Welcome to the sixteenth edition of the monthly Laven Partners’ Monitoring Update on the proposed AIFM Directive.
The new Directive seeking to regulate hedge funds is charging ahead to become law. Laven Partners provides a monthly update on the development and status of this Directive. In the true Laven Partners style, we also look at any interesting comments made by regulators and leading industry players in relation to the Directive.
Our aim is to involve the financial community and notably to aggregate the representation of investors as we believe the Directive severely reduces their access to investment opportunities. Please register your interest and comments by emailing us at [email protected]. Please feel free to forward our monitoring update to anyone who may be interested.
More than a month after the release of the Belgian proposal and Michel Barnier’s (European Commissioner for Internal Market and Services) optimism that the negotiations were in the “last strait”, the new compromise nearly fell apart after a sudden French counterstrike. The French government’s protest against the passporting provisions proposed under the latest version resulted into the French drafting their own proposal. If only the draftsmen had been on strike they would have saved us all some time…
Under the Belgian proposal third country funds or fund managers wishing to access European investors and to market their product within the EU would have to apply for an EU passport. This would mean a third-country fund or fund manager would first have to seek an approval of one Member State to conduct its marketing activities there. After this the Member State would become the fund’s Member State of referral for prudential supervision purposes. This would allow the third country fund or fund manager to exercise its passporting rights. The French apparently opposed this, trying to keep a veto for each individual Member State.
The French Minister of Finance, Christine Lagarde proposed that as a minimum requirement before being able to operate in the EU, the third country fund or fund manager would have to accept full adherence to all of the rules of the Directive. With support from Germany, the French were confident that they would secure enough votes to revoke the Belgian compromise. We just note that the French suggestion in practice would be rather hard to implement as the EU regulators would find it difficult to monitor the compliance of a third country fund or fund manager.
For a moment it seemed the political quarrels within the EU had escalated into absurdity and even the US Treasurer Tim Geithner got involved in the discussions over the future of the Directive. In an open letter to Lagarde and other European finance officials on 5 October, he urged France to remove the passporting opposition. The French eventually agreed to compromise and suggested that any EU passports are issued and administered by the European Securities and Markets Authority (ESMA) rather than by individual Member States. Whether such powers given to ESMA are legally feasible is still to be discussed. While there was hope for a compromise, it seems that at the time of going to press, the French have failed to agree to back down on their demands. The UK is continuing to fight for a more liberal and common sense approach.
Despite the fact that the final version of the Directive was expected to be announced early last week, negotiations continue. Although we may still be surprised by a last minute consensus from Brussels, it is highly unlikely that the Directive will be submitted for the plenary sitting vote on 19 October as previously planned.
Another Achilles’ heel of the Brussels law-making is the passive marketing rules proposed under the Belgian compromise. These rules would allow European investors to invest into third country funds as long as the investment is based on their own initiative without prior active marketing or promotion by the fund manager. HFM Week reported that this is another issue that has been interrupting the negotiations in the last couple of weeks and it still remains to be seen what compromise will be reached regarding this point.
The political tug-of-war and the movement towards protectionism from some Member States is striking, given the length of the overall process of drafting the legislation. Such a situation can reasonably be expected when preparing first drafts of legislation; however after more than a year of negotiations, the process seems never-ending.
We continue to see the negative impact of the constant redrafting of the Directive and adjourning of the final decision. Would be hedge funds sit on the fence worried of committing to the wrong jurisdiction while investors’ minds are polluted with anti-EU sentiments inflated by the more populist journalists. None of this is good for business (pension funds included), and regulatory certainty from a united EU alone can provide the peace of mind we all need.
It seems the industry has begun to reorganise itself more effectively from within while EU legislators still contemplate what to do. This begs the question whether an EU wide legislative measure is efficient or relevant, as any future changes and amendments may come too late to be relevant. In the end can the industry use this as an opportunity to regain the trust that was lost at the end of 2008?
That may be wishful thinking but the alternative is a potential deluge of regulation on the alternative investment industry as the Directive, when finally passed, is set to be followed by other legislative developments. Dan Waters, the FSA’s Director of Conduct Risk and Asset Management Sector Leader, told the Hedge Funds Review that the Directive will inspire an audit of the UCITS Directive, adjusting its rules to those of the AIFM Directive, including stricter provisions on remuneration.
The lack of political consensus will most likely postpone the vote on the Directive yet again. The European Parliament and the Council’s Presidency did not reach the anticipated compromise on 11 October, and the meeting of the Trilogue does not appear to be doing any better. The Belgians have also stated that they want the Directive finished by the time Hungary takes over the rotating presidency at the beginning of the year… Good luck to them!
Laven Partners – Your Global Compliance Partner
Laven Partners is a global leader in regulatory compliance, providing practical solutions for financial institutions. Please do not hesitate to contact us if you have any questions with regards to the new Directive and how it will affect your business.
