22 March 2011

Hedgeweek: Learning to live with the AIFMD

The eventual outcome has left many of the participants dissatisfied to a greater or lesser extent. Industry members believe that even after extensive changes to remove some of the most damaging or least practical provisions, the directive still fails to take into account sufficiently the specific nature of different types of alternative fund. Meanwhile, critics of the hedge fund industry argue that it fails to rein in the industry effectively and that managers will easily be able to skirt its provisions.

However, there is a broad consensus that the changes made during the drafting and negotiating process have resolved many of the more controversial aspects of the legislation and produced a text that all sides can live with – subject, of course, to the detail that must now be added in subsidiary legislation and regulations by the newly-minted European Securities and Markets Authority (ESMA), successor to the Committee of European Securities Regulators, in association with the European Commission.

Most importantly for the industry, the directive will offer non-EU-based funds and managers the opportunity to benefit from its ‘passporting’ provisions for the marketing of products to sophisticated investors throughout the 27-member union, albeit two years after EU managers with funds also domiciled in Europe. The extension of the passport regime is likely to lead to the abolition of private placement distribution arrangements under national rules, but not before at least five years after the directive takes effect in 2013, and subject to certification that a level playing field exists for managers and funds, whether inside or outside the EU.

The final version also gives European sophisticated investors freedom – for now, at least – to invest on their own initiative with whichever managers they choose, and dilutes slightly the new responsibility laid on fund depositaries for the loss of assets in their custody, by allowing them to pass on liability to a sub-custodian. At one point it appeared that custodians would be subject to strict liability for losses by funds they serviced, whether or not they were in any position to observe or prevent the wrongdoing or negligence responsible.

Overall, the final compromise on the legislation has been met with widespread relief by members of the alternative investment fund industry, and also by investors. In combination with other legislative changes elsewhere in the world, it has contributed to greater certainty by providing a clearer picture of the future regulatory landscape in which managers, service providers and investors will have to operate. In addition, to some extent the directive formally enshrines in written rules practices on which investors are now insisting in the wake of the recent financial crisis, or that managers have already adopted.

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