The Perfect Storm' - Impact And Assessment Of The Proposed Alternative Investment Fund Managers Directive

• Author: Jennifer Hourihane
• Position: Fourth Year Law Student at University College Cork
• Pages: 61-77

[2010] COLR

“THE PERFECT STORM” – IMPACT AND ASSESSMENT OF THE PROPOSED

ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE

Jennifer Hourihane *

ABSTRACT

“Never let a good crisis go to waste”.

Since the advent of the financial crisis in 2007, many lessons have been learned, and an

overhaul of financial systems globally has been underway. Banks have been recapitalised,

toxic loans have been grappled with, and lending conditions have tightened. However further

and necessary remedial action to complement this is cited as the imminent need to

“strengthen regulatory regimes, prudential oversight, and risk management” of all actors

who deal with financial institutions and pose a systemic risk to the global financial system.

Such targets include actors within the alternative investment fund industry, with an estimated

€2 trillion in assets under management, and which currently do not come under any

structured regulatory umbrella in the EU. The Proposal for the Alternative Investment Fund

Managers Directive aims to alleviate this failing by providing a framework for effective

regulation of those who manage the industries activity. The Proposal is broadly welcomed

regulation for Europe, and could even present opportunities for Ireland‟s financial services

sector. However it is not completely without flaw- aspects of the draft legislation bear

significant and some perhaps unintended consequences for the industry it targets. This draft

legislation is critically assessed in the instant article, and its pros and cons, potential impact

and suggestions for its fine tuning are outlined.

A INTRODUCTION

The financial crisis has exposed a series of vulnerabilities in the global financial system.1 It

highlighted how risks in one sector can be transmitted rapidly around the financial system,

with serious repercussions for all financial market participants and for the stability of the

underlying markets.2 One identified cause of the crisis was that policy-makers, regulators and

supervisors entrusted with the oversight of the financial system did not adequately appreciate and

address the risks building up in financial markets.3 The fallout politically, is a question of how

best to structure regulation and supervision of the financial sector in a way that would be

reactive to this problem. The recent famous observation of Rahm Emanuel comes to mind,

„never let a good crisis go to waste.‟ Responding to the situation in November 2008, the G20

*Jennifer is a Fourth Year Law Student at University College Cork.

1 Directorate General Internal Market and Services „Working Document of the Commission Services (DG

Internal Market): Consultation Paper on Hedge Funds‟ 2

<http://ec.europa.eu/internal_market/consultations/docs/hedgefunds/consultation_paper _en.pdf> (27 February

2010).

2 Explanatory Me morandum of the Proposal for a Directive of the European Parliament and of the Council, on

Alternative Investment Fund Managers and amending Dir ectives 2004/39/EC and 2009/…/EC COM (2009) 207

final (30 April 2009) (Explanatory Memorandum).

3 The Group of Twenty (G -20) Finance Ministers and Central Bank Governors „D eclaration Summit on

Financial Markets and the World Economy‟ 15 November 2008 <http://www.g20.org/pub_communiques.aspx>

(27 February 2010).

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summit4 called for an international effort „to strengthen regulatory regimes, prudential

oversight, and risk management‟ in the global financial system.

In line with international G20 objectives, the European Commission has engaged in a

review of the regulatory and supervisory framework for all financial market actors in the

European Union that embed significant systemic risks to the financial system.5 In the course

of this review the need to design a comprehensive and efficient regulatory scheme for the

AIF industry was identified.6 It is necessary to look at some existing problems in the AIF

industry to identify the core reasons behind this conclusion.

This article will trace the impact and functional aspects of the legislation, and intends

to argue that the all-encompassing scope of the draft Directive,7 renders all AIF subject to the

same provisions despite their respective differences. The discussion will the look in detail at

each actor of the AIF industry potentially affected by the proposed legislation and highlight

the unique consequences that its implementation will have on each of these actors

respectively. Consequences of the legislation common to all actors the AIF industry will then

be outlined, including cost implications and potential consequences for non-EU countries and

Ireland respectively. Lastly, in the final analysis, possible ways in which the draft legislation

may be improved before its implementation will be submitted.

B PERCEIVED PROBLEMS WITH HEDGE FUNDS AND THE AIF INDUSTRY

The High-Level Group on Financial Supervision in the EU and other expert groups entrusted

by the European Commission with the review of financial market actors, concluded that the

systemic risk embedded by AIF has not been regulated sufficiently by current rules and that

enhancement of regulatory measures in financial services, to ensure the safeguarding of

financial stability and the sustainability of economic growth is needed.8 The perceived risks

and existing modus opera ndi which prospective regulation will address are now discussed.

The AIF industry encompasses a diverse range of investment funds including hedge funds

and private equity, as well as real estate funds, commodity funds, infrastructure funds and

other types of institutional funds. These funds employ a variety of investment techniques,

investing in different asset markets and catering to different investor populations.9 Unlike

other structured investment vehicles which operate under consistent supervision by way of

4 ibid. See also: Commission Communication for the Spring European Council Commission calls on EU

Leaders to stay united against the crisis, move fast on financial market reform a nd show globa l leadership at

G20 Press Release IP/09/253 (4 March 2009) and Foundation for European Progressive Studies „Hedge Funds

and Private Equity Regulation - Assessment of the proposed AIFM directive and further proposals for a

comprehensive legal framework‟ (15 April 2009) 2 <http://www.feps-

europe.eu/fileadmin/downloads/political_economy/090425_FEPS_RegulatingHFandPE.pdf > (27 February

2010).

5 Commission Communication for the Sp ring European Council Commission ca lls on EU Leader s to stay united

aga inst the crisis, move fast on financia l mar ket reform and show global leadership at G20 Press Release

IP/09/253 (4 March 2009).

<http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/351&format=HTML&aged =0&languag

e=EN&guiLanguage=en> (27 February 2010).

6 Foundation for European Progressive Studies „Hedge Funds and P rivate Equity Regulation - Assessment of the

proposed AIFM directive and further proposals for a comprehensive legal framework‟ (15 April 2009) 2

<http://www.feps-europe.eu/fileadmin/downloads/political_economy/090425_FEPS_RegulatingHFandPE.pdf>

(27 February 2010).

7 The Directive encompasses all non UCITS regardless of legal form.

8 The de Larosière Group The High-Level Group on F inancial Supervision in the EU Report (25 February 2009)

15 < http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf > (27 February 2010).

9 (n 2) 1.

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