British and American critics of the European Commission’s draft directive aimed at regulating alternative investment funds gained an important and not-unexpected ally, after Swedish policymakers recommended important changes to the proposed legislation in a key policy document.
The Swedish document, in the form of an"issues note", came ahead of the first meetings on the matter by member-country representatives scheduled for this week. UK treasury minister Lord Myners is understood to be holding talks on the proposed directive in Brussels today.
Sweden took over the presidency of the EU, which changes every six months, in July. Until last week, there had been speculation that it would be more accommodating than France was seen to have been to some who feel the Alternative Investment Fund Managers (AIFM) directive, in its present form, would be restrictive and potentially burdensome.
“Anglo-Saxon” hedge funds and private equity firms have been particularly outspoken over what they have claimed are the draft directive’s protectionist effects.
In its issues note, the Swedish delegation, which is referred to collectively in the 20-page document as the Presidency, said it had indentified “a number of key issues in the Alternative Investment Fund Managers (AIFM) proposal that need to be addressed”.
These included proposed changes to the way AIFs are defined, as well as clarification of which types of investment vehicles are to be covered and which would be exempt, and how the new regulations would be implemented alongside such existing regulatory frameworks as the UCITS IV directive and MiFID.
At one point the Swedish body writes that an element of the directive which “restricts delegation of portfolio management to other authorised AIFMs” could “seriously affect global players, where portfolio management is today carried out by delegation to managers close to the local markets in third countries.”
Later, it notes that many “have expressed serious doubts” about the directive’s limiting of the depositaries to EU credit institutions.
“Given the global character of the activities of many market players, the current draft does not seem workable, as it in many cases will not be possible to hold the assets in the EU without incurring considerable costs for investors,” they write.
“… For investment in emerging markets, the additional costs of using an EU depositary could make investment in such markets impossible. Some third country jurisdictions also require the use of local custodians.”
Dutch pension funds speak out
Also speaking out ahead of this week’s talks was a group of Dutch pension funds, which wrote to EU international markets commissioner Charlie McCreevy to express their concern that "elements included in the…proposal may reduce investment opportunities and risk diversification, lead to higher costs and lower returns, and may, in fact, not reach [the] intended objective to reduce the systemic risk as experienced under the current financial crisis".
The pension funds — which said they represented some €450bn of assets under management, and included APG, Blue Sky Group, Shell Asset Management Company, the Philips Pension Fund, Mn Services and Doctors Pension Fund Services — argued that the directive proposes restrictions that could limit the available investment universe.
They called for getting rid of "the one-size-fits-all approach", and warned that "the many millions of European citizens who have a financial interest in this issue via their pension funds could…be adversely affected" by the directive.
"If the proposal [were] implemented as currently drafted, it will lead to a massive number of institutions requiring registration," the pension funds told McCreevy.
"The costs for this will eventually be paid by investors in AIF, such as the undersigned. Previous large-scale European legislation projects — such as MiFID, which had a smaller scale than the [proposed directive] — has shown that the costs of implementation and compliance with such legislation can be significant."
In addition to ten pension funds, the Dutch Association of Industry-wide Pension Funds and the Dutch Association of Company Pension Funds also signed the letter.
Copies were sent to the European Parliament, the Swedish presidency of the EU, the Netherlands Ministry of Finance, the Permanent Representation of the Netherlands to the EU, and the Netherlands Authority for the Financial Markets.