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25 November 2009

AIFMD Rapporteur’s opinion report - national private placement regimes recognised

In his first in-depth report on the AIFMD, Jean-Paul Gauzè's proposed rules through the European parliament set out more than 130 suggested amendments. These will be debated by European lawmakers and combined with changes to be negotiated separately among European Union member states next year.

In his first in-depth report on the AIFMD, Jean-Paul Gauzès' proposed rules through the European parliament set out more than 130 suggested amendments.These will be debated by European lawmakers and combined with changes to be negotiated separately among European Union member states next year.

Managers reacted positively to Mr Gauzes’s suggestion that they should, in effect, set their own limits on leverage, spell out the rationale and report this to national authorities. Some hedge fund sources suggested that this could be complicated.
These are some of the comments from the report:
The evaluator
The draft directive establishes a regime for AIF evaluators and contains provisions relating to the fund valuation and valuation of assets and its units.

The independence
of the evaluator should not be an obligation but an option left to the parties.

In contrast, organizational procedures should ensure the independence of this function when the evaluation is internal
to the AIFM (“China Wall").

Finally, it is not intended to establish a systematic assessment for the activities of capital- investment.
Use of Leverage:
The rapporteur proposes that managers define ex ante the limit of leverage they intend to use for each AIF they run. To set these limits, there should be some regulating principles. Managers will have to inform national supervisor of the limit they choose.
In exceptional circumstances, ESMA (European securities and market authority) would have the power to determine the leverage used by managers, with limits more stringent than those announced.
Short Selling :
Short selling is a useful technique that improves liquidity and dynamism in financialmarkets. It will not be banned.
However, as this technique increases systemic risk, it needs to be regulated by  simple rules which ensure financial stability and integrity of markets.
The marketing of funds and relations with third countries
Once licensed, managers have the ability to manage and market funds domiciled in Europe with professional investors throughout the Community. The European passport permits the marketing of any funds domiciled within the Community. Managed by an authorized manager in its home Member State, it can be marketed, subject to a simple notification procedure, in other Member States. Funds domiciled in Europe benefit from a European label, separate from the UCITS label.
A rapporteur does not close the door to funds from third countries and each Member State retains the liberty via a private placement regime to allow national movement in its territory of hedge funds domiciled outside the EU.
It also seems sensible to change the definition of marketing to give professional investors the freedom to choose the funds in which they want to invest, including those outside the Community. This possibility is offered subject to the condition of establishing the AIFM on the European territory or an existing cooperation and exchange of information agreement, particularly regarding systemic risks. This agreement will apply between the competent authority of the third country and the member state where the AIF is marketed, as well as between the AIFM and the supervisor and the supervisor and ESMA.
Finally, in order to protect retail investors, they should not be investing in master-feeder structures when the master is an AIF based in a third country or in funds invested in more than thirty per cent in funds from third countries.

© European Parliament

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