Political and regulatory news

Issue 5 - 14 December 09

Uncertainty over European regulation continues

Conflicting proposals to amend the AIFM Directive have been published by the Council of Ministers and the European Parliament.

The impact that European rule changes will have on the ‘alternative’ investment sector – including investment companies – remains uncertain.  This reflects a lack of consensus among policymakers about what needs to be done to regulate the sector.  This difference of opinion was reflected in the two sets of proposed amendments to the Alternative Investment Fund Managers Directive recently published by the Swedish Presidency of the Council of Ministers and the draft report of Mr Gauzes, the lead MEP on the Economic and Monetary Affairs (ECON) Committee of the European Parliament – both policymakers with the ability to determine the shape of the final proposals.

The Swedish Presidency proposals propose some changes which would make the intended regulations more sympathetic to the investment company structure.  This includes:

• removing restrictions on the ability of investment companies to issue shares
• recognising that closed-ended funds should not require redemption rights
• removing general leverage caps
• allowing non-EU investment company shares to be marketed in other Member States under national rules (although without a passport)
• removing critical restrictions on the use of non-EU service providers
• allowing boards to retain control over valuation
• mitigating some of the problems caused by the proposal for a depositary
• raising the level of shareholding required in a private company before additional private equity disclosures are required.

The Swedish position would preserve the ability for investment companies to employ a multi-manager approach and not force self-managed investment companies to appoint an external manager or set up a regulated subsidiary.  The paper represents an improvement on the original draft but is still far from ideal and changes are still required to reach a satisfactory conclusion.

One key issue to be resolved relates to the AIC’s proposal that the investment company – rather than an external fund manager – should be able to be regulated under the Directive.  This would preserve the role of the board and bring the measures into line with other European regulations, such as the Transparency and Prospectus Directives (see more detailed explanation in AlC’s approach to the AIFM Directive).   The Swedish text would allow this for self-managed investment companies and those adopting a multi-manager model, but not for UK investment companies with a single manager, which is disappointing.

The publication of the Swedish draft does indicate where debate has reached in the Council of Ministers, but this is not a settled position.  It is expected that the draft may still change significantly as Member States debate how the regulations should be applied.  There is plenty of scope for change promoted by those which either think the draft is too lax or too inflexible.  Where the policy will settle remains far from clear.

At the same time, MEPs are also considering how they believe the original Commission proposals should be changed.  A key milestone in this process was the draft report from Jean-Paul Gauzes, the Rapporteur of the ECON Committee, which is reviewing the Directive on behalf of the European Parliament.  Mr Guazes’ proposals are not as positive for the investment company sector as the current Swedish text as they fail to take up some of the changes proposed in the Council of Ministers.  Perhaps most critically for the likely scope of the rules, he also proposes removing the thresholds below which the Directive does not apply.  This would be particularly significant for smaller funds such as VCTs which, under the original proposals, might have fallen outside the reach of the regulations.  This exemption now looks very unlikely to survive the process of negotiating the final rules.

The draft Gauzes report also prevents Member States from allowing certain funds to be marketed to retail investors and puts forward a less favorable position on valuations.  It also fails to recognise the AIC’s call for the company to be allowed to take on responsibility for compliance.  Although the Gauzes approach would permit this for self-managed funds, for an externally managed investment company the requirements of the Directive would continue to fall on the fund manager.  The position is less clear in relation to investment companies with a multiple manager structure, or where the company delegates to separate administrators.  There are also other parts of the Gauzes report which are ambiguous and it is not possible to identify precisely what the implications might be.  However, as with the Swedish text, this version is also not fixed.  Other MEPs have until 21 January 2010 to table suggested amendments to the report and it is likely that significant adjustments will be made before the Committee reaches its final view.

Despite differences of opinion among key policymaking groups, the political desire to regulate all non-UCITS funds regardless of their legal structure remains strong. This suggests that proposals will not fall by the wayside.  However, any clear prediction of what will emerge from this process is not possible.  Further changes of direction are also made more possible by the change in the Presidency of the Council at the end of December – Spain takes the role over from Sweden – and the appointment of a new Commissioner with oversight of financial services regulation, Michel Barnier, who takes over from Charlie McCreevy in February.

The AIC is continuing to lobby hard to secure the best possible outcome for the investment company sector.  The latest Swedish Draft and the Gauzes Report show that there is still considerable scope for the proposals to evolve and that some of our key concerns have been put on the agenda.  However, the debate is far from over.

To view the “Compromise Draft” published by the Swedish Presidency of the Council of Ministers, click here.

To view the Gauzes report from the ECON Committee, click here.

Next article: Advisory market restructuring offers investment company opportunities

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