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04 February 2010

Financial Markets Law Committee (FMLC) publishes report analysing AIFMD legal risks

The report highlights fundamental issues which would, in the FMLC’s view, create legal uncertainty leading potentially to systemic failure and widespread market disruption, unless they are amended appropriately. FMLC’s concerns include the definition of leverage and the scope of the AIFMD.

The purpose of this paper is to highlight a number of provisions in the Commission's Proposal and the Presidency Compromise Texts which are capable of giving rise to significant legal uncertainty unless clarified. As the Directive on Alternative Investment Fund Managers (the “Directive”) may, once finalised, be based wholly or in part upon the Commission's Proposal, the report analyses key aspects of the Commission's Proposal whilst giving due consideration to the provisions of the Presidency Compromise Texts, where applicable.

The report does not seek to address all ambiguities and uncertainties generated by the Commission's Proposal or the Presidency Compromise Texts; nor does it seek to identify exhaustively all potential concerns with respect to the issues raised. In the FMLC’s discussions with representatives of the fund management industry and with other participants in the wholesale financial markets, an infinite number of legal uncertainly issues were raised with regard to the Commission's Proposal and the Presidency Compromise Texts. A number of those issues do not form part of this report. Its aim is to highlight certain fundamental issues which would, in the FMLC’s view, create significant legal uncertainty leading potentially to systemic failure and widespread market disruption, unless they are appropriately amended.
The FMLC's main areas of concern are summarised below.
(a) The scope of the Commission's Proposal; in particular, uncertainty as to the meaning of the central concepts, “Alternative Investment Fund” (or “AIF”) and “Alternative Investment Fund Manager” (or “AIFM”); and uncertainty as to the activities which should constitute regulated activities for the purposes of the Directive.
(b) The liability regime for depositaries including, inter alia, the imposition of a very high standard of care on depositaries, and consequent low liability threshold, in respect of their own failures and those of any subcustodians that they appoint, which may result in the insolvency of subcustodians having systemic “knock on” implications.
(c) The depositary’s obligation to verify whether the AIF or the AIFM, on behalf of the AIF, has obtained the ownership of all other assets in which the AIF invests, the difficulty in interpreting this obligation and the practical problems associated with fulfilling the obligation.
(d) The delegation restriction on depositaries and the potential inadvertent effects of such restriction.
(e) The inconsistencies and inherent conflicts between the Commission’s Proposal and existing financial services directives which create legal uncertainty as to the general application of Community legislation.
(f) The delegation restriction on AIFMs, which is uncertain in many respects and at odds with the structures of many funds.
(g) The difficulty that would be experienced by some established funds in adapting to the requirements set out in the Commission's Proposal in the absence of any “grandfathering” provisions.
(h) The definition of “leverage”, which requires further clarification, and the provision for the European Commission to set limits on the amount of leverage which AIFMs can employ.
(i) The protection afforded by the Presidency Compromise Texts to national private placement regimes (which allow AIFMs to market AIFs established in third countries to professional investors on their territory subject to national law); and the potential for confusion and uncertainty that may arise as a result of the current positioning of such provisions in the Presidency Compromise Texts.
(j) The International Standards Requirement (as defined below) in the Presidency Compromise Texts which is applicable to authorised AIFMs when managing non-EU funds and the uncertainties surrounding its application.
(k) The Equivalence Requirement (as defined below), particularly as it is set out in the Commission’s Proposal, that forms the legal context for restrictions on marketing by non-EU funds, which it may be extremely difficult, if not impossible, to satisfy in practice.

© Financial Market Law Committee

Documents associated with this article

FMLC Issue145Report - AIFMD.pdf

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