03/10 The AIFM Directive - the current state of play

Financial services and regulation alert email

The Alternative Investment Fund Managers Directive ("AIFM Directive") has been mired in controversy since the European Commission first issued its draft of the Level 1 AIFM Directive text in April 2009.  This was widely criticised from the outset for having been drafted in haste and without giving proper consideration to the differences between the types of alternative investment funds it proposed to regulate.  Because the proposed AIFM Directive will cover not only private equity and hedge funds, but also various other non-UCITS funds as well, the 'one size fits all' approach was not considered by those lobbying from the UK, to acknowledge the very real differences between these types of investment funds.

Negotiations on the proposed AIFM Directive have been protracted and detailed in the European Parliament and the European Council.  However, after multiple re-drafts of compromise proposals produced first by the Swedish Presidency and now by the Spanish Presidency of the European Council, and the tabling of more than 1,600 amendments to ECOFIN, the committee of the European Parliament, led by the French MEP Jean-Paul Gauzès and steering the process at the Parliamentary level, there remain significant key issues outstanding.  These include:

• the so-called "third country issue"; 
  
  this is, in essence, whether, and if so what the requirements will be, for fund managers and alternative investment funds located outside the EU, to be marketed to professional investors within the EU. The current position seems to be that this should be permissible, provided such managers are governed by equivalent regulatory requirements in their home jurisdictions. However, the details of who should make the assessment of regulatory equivalence and the procedures for doing so will inevitably add a further layer of complexity to such marketing from the outset. The UK is also concerned at the degree of discretion the European Commission will have in setting and overseeing such standards and requirements; 
• the so-called "passport"; 
  
  this would give EU-wide marketing rights to fund managers approved in accordance with the proposed AIFM Directive.  Although included in the original Commission proposal for the AIFM Directive, the "passport" has been deleted by the Spanish Presidency, provoking further criticism of the protectionist leanings of the proposed AIFM Directive - and the attendant threat of regulatory arbitrage from other jurisdictions outside the EU.

Recent developments

These include:

• the removal of the proposed AIFM Directive from ECOFIN's agenda on 16th March, 2010, allegedly triggered by the personal intervention of Gordon Brown; and 
• the letter from US Treasury Secretary, Timothy F. Geithner, to the EU's Internal Market Commissioner, Michel Barnier, dated 1st March 2010. The letter expressed concerns about the content of the proposed AIFM Directive from the US perspective.

Timing

The Spanish Presidency currently is proposing to continue with the original timetable, despite the difficulties the proposed AIFM Directive has faced and the delays at both the Parliament and Council levels. So far, the timetabled vote in plenary session in June 2010 remains in place.  For this to hold good, however, the discussions between the European Parliament, Council and Commission, scheduled for May 2010, will have to reach agreement without undue delay.

Next steps

The next steps in the timeline are an informal meeting of ECOFIN from 15th - 18th April, for which a further compromise text may be produced by the Spanish Presidency.  Any formal decision, however, would not be made until the formal meeting of ECOFIN in May.

Other matters that may be influential in steering the direction of the negotiations are the G-20 meeting on 23 - 25 April.  The G-20 has not confirmed if the regulation of hedge funds will be on the agenda or not but, in the past, the G-20 has strongly opposed protectionist measures, which is a criticism that both the UK and the US have made of the proposed AIFM Directive.  If the G-20 were to reiterate their opposition to such measures this might make it increasingly difficult for EU policy makers to continue in such a vein.  In addition, if there were to be a change of Government in the UK in May and a Tory Government takes power, Tory leaders have, in the past, been critical of the proposed AIFM Directive which, if they continue to do so, may increase the forcefulness of the UK's lobbying. 

In the meantime, there clearly remain key issues to iron out before agreement will be possible on the proposed AIFM Directive. Whilst consensus has been reached on a number of previously contentious aspects of the draft, there are still plenty of detailed points as well as pivotal questions to address: both within the EU and on the wider international stage.