27 March 2012

FN: Hedge fund managers fear AIFM Directive U-turn

Hedge fund managers have expressed alarm that the European Commission has given Member States only two weeks to respond to a new text on the implementation of the Alternative Investment Fund Managers' Directive.

It was announced yesterday at the European Securities Committee that Member States now have just two weeks to respond to the European Commission's text on the implementation of the Directive, known as Level 2.

One hedge fund industry insider said that this was an "extremely short deadline" and that the text was counter to what had been agreed in the first stage of legislation.

The final draft of the Directive, agreed by the European Commission and Council of Ministers and ratified by the European Parliament, adopted a compromise position, which was seen as considerably more moderate. It introduced a passport for third-country managers, and allowed them to continue to access European investors through national private placement rules in the interim.

The Directive says that if third-country managers want to access EU investors, they may need to be compliant with the Directive. The Commission wants the third-country regulators - such as the US Securities and Exchange Commission - to oversee their own managers and see if they are AIFM Directive-compliant. The regulators themselves are concerned about having to establish if their citizens are following foreign laws, people familiar with the situation said. The new agreements would bind them to do so.

Another key area of concern is around depositories. Under the current draft, depositories must assume strict liability for any losses, even from circumstances beyond their control, making it extremely costly to provide their services. There are also restrictions on choice of depositories. A person familiar with the new text said that its treatment of collateral and the status of assets subject to collateral arrangements is unclear. This means that the scope of the depositary liability regime is unknown, introducing further uncertainty and costs.

A spokesperson for the European Commission said that informal consultations between the European Commission and the Member States and the European Parliament are underway, after which the European Commission will adopt a draft. She said: “We hope to see the College of Commissioners adopting the draft regulation before the summer break. The three-month opposition period would then start.” It is during this period that Member States can voice any concerns that they have with the regulation.

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