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Europe proposes regulation of alternative investment fund managers

The European Commission has proposed a directive on alternative investment fund managers that will require them to be authorised and subject to “harmonised regulatory standards” on an ongoing basis.

The directive will only apply to those AIFM managing a portfolio of more than €100m. A higher threshold of €500m applies to AIFM not using leverage and with a five-year lock-in period for their investors as they are not regarded as posing systemic risks.

The EC says a threshold of €100m implies that roughly 30 per cent of hedge fund managers, managing almost 90 per cent of assets of EU domiciled hedge funds, would be covered by the directive.

The proposed directive will also enhance the transparency of the activities of AIFM and the funds they manage towards investors and public authorities.

The EC says this will enable member states of the European Union to improve the macro-prudential oversight of the sector and to take coordinated action as necessary to ensure the proper functioning of financial markets.

It adds that the proposal will help to overcome gaps and inconsistencies in existing regulatory frameworks at national level and will provide a secure basis for the development of the internal market.

AIFM, which includes managers of hedge funds and private equity funds, managed around €2tn in assets at the end of 2008.

The proposals permit AIFM to market funds to professional investors throughout the EU, subject to compliance with demanding regulatory standards.

They also grant access to the European market to third country funds after a transitional period of three years.

This is the first attempt in any jurisdiction to create a comprehensive framework for the direct regulation and supervision in the alternative fund industry. The proposal will now pass to the European Parliament and Council for consideration.

Internal market and services commissioner Charlie McCreevy says: “Alternative investement fund managers have become important participants in the European financial system and their activities have had a significant impact on the markets and companies in which they invest. There is now a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector.

“In particular, it is essential that regulators have the information and tools necessary to conduct effective macro-prudential oversight. The crisis has also underscored the importance of robust risk and liquidity management systems and the need for reliable investor information as the basis for effective due diligence.”

The Investment Management Association says it welcomes new rules to allow fund managers to distribute non-UCITS funds to professional investors in EU member states.

Currently, cross-border fund distribution in EU countries is limited only to UCITS funds.

Director of international relations Jarkko Syyrilä says: “If the directive comes to fruition, EU authorised AIFMs will be able to distribute both EU and non-EU domiciled funds to professional investors in any member state. These changes to the rules will offer more choice for Europe’s professional investors and further strengthen Europe’s fund management industry.

“However, waiting another three years until third country funds can be distributed in Europe is too long. European investment funds are marketed around the globe with remarkable success. We are fully convinced that open markets will be of benefit to Europe. IMA will be engaging with all the relevant authorities to discuss the draft directive in further detail.”

Ashurst regulatory partner James Perry says the proposal is “deeply flawed and politically motivated”.

He says: “It will add very substantial costs for fund managers, without any obvious regulatory benefits and will create uneven playing fields into the bargain. Managers that have nothing to do with private equity and hedge investment will be caught.

“Everyone admits that private equity has done nothing wrong but they’re still caught. The irony is that European regulators already have ample powers to respond in a sensible, proportionate way to the issues – as the FSA has already done in the UK. The wider international dimension clearly hasn’t been thought through properly.”

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