The Belgian presidency of the EU Council has issued new proposals on the pending AIFM directive, which allow non-EU funds and fund managers access to European markets.
The proposals, the latest in a series of attempts to find compromises among at-odds EU lawmakers, offer a dual approach to so-called third country rules that regulate foreign managers and funds based outside of the EU. The Belgian compromise permits both a passport system, allowing full EU market access with the approval of one member state, or through an individual EU member state’s private placement system.
The proposals by Belgium are an attempt to find middle ground between more lenient rules supported by the EU Council, and stricter rules backed by the EU Parliament that have been widely derided by the private equity industry.
The proposals by Belgium are an attempt to find middle ground between more lenient rules supported by the EU Council, and stricter rules backed by the EU Parliament that have been widely derided by the private equity industry.
If passed, the new proposal will go through a five-year trial period following the directive’s implementation, after which the EU Commission will launch a review of the directive that includes consultation with the private equity industry.
Should the Commission determine the more industry lenient passporting framework has no negative effects, such as on “investor protection, market disruption, competition and monitoring of systemic risk“, the passporting framework would then apply exclusively, the proposal stated.
Should the Commission determine the more industry lenient passporting framework has no negative effects, such as on “investor protection, market disruption, competition and monitoring of systemic risk“, the passporting framework would then apply exclusively, the proposal stated.
“Every time a new compromise proposal comes out, we’re eliminating some of the areas of ongoing arguments,” said Simon Morris, partner at CMS Cameron McKenna, in an interview with PEM. Belgium is the fourth country to serve as president of the EU Council during the shaping of the AIFM directive.
Effects on EU managers
Effects on EU managers
Along with managers based outside of the EU, the proposal will address EU managers wanting to market a third country domiciled fund either through the passport framework or private placement regime.
EU managers wanting to market funds established in a third country via a passport, could do so under the condition the third country has in place sufficient rules and communications with the manager’s country and any other member state the fund will be marketed in. Furthermore, the manager would no longer need equivalent market access to the third country jurisdiction the fund is domiciled in.
Likewise, under the proposed dual approach system, EU managers could market third country funds under an EU member state's private placement regime if they meet the directive’s requirements and have sufficient cooperation agreements with the relevant EU member state relating to systemic risk oversight and other information exchange agreements.
Allowing national private placement regimes will be welcomed by large parts of the industry, noted a legal update from London-based law firm CMS Cameron McKenna. The proposal will also find criticism by GPs as private placement regimes must still adhere to all of the directive’s requirements. This includes provisions on authorisation procedures, capital requirements and international cooperation agreements, all of which will limit the possibilities for private placement marketing.
Effects on non-EU managers
For non-EU fund managers wanting to market or manage funds in the EU under the passport system, the proposal calls for different requirements depending on whether the fund is EU domiciled. Either way, GPs will need to meet all the directive’s requirements and disclose the fund’s marketing strategy, as well as meet the aforementioned tax and regulatory information exchange agreements, among other rules.
Likewise, non-EU fund managers are permitted to market both non-EU and EU funds under each member state’s domestic private placement rules as long as the GP complies with transparency and other private equity fund provisions. The managers also must have sufficient cooperation arrangements “relating to systemic risk oversight and information exchange” between the manager’s home state, and any member state the fund is marketed in.
The battle continues
The allowance of private placement regime is important given hardships of actually meeting the requirements of the passport framework, said Morris. “Not even the US can tick all the boxes on equal access, exchange of information agreements and cooperation between tax authorities for example”, he said.
“This is being driven by the government of France, and by a lesser extent the government of Germany,” said Morris, adding “any harm that can be done to the dominant position of the UK is to the benefit of those two countries”.
This past week US Treasury Secretary Tim Geithner reportedly sent a letter to French Finance Minister Christine Lagarde arguing the country’s position on third country rules was too burdensome.
Speaking on the new proposal’s likelihood of making it in the final language of the directive, Morris said the French government, a strong advocate of strict third country rules, would likely be content with the new dual approach.
Other sources, however, remain sceptical the dual approach set out in this week’s compromise proposal will be accepted by certain member states.
“There is a strong lobby resisting combining … a passport and national private placement regimes,” said Norton Rose partner and AIFM specialist, Michael Newell. He added this would probably result in further delay in agreement on the directive’s final text.
The EU parliament is scheduled for a plenary vote on the directive later this month, however further negotiations are likely to push it back later into the year.
Likewise, under the proposed dual approach system, EU managers could market third country funds under an EU member state's private placement regime if they meet the directive’s requirements and have sufficient cooperation agreements with the relevant EU member state relating to systemic risk oversight and other information exchange agreements.
Allowing national private placement regimes will be welcomed by large parts of the industry, noted a legal update from London-based law firm CMS Cameron McKenna. The proposal will also find criticism by GPs as private placement regimes must still adhere to all of the directive’s requirements. This includes provisions on authorisation procedures, capital requirements and international cooperation agreements, all of which will limit the possibilities for private placement marketing.
Effects on non-EU managers
For non-EU fund managers wanting to market or manage funds in the EU under the passport system, the proposal calls for different requirements depending on whether the fund is EU domiciled. Either way, GPs will need to meet all the directive’s requirements and disclose the fund’s marketing strategy, as well as meet the aforementioned tax and regulatory information exchange agreements, among other rules.
Likewise, non-EU fund managers are permitted to market both non-EU and EU funds under each member state’s domestic private placement rules as long as the GP complies with transparency and other private equity fund provisions. The managers also must have sufficient cooperation arrangements “relating to systemic risk oversight and information exchange” between the manager’s home state, and any member state the fund is marketed in.
The battle continues
The allowance of private placement regime is important given hardships of actually meeting the requirements of the passport framework, said Morris. “Not even the US can tick all the boxes on equal access, exchange of information agreements and cooperation between tax authorities for example”, he said.
“This is being driven by the government of France, and by a lesser extent the government of Germany,” said Morris, adding “any harm that can be done to the dominant position of the UK is to the benefit of those two countries”.
This past week US Treasury Secretary Tim Geithner reportedly sent a letter to French Finance Minister Christine Lagarde arguing the country’s position on third country rules was too burdensome.
Speaking on the new proposal’s likelihood of making it in the final language of the directive, Morris said the French government, a strong advocate of strict third country rules, would likely be content with the new dual approach.
Other sources, however, remain sceptical the dual approach set out in this week’s compromise proposal will be accepted by certain member states.
“There is a strong lobby resisting combining … a passport and national private placement regimes,” said Norton Rose partner and AIFM specialist, Michael Newell. He added this would probably result in further delay in agreement on the directive’s final text.
The EU parliament is scheduled for a plenary vote on the directive later this month, however further negotiations are likely to push it back later into the year.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
