EU finance ministers approve AIFM directive

The Economic and Financial Affairs Council has agreed to a text for the Alternative Investment Fund Managers Directive to be put before the European Parliament. A final decision is expected within days.

The regulation of private equity managers in the European Union is moving forward after EU finance ministers agreed on the much debated “passport” rules for the alternative investment fund sector.

The finance ministers agreed that passports will be available to private equity managers from outside the 27-country member states provided they and the countries where they are based meet certain criteria including disclosures on pay structures.

“On the very sensitive question of the passport, the agreement foresees a passport for third-country funds and managers. That was the initial proposal of the Commission. It will be a passport on merit, founded on a solid basis and providing strong controls in terms of risk management. It will also reinforce the internal market,” said Michael Barnier, the EU internal market and services commissioner, in a statement.

Countries will receive a “passport” in return for signing common rules that will be set by the incoming European Securities and Markets Authority (ESMA), which will be based in Paris as of January 2011. The agreement determined that ESMA will have emergency powers to shut down a fund after a decision by EU finance minister decides it poses a threat to the stability of the financial system.

The new system under ESMA will be phased in over the next few years, starting with a passport for European funds in 2013 and followed by non-EU private equity managers in 2015.

Industry groups were quick to respond to the news, pleased that an agreement has been reached.

“It is with a degree of caution that we welcome the news that a text has been agreed. Whilst significant progress has been made since May in keeping the EU market open to non-EU funds and in removing measures that would have hurt European Union investors, there is no doubt this Directive imposes an additional regulatory burden on our industry. As Europe emerges from the recession, it can ill-afford to discourage investment and stifle growth,” said Simon Walker, chief executive of the British Private Equity and Venture Capital Association, in a statement.

The Alternative Investment Management Association said: “We are glad the European finance ministers have reached agreement … There is still much in the directive that will be difficult to implement for the industry and there will be a heavy compliance burden … But the impact will be far less severe than if something close to the original proposal had been agreed.”