Spain's latest AIFM draft reinstates regulatory 'fortress'

A proposed regulatory provision that would prevent EU investors from accessing foreign funds and managers – which was originally removed by previous European Council president Sweden – has been reinstated in a current draft by new Council leader Spain, leading to industry concerns about protectionism.

The threat that European investors would face a serious loss of access to top-performing alternative investment managers – especially in the US – has long been a point of contention by lobbyist groups regarding the European Commission’s “Directive on Alternative Investment Fund Managers”, which if passed would also increase disclosure requirements and compliance costs for firms.

Under a provision known as Article 35, managers based in the EU would only be able to market funds within the EU if cooperation arrangements were in place between the regulator of the manager’s jurisdiction and that of the EU member state in which the investors are located. The latest compromise draft submitted by Spain earlier in February reinstated this measure, after an initial draft formed during Sweden’s presidency would have allowed non-EU funds to apply for a pan-European passport to market to investors in non-member states.

“Stipulating that these cooperation arrangements must be in place sounds reasonable enough but we are worried that they would be difficult to establish and comply with,” Andrew Baker, chief executive officer for the Alternative Investment Management Association (AIMA), said in a statement. “European institutional investors are currently free to seek out the best managers globally. Any restrictions imposed on European investors would also hit asset managers in financial centres such as the United States, Canada, Switzerland, Hong Kong.”

The UK’s House of Lords had previously called the directive’s marketing restrictions “protectionist” in a letter to Financial Services Secretary Lord Myners, adding that they would also prohibit many foreign managers from being able to raise and market funds in the EU. The House of Lords in November had heard testimony from industry figures including Danny Truell, chief investment officer of the Wellcome Trust charitable foundation, who said that the directive in its current form would seriously restrict investment opportunities for many EU foundations and charities.

EVCA chairman Jonathan Russell has also said that the proposals would open the door to similarly protectionist legislation from other countries, and make investing capital in Europe less attractive.

The current working text which includes the provision is being debated by the AIFM Directive Council Working Group in Brussels, with a debate and eventual vote expected in the European Parliament later this year. Before the vote can occur however, the more than 1,000 amendments that have been proposed by Members of the European Parliament to the separate European Council and European Parliament versions of the directive must be reconciled.