Michel Barnier, Vice-President of the EC in charge of Internal Market and Services and Industry and Entrepreneurship (pro term), seated, reading documents (EC Audiovisual Services, 1/07/2014)
It has been a rough week for the European hedge funds industry. The deadline (22/07/2014) for the implementation date of the Alternative Investment Fund Managers Directive (AIFMD) has well passed and many fund managers ran to apply at the very last moment. Now it is time for the national authorities to review the applications and report whether they comply with the rules of the directive.
More regulation for EU hedge funds, better financial system
Everything began with the severity of the global financial crisis. There has been a gap in the European legislation regarding the protection of the investment public of the hedge funds and the private equity funds. Thus, a directive was introduced in April 2009 in order to provide a comprehensive regulatory framework for the EU Alternative Investment Fund Managers (AIFMs). The first level of the directive was finalized on 21 July 2011 but the first agreement contained several implementation issues which needed the attention of the European bodies.
After the technical support of the European Securities and Markets Authority (ESMA), the European Commission (EC) proposed the second level of the directive at the end of 2012. The date to implement these regulations into national law by the Member States was set on 22 July 2013 or 22 July 2014 in the case of European Union Member States using a one-year transitional period.
In short, this directive is assigned to regulate EU and non-EU fund managers who manage Alternative Investment Funds (AIFs) that are established or not in the EU. This means that EU managers will have to follow detailed rules on delegation, remuneration, leverage and reporting and separate their risk management and evaluation operations. Furthermore, when an EU fund manager will be granted authorization under the AIFMD, then a passport will be given to him to either manage AIFs in other EU countries or market shares in AIFs to professional investors. As far as non-EU fund managers are concerned, they must always acquire a passport in order to market shares in AIFs within the EU but that is going to take place at the beginning of 2015.
Funds not ready for AIFMD
Even if there has been done much work , there are some Member States that haven’t fully or at all complied with the rules of the AIFMD. The global hedge fund industry association known as the Alternative Investment Management Association (AIMA) commented on this: “This is hindering managers’ ability to do business and means that investors in certain countries may be prevented from accessing alternative investment fund”. But there are cases where even if managers in European countries are in line with the directive, they face delays in the procedure of being authorized by the national regulators. And this comes at a cost for managers who cannot reach investors in these countries.
AIFMD: a way for European economic improvement
It is clear that the EC is at the right path to set rules that can enhance the way hedge funds are functioning with regards to investors’ protection. The fact that the timeframe of the AIFMD shows that we are still in the middle of this journey sounds even more promising. However, the Commission needs to be vigilant because there can always appear implementation problems that could spoil the whole project and that could be at the greater cost of investors.
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