July 2007

PAN EUROPE: Rattled by red tape

A story of excrutiating bureaucracy is told at the Irish funds conference. By Nick Fitzpatrick  A finer anecdote of how regulatory bureaucrats can frustrate the ambitions of pan-European asset managers has probably never been heard than the one presented by Jim Cecere, of Vanguard, the US investment house. He related to an audience a story about how one regulator in Europe rejected an application to register a fund in its territory because the letter to trustees began ‘Dear Chairman’. The regulator in question wished to see ‘Dear Sir/Madam’ instead. “We had it [the application] thrown back at us and we had to wait for the next cycle to begin before we could re-submit our application. We had spent obscene amounts of money on lawyers and translators to get that far,” he said. Cecere did not name the regulator, but it is unlikely that the guilty party was the Irish regulator, in whose territory Cecere was relating his story at the IFIA/NICSA Conference – the annual Irish funds industry event – in the second week of June. He was speaking in the closing stages of the conference and was giving his views on what asset managers should be asking Charlie McCreevy, the EU commissioner for internal markets and services, to do. “End the absolute insanity of registering products in different markets,” was, of course, Cecere’s suggestion. McCreevy, who hails from County Kildare, where the conference was held, was not present to hear this and other suggestions. But on the previous day Michael Murray, a member of McCreevy’s cabinet, had spoken at the conference. Essentially he repeated the contents of the Asset Management White Paper – a policy proposal released last year which is designed to consolidate an over-crowded and constrained market. But at least Murray re-affirmed that the commissioner backs the idea of regulator-to-regulator notification for UCITS funds rather than relying on managers filing information directly in each country. Other asset managers also gave their views on what the industry should request of McCreevy. Vincenzo Falbo, chief executive of Eaton Vance Management (International), called on the commissioner to “take the politics out of CESR” [the Committee of European Regulators]. Politics, said Falbo, is causing delays. CESR has numerous consultations currently running that affect pan-European fund managers. Charles Beazley, president, Nikko Asset Management Europe, also opined. “Use principle-based regulations to stamp out ‘market abuse’ if that’s what it is, but don’t threaten us with ‘market abuse’ just because you do not understand it.” Beazley, a former alternative investment chief at Gartmore, the UK fund manager, was echoing something he had said when sitting on a hedge fund panel earlier in the conference and that had been aimed at a certain participant in another prestigious event held in the same week – the G8 meeting of governments in Germany. In particular his comments seemed aimed at the German chancellor, Angela Merkel, who is critical of hedge funds. Hedge funds are like protein for Ireland’s financial services industry, which lists and administrates many of them. At the previous hedge fund panel though, a number of issues were raised that the German chancellor may liked to have heard. Charlie Porter, CEO of Thames River Capital, a UK asset manager, said he was “astounded” that so many hedge funds did not have pricing committees. Pricing hedge fund assets and NAVs is an ongoing problem and quite central to their success in the institutional market. Thames River Capital has consequently set up a committee to do this. Donnacha Loughrey, portfolio manager, alternative investments, at Irish manager KBC Asset Management, acknowledged that mis-pricing was a “hot topic”. “There are a lot of complex derivatives out there like CDOs and mortgage-backed securities. Overstatements of NAVs and understatements of volatility are an issue. Mispricing is due to lack of independent pricing,” he said. But he also said that style drift was an issue. “We’ve found that a lot of managers have moved to speciality finance, like litigation finance, and that’s a worry. We find the same manager [that is established in one strategy] does not have the capabilities or staff for this.” Beazley noted: “The industry is still pretty young”, and he said the hedge fund industry was exerting a “kind of leadership” on the investment management industry. © fe July 2007

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