Political and regulatory news

AIFM Directive implementation rolls on

The process of introducing legislation to regulate hedge funds, private equity and all other non-UCITS funds operating or sold in the EU continues.

A further, so-called, implementing directive, is expected to be published in the first quarter of next year.  The European Commission is currently considering what this should cover following the publication in November of guidance from the European Securities and Markets Authority (ESMA).

 ESMA was asked at the end of 2011 to give a view on the detailed aspects of implementing the main legislation.  This included questions such as how leverage should be calculated, what organisational arrangements would be required of regulated entities, how depositaries should operate and what additional rules would be required to manage delegation.  The issues were extremely technical and providing a view on how they should be dealt with represented a significant challenge for the new European authority.  The Commission’s original intention was for ESMA to report to it by September but an extension was granted until mid-November following concerns that such a short deadline was impractical.  That ESMA met its revised deadline was nevertheless an impressive feat considering the number of issues to be considered. The complexity of its task is perhaps illustrated by the sheer length of its report, which amounts to over 500 pages.

Overall ESMA’s recommendations represent a sensible blueprint for further legislation.  The AIC and wider funds industry will be considering the proposals in detail, particularly on key issues such as depositary liability and access for funds based outside the EU, but, on an initial analysis, the overall approach looks acceptable.  The number of detailed rules proposed does bear out AIC concerns that the new requirements will create an additional and unwelcome layer of compliance obligations and cost.  However, our initial analysis is that they will not disrupt the AIC’s ambition that an investment company should be able to be the regulated party under the rules if it wishes to.  This is an important issue as it potentially provides significant benefits for some member companies by limiting their obligations under the new regulatory arrangements and reduces possible governance concerns.  See AIFM Directive handbook for more detail. 

It now falls to the European Commission to translate ESMA’s advice into detailed legislation.  This is expected to take place over the next few months and is likely to be based largely on the ESMA proposals.  This reflects the level of work already done by ESMA, the limits on the implementing legislation created by the overarching directive, and time constraints.  To meet the implementation timetable set for this process the implementing rules will have to be agreed by July – giving Member States a year to introduce domestic arrangements as required.  The UK is also expected to publish its own proposals for domestic implementation in the New Year.  The AIC will be engaged with both of these processes but it is clear that the detailed obligations for compliance with the Directive, and the challenges this raises for investment companies, will become increasingly clear during 2012.

Next article: Red tape reduction in prospect for VCTs

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Back to Issue 5 - 12 Dec 2011