Laven Partners AIFM Directive Update – July 2009

Welcome to the first edition of the monthly Laven Partners’ Monitoring Update on the proposed EC Directive.

The new Directive seeking to regulate hedge funds is charging ahead to become law. Laven Partners will be providing you with a monthly update on the development and status of this Directive. In the true Laven Partners style, we will also be looking at any interesting comments made by regulators and leading industry players in relation to the Directive.

The European Commission put forward to the European Parliament the proposal for the Directive in April 2009. The proposal is currently in a preparatory phase with the European Parliament and a debate or an examination is expected to take place in November with an indicative vote scheduled for shortly after.

There has been little consultation of interested parties in relation to the Directive. Currently, the only consultation taking place is with the financial ministries of EU member states. FSA officials recently said in a hedge fund meeting organised by London’s Imperial Collede, that there is enormous pressure to enact the directive, and that they expect a new law to be introduced by December 2009.

Jerome Lussan, Managing Director of Laven Partners says: “The current draft of the Directive has some good elements. Requirements for enhanced disclosure and the regulation of management companies are to be welcomed. However, the increasingly heavy hand of governments on the control of financial markets is not. Historically, government intervention in financial markets does not have a good track record.”

Laven Partners believes that new law must benefit investors and not be used as a political tool for power or a means to push the alternative investment industry out of the EU. As currently drafted, the Directive is so broad it will inevitably be full of unintended consequences. For example, it applies to all alternative strategies including real estate. Many countries in the EU have thriving real estate sectors which could be put at risk. The costs of implementing the directive will probably be prohibitive for many alternative investment firms currently based in the EU.

In a recent meeting with AIMA, Lord Myners said that: “the UK is not in the business of blocking more stringent regulation, contrary to what some in Europe may say” and that “the UK government’s aim was a framework which allows efficient, well run and well regulated fund managers to compete for business without restriction across the EU and to make the EU a base from which to compete in global markets.”

However, Jerome Lussan note: “if the directive is meant as a corrective action to any breaches of regulations which occurred last year, we should start by enforcing the existing framework rather than creating new regulations. Hedge funds were not recognised as the cause of the financial crisis by Lord Truner or de La Rosière so why all the noise? This fact weakens the very foundation on which this directive is based.”

Please keep a look out again for the next monthly monitoring update on the EC Directive. The Economist has recently noted that Sweden, which assumed the presidency of the European Union on July 1, could adopt a more rational approach, given its history of financial meltdown and subsequent recovery and that therefore Sweden could be the ideal country to orchestrate the reform of Europe’s financial landscape.

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