EU to bar alternative funds outside bloc

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The Swedish EU Presidency is preparing to limit the activity of European alternative investment funds to within European borders, a document from the EU’s rotating presidency revealed yesterday (11 November).

A document shows that the Swedish Presidency has decided to restrict operations between EU and non-EU domiciled funds. The compromise proposal is intended to revise a European Commission plan to regulate alternative investment funds, deemed unworkable by the funds industry.  

   

The document also reveals further restrictions on alternative investment funds such as borrowing limits and curbs on pay. The latter proposal is part of an EU drive to crack down on the kind of high-risk investments made by bankers before the crisis, which many observers believe to be encouraged by unjustifiably high pay. 

Moreover, the Swedish proposal introduces a new requirement preventing an EU manager from investing in a non-EU fund unless it has an EU manager or its non-EU manager is based in a country that has an information-sharing agreement with EU member states. 

So-called third party equivalents were a subject of vehement debate at a Parliament hearing on the draft directive this week (10 November). Representatives of the asset management community called on the EU to clarify what third party funds – funds outside the EU – were able to do inside the EU. 

The Presidency’s clarifications are likely to upset asset managers, who have said they will ask for the deletion of the third party amendment for fear that it will limit their trade with non-EU funds. 

At the hearing, a representative of a Dutch pension fund said that if the directive is not changed, there should be separate provisions allowing pension funds to conduct their business outside the EU. 

A third of Dutch pension fund MN Services investments come from non-EU investors, which could be eliminated if the directive is implemented. 

Kris Douma from MN Services told MEPs said that pension funds need some flexibility because they have to create vehicles for smaller funds to pool their resources and gain a foothold in the market. 

Pensions could be hit 

Europe will not be able to afford the fallout from implementing the current proposal to regulate alternative investment funds, Gerben Everts of the Algemene Pensioen Groep  (APG), another Dutch pension fund, warned MEPs at the hearing. 

Calling on the Commission to retract its proposal entirely and launch another impact assessment, Everts warned that the draft Alternative Investment Funds Directive (AIFM) would have “a tremendous impact on pension funds and pensioners in Europe”. 

“With an ageing population, foreseeable reductions in macro-economic growth, high unemployment and with the challenge of refinancing government debts post-crisis while inflation is looming, the fallout of the directive is something Europe can ill afford,” Everts told a crowded room of MEPs in the Parliament on 10 November. 

APG’s regulatory advisor said the current directive would not only cost the industry 1.4 bn euro a year in compliance costs, but also add 15-20% to pension premiums. Pensioners would see their income drop considerably. 

Everts complained that pension funds had been excluded from working groups on the directive and that the Council was at the mercy of a disorganised lobby against the proposal. 

“At a time when there is a growing pensions crisis across Europe coupled with an ageing population, politicians need to look much closer at the huge costs that this could put on pension funds,” UK Conservative MEP Vicky Ford stressed at the meeting. 

On 29 April, the European Commission proposed a new set of rules for hedge funds and private equity firms, requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term. 

The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks. 

The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that the exemption of funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis. 

  • Dec. 2009: Parliament to discuss amendments to the AIFM Directive.
  • April 2010: Parliament's economic and monetary affairs committee expected to vote on amended report.

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