NEWS

EU Finance Ministers today (May 18) cleared their version of alternative investment fund following an EU Parliament Committee’s vote yesterday (May 17) on their version of the new directive.

Significant differences remain between the Council and Parliament remain – including “passport”, “third country access” – as negotiations between the Commission, Parliament, and the Council in the “trilogues” intensify.

The FT reports (“Haggling over the legislation is far from over,” May 18) that, “The council of ministers, the parliament and the Commission staff are due to sit down to thrash out a compromise, with hopes of resolving the issue before the long summer break in August.”

Parliament’s ECON Committee voted yesterday (Monday) 33-11 for Jean-Paul Gauzès’s report.

The ECON Committee proposal has the following:

Third country access: “[F]unds and managers outside the EU would be able to get EU-wide marketing rights, provided strict conditions were met.” (FT)

These five conditions include tough standards to combat money laundering and terrorist financing, reciprocal access, and information-sharing agreements on taxes and other matters.

As The Economist puts it: “The parliamentary draft dangles the possibility of a ‘passport’ that would enable authorised third-country funds to sell their wares throughout the EU. But it comes at a high price. Funds would not just have to satisfy the EU about the quality of their home regimes in areas such as money-laundering and tax, but their home supervisors would also have to ensure that funds comply with EU rules—a bit of regulatory over-reach that will not go down well in places like America. Worse still, the parliamentary draft appears to ban EU investors from placing money with offshore funds that do not meet European rules.”

ECON Committee Press Release: “In the case of a fund outside the EU, this fund would be allowed to be marketed in the EU if the country where it is located has high enough standards to combat money laundering and terrorist financing, grants reciprocal access to marketing of EU funds on its territory and has agreements in place with the Member States where marketing is intended on exchange of information related to taxation and monitoring matters. Finally, the country must recognise and enforce judgements given in the EU on issues connected to the directive.”

Depositaries: “The depositary would be liable for the actions of any sub-depositaries appointed unless it is legally prevented from exercising its role in the country where the manager is investing. If the sub-depositary was contractually able to reuse or transfer the assets, the depositary could also relieve itself of liability. Depositaries would be able to delegate some tasks to a sub-depositary outside the EU provided the third country fulfils similar equivalence conditions to those applicable to funds.” (Hedge Fund Review)

As The Economist reports (May 18), “[L]egislators want to increase custodians’ liability for the assets they look after. Pension funds and other investors fear they will be charged a higher premium by custodians as a result; they may also find it more difficult to put money into emerging markets if custodians become warier of delegating assets to sub-custodians in those countries. The provision on custodians ‘has potentially the biggest downside for the average investor,’ says James Greig of PricewaterhouseCoopers, a consultancy. These objections are the industry’s best hope of further change. European policymakers may not take too much notice of hedge-fund types and their defenders in the City of London. Ignoring the investors they are trying to protect is harder.”

ECON Committee Press Release: “The main innovation here is that the depositary will be able delegate its tasks to a certain extent, provided that it keeps a watchful eye on the actions of the sub-depositary it has delegated these tasks to. A depositary will also be able to delegate some of its tasks to a sub-depositary outside the EU provided it remains liable for the sub-depositary’s actions, retains control over it, and the third country fulfils similar conditions required from non-EU countries wishing to have their AIF marketed in the EU.

“Regarding liability, a depositary will be able to avoid liability for any loss of financial instruments if this is a result of force majeure or it can be proven that the cause of the loss was an unforeseeable external event. In the event of delegation, the main depositary remains liable for the actions of the sub-depositaries unless the depositary is legally prevented from exercising its role in the country where its AIFM is investing or could not due to unforeseeable external events. Finally, in the event of the sub-depositary being contractually able to reuse or transfer the assets, the depositary can then relieve itself of liability.”

Leverage levels up to AIFMs
ECON Committee Press Release: “The Commission proposal stated that it was for the Commission to decide the maximum levels of borrowing that a specific AIFM could use to increase the returns of an AIF. The text adopted on Monday states that it should be the AIFMs themselves who set their own leverage limits in respect of each AIF they manage. The national authorities would then monitor the suitability of these limits. ESMA would also have the power to require these limits to be corrected if it considered them inappropriate.”

Valuators “Fund managers will be able to carry out their own valuation provided this is done independently with the use of Chinese Walls. If valuation is delegated to an external provider, the fund manager will retain liability for the process.” (Hedge Fund Review)

ECON Committee Press Release: “The Commission proposal prohibited an AIFM from being its own valuator of the worth of its AIF. The Economics Committee text allows this provided there are safeguards in place allowing the valuation function to be carried out independently (Chinese walls). The text also provides that if there is no external valuator the Member State may ask for the system in place guaranteeing independence to be checked by outside bodies such as an audit firm. The text also specifies that the delegation of valuation tasks will not shift liability from the AIFM to the external valuator.”

Naked Short Selling Ban: “The committee’s text bans naked short-selling and requires managers to regularly disclose information on important short positions to national authorities. It would also enable Esma to restrict short-selling activities in exceptional circumstances or to protect the financial system’s stability.” (Hedge Fund Review)

ECON Committee press release: “It also provides that ESMA may decide to restrict short-selling activities in exceptional circumstances or to protect the financial system’s stability.”