Political and regulatory news
Issue 4 - 20 October 09
Presidency identifies issues in relation to AIFM Directive
The European Presidency has published a paper setting out a number of issues for consideration in relation to the draft AIFM Directive.
The Presidency of the European Union, currently held by Sweden, has published a paper setting out a wide range of issues which need to be addressed before the draft Alternative Investment Managers Fund (AIFM) Directive can be finalised. It has also identified a number of alternative approaches for consideration.
The Swedish note highlights many of the issues being raised by the AIC in its lobbying activities. The Presidency recognises that “The directive covers managers….of funds with different business models…..There are indeed provisions in the proposal which from a technical point of view do not seem relevant to all funds, especially those without redemption rights”. This includes investment companies which, as closed-ended funds, offer no right to redemption.
The Presidency’s note is likely to be influential in directing the Council of Ministers discussions about the development of the Directive (see article AIFM Directive subject to complex legislative process). The key issues are:
The Presidency suggests that the current definition of an Alternative Investment Fund (AIF) “does not make it sufficiently clear what entities will be under the scope”. It also highlights the risk that entities which should not be targeted are inadvertently caught. It proposes that the definition of AIF, and the application of certain exemptions, be clarified. The note includes a broad range of alternative options, including the exclusion of closed-ended funds either from the whole Directive or specifically from the marketing and disclosure requirements, although in reality these options are highly unlikely to be adopted.
The Presidency notes concerns about requiring an independent valuation of a fund. It says that this “may not lead to any benefits for certain business models, but instead impose unjustified costs and create problems….”. It suggests that the rules could be made less stringent by giving the manager explicit responsibility for valuing the fund, with an independent valuation being carried out where appropriate.
The Presidency notes concerns that limiting eligible depositaries to EU credit institutions could result in substantial risk concentration. It also highlights concerns about the proposed liability regime. It concludes “the current draft does not seem workable, as it in many cases will not be possible to hold the assets in the EU without incurring considerable costs for investors”. The Presidency proposes that regulation in this area is postponed until the completion of a review on depositary functions for UCITS funds (see article Overhaul of depositary arrangements proposed).
Possible restrictions on delegation to third parties are also discussed by the Presidency. It has said that restricting delegation only to other managers authorised under the Directive “….could seriously affect global players, where portfolio management is today carried out by delegation to managers close to the local markets in third countries”. It suggests that it should be made possible to outsource investment management and administrative functions to firms both in the EU and in third countries without them having to be specifically authorised under the Directive.
The Presidency’s note explores concerns about the Commission’s proposals on leverage, particularly in relation to the definition, calculation and reporting aspects of the rules. One possible solution is to allow each Member State to set its own leverage limit as and when necessary. This would enable the risk profile of individual entities to be taken into account. It would also seek to avoid possible pro-cyclical effects where investors sell assets in a falling market, which could reinforce declining asset values, increase relative gearing and thereby increase market instability.
Commenting on restrictions on non-EU managers managing or marketing funds to professional investors in the EU, the Presidency said “there seems to be an overwhelming majority of Member States which are against imposing undue restrictions on investment opportunities…., as well as creating other barriers to global capital flows”. It proposes a number of possible solutions aimed at relaxing these rules, including allowing investors to invest in third country funds “at their own initiative”.
The Swedish Presidency’s run through of key issues indicates a desire to tackle the impracticalities of the proposals and to create a workable and effective regulatory framework. Although it is difficult to predict the outcome of the legislative process, Sweden’s contribution is clearly a step in the right direction. How it will handle the issues is as yet unclear – but the Swedish presidency will hopefully set the ‘direction of travel’ and increase the likelihood of a constructive resolution to the Council negotiations.
To view the European Presidency’s Issues Note published on 2 September 2009, click here.
Next article: Overhaul of depositary arrangements proposed
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