On Wednesday, April 29, the European Commission proposed a directive targeted at entities engaged in the management and administration of alternative investment funds ("AIFMs"). The directive would require that all EU-domiciled AIFMs with over €100 million in assets under management, or over €500 million for those AIFMs solely managing funds that are not leveraged and with an investor lock-up period of at least five years, be authorized by the competent authority in their respective home countries. The Commission had circulated a draft proposal earlier in April that only covered managers with over €250 million in assets under management. The plan faced heavy criticism from French Finance Minister Christine Lagarde and several members of the European Parliament, who complained that the legislation was too flimsy. The last-minute change indicates that their appeals were at least partly successful.

Under the directive, regular reporting would be required of covered AIFMs to the relevant competent authority regarding principal markets and instruments in which they invest, their principal exposures, performance data and concentration of risk. Covered AIFMs would also be required to notify the competent authority of the identity of funds managed, the markets and assets in which the funds will invest and the organizational and risk management arrangements established in relation to the relevant funds. The directive would subject covered AIFMs to a minimum capital requirement of €125,000 with an additional requirement if assets under management exceed €250 million. The proposal does not, however, seek to regulate or impose capital requirements on the underlying funds managed by the AIFMs.

Under the directive, only AIFMs established in the EU would be able to provide their services within the EU. For now, however, sales of funds domiciled outside the EU would be allowed to continue in EU member states which currently allow such sales. The directive provides that after a three-year period, funds domiciled outside the EU would have to comply with stringent requirements on regulation, supervision and cooperation, including on tax matters in order to be offered for sale in the EU.

Initial reaction from the industry was critical. Florence Lombard, executive director of the Alternative Investment Management Association ("AIMA") said, "This directive is not a proportionate regulatory response to any of the identified causes of the current crisis." AIMA called the directive "hastily prepared and without consultation" and suggested that it may threaten thousands of jobs and slow down economic recovery.

If the directive is approved by the end of 2009, it could come into force in 2011, with provisions that apply to funds outside the EU becoming applicable in 2014.

European Commission Press Release: available here (HTML)

Proposed Directive: available here (PDF)

FAQ Regarding Proposed Directive: available here (HTML)

AIMA Press Release: available here (HTML)

Story: Hedge Fund Managers, Buyout Firms Face First EU Law, Bloomberg (April 29, 2009)