ABBL

On 29 April 2009, the European Commission proposed a new set of rules for hedge funds and private equity firms, requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term.

Private equity and hedge funds are private capital pools. Private equity invest in companies, mainly by acquiring businesses to sell them at a higher price: so-called 'buy-outs'. Hedge funds are investment vehicles which exploit market imperfections to make returns even when markets are underperforming.

Private equity and hedge funds are very lightly regulated. This allows them to make investments and take risks that other actors cannot take. Following the financial turmoil in the US and Europe, the European Parliament decided to address the issue. Although the crisis was not directly determined by hedge and private funds, it is widely acknowledged that they have made it worse.

The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks.

The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that the exemption of funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.

AIFM or the importance of a phone call

The Alternative Investment Fund Manager Directive (AIFM), the surprise hedge fund and private equity directive that emerged a year ago from the EU Commission, promised to be a challenging dossier for Europe. Until April 2009, few would have bet that a text to regulate these funds would ever be presented, as it was against the will of the EU Internal Market Commissioner. Yet, given the intense pressure, a proposal was in the end literally rushed through by the EU Commission services. Unfortunately, as the old adage has it, one should not confuse haste with speed, nor with quality.

The 2009 text was indeed torn to pieces by the industry as well as by some regulators. It is true that, without taking position on its raison d’être, the draft directive failed to approach the issue realistically and demonstrated a lack of understanding of how the business actually worked. Thus, after the initial proposal from the EU Commission, the EU Council took over, and improved the text over many meetings.

Approval should have been secured at the ECOFIN meeting of 16 March 2010, but rumour has it that the UK Prime Minister made a phone call to the EU Council Presidency, asking to have the AIFM discussion dropped from the agenda, thus postponing a vote until May at the earliest. At the same time, this move opened the door for the European Parliament, which is currently also reviewing the text. It also offered the European Parliament the opportunity to take a leading role and likely to be the first to finalise a negotiation proposal. Unfortunately, it will do so from a far worse base than the latest, by no means perfect, EU Council proposal. In the end, a vote on the directive, foreseen in June, will now probably be postponed until the Belgian Presidency of the EU Council and subject to renewed pressures from a post-election UK.

Short phone call, big effect.


From ABBL March 2010 Newsletter