IMA takes aim at AIFM

28 September 2009

The controversial Alternative Investment Fund Managers (AIFM) Directive, which has raised fears that tighter controls on investments will drive business away from Europe, is undergoing a second round of discussions under the Swedish presidency of the Council of the European Union, writes Jon Eldridge. Following written comment from member states, the Swedish presidency has identified ten issues on which agreement is still to be reached. The most important of these is the scope of the directive – the definition of an alternative investment fund (AIF), for example. Billed by the European Commission as a central part of its response to the financial crisis, the proposed directive would create a comprehensive and effective regulatory and supervisory framework for AIFMs at a European level. Areas relating to scope include: exemptions; the de minimis thresholds; clarification of the treatment of credit institutions; investment firms and other institutions managing AIFs; and double authorisation for entities whose business includes but is not limited to managing AIF. The Swedish presidency has also highlighted issues relating to third countries, those countries that the EU has a special relationship but which aren’t part of the Union. An “overwhelming majority” of member states are against imposing undue restrictions on investors, especially institutional investors, as well as creating other barriers to global capital flows. Several options are being considered in regards to the articles of the proposed directive concerning third countries, including deleting parts of the legislation. The other key issues are: definitions relating to management services, marketing and leverage; alignment with the UCITS IV Directive; valuation issues; liability of depositaries; delegation of functions; the calculation of leverage and reporting to competent authorities; obligations for AIFMs managing AIFs which acquire controlling influence in companies; and articles on supervision. AIFM unhappy Several aspects of the Commission’s proposal were heavily criticised by the Alternative Investment Management Association, particularly those relating to leverage, depositaries and marketing. The proposed directive puts a cap on leverage allowing fund managers to take on a limited amount of debt. Some financial analysts argue, however, that this will force them to sell assets in a falling market, thereby worsening an economic downturn. One of the options under consideration is to redraft the legislation to allow the designated authorities to limit leverage when deemed necessary i.e. take into account the risk profile of the individual AIFM. “It would also remove any pre-setting of the leverage level, while providing the competent authorities with the means to limit leverage should there be a possible threat to financial stability,” according to the Swedish presidency. Marketing of non-EU funds is another sticking point. European investors, particularly those in London where 80 percent of European hedge funds are located, want to retain access to global funds and are unhappy about any proposed restriction. The issue concerns the proposed definition of marketing that includes cases where shares or units of an AIF are purchased at the investor’s own initiative. The Swedish presidency suggests that a way forward would be to align the definition of marketing in the AIFM directive with the definition of marketing in other sector directives. The proposed directive will apply only to those AIFMs who manage a portfolio of more than €100 million. AIFMs not using leverage and having a five-year lock-in period for their investors are not considered as posing systemic risk and have a threshold of €500 million. As a result, the directive will cover the lower threshold, roughly 30 percent of hedge fund managers, managing almost 90 percent of assets of EU domiciled hedge funds. The Directive will in total cost the private equity and hedge fund sectors in the EU between €1.3 billion and €1.9 billion in the first year in compliance cost alone, according to a recently published Open Europe study. Lobby call The UK’s Investment Management Association has called on institutional investors to participate in lobbying activity. The association argues that the scope of the directive is too broad and could affect pooled pension funds. The European Fund and Asset Managers Association has also criticised the legislation. It wants managers and funds to be subject to national regulation, and those funds exclusively distributed at the national level to be exempt from the directive. It also wants national private placement regimes to continue, UCITS management companies to have automatic authorisation to manage AIFs, depositary regulation to be finalised after the results of the Commission consultation on UCITS depositaries, and for the AIFM, UCITS and MiFID directives to be consistent. The Swedish presidency says that it is optimistic that agreement can be reached in the Council by the end of the year. The proposed directive would then be discussed in the European Parliament before going into effect in 2010. A version of this article was originally published in Compliance Monthly.

 

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