrictions on the availability of such information make the assessment of risk more difficult and are an impediment to inward investment. 
  2. Further, investor confidence is quickly undermined if financial data is not equally available to all interested persons or is unreliable.
  3. A country’s monetary and fiscal policy must be both transparent and predictable. An investor will assess the merits of an investment on the basis of a particular fiscal and monetary environment; unexpected increases in interest rates or taxes will pose problems for inbound investment.    

6.10 – Efficient, transparent and fair licensing regimes

Licensing processes should not be used as an obstacle to investment or development of an industry. Instead, efficient licensing processes can be a selling point for a jurisdiction.


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