Tag: EU

AIFMD in the UK

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HM Treasury has published its response to its first consultation on the transposition of the Alternative Investment Fund Managers Directive (“AIFMD”) in the United Kingdom. The main thrust of the AIFMD will not hit Europe for a few years, but in the meantime there will be more uniform limitations on private placements in the European Union starting on July 22, 2013. Unfortunately, all of the EU countries are scrambling to get the new regulatory regimes in place. “Scrambling” may imply more activity than is really happening.

The United Kingdom has moved a step closer and published revised draft regulations under the AIFMD (.pdf). The good news is that the UK is proposing to provide a year of transition so that the requirements under the AIFMD for private placements won’t come into full effect until July 2014.

The draft regulations propose replacing the registration process for non-EU managers seeking to market their funds under the U.K. private placement regime with a simple notification procedure. You certify your compliance with the AIFMD. That way the fund manager does not have to wait for the approval of the Financial Conduct Authority before undertaking marketing.

That registration requirement is trouble under the AIFMD. Effectively, you need to go through the registration process and wait for approval before marketing in that EU country. There is no private placement passport. Of course, it may turn out that you end up with no investors in that country.

Now we need the other member countries of the EU to move forward so that European investors don’t get excluded from investment opportunities when the end of July comes around.

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The EU Directive On Alternative Fund Managers Is in Effect

The chaos around the Swiss Franc may be a sign of a coming crisis in the European Union. For private fund managers, a different crisis may be the new European regulatory regimes for private funds. With all of the flux in the United States over the regulation of private funds, it’s been easy to forget that the EU has been trying to put a new regulatory regime in place.

Over the summer, the official text of the Alternative Investment Fund Managers Directive (2011/61/EU)(.pdf 73 pages) was published. The European Parliament adopted the Directive in November, 2010 and the Council of the European Union adopted it in May, 2011. The EU member states will have until July 22, 2013 to update their the national laws, regulations and administrative provisions to give effect to the AIFMD.

This new EU legislation will regulate managers of hedge, private equity
and real estate funds and other alternative investment funds. It covers almost any investment fund except funds regulated under EU legislation on Undertakings for Collective Investment in Transferable
Securities (UCITS).

There are still many moving parts. The EU regulatory regime will need to be in place and there will likely be variations from country to country in the EU.

If you have European investors or operations in Europe, you have more reading to do.

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Europe’s New Directive on Alternative Investment Fund Management

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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Europe’s Approach to Derivatives Regulation

With this summer’s passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s Europe’s turn to address financial regulation. This morning, the European Commission released its Proposal for Regulation on OTC Derivatives, central counterparties and trade repositories.

The proposal seems to look a lot like the Dodd-Frank’s approach by creating a central trade repository, required margins, and required collateral. The proposal follows the commitment from the G-20 that

“All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”

The proposal excludes non-financial firms who use derivatives to mitigate risk in their core business from the central clearing requirements.

More analysis to come.

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I’m reading through the proposal and the supporting documents.

Privacy on Both Sides of the Atlantic

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Here is the United States we are mostly talking about financial information and medical information when it comes to privacy and  data security. The state data privacy laws focus on social security numbers and financial account information. HIPPA created a federal regulatory regime for medical information.

Europe has been focused less on financial information and much more on personal information when it comes to data security. The EU regulators are much more protective of the information about where you live, your race and your religion.

I thought this quote summed up the different approaches quite nicely:

Europe: You don’t understand privacy until they come for your neighbor in the middle of the night.

That came from Kim Howard the Editor of ACC Docket through a Twitter update. Memories of the Holocaust still drive regulations in the EU.

Update on the European Directive to Regulate Alternative Investment Fund Managers

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The draft Directive on Alternative Investment Fund Managers pdf-2 was published on April 30, 2009. The Proposed Directive has been subject to lots of criticism. Many of the provisions in the Proposed Directive misunderstood the characteristics of different types of alternative investment funds.

It now seems the Proposed Directive will be implemented in one form or another. (The EU’s focus on financial market reform has not been distracted by health care reform like happened here in the US.)

The first problem with the proposed directive is that it has broad definition of “alternative investment fund” so it can sweep up all hedge funds. It seems the the Presidency of the European Council has noticed that the existing definition would capture funds that clearly should not be the target of the Proposed Directive. [see AIFM Issues Note from the EU Presidency]

Unless non-EU managers comply with the rules within three years of the Directive coming into force (probably around 2015) they will be barred from offering their products in the EU. Britain, another center of hedge funds and private equity is campaigning to water down the directive. France, Spain and Germany seem to be very pro-directive and in favor of stiffer regulations.

Britain’s financial services minister, Paul Myners, told a conference: “Smell the coffee! There is going to be a directive.”

For more detail read a client alert from Shearman & Sterling: Update on the European Directive to Regulate Alternative Investment Fund Managers.

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AIMA Warns of Global Impact of EU AIFM Directive

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The Alternative Investment Management Association has warned that the European Commission’s draft directive on Alternative Investment Fund Managers would negatively affect fund managers and investors around the world if enacted into European law.

The Directive applies primarily to any Alternative Investment Fund Managers which is established in an EU Member State and which provides management and administration services to one or more alternative investment funds. However, it will also apply to the marketing of a fund within the EU by Alternative Investment Fund Managers which are established outside the EU.

Marketing Conditions

There are five conditions that a non EU registered fund manager must meet to be able to market the alternative investment fund in the EU:

  • Its home country must have prudential regulation and ongoing supervision which is “equivalent” to the Directive’s provisions
  • Its home country allows effective market access to EU fund managers which is comparable to that granted by the EU to fund managers from that country
  • Its home country has a cooperation agreement with EU regulators for monitoring the potential implications of the activities of the Third Country Fund Manager for the stability of systemically relevant financial institutions and the orderly functioning of markets
  • Its home country has signed an agreement with EU regulators to allow the sharing of  information on tax matters
  • The fund must provide EU regulators with the identities of significant owners

Satisfying the Conditions

Unfortunately for fund managers, four out of the five requirements require their home country to act. If the EU effectively locks out funds managed by non-EU fund managers, countries may reciprocate and lock out funds managed by EU managers from their markets.

If the Directive is adopted in its current form, fund managers may need to open an EU office and subject themselves to the EU and member state regulations.

Status

The Directive is merely at the start of the EU’s legislative process and it is likely to be revised before the Directive comes into force.

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EU Proposes Directive on Alternative Investment Fund Managers

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The European Commission published a draft Directive on Alternative Investment Fund Managers to establish a common regulatory and supervisory framework for all investment managers of funds promoted to investors in the European Union and not currently subject to European level regulation. Though the measure is directed at the hedge fund industry, the Directive would affect the operations of managers of all funds that are not registered as UCITS (Undertakings for Collective Investments in Transferable Securities), including private equity, real estate, infrastructure and venture capital funds.

The Directive is at an early stage of the legislative process and may be subject to significant change before it is adopted. Even in its current form it will not come into force before the end of 2011 and the proposals relating to the promotion of funds incorporated outside the EU will not come into force for a further three years after that. I expect there will intense lobbying from the financial services industry and the hedge fund industry.

The Directive is mainly driven by the European Commission’s aim to get control over what it perceives as systemic risks in unregulated fund markets. There is a set of regulations focused on managers domiciled in the EU and a second set on funds marketed in the EU.

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