Wednesday, February 10, 2010

AIFM Directive Update: UK Regulators Express Concern over Commission Proposal; The Spanish Compromise Text

Two separate analyses of the European Commission's proposed Directive on Alternative Investment Fund Managers (the "Directive"), introduced in April 2009, have recently been published in the United Kingdom.

The first appears in a letter the House of Lords Select Committee on the European Union sent to the Financial Services Secretary in December 2009. The letter expresses the committee's concern over certain aspects of the Commission's proposed Directive, such as the unnecessary level of protection it provides to institutional investors, the one-size-fits-all approach, the restrictions on the marketing of non-EU funds and possible restrictions on non-EU managers marketing in the EU. The committee warned that unless the Directive's regulatory approach was coordinated with global arrangements, particularly those in the United States, the EU alternative investment fund industry's global competitiveness could suffer, dealing a serious blow to the EU and UK economies.

The second analysis of the Commission's proposed Directive appears in a January 2010 report published by the Bank of England Financial Markets Law Committee. The report highlights numerous fundamental issues which could, unless appropriately addressed, "create significant legal uncertainty" and lead to "systemic failure and widespread market disruption." According to the report, the most acute issue in the proposed Directive is its uncertain scope, as the meaning of core concepts such as "alternative investment fund" and "alternative investment fund manager" remain unclear. Further issues include the stringent liability regime for depositaries and their obligation to verify that funds have obtained ownership of all other assets in which they invest, which might prove impractical, time-consuming and costly for investors. In addition, the definition of "leverage," a key element of the Directive, should be clarified, particularly in order to effectuate the threshold exemption which the Directive envisages. Finally, the report calls for a revision of the Directive's third-country provisions to enable EU fund managers to manage non-EU funds, and allow non-EU funds to market to EU investors. The report concludes that in order for the Directive to be successful, there should be "no doubt as to its scope in order to avoid uneven implementation and the possibility of regulatory arbitrage across EU Member States."

After the Commission published its proposed Directive in April 2009, the Swedish presidency of the Council of the European Union (the "Council") published its compromise texts in November and December 2009. On February 4, 2010, the Spanish presidency of the Council published its own compromise text of the Directive. A major departure from the Swedish compromise introduced by the Spanish compromise text relates to the ability of non-EU funds to be marketed to EU investors. The amended proposal would only allow such marketing where there are appropriate cooperation arrangements in place between the relevant authorities of the fund's home state and the EU Member State in which the fund's units are proposed to be sold. In addition, the manager of the non-EU fund would be required to comply, at a minimum, with the provisions of the Directive relating to annual reports, disclosure to investors, and reporting to regulators, as well as those which apply to managers that acquire control of non-listed and listed companies.

Before the Directive can become law, both the European Parliament and the Council of Ministers will have to agree on its final terms. As the Directive continues to be the subject of intense political discussions, the full extent of the Directive's requirements remain to be seen.