AIFM passes parliament, industry faces new regulations

As expected, the EU parliament has accepted compromise proposals put forth by the rival EU council, ushering in a new wave of rules on fund transparency, remuneration, asset stripping and non-EU funds and managers.

The Alternative Investment Fund Manager directive, a 210 page text of new rules and regulations over Europe’s private equity industry, has passed the EU Parliament on a vote of 513 to 92.

The long anticipated directive will impose new rules on general partners’ pay, fund transparency, restrictions on asset stripping, but most notably, the rules will allow non-EU funds marketing access to the 27-member bloc.

Until recently, discussions have been deadlocked between the EU Parliament – arguing for stricter regulation of fund managers – and the more GP-friendly EU Council.

The directive ultimately underwent 17 compromise proposals, the latest being in late October under the Belgian presidency of the EU Council, when EU finance ministers played their part in approving the negotiated text.

Third country rules

Non-EU managers have been permitted access to European investors. However, this will be under the condition the non-EU country has in place sufficient regulatory standards and information sharing agreements with member states.

Under the system, two years after the directive becomes fully implemented by EU member states into national law (sometime in early 2013), EU fund managers can be granted a passport which will allow a fund to be marketed to professional investors across all EU member states. Non-EU funds and managers will be able to obtain this passport sometime in early 2015 provided they are able to meet the directive’s requirements.

From this point, a dual marketing system will be in place until 2018, in which a passport scheme will co-exist alongside national private placement regimes, which allow marketing rights on a country-by-country basis. After this three year period of co-existence, “it is the intention that the national regimes shall be terminated, after the entry into force of a delegated act by the Commission in this regard”.

The directive also introduces new rules on manager remuneration, fund transparency, asset stripping and depositaries, among other things.

Under the directive, GPs will face new rules on pay and bonuses, similar to those imposed on bankers under the Capital Requirements Directive. Remuneration policies will have to ultimately be put in place for any staff whose work will have a material impact on the risk profile of a fund.

GPs will also be subject to new restrictions on the amount of capital they can distribute following the takeover of a non-listed or public company. In the first two years following an acquisition, fund managers must use their “best efforts” in preventing “distribution, capital reduction, share redemption and/or acquisition of own shares by the company”.

Furthermore, GPs must ensure a single depositary for every fund under management. Depositaries, which will be responsible for overseeing and safeguarding a fund’s cash flows and assets, will face increased standards. Under the directive, depositaries will be liable for any loss of assets in its custody, unless it can “prove that loss is result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite its reasonable efforts”.

Some exemptions, however, have been made for private equity firms hitting certain characteristics. Funds with aggregate assets under management no greater than €100 million will be exempt. Likewise, unleveraged funds under the €500 million mark will also be out of the directive’s scope. Further exemptions are provided to pension funds, sovereign wealth funds, and to holding companies whose shares are already admitted to trading on a regulated market.