The proposals by Belgium are an attempt to find middle ground between more lenient rules supported by the EU Council, and stricter rules backed by the EU Parliament that have been widely derided by the private equity industry.
Should the Commission determine the more industry lenient passporting framework has no negative effects, such as on “investor protection, market disruption, competition and monitoring of systemic risk“, the passporting framework would then apply exclusively, the proposal stated.
Effects on EU managers
Likewise, under the proposed dual approach system, EU managers could market third country funds under an EU member state's private placement regime if they meet the directive’s requirements and have sufficient cooperation agreements with the relevant EU member state relating to systemic risk oversight and other information exchange agreements.
Allowing national private placement regimes will be welcomed by large parts of the industry, noted a legal update from London-based law firm CMS Cameron McKenna. The proposal will also find criticism by GPs as private placement regimes must still adhere to all of the directive’s requirements. This includes provisions on authorisation procedures, capital requirements and international cooperation agreements, all of which will limit the possibilities for private placement marketing.
Effects on non-EU managers
For non-EU fund managers wanting to market or manage funds in the EU under the passport system, the proposal calls for different requirements depending on whether the fund is EU domiciled. Either way, GPs will need to meet all the directive’s requirements and disclose the fund’s marketing strategy, as well as meet the aforementioned tax and regulatory information exchange agreements, among other rules.
Likewise, non-EU fund managers are permitted to market both non-EU and EU funds under each member state’s domestic private placement rules as long as the GP complies with transparency and other private equity fund provisions. The managers also must have sufficient cooperation arrangements “relating to systemic risk oversight and information exchange” between the manager’s home state, and any member state the fund is marketed in.
The battle continues
The allowance of private placement regime is important given hardships of actually meeting the requirements of the passport framework, said Morris. “Not even the US can tick all the boxes on equal access, exchange of information agreements and cooperation between tax authorities for example”, he said.
“This is being driven by the government of France, and by a lesser extent the government of Germany,” said Morris, adding “any harm that can be done to the dominant position of the UK is to the benefit of those two countries”.
This past week US Treasury Secretary Tim Geithner reportedly sent a letter to French Finance Minister Christine Lagarde arguing the country’s position on third country rules was too burdensome.
Speaking on the new proposal’s likelihood of making it in the final language of the directive, Morris said the French government, a strong advocate of strict third country rules, would likely be content with the new dual approach.
Other sources, however, remain sceptical the dual approach set out in this week’s compromise proposal will be accepted by certain member states.
“There is a strong lobby resisting combining … a passport and national private placement regimes,” said Norton Rose partner and AIFM specialist, Michael Newell. He added this would probably result in further delay in agreement on the directive’s final text.
The EU parliament is scheduled for a plenary vote on the directive later this month, however further negotiations are likely to push it back later into the year.