The proposed AIFM directive has raised hackles among alternative fund managers. Peter Cluff looks at its progress so far
Mention the Alternative Investment Fund Managers acronym (AIFM) in fund management circles and you are unlikely to receive a cheery response. The proposed EU directive has come in for withering criticism from managers and investors alike with restriction of choice, tougher barriers to entry and increased costs for all being lamented; even the European Parliament has acknowledged that it will cost around €22bn to implement and could lower the EU's GDP by some 0.2%. Fund managers have been left scratching their heads asking why the first co-ordinated response to the banking crisis has been to further regulate their industry?
But is such wholesale criticism justified? The intentions are laudable - being the harmonisation of the marketing of funds, and the collection and sharing of systematic information between regulators. Furthermore a European-wide passport for marketing funds is also a welcome step for private placements. The concern emanates from what many perceive to be the disproportionate weight of extra regulation which accompanies these aims.
As regulation goes European-wide there is a feeling that the one-size-fits-all nature of the directive results in unnecessary regulation and bureaucracy for certain sectors or for smaller managers which could not themselves be considered a systemic risk. Logically, why should a manager of an unlisted property fund undertaking six investments a year be treated on the same basis as a hedge fund manager carrying out multiple trades a day on the listed markets?
It is history repeating itself for many. Private equity funds used to make up about a third of IMRO's membership and there were various carve out provisions in areas where it was acknowledged that regulation was over-demanding or inappropriate. When IMRO and the other regulated UK bodies were swept up into the all-encompassing FSA, such carve-outs and the tailoring of regulation to different business activities were largely extinguished. Now there is a danger that any remaining concessions or acknowledgement of industry practice accepted by the FSA will be usurped by the prescriptive nature of the new directive.
So where are we in the process? The progression of the directive has been very fast, which reinforces the view that it was a knee-jerk reaction to high-profile scandals like Madoff; but the perceived need to enact quickly also raises the hope that there may be some compromises made to the initial austere terms. The EU Commission published the original text in April last year. Since then the European Council and European Parliament have been developing separate versions of the text. The Council (so far under three separate presidencies - Czech, Swedish and now Spanish) has set up numerous working groups and received countless representations from individual fund managers, investors and governments. The Spanish presidency has produced the latest compromise proposal.
Meanwhile the Parliament's Committee on Economic and Monetary Affairs has already tabled some 2,000 proposed amendments and its Committee on Legal Affairs has yet to submit its changes. The Council, Parliament and Commission will continue their trialogues with the intention of having an agreed text by July of this year. Given the number of amendments and current differences between the draft texts, maintaining this timetable will be challenging. A further two years will then be required to allow the directive to be transposed into national law, during which time the devil in the detail will become apparent.
All of which leads to fund managers (and investors) feeling that they are currently embroiled in a phoney war. Public consultation is at an end and in many key areas we are none the wiser as to the eventual outcome of the deliberations by the various European bodies. As such it is difficult to make any firm changes in business practices or to prepare for deeper regulation. However, certain changes can already be foreseen, for example regulatory capital will increase, probably to €125,000 plus 0.2% of gross assets under management, providing an increased burden on smaller managers (although it is hard to justify a link between this and reducing systemic risk).
In addition, hedge fund, private equity and property funds will have to get used to having an independent depositary for their funds. These depositaries will appoint custodians and administrators, and may even be responsible for arranging external valuations. The liability these depositaries must assume remains a key part of current discussions and ultimately will have to be paid for by fund managers and/or investors.
Many potential issues remain with a lack of clarity in basic areas such as agreed definitions (for example, what constitutes leverage and who has the power to determine whether it should be capped); and the need to abstain from protectionist tendencies (in how non-EU managers are allowed to market both EU and non-EU funds).
Furthermore new provisions are still being introduced; the Swedish presidency in its final act in December issued a revised text containing banking-style restrictions on the remuneration of fund managers (proposing that at least 60% of bonuses should be deferred).
With fund managers already reeling on the ropes, a further formidable combatant has entered the ring from the other side. The SEC, under the proposed Private Fund Investment Advisers Act, wants all managers which have more than 15 US investors or more than $25m (€18.31) of assets under management from US investors in their private funds to register with the SEC, adhere to their compliance policies (perhaps even including sitting examinations) and become subject to routine inspections.
A co-ordination of supervision between the US and European regulators would help to ensure a limitation on protectionist or tit-for-tat policy-making and would reduce the requirement for fund managers with investors or products on both sides of the pond to double up on their regulatory requirements. Encouragingly a dialogue is taking place.
Reasons to be cheerful include the fact that manager awareness of the possible implications is quite high; closed-ended funds raised prior to implementation, it appears, will be exempted from having to comply, and there is still time for the EU regulators to include greater elements of proportionality by differentiating between different fund managers and fund types. We still have a few more months to wait and see what the directive really stands for... All is fine... Maybe.
Peter Cluff is a principal at Europa Capital.