The agreement of European bodies on post-crisis financial reform shows a political willingness to negotiate on other pending regulatory rules including the Alternative Investment Fund Manager directive, according to EU internal market and services commissioner Michel Barnier.
While several legal sources have clarified Europe’s broader financial overhaul – which includes three new regulatory agencies and a new systemic risk body – will have only a minimal effect on the private equity and real estate industry, the AIFM will impact the industry in numerous ways, depending on its final text as agreed between the EU Council of Ministers, the European Commission and the European Parliament.
In May, the EU Parliament’s Economic and Monetary Affairs Committee approved a version of the directive, while the Council of Ministers, which has representatives from each member state, approved a separate version of the directive. Lawmakers have been working since then on a compromise, which is expected in coming weeks.
Barnier indicated European lawmakers were now “in the last straight” regarding the AIFM, according to Reuters.
“There are two or three sensitive points including on the treatment of third countries and the passport,” Barnier was quoted as saying.
Under both the Parliament and the Council texts, non-EU domiciled fund managers, or “third country” managers, would be barred from marketing their funds to European investors unless they can demonstrate they comply with certain sets of requirements; doing so would give them a “passport” to market their fund(s). The requirements as well as the passport measures are treated differently in each text.
Some of the EU’s largest trading partners have expressed concern over their ability to meet the requirements proposed in the Parliament’s version, which is considered more restrictive because it features fewer exemptions for marketing and more protectionist language.
According to an FSA report prepared by Boston-based law firm Charles River Associates, there is currently
This would give ESMA a direct supervisory role it has with no other financial institution under the Council’s proposals
Parliament’s version would require non-European private equity GPs to answer to the proposed European Securities and Markets Authority (EMSA), a supervisory body which would be responsible for securities and asset management regulation. “This would give ESMA a direct supervisory role it has with no other financial institution under the Council’s proposals,” Dan Waters, the UK Financial Services Authority's director of retail policy and conduct risk, said during a speech in June.
Waters added foreign regulatory agencies, such as the SEC, would be required to exercise the powers of the ESMA in relation to the foreign fund manager should they wish to market the fund in the EU. Such an agreement “would also require that US fund managers submit themselves to the jurisdiction of the courts in Europe for matters arising from the Directive”.
While the precise details of how such a framework would work are yet to be determined, requiring an agreement with a third country regulator to exercise the supervisory powers of an European authority, means “the current proposal need a lot of work to make it feasible in practice”, argued Waters. “Such a radical departure from current arrangements would also create real practical problems for investors and limit their ability to benefit from the diversification offered by the alternative investment fund sector.”
The FSA has thus backed an approach more in line with the European Council’s draft version of the AIFM, which permits the private placement of non-European managed and domiciled funds alongside a marketing passport regime.