22 Oct 2010
By Bill McIntosh
Familiarity with the Alternative Investment Fund Managers Directive is now bordering on contempt. But the possible effects of this politically motivated directive can’t be under estimated. Until the European Parliament finalises AIFMD, likely in mid-November, even the most talented lawyer is going to be measured in providing advice of what it means for hedge funds.
At the moment the third country passporting provisions to allow non-EU based managers access to the EU looks settled The Belgian Presidency proposed a dual system which will see the passport introduced two years after the implementation of the AIFMD (which is expected to be transposed into national laws in early 2013), followed by a potential phasing out of national private placement regimes after 2018. Though this has been the most hotly contested issue, Dublin solicitors William Fry have identified a number of other contentious issues.
Depositaries
Prime brokers and less regulated entities for long term closed-ended funds have been cleared to act as depositaries. But one fundamental issue is still highly problematic, namely, the strict liability regime pursuant to which the depositary would be liable to the Alternative Investment Fund or to the investors of the AIF for the loss of financial instruments held in custody. William Fry notes that a carve out has now been included in the latest Belgian text where custodian activities are delegated to a third party and such delegation is appropriately conducted and there is a written contract between the depositary and the third party that explicitly transfers the liability of the depositary to that third party in circumstances where the AIF would have a direct right of action against the third party.
Short Selling
The compromise text removes all regulatory provisions relating to short selling, thus leaving such arrangements to be dealt with separately under separate legislative provisions. For now, this means that national market regulators will remain free to regulate short selling with the potential for political intervention when market pressure rises.
Remuneration
The Belgian compromise widens the categories of AIFM staff subject to the remuneration policy. It will now extend beyond risk takers and control functions to any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. In addition, members of the remuneration committee must be members of the management body not performing executive functions in the AIFM. William Fry also point out that a key proportionally principle has been included in the remuneration policy so that an AIFM is obliged to follow the remuneration policy “in a way and to the extent that it is appropriate.” However, this is in an annex, not the main text, which makes the drafting far from ideal and means that a truly proportionate implementation is still not ensured.
Ultimately, the EC wants to make AIFM work. But it is one thing to pass a directive and quite another to make it efficient and practicable. With some measures the impact is clearly many years from being known. But it is obvious that investors will pay higher costs and new funds will be more difficult to set up. In sum: lower returns and less innovation just as institutional investors are increasing their allocations and making their presence felt in the running of alternative funds.
Familiarity with the Alternative Investment Fund Managers Directive is now bordering on contempt. But the possible effects of this politically motivated directive can’t be under estimated. Until the European Parliament finalises AIFMD, likely in mid-November, even the most talented lawyer is going to be measured in providing advice of what it means for hedge funds.
At the moment the third country passporting provisions to allow non-EU based managers access to the EU looks settled The Belgian Presidency proposed a dual system which will see the passport introduced two years after the implementation of the AIFMD (which is expected to be transposed into national laws in early 2013), followed by a potential phasing out of national private placement regimes after 2018. Though this has been the most hotly contested issue, Dublin solicitors William Fry have identified a number of other contentious issues.
Depositaries
Prime brokers and less regulated entities for long term closed-ended funds have been cleared to act as depositaries. But one fundamental issue is still highly problematic, namely, the strict liability regime pursuant to which the depositary would be liable to the Alternative Investment Fund or to the investors of the AIF for the loss of financial instruments held in custody. William Fry notes that a carve out has now been included in the latest Belgian text where custodian activities are delegated to a third party and such delegation is appropriately conducted and there is a written contract between the depositary and the third party that explicitly transfers the liability of the depositary to that third party in circumstances where the AIF would have a direct right of action against the third party.
Short Selling
The compromise text removes all regulatory provisions relating to short selling, thus leaving such arrangements to be dealt with separately under separate legislative provisions. For now, this means that national market regulators will remain free to regulate short selling with the potential for political intervention when market pressure rises.
Remuneration
The Belgian compromise widens the categories of AIFM staff subject to the remuneration policy. It will now extend beyond risk takers and control functions to any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. In addition, members of the remuneration committee must be members of the management body not performing executive functions in the AIFM. William Fry also point out that a key proportionally principle has been included in the remuneration policy so that an AIFM is obliged to follow the remuneration policy “in a way and to the extent that it is appropriate.” However, this is in an annex, not the main text, which makes the drafting far from ideal and means that a truly proportionate implementation is still not ensured.
Ultimately, the EC wants to make AIFM work. But it is one thing to pass a directive and quite another to make it efficient and practicable. With some measures the impact is clearly many years from being known. But it is obvious that investors will pay higher costs and new funds will be more difficult to set up. In sum: lower returns and less innovation just as institutional investors are increasing their allocations and making their presence felt in the running of alternative funds.
