The Importance of Internal Control in SGEICs

On September 21, the Compliance area of the Barcelona Finance School (BFS) – Institute of Financial Studies (IEF) organized a Finance Afterwork to talk about the importance of internal control in closed-end collective investment management companies with the participation of Ms. Carmen Corsín, coordinator of the Authorization and Registration Department of Entities at the CNMV in Barcelona.

First, she presented the map of registered and authorized venture capital entities and a study as of June 30 to show that the trend is positive and that the industry is moving in an upward direction for this type of investment vehicle.

In fact, she mentioned that according to a study by SPAINCAP, the Spanish Venture Capital and Private Equity Association, “the first half of 2023 reached the second-best historical record in the number of private equity investments and the best semester of fundraising (an increase of 22% compared to the first half of 2022)”.

From BFS – IEF, we wanted to highlight the roles of Compliance, risk, and everything associated with the internal control of regulated closed-end entities. In this regard, Ms. Carmen Corsín explained the types of risks these entities face, emphasizing that the key lies in the organizational requirements demanded by current regulations. Local and also community regulations affecting venture capital entities, such as Law 22/2014, the GFIA Directive, or Delegated Regulation (EU) 231/2013, establish what these requirements are and the obligation to comply with them. In fact, fulfilling internal control obligations is essential to obtain authorization for a closed-end management company such as an SGEIC.

The speaker also talked about so-called Chapter II managers, that is, those authorized to operate with retail clients and the obligations they have compared to those that do not. We know that when it comes to retail clients, according to the Markets in Financial Instruments Directive, MiFID, due diligence is more complex, client knowledge must be more thorough, and it is necessary to generate evidence of the entire investor onboarding process.

Regarding the internal control function, she explained that we are talking about: (i) the audit function, (ii) the Compliance function, and (iii) the risk control function. The rules establish the obligation of these functions, whether all or some of them, depending on the type of entity and the activities each is authorized to perform. The outsourcing of these control functions was discussed, in which cases it is feasible and in which it is not. And if possible, how such outsourcing should be carried out.

In this Finance Afterwork, we had the opportunity to learn a little more about the role of the different internal control functions for venture capital entities from the regulator itself, the National Securities Market Commission (CNMV).

Elisabet Escayola

Head of Compliance at IEF-BFS