On April 29, the European Commission announced a proposed Alternative Investment Fund Managers Directive (Proposed Directive). The Proposed Directive has not yet been published by the Commission. The Proposed Directive requires approval by the European Parliament and the European Council. It will not come into force until two years after that approval, at the earliest in late 2011.
The Proposed Directive will apply to alternative investment fund managers (AIFMs) managing a portfolio of more than €100 million (approximately $130 million). A higher threshold of €500 million (approximately $665 million) applies to AIFMs that do not use leverage and have a lock-in period of five years or more. AIFMs are defined to include not just managers of hedge funds, private equity funds and other alternative investment funds, but all managers of funds which are not UCITS funds meeting the requirements of the UCITS Directive 85/611/EEC. (UCITS funds are open-ended funds investing in transferable securities and certain other financial instruments which can be marketed to the general public in EU Member States). This will include, for example, managers of real estate funds, commodity funds and infrastructure funds.
The press release and frequently asked questions (FAQs) which the Commission has published indicate that the Proposed Directive:
- will require AIFMs to be authorized by the financial services regulator in their home state;
- will subject AIFMs to meet ongoing minimum financial resources requirements and other regulatory requirements including information disclosure to regulators with respect to its principle exposures, performance data and risk concentrations;
- will apply regulatory standards to key service providers to alternative investment funds, including requiring regulated depositaries and regulated valuation agents (valuators);
- will require AIFMs to meet defined standards with respect to management of risk, liquidity and conflicts of interest; and
- will permit AIFMs to market alternative investment funds to professional investors throughout the EU under a private placement regime. This will apply to funds established in non-EU jurisdictions only after a transitional period of three years from the date the Proposed Directive comes into effect and will be conditional on the jurisdiction of the fund’s domicile being recognized by the EU as having equivalent regulatory and supervisory standards and information-sharing and co-operation arrangements on tax and other matters.
The Commission stated that it anticipates “intense political discussion and negotiation” in view of the subject matter. It is clear that when the Directive is finally enacted it is likely to differ in significant respects from the Proposed Directive. On one side, the UK government and industry bodies such as the Hedge Fund Standards Board and the Alternative Investment Management Association have condemned the proposed Directive as too heavy handed. On the other side, the Socialist Group of the European Parliament has expressed its dismay that the proposal does not go far enough. The Socialist Group has spoken of a “proposal filled with loopholes which make the real regulatory effects highly ineffective” and is complaining that the Commission is proposing to regulate “only fund managers” and not the funds themselves.