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
[2010] COLR
Jennifer Hourihane *
“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.
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
< _en.pdf> (27 February
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 <>
(27 February 2010).
[2010] COLR
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.
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- > (27 February
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).
< =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
(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 < > (27 February 2010).
9 (n 2) 1.

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