Andrew Baker, AIMA CEO, says the association has concerns over the ‘impractical and unworkable’ proposals in the EU’s Alternative Investment Fund Managers Directive (AIFMD).
AIMA, as the global hedge fund association, fully supports the regulatory goals of the EU’s Alternative Investment Fund Managers Directive (AIFMD). It is desirable both to increase transparency and to improve systemic risk assessment in the interests of financial stability.
However, we are concerned that many of the proposals in the texts of the Directive discussed by the European Parliament’s Economic and Monetary Affairs Committee (ECON) and European finance ministers at the ECOFIN meeting are impractical and unworkable.
In particular, it seems that the process of negotiation in ECON was so highly-politicised that it took little note of the legal and practical feasibility of the compromise amendments put forward. For example, Article 35a now prohibits investors from investing in third country funds unless the jurisdiction of the fund meets a list of various conditions which have very little to do with prudential regulation. It is questionable whether, today, every EU Member State would meet those conditions. And the international passport proposed by the Parliament is unworkable as it relies on the extraterritorial enforcement of EU rules by third country supervisors who would almost certainly decline to do so.
We are also concerned that the Directive singles out our industry for special treatment and imposes controls and burdens that it does not place on other financial market participants.
We can safely say that the Parliament’s proposed rules on depositaries, delegation, valuation, leverage, short selling, access to third countries’ funds and service providers have no equivalent in any other part of EU financial services legislation.
Many requirements proposed to be put on the alternative asset managers in the ECON text are disproportionate to the point of being punitive. Often, they are considerably more onerous than obligations imposed on the rest of the financial services industry. All we are seeking is equal and fair treatment.
The text approved by the Council is much more practical and realistic than the Parliament’s one, particularly on the crucial issue of third countries, where the Council text does allow for national private placement regimes which would allow third country managers to market their funds in individual EU member states.
However, we do still have some significant concerns. On the third country issue, the Council text proposes co-operation arrangements between the regulator of fund manager and the regulator of each EU member state in which the fund are marketed. This could prove impractical, it would mean that the third country regulator of funds to be marketed across the EU would have to conclude 27 separate agreements with the relevant national supervisors.
The strict liability that the depositaries must assume for any losses (even from circumstances beyond their control) will make it extremely costly to provide their services. The restriction on choice of depositaries could also increase systemic risk as it will create concentrations of risk among fewer depositaries.
Finally, the rules on remuneration have been essentially taken over from the banking directive. This is not appropriate: asset managers are not banks. The asset management sector has completely different compensation structures, such as performance fees, to the banking sector.
We hope that the ‘trilogue’ process between Council, Commission and Parliament will resolve these and other outstanding issues in a reasonable and sensible manner. We stand ready as we have throughout the prior stages of this process to provide technical input and hard data to move this to a more evidence-based regulatory outcome.