Thursday, April 23, 2009

EU Regulation: First Draft of EU Directive on Regulation of Alternative Investment Fund Managers Stirs Opposition

A first draft of the EU Directive on Alternative Investment Fund Managers, circulated among members of the European Parliament, provides certain organizational, registration, reporting and ongoing compliance requirements for managers of alternative investment funds ("AIFM"), other than UCITS funds or those alternative investment funds with assets that in the aggregate do not exceed EUR 250 million. A final draft proposal of the Directive is expected to be released by the end of April.

The current draft of the Directive does not distinguish between managers of hedge funds, private equity funds or other funds that are not the subject of the present regulatory focus. According to the draft, "it would be ineffective and short-sighted to limit any legislative initiative" to hedge funds and private equity funds because "any arbitrary definition of these funds might not adequately capture all the relevant actors and could be easily circumvented." The draft Directive does not contain any restrictions on the investment policies of an AIFM or the organization or structure of the portfolios that it manages. The main focus is on the reporting requirement of the AIFM to help asses potential risks and monitor its activities.

The draft Directive does not foresee the registration of the alternative investment fund itself and an AIFM would continue to be able to manage alternative investment funds organized outside of an EU Member State, provided that the funds are organized in a manner compliant with the Directive. Among other things, the draft Directive requires each alternative investment fund to have an independent valuator who would value the alternative investment fund's assets at least once a year and have its registered office in a Member State, and appoint a depositary who will safe-keep any financial instruments which belong to the alternative investment fund and secure the ownership of its other assets.

The Financial Times reported initial reactions from members of the European Parliament belonging to the Socialist group, who called the draft proposal "almost worthless" and "filled with loopholes" that would render it "highly ineffective." They promised to make the matter a central issue in the upcoming European Parliament elections in June.