UCITS, Non-UCITS & Hedge Funds

Author:Ms Breeda Cunningham, Paula Kelleher and Andrew Lawless
Profession:Dillon Eustace

(a) EC's Draft Directive on Alternative Investment Fund Managers

At its meeting held in Luxembourg on 19 October, 2010, the ECOFIN reached agreement on the draft Alternative Investment Funds Managers Directive ("AIFMD"). On 11 November, a successful plenary vote by the European Parliament has led to the adoption of the AIFMD. Further details on the implementation of the AIFMD will be decided in 2011. The AIFMD is due to be implemented across the EU in 2013.

In November, 2010 the IFIA published an "Industry Information Note" outlining some of the main issues that apply to the fund industry in Ireland.

As previously set out, the draft AIFMD on AIFM covers Non-UCITS funds including hedge funds, private equity and commodity funds and aims to create a harmonised regulatory and supervisory framework for AIFM within Europe.

The AIFMD will require all applicable AIFM to be authorised and subject to harmonised regulatory standards on an ongoing basis. It will also increase the reporting and transparency of AIFM and the funds they manage for investors and public authorities. The aim is to improve Member States macro prudential oversight of the funds sector and take harmonised action where appropriate with regard to the proper functioning of financial markets.

It is proposed that the AIFMD will:

Adopt an 'all encompassing' approach to ensure that no significant AIFM is outside of regulation and oversight, while providing exemptions for much smaller managers. It will only apply to AIFM managing a portfolio of €100 million plus. A higher threshold of €500 million applies to AIFM not using leverage (and having a five year lock-in period for their investors) as they are not regarded by the EC as posing systemic risks. According to analysis by the EC, a threshold of €100 million implies that about 30% of hedge fund managers, managing almost 90% of assets of EU domiciled hedge funds, would be covered by the proposed Directive; Aim to regulate major sources of risks in the alternative investment value chain by ensuring that AIFM are authorised and subject to ongoing regulation and that key service providers, including depositaries and administrators, are subject to robust regulatory standards, as is currently the situation in Ireland; Increase the transparency of AIFM and the funds they manage for supervisors, investors and other key stakeholders; Ensure that all regulated entities are subject to governance standards and have robust systems in place for the management of risks, liquidity and conflicts of interest; Permit AIFM to market funds to professional investors throughout the EU subject to compliance with regulatory standards; and Grant access to the European market to third country funds after a transitional period of three years. The EC have said this is to allow the EU to check whether the necessary guarantees are in place in the countries where the funds are domiciled (with respect to among others equivalence of regulatory and supervisory standards and exchange of information on tax matters). The Directive is subject to a co-decision process which includes the ECON Committee of the European Parliament and the Council of Ministers Working Group. The ECON Committee of the European Parliament appointed a Rapporteur (MEP Jean-Paul Gauzes) who is responsible for guiding the Directive through Parliament.

In October, 2009 the IFIA reported that the European Fund and Asset Management Association ("EFAMA") AIFM Working Group on which the industry participates reached broad agreement on the issues they had been considering:

Agreement on a level playing field, but as of yet without clarity on impacts for closed ended, listed funds passported under the prospectus directive or securitization vehicles (discretionary managed fund versus company issues); Definition of management services aligned to UCITS Annex II; Capital requirements aligned with UCITS with a similar cap; Valuation to be a function as per UCITS model; Depositary rules to follow current UCITS requirements and for there not to be full liability; Delegation requirements to be more flexible as current UCITS requirements, allow for delegation of portfolio / investment management to third country non AIFM entities; To make the leverage requirements much more flexible; and Third country funds, to allow private placement and reverse solicitation according to national rules to continue, but not have provision for an EU passport. MEPs of the European Parliament's ECON had voted in favour of the Parliamentary version of the EU's AIFM and European finance ministers have agreed to give the Presidency the mandate to negotiate on behalf of the Council with Parliament.

The three-way ("trilogue") discussions between representatives of the European Parliament's ECON (Economic and Monetary Affairs) Committee, the Presidency of the Council of the European Union and the European Commission have now begun.

On the negotiating table are the two differing versions of the draft Directive, approved in May by ECON and the Economic and Financial Affairs ("ECOFIN") Council, part of the Council of the European Union. The ECON team is understood to include the chairwoman of ECON, Sharon Bowles, the rapporteur, Jean-Paul Gauzès, and the six shadow rapporteurs taken from the main political blocs in the European Parliament. The Council is represented by the Belgian government as the President of the Council of the EU. The Commission officials present at the discussions are there to assist the parties agreeing on a compromise text. But they will naturally favour any wording which backs up their original version of the draft Directive, published in April, 2009.

Where there is already broad agreement between the texts, such as on registration and authorisation of EU managers, those areas will be incorporated immediately into the new compromise text, drafted by the EC. This will leave the negotiating teams free to discuss solutions to areas where there is disagreement – including the issue of third countries. The other controversial areas include: valuation; depositaries; scope; leverage; remuneration; delegation; capital requirements...

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