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Magazine Issues » July 2009

LEGAL EASE: what's the alternative?

The obligation for alternative fund managers to obtain an
authorisation has caused concern at European level and has been
criticised by the alternative funds industry.  Ursula García (pictured) and Maria Graiño Cuatrecasas comment

ursula_garcia.jpgAgainst the background of international discussions about solutions for the current crisis, regulatory and financial measures have been adopted by groups such as G20, Iosco and the Financial Stability Forum. In this context, the European Commission issued a draft Directive on Alternative Investment Fund Managers last April.

This directive will introduce EU-harmonised regulation for EU-domiciled alternative investment fund managers, that is, managers of funds that are not regulated under the Ucits Directive who manage and administer or commercialise alternative investment funds in the EU.

Unlike the Ucits Directive, this proposal has opted for a manager-regulation approach due to the wide range of “alternative investment funds” and the possibility that a limited definition might allow the circumvention of the directive.

The proposal establishes that all EU-domiciled alternative fund managers with assets under management above the threshold of €100m or, in the case of alternative investment funds with no leverage and a lock-in period of at least five years, above the threshold of €500m, will need to be authorised by the home member state competent authority and will be subject to ongoing requirements.

In order to obtain such authorisation, alternative fund managers would have to meet certain capital and resources requirements. They will be required to provide detailed information of their planned activity, the identity and characteristics of the funds managed, the internal governance of the alternatives managers (including arrangements for the delegation of management services) and internal arrangements with respect to risk management, asset valuation, safekeeping of assets, audits, and the systems of regulatory reporting, in order to demonstrate they are suitably qualified to provide alternative fund management services.

This obligation for alternative fund managers to obtain an authorisation has caused concern at European level and has been criticised by the alternative funds industry, which considers auto-regulation as a better alternative. Additionally, the private equity industry considers that some of the proposal’s requirements based on liquidity and capital requirements, asset valuation, custody, delegation, risk management and transparency, are not necessary for private equity entities and involve high costs and a competitive disadvantage.

Notwithstanding that, from the perspective of jurisdictions with strict authorisation requirements for alternative managers, such as Spain, both in the hedge funds and in the private equity field, if the proposal maintains its current wording, the directive would
not signify a drawback for these entities in terms of adaptation. Besides, the alternative fund managers ‘passport’ will enable
Spanish alternative fund managers to freely provide management services in member states other than Spain, subject to a notification procedure.

As regards the marketing of these alternative investment funds, the proposal establishes that alternative fund managers authorised in their home member states will be entitled to market their funds to investors in any member state, though limited only to professional investors, and member states will be allowed to decide whether to allow alternative fund managers to market their funds to retail investors.

The cross-border marketing of alternative funds will be subject to a notification procedure, as with the current passport regimen for Ucits, under which relevant information is provided to the home member state and transmitted to the host. 

Harmonised alternative fund managers domiciled in third countries will have the same rights to market the alternative fund in the European market if the third country has signed an agreement with a European member state that complies with the standards in Article 26 of the OECD Model Tax Convention and ensures tax information will be exchanged effectively. This possibility, forbidden in certain European jurisdictions until now, would increase competition in Europe.

An important problem of this proposal is that it has not set up a harmonised tax regime for alternative fund managers. Consequently, the future success of the system established for alternative investment funds and their cross-border commercialisation shall greatly depend on how this issue is solved in further proposals or accompanying regulations.

©2009 funds europe