New European Union-wide rules on the marketing of alternative investment funds overcame the final hurdle this afternoon when the European Parliament adopted, by 513 votes to 92 with three abstentions, the Directive on Alternative Investment Fund Managers.
The directive will impose registration, reporting and initial capital requirements on all funds not covered by the Ucits directives on the cross-border marketing of retail funds, as well as rules on asset stripping aimed at private equity firms and provisions that would require the deferment of a substantial part of the remuneration of alternative fund managers.
It also includes provisions that will tighten the responsibility of depositaries providing custody services to alternative funds as well as setting out capital requirements for managers and rules on the use of leverage.
The legislative process has taken more than 18 months since the European Commission published the first proposal for the directive on April 30, 2009, and has required a succession of drafts. The process was temporarily stalled in May when the Parliament’s Economic and Monetary Affairs Committee and the Council of EU Economic affairs and Finance Minister approved conflicting versions of the directive.
With the UK and France in particular at loggerheads over the position under the directive of managers and funds based outside the EU, a breakthrough was finally reached on October 19 following a compromise draft drawn up by Belgium, which holds the rotating presidency of the EU Council.
After the Belgian text was approved by EU economic affairs and finance ministers, it was endorsed in substantially the same form by a so-called ‘trialogue’ meeting on October 26 involving representatives of the Parliament, the Commission and EU member states.
The compromise text introduces an EU marketing ‘passport’ for alternative fund managers based within the 27-member union. After a two-year transition period, managers and funds based in non-EU countries will also be able to obtain a passport, subject to their adherence to the terms of the directive and regulatory co-operation on the part of their host jurisdictions, as well as compliance with international standards on money-laundering prevention and tax transparency.
It also preserves the existing system of country-by-country private placement rules for distribution of alternative funds by non-EU managers for at least five years, or until the Commission and the new European Securities and Markets Authority determine that the passport system is operating satisfactorily.
“It is to be welcomed that a year and a half’s uncertainty about the regulation of all non-Ucits managers and their products is now over, and we can move forward,” says Peter De Proft, director general of the European Fund and Asset Management Association. “I congratulate both the European Parliament and the Belgian presidency for their relentless efforts to finalise these negotiations.
“The process involved with the AIFMD was unprecedented for the investment management industry. Revisions of the successful Ucits regime followed careful consideration, impact assessment and consultation. These principles of better regulation were ignored regarding the AIFMD, and therefore the end result is far from optimal. We sincerely hope that this will prove to be an exception and not the rule for future revisions of EU investment management regulation.”
In a statement, the European Parliament said it had insisted from the outset on the need to combat asset stripping, which was not covered by the original Commission proposal and the inclusion of which was resisted by member states during negotiations.
The directive now sets limits on distributions and capital reductions within the first two years following the acquisition of a company by a private equity investor to deter the latter “from attempting to take control of a company solely in order to make a quick profit”.
Depositary liability has been increased in with the aim of preventing Madoff-style frauds in the future. The directive requires that if a depositary legally delegates its tasks to other institutions, it must provide include provisions within the contract that allow the fund or its manager to claim damages against the entity to which the tasks are delegated.
Four years after the directive’s rules take effect in 2013, when member states are required to have enacted the legislation into their national law, the Commission will undertake a general review of the operation of their rules and their success in upholding the principles of the EU single market.
The Commission will work with the future European Securities and Markets Authority to flesh out the details of how the directive will work through guidelines, regulations and secondary legislation.
