9 Financial services
| (30624)
9494/09
+ ADDs 1-2
COM(09) 207
| Draft Directive on Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC
|
| Legal base | Article 47(2) EC; co-decision; QMV
|
| Document originated | 30 April 2009
|
| Deposited in Parliament | 6 May 2009
|
| Department | HM Treasury |
| Basis of consideration | EM of 20 May 2009
|
| Previous Committee Report | None
|
| To be discussed in Council | Not known
|
| Committee's assessment | Politically important
|
| Committee's decision | Not cleared; further information requested. But relevant to the debate in European Committee on the Commission Communication Driving European Recovery
|
Background
9.1 In its Communication Driving European Recovery the
Commission said "To deliver responsible and reliable financial
markets for the future, the Commission will propose an ambitious
new reform programme, with five key objectives." The second
objective was "To fill gaps where European or national regulation
is insufficient or incomplete, based on a 'safety first' approach."
Amongst the proposals in this connection that the Commission said
it would make was "A comprehensive legislative instrument
establishing regulatory and supervisory standards for hedge funds,
private equity and other systemically important market players."[40]
The document
9.2 The Commission now proposes an Alternative Investment Fund
Managers Directive which would harmonise Community regulation
of managers of hedge funds, private equity funds and any other
form of investment fund, apart from pension funds and the already
harmonised UCITS (Undertakings for Collective Investments in Transferable
Securities) funds (in the UCITS Directive currently being recast).[41]
The Commission presents the draft Directive as part of a programme
to extend appropriate regulation and oversight to all actors and
activities that embed significant risks and notes calls for closer
regulatory engagement in the sector from the European Parliament[42]
and in the de Larosière Report.[43]
9.3 The draft Directive would:
- establish a secure and harmonised
Community framework for monitoring and supervising the risks that
Alternative Investment Fund Managers pose to their investors,
counterparties, other financial market participants and to financial
stability;
- permit, subject to compliance with strict requirements,
Alternative Investment Fund Managers to provide services and market
their funds across the internal market;
- exempt managers whose total funds under management
are less than €100 million (£89 million), or €500
million (£447 million) where the funds are locked up for
at least 5 years and do not use leverage — the higher limit
is intended to cover private equity funds, which generally meet
those criteria
- exempt managers who do not manage Community-domiciled
funds or market units within the Community;
- prevent non-Community funds from marketing funds
into the Community unless they were domiciled in countries which
had been shown to have adequate standards of supervision and tax
information sharing;
- prevent third country funds being marketed for
the first three years of the Directive's life;
- impose a number of requirements in the area of
conduct of business, including requiring Alternative Investment
Fund Managers to have appropriate procedures to manage conflicts
of interest, investment risk (including specific rules in respect
of investment in securitisations) and liquidity, employ an appropriately
qualified independent valuer and appoint a Community-authorised
bank to act as depositary (with responsibility for safekeeping
of the Alternative Investment Fund's assets);
- require Alternative Investment Fund Managers
to hold capital of €125,000 (£112,000) plus 0.02% of
the amount by which their funds under management exceed €250
million (£224 million);
- require Alternative Investment Fund Managers
to provide information to supervisors to allow the supervisor
to monitor potential systemic risks posed by their activities;
- subject Managers of Alternative Investment Funds
which have used a high degree of leverage in at least two of the
past four quarters to additional disclosure requirements;
- provide for the Commission to adopt implementing
measures specifying limits to leverage;
- subject private equity funds, defined as Alternative
Investment Funds with stakes of 30% or greater in a company or
companies with turnover greater than €50 million (£45
million), more than 250 staff or enterprise value above €43
million (£39 million), to additional disclosure requirements;
- require private equity funds to disclose to a
target firm, among other information, how they obtained the stake,
their policy on conflicts of interest, the policy for communication
with employees and, for unlisted companies, the development plan
for the company;
- provide a passport allowing Alternative Investment
Funds to be marketed to professional investors in any Member State
provided the Alternative Investment Fund manager has notified
its home supervisor of its intention to start marketing;
- permit Member States to allow marketing of Alternative
Investment Funds to retail investors locally (in the UK this would
apply mainly to non-UCITS retail schemes which are regulated investment
funds the Financial Services Authority deems suitable for marketing
retail clients); and
- allow Alternative Investment Fund Managers to
provide services cross-border to Alternative Investment Funds
in other Member States.
9.4 The Commission annexes to the proposal an impact
assessment and an executive summary of the assessment. The assessment
describes the affected industry sectors and the options the Commission
considered for regulation, but does not give an assessment of
costs.
The Government's view
9.5 The Financial Services Secretary to the Treasury
(Lord Myners) says that:
- the Government supports the
principle of harmonising regulation of Alternative Investment
Fund Managers across the Community;
- while existing Community Directives already provide
a degree of harmonisation, application is inconsistent;
- a harmonising Directive will therefore [sic]
be helpful in ensuring a universally high standard of regulation
in this area;
- in relation to the risks posed by Alternative
Investment Fund Managers and Alternative Investment Fund more
generally, the Government shares the Commission's assessment that
hedge funds and other forms of Alternative Investment Fund were
not a significant cause of recent financial instability;
- the Government, however, also agrees that recent
financial events have highlighted the need for public authorities
to maintain closer oversight of hedge funds to ensure effective
monitoring of the risks to market stability which hedge fund activity
may pose in aggregate; and
- the Financial Services Authority and the Government
have therefore been working together to develop a process to deliver
this enhanced oversight — this is broadly consistent with
the elements of the Commission's proposal which cover systemic
risk oversight, although the Government plans to argue for greater
supervisory discretion over implementation.
9.6 The Minister then says that the Government plans
to seek important improvements to the draft Directive to ensure
that it avoids imposing unnecessary burdens on the Community Alternative
Investment Fund Managers industry while at the same time delivering
the necessary improvement in regulatory standards. He elaborates
that:
- on non-Community firms and
funds, the Government plans to argue for a more open approach
to funds, managers and service providers from outside the Community
— where regulatory checks are imposed, these should be consistent
with emerging international standards and should not have the
effect of closing the Community market to external competition;
- on private equity disclosure, the UK private
equity industry has already taken voluntary action in this area
through the Walker guidelines[44]
— the Government believes stakeholders are broadly content
with the level of disclosure provided by these guidelines and
therefore intends to oppose the imposition of new regulatory requirements
which could, in any case, only apply to Community-managed private
equity funds and not to other forms of private ownership, for
example non-Community private equity funds or family ownership;
and
- on greater supervisory discretion, the Government
agrees that greater oversight of the potential systemic risks
posed by Alternative Investment Fund Managers is necessary; it
believes, however, that to do this effectively supervisors will
have to exercise judgement over which data to collect —
there are some parts of the Alternative Investment Fund Managers
industry which pose no realistic systemic risk but others which
do and supervisors should be able to target their oversight accordingly,
focusing on genuine sources of systemic risk, potentially collecting
significant amounts of detailed data — and the Government
intends to argue for this approach to be permitted under the Directive.
9.7 The Minister, advising us that Council Working
Group discussion of the proposal is likely to continue at least
until the end of 2009, says that the Government is establishing
a number of stakeholder groups to give affected firms an opportunity
to share views on the draft Directive and to gain a more developed
understanding of the cost impacts of the proposal. He notes that
the draft Directive and the Commission impact assessment do not
include a specific estimate of administrative costs — the
Commission argues that they will depend on existing national legislation.
The Minister comments that, as part of its consultation process,
the Government will seek further information on the likely impacts
on affected sectors from UK firms.
Conclusion
9.8 This draft Directive clearly could have a
significant affect on Alternative Investment Fund Managers. It
is likely that in due course we will wish to recommend it for
debate. But before considering that possibility further we wish
to hear about:
- the outcome of the Government's
consultations on the matter, including information on possible
impacts; and
- progress in negotiations on the Government's
aspirations in relation to non-Community firms and funds, private
equity disclosure and greater supervisory discretion.
9.9 Although meanwhile the document will remain
under scrutiny, we note that it is relevant to the debate we have
recommended on the Commission Communication Driving European
Recovery.[45]
40 (30474) 7084/09 + ADD 1: see HC 19-xii (2008-09),
chapter 1 (25 March 2009). Back
41
(29873) 12149/08 + ADDs 1-2: see HC 16-xxxii (2007-08), chapter
4 (22 October 2008), HC 16-xxxv (2007-08), chapter 1 (12 November
2008) and Stg Co Deb, European Committee, 25 November 2008,
cols. 3-24. Back
42
See http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P6-TA-2008-0425&language=EN&ring=A6-2008-0338
and http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P6-TA-2008-0426&language=EN&ring=A6-2008-0296.
Back
43
See http://ec.europa.eu/commission_barroso/president/pdf/statement_20090225_en.pdf,
seventh recommendation, page 25. Back
44
The Walker Guidelines set standards for public disclosure by private
equity portfolio companies - see www.walker-gmg.co.uk. Back
45
See footnote 40. Back
|
