EUROPE - Managers of hedge funds, private equity and real estate funds would escape regulation under a proposed European Commission directive targeting alternative investment fund managers, if their assets under management total less than €250m.

In an explanatory memorandum seen by IPE, the Commission stated it plans to exempt the smaller alternative investment portfolios to enable "supervisory attention [to be] focused on the areas where the risks are concentrated".
The proposed threshold implies that around 15% of hedge fund managers, managing 76% of assets of EU-domiciled hedge funds, would be covered by the Alternative Investment Fund Managers Directive.

However, the EC has estimated that the total assets of non-Ucits funds amount to around €2trn and this directive would also capture 36% of managers of other non-Ucits funds, such as open-ended Dutch funds and open-ended real estate funds.

The lower limit is designed to ensure most managers in niche businesses, such as start-ups and venture capital, escape regulation, according to the paper.
The €250m limit and other aspects of the current draft, which is still subject to revision prior to ‘adoption' or publication on 29 April,  has already come under ferocious attack by Paul Nyrup Rasmussen, the European Parliament's leader of the Socialist Party.

He claimed the €250m limit is "much too high", and argued it allows many funds to remain outside the directive.
In contrast, however, Sharon Bowles, liberal MEP and a prominent member of the economic and monetary affairs committee, suggested the limit is "possibly a bit on the low side".

Bowles, who generally supports the Commission initiative, also noted, however, that with the forthcoming European election and other delays, one version or another of the directive is unlikely to clear through to adoption by Brussels before the end of the year.
In such circumstances, normal timing for the legislation to be up and running across the EU would be around the start of 2012 but there could be delays prior to ‘transposition' into national codes, followed by ‘implementation'.
Elsewhere, there has been a general welcome to the legislation from other bystanders, including Pat Ferguson, chief executive of the €800m Construction Workers Pension Scheme in Ireland,

"I don't think anybody can object to the Commission proposal," said Ferguson.
"They have gone a long way to make it fair. Hedge funds which were behaving like Merlin, the magician, will have to make it clear what they are doing," he continued.

Despite possible benefits the new directive and legislation could bring, Ferguson also noted the potential compliance associated is likely to be costly.

Jean-Pierre Paelinck, secretary general of the Euroshareholders confederation of shareholders associations in Brussels, also said he found the proposed directive to be "a step in the right direction".
The Commission has repeatedly suggested the motive for such pan-EU regulation has been demonstrated by the financial crisis as the turbulence of recent months has shown "how risks crystallising in one sector of the global financial system can be transmitted rapidly around the financial system, with serious repercussions for all financial market participants".
Examples of the risks being targeted through this directive include:

the use of leverage; conflicts of interest, including in particular with respect to remuneration; lack of transparency,  and the potential for misalignment of incentives in portfolio management companies.  

The current regulation, which is by a combination of national financial law and other fragmented systems, "do not constitute a robust and comprehensive response to [the] risks", stated the European Commission.