In April 2009, the European Commission published the draft Alternative Investment Fund Managers Directive. The Commission's aim was to create a comprehensive framework for the direct regulation and supervision of the non-UCITS alternative investment industry in Europe including hedge funds, private equity finds, investment trusts and property funds. The AIFM Directive is being pursued notwithstanding the fact that the Commission itself conceded in April 2009 that hedge funds were not the cause of the economic crisis and that private equity houses were not regarded as posing systemic risks to the financial system.

The draft Directive's "one size fits all" approach has led to much criticism in the UK from industry and investor representative bodies.

The concern is that, if implemented in its current form, the Directive would place significant additional regulatory burdens and prohibitions on the EU asset management industry.

For example, the Directive imposes an obligation on Alternative Investment Funds (AIFs) to appoint independent depositaries (who would have strict liability to investors for any losses resulting from their failure to perform their obligations) and independent valuers. Such obligations would inevitably significantly increase costs for investors and limit investment choice, both in the EU and globally. They would also, in the context of AIFs which are closed-ended investment companies, conflict with the concept of overall responsibility resting with the board of directors. The Directive would also pose a genuine threat to the continued viability of the UK's long-standing investment trust industry (at a fundamental level, it would prevent the further issue of shares by an investment trust) and to a number of other current fund models.

In November 2009, the European Council (under its then Swedish Presidency) proposed various amendments to the Commission draft of the Directive in the hope of establishing agreement in principle on many of the Directive's core elements. No real progress was made by the end of 2009 however, and Spain has now taken over the Council Presidency.

The European Parliament Economic and Monetary Affairs Committee (ECON) has undertaken an impact assessment of the draft Directive and its Rapporteur, the French conservative MEP Jean-Paul Gauzès, published his report towards the end of November 2009.

Any proposed amendments from industry and investor representative bodies had to be submitted, via supportive MEPs, to the Rapporteur by 21 January 2010. The Rapporteur (supported by a number of Shadow Rapporteurs) is in the process of finalising ECON's proposed amendments, although it is understood that well over a thousand amendments have been tabled by MEPs. This is unprecedented in EU financial services regulation and shows that there is still a long way to go before we see a final form Directive.

Once ECON has produced its suggested amendments, a "trialogue" process between the Commission, the Council and the European Parliament will commence with a view to trying to agree the final form Directive. Whilst the final Directive could be approved in the European Parliament as early as July 2010, many factors (including the unprecedented number of amendments tabled by MEPs) could well result in that timetable slipping. Once the Directive has been approved, it is likely to be implemented by Member States within 12 to 18 months.

Shepherd and Wedderburn has recently assisted Scottish Financial Enterprise, the representative body for the financial services industry in Scotland, in finalising is own submission to the Rapporteur.