Sweden has called for significant revisions to the proposed European directive on alternative investment fund managers. In its capacity as the current holder of the EU presidency, Sweden released an "issues note" on September 2 that identifies many of the concerns voiced by both the alternative investment fund industry and other EU member countries, and sets forth concrete proposals for possible solutions.

The document particularly criticizes the proposal's lack of differentiation among "managers of a very heterogeneous group of funds." The document notes that many of the proposal's provisions are irrelevant to certain types of funds, especially ones without redemption rights.

Sweden's document also notes the problems the proposal raises with investments in non-EU domiciled funds and fund managers, stating that "an overwhelming majority of Member States...are against imposing undue restrictions on investment opportunities for especially institutional investors, as well as creating other barriers to global capital flows" and offering a list of possible revisions.

The issues note appears to indicate a desire by Sweden to reach a consensus on the regulation of investment funds in the EU before it relinquishes the six-month presidency position to Spain at the end of the year. In contrast, Spain's Finance Minister Elena Salgado expressed support on September 10 for retaining the current broad scope of the directive.

Following the release of Sweden's note, UK City Minister Lord Myners visited Brussels to urge changes to the directive. Myners cautioned that a misguided directive would drive funds and their managers to non-European locations.

Myners noted that the directive is seemingly failing to gain any real momentum. He stated, for example, that EU member states were starting to realize that the proposed limits on leverage were based on a "flawed understanding" of how alternative investment managers operate. Myners also pointed out other provisions he believed were flawed, including restrictions on the use of non-EU domiciled funds and disclosure of business plans.

Following his visit to Brussels, Myners returned to London to debate the merits of the directive with its chief architect, EU Socialist Party President Poul Nyrup Rasmussen. At the debate, held on September 11 by the Open Europe think tank, Rasmussen agreed that it would be "foolish" to push ahead without more consultation. However, he also stated that he believed the directive was—and would be found to be—too narrow.

In particular, Rasmussen said he expected the final directive would include stronger capital requirements; a lower de minimis threshold; coverage of both funds and their managers; a more rigid definition of transparency and a "solution" to "the problem of offshore fund managers." He noted that the latter could mean Cayman-domiciled hedge funds would have to move onshore to be sold to EU investors.

Joining the UK and Sweden in criticizing the proposal last week was a group of Dutch pension funds. In a sharply-worded letter to EU Internal Markets Commissioner Charlie McCreevy, the group—which represents some €450 billion of assets under management—charges that the proposal could reduce investment opportunities and raise costs while possibly not achieving its intended objectives.

Like the Swedish issues note, the Dutch pension funds letter particularly criticizes the proposal's "one-size-fits-all approach" to fund regulation. Signatories to the letter included APG, Blue Sky Group, Shell Asset Management Company, the Philips Pension Fund, Mn Services and Doctors Pension Fund Services.

EU Presidency Issues Note: available here (PDF)

Story: Alternative funds score EU victory, Financial Times (Sept. 4, 2009)

Story: Lord Myners warns over EU hedge fund rules, Times Online (Sept. 7, 2009)

Story: EU lawmaker says hedge fund rules may be beefed up, Reuters (Sept. 14, 2009)

Story: Hedge funds are not for hedging, says Spain's finance minister, The Guardian (Sept. 10, 2009)