Directive on Alternative Investment Fund Managers

The European Parliament has approved the Directive on Alternative Investment Fund Managers. European countries will now be setting up a framework for regulating hedge funds and private equity funds. The AIRM Directive passed with 513 votes to 92 with 3 abstentions on November 10.

Under the Directive, an “alternative investment fund” is any collective investment undertaking which raises capital from a number of investors and is not registered under the EU’s Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). So along with hedge funds, the directive sweeps up private equity funds, real estate funds and commodity funds.

One key and contentious provision is the inclusion of a single EU passport for fund managers. An alternative investment fund manager can register under the legislation in one Member State that complies with the rules of the Directive. Then the manager can manage or market funds to professional investors throughout the EU after notification. It will also eventually allows US and other non-EU fund managers to get a passport. There will be a dual system for three years during which US and other non-EU hedge funds and fund managers will be governed by national private placement regimes under each jurisdiction, until the passport rules take effect.

The directive has some limitations on the use of leverage by the funds and fund managers will be required to notify regulators about their use of leverage.

Here is a rough timeline for the directive and its effects:

January 2011	Entry into force of the directive
January 2013 (2 years after entry into force)	Deadline for transposing the directive’s rules into national law, including those on granting passports to duly-registered, EU-based, AIFs and AIFMs.
January 2015 (2 years after transposition)	ESMA reports on functioning of passport system for EU AIFs and AIFMs, national private placement regimes, and possible extension of passport system to non-EU AIFs and AIFMs.
April 2015 (at the latest 3 months after ESMA report)	Commission adopts a delegated act, based on ESMA advice, specifying date when passports for non-EU AIFs and AIFMs will be available.
April 2018 (3 years after entry into force of delegated act)	Second ESMA report on the functioning of the passport and the possible ending of national private placement regimes.
July 2018 (at the latest 3 months after ESMA report)	Commission adopts a second delegated act, based on ESMA advice, specifying date when national private placement regimes must be terminated.

I’m going to spend some time reading the Directive in more detail to figure how it will affect me. One thing is clear: It’s going to be more time-consuming and more expensive to market and manage private funds in the EU.

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