On December 19, the European Commission ruined the Christmas of private equity compliance professionals across Europe by releasing its long-awaited ‘Level 2’ implementing measures for the controversial Alternative Investment Fund Managers Directive.
When the Commission failed to publish these measures last summer, as promised, many in the industry assumed it needed extra time to clarify certain rules. One particular source of debate has been the rules concerning delegation, which are intended to prevent GPs from substantially outsourcing fund operations to other countries.
2. RISK AND PORTFOLIO MANAGEMENT
Level 2 also requires firms to split risk and portfolio management in a “functional and hierarchical” manner, while still conforming to the delegation provisions. Helpfully, the text does provide some qualitative factors GPs can use to determine when too much delegation has occurred. But these factors do not clearly distinguish ‘risk management’ from ‘portfolio management’.
The industry has been up in arms about the directive’s depositary requirement since the initial drafts. The major concern was initially cost – and this fear has not been eased by the Level 2 measures, as the Commission did not provide depositories any additional wiggle room to escape liability for lost assets held in their custody (as banks and other entities had hoped).
It’s clear that there’s still much to be done following the publication of the Level 2 measures. ESMA will be providing further guidance to the remuneration code, which will detail how firms should report their employees’ pay packets in the first quarter. The new measures have also provided national regulators with the impetus to press forward with implementing the directive within their respective laws. For GPs, the real work starts here.