On 11 September 2009, HM Treasury published the text of a speech made by the Financial Services Secretary, Lord Myners, at an event organised by the Policy Exchange, a public policy think tank.
Lord Myners began his speech by underlining the importance of the alternative investment industry in the European context, both for investors and for the broader economy. He suggested that criticisms of asset stripping and job cutting that are often associated with the industry are an invention of the industry’s detractors, since if the private equity industry operated in this way it would make no money. He argued that prejudice should not get in the way of the fact that private equity has generally been a force for good: for its clients and the companies in which it invests and their employees. He also added that hedge funds and private equity have not been at the centre of the current crisis.
He then accepted that better regulation is required at all levels, internationally, at EU level and nationally, and stressed that the UK does not oppose more stringent regulation and effective supervision. Indeed, unlike some European countries, the UK has regulated alternative fund managers for many years and he mentioned that the FSA was intending to extend its surveillance of the sector. He also pointed out that a relatively high degree of regulation has not prevented the UK hedge fund industry from gaining market share from its relatively less regulated US counterpart in recent years.
He did, however, qualify his remarks by saying that the hasty imposition of ill-considered rules would be counterproductive and that protectionism should not be dressed up as protection. He also criticised the Commission for not having consulted on the draft Alternative Investment Fund Managers Directive (AIFM Directive) and said that the proposals as they stand need to be remedied.
Whilst agreeing in principle with the wide range of obligations that the AIFM Directive proposes to place on the manager, Lord Myners criticised what he regarded as the Directive’s "one size fits all" approach and suggested that regulation must acknowledge differences - for example those between private equity and hedge funds.
He also looked at areas which critics have complained that the AIFM Directive does not cover:
- The regulation of managers but not the funds themselves. Lord Myners believes that as the manager controls the fund, itself merely a vehicle in which assets are held, regulation of the manager will bring oversight of all the funds under the control of that manager, even those funds located outside the EU. He distinguished funds invested in by professional investors from retail investment funds and suggested that the same degree of regulation for the former as for the latter would have serious implications for what is believed to be the level of competence of professional investors.
- Naked short selling. He finds those who say that the AIFM Directive does not cover this issue and should, wrong on both counts. The Directive does, he believes, cover the issue in the articles on liquidity and in the provision for the Commission to adopt implementing measures specifically governing the issue of naked short selling. However, Lord Myners finds these provisions inappropriate. Since short selling is not unique to hedge fund managers it should be covered consistently for all market participants. So whilst he believes that the Directive is not the place to deal with short selling, he does welcome the Commission’s forthcoming review of market abuse rules.
Lord Myners went on to discuss portfolio company disclosure. He objected to the fact that the current proposal gives rise to obligations that could leave a company that is the target of a bid, and its shareholders, holding different information about an attempted takeover from an EU private equity firm compared to one from a firm outside the EU. He felt that such obligations would lead to less investment by private equity firms into European businesses.
He also had reservations about the disclosure obligations regarding the annual provision of information to employees. He felt that the threshold was being set so low as to impose administrative costs on smaller companies that would put them at a competitive disadvantage compared with larger ones.
More generally, Lord Myners felt that there is no reason, other than for "enlightened self-interest", for private equity to go beyond the guidelines set out in the Walker report and no reason why private equity ownership should be penalised with burdens that do not apply to, amongst others, family controlled businesses or subsidiaries of large multi-national corporations. He felt that this would actually mitigate against the “level playing field” and provoke the sort of arbitrage that the framers of the AIFM Directive wish to avoid.
Lord Myners ended his speech by discussing where the AIFM Directive had got to in the European legislative process. It is currently being discussed in Council Working Groups. The Directive is also subject to co-decision by the European Parliament.
View The Alternative Investment Fund Managers Directive, the Policy Exchange, 11 September 2009