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EU rules could hit investment trusts

Proposed European Union rules could create fundamental problems for investment trusts, says Ian Sayers, the deputy director general of the Association of Investment Companies (AIC).

Under the new law, managers of hedge funds and similar alternative investment funds that handle at least 500m (445m) would have to register with regulators. For those managers that use borrowed money, the limit is 100m.

Managers of closed-ended funds, subject to the limit, will be caught, Sayers warns. He says they will be restricted by the the lower limit of 100m as most of them use leverage.

The new law on hedge funds and similar alternative investment funds was proposed in an attempt to plug regulatory holes that contributed to the financial crisis.

In an official statement, the AIC says that the directive from the European Commission requires an independent valuation of the assets of the fund once a year, and each time shares are issued or redeemed. This will add significant costs to investment companies investing in illiquid assets.

This is not a better valuation, Sayers adds. [The managers] have to do this every time they buy shares but private equity evaluations take months.

With the new law, these managers would also have to have to disclose information about their business. This includes, for example, the extent to which they used borrowed money or financial instruments to boost returns.

For now, the draft law applies only to managers, rather than funds, because many funds are based offshore. After three years, the rules will get tougher for funds based outside the EU, the statement by the European Commission says.

The commission also announced plans to help consumers make informed decisions about risks and costs. The commission justifies this with the fact that many of these packaged investment products have lost much of their value during the crisis.

Sayers adds that because all shares will be deemed to be complex products, it will be harder to sell them.

The AIC further criticises the directives requirement that funds have arrangements in place for the redemption of shares. It says this is not appropriate for closed-ended funds such as investment companies.

Many investment companies, the AIC statement continues, chose to separate management and administration. The directives assumption, however, is that a fund has a single fund manager for the entire operation.

The AIC warns that the proposal, which defines an alternative investment fund as any fund that is not regulated as a Ucits fund, would be very damaging to the interests of investment companies and their shareholders.

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