Laven Partners AIFM Directive Update – November 2009
In our August edition of the EC Directive Monitoring Update, Laven Partners reported that the Swedish Presidency was a likely player to take action against “overzealous regulation” and thereby ensure that the concerns of the investment management industry were heard when discussing the EC Directive with the European Commission. These predictions were correct, and in October, the Presidency released a revised version of the draft. Laven Partners has been able to gain access to this revised version of the Directive.
Previously, concerns regarding the vagueness of the EC Directive were widespread, as the draft applied to “entities [within the EU] engaged in the management and administration of alternative investment funds”, further defining ‘management services’ as “the activities of managing and administering one or more AIF on behalf of one or more investors”. Rather than specifically targeting institutional funds as intended, this definition would have led to a large part of the retail fund sector being within the Directive’s scope.
Laven Partners is pleased to see that the revised edition of the draft has disposed of the use of the ambiguous definition of ‘management services’, and has instead sought to give a clearer outline. Examples of the functions included are ‘investment management’, ‘portfolio management’, ‘customer inquiries’ and ‘regulatory compliance monitoring’. Unfortunately, the lack of distinction made between closed and open funds and EU and non-EU funds remains to be rectified. The Institute of Chartered Accountants has highlighted the seriousness of this lack of distinction: “Risks differ between business models. These different risks mean that there will be different regulatory objectives in managing them; delivering different regulatory objectives will require different information.”
The draft initially stated that the Commission “shall adopt implementing measures setting limits to the level of leverage an AIFM can employ” – an explicit contradiction to the Commission’s prior claim that the Directive is not intended to regulate products. In addition to this, fixed limits would have a disproportionate effect on a large number of smaller firms. Following a considerable amount of objection, the Swedish Presidency has amended this policy on leverage as stated in Article 25 of the Directive and the revised version of the Article clearly states that it will be the authorities of the home member states who are able to set leverage limits, only when ‘deemed necessary’ and strictly on a temporary basis.
Whilst Laven Partners feels that revisions made to the Directive are a step in the right direction, we still feel that there is space for improvement. Unfortunately, the Swedish Presidency has apparently not revised the section relating to the marketing of off-shore funds – an issue which has been of great concern to many managers. Like the European Fund and Asset Management Association, we also believe that it is imperative that the EC Directive be more consistent with the UCITS, MiFiD and Transparency Directives.
We appreciate that the revised EC Directive does have positive attributes, such as increased transparency, additional oversight, and single market passports for non-UCITS funds. There are still nonetheless a number of issues. Should the Directive come into force as it currently stands, managers of hedge funds and funds of hedge funds face a dramatic increase in regulatory and reporting requirements, as well as increased costs and restrictions on investment strategies. Finally, the market environment fostered by the Directive will be of a protectionist nature likely to lead to retaliatory measures by non-EU countries.
Laven Partners hope that over the next few weeks the European Commission will take the time to consider the revisions to the draft as made by the Swedish Presidency, and perhaps take some of these amendments on board. In January 2010 Spain will take over the Presidency and is expected to take a much stricter approach to European fund regulation. We will of course be updating you on any such progress in our December edition – so be sure to look out for it!
