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Laven Partners AIFM Directive Update – May 2010

Posted on 19 May 2010

Welcome to the eleventh 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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AIFM Directive

The flying phrase by Michel Barnier, the EU Commissioner for Internal Markets and Services, that “2010 is the year of decisions and convergence” has failed to echo the general mood of the alternative industry, as the European Parliament’s Committee for Economic and Monetary Affairs’ (Econ) vote on the AIFM Directive was postponed for the third consecutive time at the end of April!

The next vote is scheduled to take place on Monday 17 May 2010 (as we go to press), while the Economic Financial Affairs Council’s (Ecofin) vote, which was also postponed in March, is now due to take place a day later, on Tuesday 18 May. The reasons given for the delays varied from the absence of shadow rapporteurs, to ash clouds, to demand for more consulting from the Legal Affairs Committee, the EU body responsible for the interpretation and application of European law.

Following the UK general election and the appointment of George Osborne as Chancellor of the Exchequer, Mr. Osborne will now travel to Brussels “to fight Britain’s corner in the mounting row with the rest of Europe over hedge fund regulation”, said theTelegraph. However an EU diplomat told the Wall Street Journal that “there is a very strong qualified majority of EU states in favor of this regulation,” adding that the rest of the bloc wouldn’t bend to the UK on this issue.

After the vote, the Directive will be discussed by the European Council and consequently presented to the European Parliament towards July 2010.

The combined efforts of French Finance Minister Christine Lagarde and German Finance Minister Wolfgang Schäuble to write an editorial in The Wall Street Journal have failed to calm the alternative industry. At a recent HFM Week breakfast meeting Conor Foley, Partner at lobbyist group Hume Brophy, welcomed the French and German statements to commit to the open European market, however reiterated that the Directive in its current format would be damaging. He nonetheless criticized industry participants for starting their lobbyist campaigns so late in the Directive approval process.

The industry is also keen to see what the “civil partnership” between David Cameron and Nick Clegg will bring, although the outcome of the hung parliament probably leaves even less time to put any UK proposals forward, before the Econ and Ecofin meetings and the EU Parliament’s plenary sitting in July. The good new for the hedge fund industry in the UK is that they have a Tory Prime Minister – as seen from the Conservative party’s benefactors, one can find names such as Michael Hintze of CQS and Crispin Odey of Odey Asset Management. The future should look slightly brighter for the hedge fund professionals who have been dreading the Directive.

An analysis performed by Hedge Fund Research illustrates that the potential threat from the AIFM Directive is perceived as real with an increasing number of hedge fund managers considering locating their fund structures onshore. The research shows that the proportion of hedge funds domiciled in the Cayman Islands has slipped from 40.1% to 37.3% since the end of 2008, whereas the number of funds moving to Ireland and Luxembourg has increased by 60%.

With regards to the Directive’s approval process and the month ahead, many suggest that the UK is becoming increasingly isolated and the other 25 member states could end up voting without having London on board, as Britain is unlikely to find the political direction necessary by the time the Econ and Ecofin as well as the European Parliament votes are due. The UK may become a lonely warrior.

UCITS IV

While we wait to see imminent developments for the AIFM Directive, we also have the UCITS IV implementation nearing us. At the moment, this does not appear to enthuse the fund industry.

Jarkko Syyrilä, the Director of International Relations of the UK’s Investment Management Association (“IMA”), has suggested that the effect of the AIFM Directive will go beyond the hedge fund and private equity industry players and burden the operations for all non-UCITS fund managers. Syyrilä has also raised concerns about the European investor’s ability to invest in third country funds under the proposed AIFM Directive: “How will our international trading partners react to this closing of the doors of Europe and will it lead to retaliation? The risks are evident and a big question is how will this impact the global distribution opportunities of European funds, including UCITS?” Syyrilä said these issues could impact UCITS IV, which is scheduled to be part of Commissioner Barnier’s working program for 2011.

Syyrilä has also stated that the improvements of the UCITS IV package are much smaller than expected and have resulted in overly detailed and burdensome rules and uncertainties on how the new rules interplay with member states’ tax legislation. Some predict that the implementation of UCITS IV structures will lead to tax issues. There are also a number of legal uncertainties within the EU integrated market for UCITS, as reflected by the Madoff scandal and the UBS/Luxalpha case. Hence, despite the unilateral approach, some UCITS provisions are implemented differently across EU member states, especially for example when it comes to the level of liability imposed on certain depositories.

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We all look forward to more developments even if at this stage we believe our clients should ready themselves with EU based fund vehicles and start adapting to the inevitable regulatory changes.

Please keep a look out again for our next update.