United States of America: FCA Review of Sponsor Requests: Identifying and Managing Disputes
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The Financial Conduct Authority (FCA) has published Preliminary Market Bulletin No. 37 (PMB) with the results of its review of conflict inquiries since the publication of Technical Note 701.3. Overall, there were fewer conflict inquiries, but the review highlighted some cases of interest where, after discussion with the Financial Conduct Authority (FCA), sponsors took action to reduce the risk of actual or perceived conflicts of interest. For example, when a senior employee of the sponsoring company is a member of the lending and sponsoring team.
PMB #37 reminds Sponsors to use reasonable market user testing to help assess circumstances where there is a perceived conflict of interest and to contact the FCA early if there are any unusual, new, or complex features of the transaction.
In August 2017, the FCA published Technical Note 701.3 which contains guidance on how the FCA can expect sponsors to assess disputes. If there is no conflict or the company can manage the conflict, the FCA will not expect a sponsoring company to contact them. However, the Sponsor must contact the FCA if there are certain exceptional circumstances including:
- where the proposed loan size is greater than 0.5% of the total assets of the sponsoring group; or
- In the context of a related party transaction, the sponsor proposes to provide a fair and reasonable opinion and also acts in another capacity, such as providing acquisition financing, to the related party or other party to the transaction.
FCA Review Results
- The majority of sponsors have not submitted a request for dispute guidance since the submission of Technical Note 701.3 and the total number of conflict inquiries has decreased.
- Sponsors’ offerings generally met the requirements set out in the Financial Conduct Authority (FCA) guidelines.
- The most common types of sponsor conflict inquiries included Class I disposals/acquisitions and initial public offerings.
Cases of interest
PMB Report No. 37 highlights cases of concern in which, after discussion with the Financial Conduct Authority (FCA), a different course of action has been taken to minimize any risk of conflict. These include:
- Where a senior employee of the sponsoring company was a member of the lending and sponsoring team. After a discussion with the FCA, the company removed the individual from the sponsor’s team to ensure that the teams could perform their roles independently of each other.
- The sponsoring company provides financing for the loan through margin loans and takes collateral in the form of equity in the issuer. This may result in the company having a physical equity stake in its client which can be increased if the issuer is in financial difficulty. Where the risk of a sponsor acquiring a material stake is low, the guidance in TN 701.3 should be followed. However, Sponsors should contact the Financial Conduct Authority (FCA) if there are any unusual, new or complex features of the transaction or the Sponsor’s involvement in it.
- Sponsor has provided a fair and reasonable opinion on a related party transaction at a time when the Sponsor is invited to provide acquisition financing for the transaction. The FCA was concerned about a conflict of interest or perception of a conflict, and so the issuer instructed another sponsor to provide the confirmation. Because sponsor information is important in this type of situation, a sponsor should contact the FCA before deciding if it can provide the services of a sponsor.
Points to take away
- The sponsoring company must submit its own analysis with the dispute submission.
- Sponsors should use reasonable market user testing to help assess circumstances in which there is a conflict of interest.
- Deal with FCA early.
- Contact the FCA if there are any unusual, new, or complex features of the transaction.
Preliminary Market Bulletin No. 37
Technical Note 701.3
The content of this article is intended to provide a general guide to the topic. It is recommended to take the advice of specialists in such circumstances.
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