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UK alternative asset industry says EU directive could damage its members

Hedge fund and private equity firms have slammed EU proposals for tight regulation of their sector. A prevailing theme of the objections centred on the damage the regulations could do to smaller fi

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Hedge fund and private equity firms have slammed EU proposals for massively tightened regulation of their sector.

A prevailing theme of the objections centred on the damage the regulations could do to smaller firms, while many also felt the industry had not been sufficiently consulted.

Others said there was still some confusion about exactly what the directive would require of asset managers. A spokeswoman for Jersey Finance, the marketing arm of Jersey’s financial services industry, said a delegation was hoping to travel to Brussels in the next to weeks in search of clarification.

The proposed Alternative Investment Fund Managers Directive, as it is known, would require the approval of the European Parliament and EU member states before becoming law, which was said unlikely to happen before 2010 at the earliest.

As currently written, the directive  http://ec.europa.eu/internal_market/investment/alternative_investments_en.htm would apply to alternative investment fund managers —  or AIFM as it calls them — with a portfolio of more than €100m.  A higher threshold, of €500m, would apply to those asset managers which did not use leverage and had a five-year lock-in period for their investors.

Roughly 30% of EU hedge fund managers, managing almost 90% of assets of EU domiciled hedge funds, would fall into one of these two categories, according to European Commission estimates.

It would oblige fund managers, rather than their funds, to be authorised and regulated, and set out a raft of new reporting, governance and risk-management requirements.

‘Starting point’
Some in the industry noted that the draft directive was intended as a starting point for discussion and was likely to face amendment before becoming law.

“We hope to contribute to a substantial improvement in the current proposals,” said the chairman of the London-based Hedge Fund Standards Board, Antonio Borges, who also noted that the draft had “not been discussed with the key interested parties nor is it consistent with the analysis and recommendations of the commission’s own experts”.

European Venture Capital Association chairman Jonathan Russell charged that the directive would “punish middle market companies, which lie at the heart of corporate Europe”, adding that around 5,000 portfolio companies would be forced to comply “with costly and unwarranted disclosure rules that go beyond even those required by publicly-listed companies”.

What’s more, he noted, none of a series of recent reports into financial regulatory reform had identified the private equity sector “as posing a systemic risk”.

Florence Lombard, executive director of the Alternative Investment Management Association, said the directive was “not a proportionate regulatory response to any of the identified causes of the current crisis”. 

 “It should be obvious that this is a deeply undesirable and immensely damaging exercise which the British Government, in particular, should be doing its utmost to forestall," said Simon Walker, chief executive of the British Private Equity and Venture Capital Association.

He added: “This measure is irrational in that it seeks to bring very different asset management classes such as private equity and hedge funds within the same domain, [and] contradictory in that the purpose of this exercise was supposed to be the regulation of institutions believed to pose systemic risk to the financial system.

Yet as the Commission’s own press release confirms, private equity houses ‘are not regarded as posing systemic risks’.”

Some associations said they welcomed the directive and the transparency it would require of firms.

Supporters

The London-based Investment Management Association, for example, which represents the UK’s £3.4trn asset management industry, said it welcomed what it regarded as the directive’s "new rules to allow fund managers to distribute non-Ucits funds to professional investors in EU member states".

If the directive were approved, "EU authorised AIFMs will be able to distribute both EU and non-EU-domiciled funds to professional investors in any member state," said IMA head of international relations Jarkko Syyrila.  

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