AIFM: regulation or directive?

A “call for evidence” over some of the Alternative Investment Fund Managers directive most hotly contested provisions ended in January— giving spotlight to debate over how to best implement the long-anticipated new rules.

Approximately 50 participating banks, industry lobbying groups and investment firms submitted responses to the European Securities and Markets Authority (ESMA)— which became the successor to the Committee of European Securities Regulators (CESR) as part of a wider regulatory overhaul. The ESMA launched the consultation period months ahead of its report providing technical advice to European lawmakers on how to best flesh out the directive’s core mandates.

As part of its report the watchdog agency will recommend how much flexibility to give EU member-states in implementing the AIFM’s mandates: either through a directive or regulation. The difference between the two legal instruments is significant. Under an EU directive, a member state implements language through its own lawmaking procedures, meaning greater say and interpretation in adopting a directive’s provision. In contrast an EU regulation is more direct, having immediate effect across the union, thus leaving less wiggle room in carrying out the law’s intent.

Internal debate

And though the industry took a collective stand against the AIFM’s more draconian proposals during its write-up, some unity has been lost in determining which instrument best serves the interest of private equity and other alternative investment managers.

In a 51 page response the European Private Equity and Venture Capital Association (EVCA) threw its weight behind the directive route for rules, arguing the various types of funds, structures and strategies across EU countries require a tailored response.

Indeed, the bulk of responses addressing the question reached similar conclusions in deciding to raise the directive flag. These supporters include sister lobbying group the British Private Equity and Venture Capital Association; the Alternative Investment Management Association; and the European Real Estate Investors Group.

However some organisations issued qualifications in deciding which camp they supported, contending the flexibility afforded by the directive route could lead to greater legal uncertainty or a lack of legal harmonisation in some areas. With respect to a fund’s risk and liquidity management or transparency and reporting obligations, a regulation instrument would be more favourable, argues global fund administration group State Street. This would “ensure EU-wide consistency on broadly technical matters, including for entities that operate on a cross-border basis”, said the group in its submission.

Also lobbying on behalf of some AIFM provisions falling under the regulation stamp is the French Asset Management Association.

The group, which represents French private equity shops among others, argued regulations were more time-efficient and would give the newly established Paris-based ESMA greater ease in monitoring funds under a harmonious framework.

Risk both ways

Though when the European Commission decides how AIFM provisions will be separated between regulations and directives, most will hopefully fall under the latter to allow member states to implement the rules proportionately and taking account of the diversity of the industry, says Norton Rose partner and AIFM specialist, Michael Newell, in an interview with PEM. “It’s only where the commission sees there to be a risk of misinterpretation or arbitrage they should opt for implementation through regulation, for example in relation to information filings with regulators”, adds Newell.

Under either option the private equity industry faces some risk, adds Gus Black of Dechert. “The ESMA has already started reading things into the directive that go beyond the scope of the level I text ,” says Black, adding this meant a regulation approach crafted by the EU Commission (on the advice of the ESMA) could result in a directive more onerous than originally intended.

Likewise the directive route is its own gamble, elaborates Black. “It does potentially leave open the option for member states to interpret rules more harshly — but could also allow nations better acquainted with private equity, such as the UK, to interpret provisions in a more sensible manner”.

But until the ESMA submits its report in September, it will remain difficult to make heads or tails over how rules are likely to be passed or the amount of liberty member states will take in interpreting provisions. In theory, directives and regulations should not be implemented in a vastly different way, explains one private equity lawyer—“but the AIFM is an area where subtleties and detail might make all the difference.”