The EU's proposed Alternative Investment Fund Managers Directive
By: Vanessa C. Edwards and Philip J. Morgan
In separate votes on 17 and 18 May, the European Parliament and the Council of Ministers (the two arms of the EU legislature) adopted their respective positions on the infamous Alternative Investment Fund Managers Directive (“the Directive”). The versions approved, however, differ significantly from each other, and the discussions will now move on to the so-called “Trialogue” procedure, involving the Parliament, the Council, and the European Commission, in an attempt to arrive at a final, definitive text acceptable to all three institutions. Although the Commission is not strictly part of the legislature, the new Internal Market Commissioner, Michel Barnier, is likely to have a significant influence in negotiating the final text given the differences between the two versions. It is hoped to have the Directive agreed in July, but this is widely regarded as over-ambitious.
The draft legislation seeks to establish a harmonised framework for monitoring and supervising the risks that alternative investment funds (“AIFs”) (including venture capital funds, hedge funds, investment trusts, commodity funds, property funds and private equity funds) pose to investors, counterparties, other market participants and to financial stability, and to lay down the requirements for alternative investment fund managers (“AIFMs”) to provide services and market EU funds throughout the EU.
The Council and the Parliament have generally agreed on the following points:
- AIFMs will require national authorisation, and must comply with certain requirements concerning minimum capital, disclosure to investors and other standards of conduct.
- Larger AIFs will be subject to regulatory oversight of their total leverage.
- AIFMs’ remuneration will be subject to restrictions, essentially linking pay to risk.
- AIF assets must be independently valued and kept by a depositary bank, which would be liable for the assets.
- Managers of an AIF that acquires interests in non-listed companies are subject to additional disclosure obligations.
There remains significant divergence, however, on other issues, including the so-called “third country rules,” one part of which deals with access by non-EU AIFMs to EU markets. The Council approach would permit non-EU AIFMs to market funds established in a third country to professional investors in any Member State that chose to allow such marketing, subject to certain requirements regarding disclosure of information to investors and to EU regulatory authorities, and subject to appropriate cooperation arrangements between the authorities in the EU and those of the non-EU AIFM for the purpose of systemic risk oversight. By contrast, the Parliament’s plan would require non-EU AIFMs to agree to be subject to requirements of the Alternative Investment Funds Directive, with compliance to be monitored by an appropriate regulatory body in the AIFM’s country of domicile, by agreement between that body and ESMA (a proposed new centralised European regulatory agency, the European Securities and Markets Authority). Both the AIFM’s country and the country of domicile of the AIF would also need to satisfy the EU concerning protection against money laundering and terrorist financing, reciprocal access to marketing of EU funds on its territory, exchange of information relating to taxation and monitoring matters.
The US (where a significant proportion of EU-based funds raise capital) and the UK (where a significant proportion of EU-based funds are managed) share concerns about the likely effect of the Directive, particularly in relation to the third-country rules. In a letter to the Commission in March, US Treasury Secretary Timothy Geithner warned that the proposals could cause a rift between the US and the EU by discriminating against US groups in preventing them from getting a “passport” to market to EU investors. The new UK Government, for its part, seems to have decided not to fight what would inevitably have been a losing battle against the Directive, settling instead for a statement in the communiqué issued after approval by the Council of Ministers on 18 May, noting that future negotiations should take into account concerns expressed by some Member States about the rules for non-EU managers.
