The continuing saga of the Alternative Investment Fund Managers Directive (the Directive) of the European Union is causing heartburn throughout the world's financial capitals.
Despite strong rhetoric from the Conservative Party whilst in opposition, the UK's newly elected Conservative-Liberal coalition government quietly agreed to the next phase of the implementation of the Directive, perhaps aware that it could not assemble enough votes to block adoption of positions on the Directive using the Qualified Majority Vote system.
Details of the positions adopted can be gleaned from the respective press releases of the Economic and Monetary Affairs Committee of the European Parliament (the Parliament) and of the Council of the European Union (the Council).
The position adopted by the Parliament and the Council's press release makes clear that the EU plans to press ahead and that 'Alternative Investment Funds' (which will likely encompass hedge funds, private equity, real estate funds amongst others) will likely face more scrutiny, increased regulatory burden and (in the case of non-EU funds) restrictions on market access.
The latter is the 'hot button' issue internationally. Both the Parliament and Council versions of the proposed Directive will affect the ability of Alternative Investment Funds with managers established outside the EU to market investments in the EU. The Parliament's version requires third countries to (amongst other things) adopt prudential regulation and supervision equivalent to EU standards, grant comparable market access, and agree tax information exchange agreements.
This unilateral regulatory overreach is unlikely to win the EU many friends outside its borders. Indeed, the United States has already made its displeasure clear. In March 2010, US Treasury Secretary Timothy F. Geithner warned European Union financial services commissioner Michel Barnier that the proposed AIFM Directive would discriminate against US funds. Subsequently, in a letter to four European finance ministers in April 2010, Mr. Geithner said that European policy makers should not block US investment funds from their markets.
The UK -- home to about 80 per cent of Europe's hedge fund industry -- seems to have won some small concessions, both for its own industry and for managers in third countries (many linked to City of London operations) with the Council press release saying that "it took note of remaining concerns expressed by delegations". Future negotiations will, apparently, take these concerns into account.
The Parliament and the Council will now negotiate to adopt a common position on the final text of the Directive, with a view to agreement on the final text of the Directive by the Summer. The next few months will be crucial for industry participants seeking to lobby lawmakers on the final detail.