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Laven Partners AIFM Directive Update – March 2010

Posted on 16 Mar 2010

Welcome to the ninth edition of the monthly Laven Partners’ Monitoring Update on the proposed AIFM Directive.

The new Directive seeking to regulate hedge funds is charging ahead to become law. Laven Partners provides a monthly update on the development and status of this Directive. In the true Laven Partners style, we also look at any interesting comments made by regulators and leading industry players in relation to the Directive.

Our aim is to involve the financial community and notably to aggregate the representation of investors as we believe the Directive severely reduces their access to investment opportunities. Please register your interest and comments by emailing us at ecdirective@www.lavenpartners.com. Please feel free to forward our monitoring update to anyone who may be interested.

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Despite the extensive lobbying efforts and more than 1,700 amendments presented by MEPs, on 11 March the Directive was officially moved to the European Commission’s Committee of Permanent Representatives for consideration. The next step will be the crucial approval of the EC’s Economic and Financial Affairs Council (Ecofin), which is scheduled to take place on 16 March.

To block passage of the Directive, the EU council requires 91 votes. The block likely to vote against it is currently comprised of the UK, Sweden, Ireland, Hungary, Czech Republic, Austria, Slovakia and Malta. According to Financial News, out of 335 total votes, 92 are strongly in favor of the Directive, with an additional 142 votes likely voting in support.

After four Spanish Presidency revisions, the main issue regarding marketing of funds for investment managers based outside the EU remains unresolved. France and Germany appear to be allied in pushing for stricter requirements, whereas the UK is concerned about the protectionist measures that might be implemented by non-EU countries in retaliation. Other outstanding issues are the Directive’s scope and depositary requirements among other things.

The House of Lords EU Committee’s report published on 10 February illustrates that “coherent oversight of AIFMs across the EU by requiring the registration of, and the collection of appropriate data from, managers” is welcomed; however the “one size fits all” approach will not work. The report also suggests that the retail level of protection detailed in the Directive is not required, as alternative funds are typically aimed at institutional investors that have resources to undertake appropriate due diligence. It also concluded that “EU managers should be able to continue to invest in non-EU funds and fund managers located outside the EU should be able to invest in Europe.”

A number of meetings are being held both in London and Brussels – the Internal Market and Services Commissioner Michel Barnier visited the UK to meet with London MEP Sayed Kamall and leading hedge fund and private equity firms, in order to ensure a continuous dialogue between the regulators and the industry. Likewise, this week the City of London’s Lord Mayor Nick Anstee and policy chief Stuart Fraser will visit Commissioner Barnier in Brussels.

Opposition to the Directive has also gained momentum on the other side of the Atlantic, where the Managed Funds Association (MFA) echoed US Treasury Secretary Tim Geithner’s concerns over the protectionist nature of the Directive. MFA president and CEO Richard Baker urged the US government and relevant federal financial regulators to “actively and substantively engage their European counterparts to enact a set of reforms that promote transparent, liquid and stable financial and capital markets.”

Nonetheless, the US criticism was rejected by Marine de Carné, spokeswoman for the French delegation to the EU, who said that the Directive “wasn’t discriminatory because once a fund manager had met the European standard, it would have a passport to the whole EU”.

The rush towards stricter regulation is even more questionable in light of the recent report carried out by the Financial Services Authority, which concluded that hedge funds do not pose systematic risk. In particular, the regulator found that counterparty risk levels were minimal, as prime brokerage divisions of investment banks did not have overly significant exposures to any one hedge fund.

The biggest concern at this point appears not to be details of the text itself, but the fact that by the time the Directive is implemented in 2012 the Directive will simply be outdated.