The European Commission’s proposals for level 2 implementation measures for the Alternative Investment Fund Managers Directive has been circulated to European Union member states and to the European Parliament.
The Commission’s draft has prompted criticism from hedge fund managers quoted in media reports and from a hedge fund industry body, the Alternative Investment Management Association, that in certain areas its proposals differ significantly from those put forward by the European Securities and Markets Authority (Esma) in its advice delivered to the Commission on November 16.
According to Aima, the Commission plans to put the level 2 measures into effect in the form of a regulations which applies directly to member states, rather than a directive that would have to be adopted into their national law in a separate legislative process. The association says that using directives would give member states greater flexibility in implementing the measures.
Aima also notes that member states and the European Parliament had only two weeks to respond to the text following its circulation by the Commission in the final week of March. No further consultation period is planned before the Commission adopts the level 2 measures in their definitive form, due by July this year.
In a statement, the hedge fund association says the draft regulation “appears to significantly and substantially diverge from the Esma advice in … key areas including third country provisions, depositaries, delegation, leverage, own funds, professional indemnity insurance, appointment of prime brokers and calculation of assets under management.” It argues that while the Commission is not bound to follow Esma’s advice, if it does so there should be more transparency and better consultation.
Hedge fund managers quoted by publications such as Financial News and the Financial Times complain that the Commission’s text would increase the liability of banks in the event of loss of fund assets for which they were acting as depositary and their responsibility for assets subject to collateral arrangements, that a more flexible method of calculating a fund’s leverage has been removed from the available options, and that the rules on delegation of functions such as asset management to non-EU companies have become more restrictive.
Aima says it is particularly concerned about proposed changes in the way co-operation arrangements between EU and third-country regulators are organised. It argues that a requirement that EU and non-EU regulators sign co-operation agreements legally binding on both parties and requiring that third-country regulators enforce EU law in their territories “would be extremely problematic if not impossible to conclude”.
Without such co-operation agreements, asset managers based outside the EU would be able to access investors inside only through reverse solicitation, described in the directive as ‘passive marketing’. Aima says this would effectively render inoperative existing national private placement regimes available in some EU countries and prevent delegation of portfolio management outside of the EU.
“Esma has made it clear in its advice that cooperation agreements are to be signed on a best-efforts basis and are meant to reflect international norms such as the Iosco Multilateral Memorandum of Understanding,” says Aima chief executive Andrew Baker. “We hope the Commission follows this advice.”
For details of Esma’s advice to the Commission, please see our article of January 21 entitled Esma Advice Increases Certainty on Third-Country AIFMD Level 2 Measures, which can be found by clicking on the link below.
Chevalier & Sciales will analyse the Commission’s proposals in detail once they are made publicly available.