25/03/2010 Author: Tony Griffiths

Changing Fortunes

The forced delay in the EU Council's vote on the latest draft of the AIFM Directive has offered fresh hope to hedge fund lobbyists that there is still time to soften the legislation's more damaging tenets. And, with fresh pressure from the US and UK government, the outcome in Brussels is far from decided.

"We have postponed the hedge fund directive,” said Spanish finance minister Elena Salgado after last week’s meeting of the EU Council. “This gives us a few more weeks to try to broaden the consensus, which at the moment still falls short of where we would like.” In a saga increasingly defined by its twists and turns, this latest development has perhaps been the most surprising yet.

Expectation prior to last week's Economic and Financial Affairs (Ecofin) council meeting – a gathering of the EU’s finance ministers – had been that member states would agree on the latest draft of the Alternative Investment Fund Managers (AIFM) Directive, with the UK begrudgingly bowing to pressure and conceding ground. Talk in Brussels had long been that Council president Spain, eager to see the project completed during its tenure, would seek a qualified majority rather than unanimity on 16 March. And with the hours and minutes ticking by, that remained the belief. “The UK will get something small, but everyone expects an agreement to be secured,” one Brussels source had told HFMWeek on the eve of the meet.

As HFMWeek previously reported, waning support for the pro-alternatives stance had resulted in the loss of the UK’s blocking minority – the minimum 91 votes required to reject legislation in the EU Council. With the Council’s pro-Directive members in a position to push the document through, the legitimacy of the threat and the severity of its potential ramifications prompted the personal intervention of UK premier Gordon Brown. The Directive’s controversial third-country provisions had already drawn criticism from US Treasury chief Tim Geithner, and the mounting pressure proved enough to push Spain into its one-minute-to-midnight climb-down.

The week’s events serve to highlight, first and foremost, the politics inherent in the process. The blocking minority is believed to have been lost following the abstention of vote-heavy Poland, who went quiet after the UK refused to back its stance on coal emissions, while the Council’s decision to back down and allow for more time has been linked strongly to the upcoming UK election and a more hawkish approach by the US – exemplified by Geithner’s letter.
A crushing victory for continental Europe over UK lobbyists would have weakened Gordon Brown’s position, and with the UK digging its heels in, rumours suggest that French President Nicolas Sarkozy, among others, was reluctant to push the Directive through and risk an anti-European backlash at the UK polls. German chancellor Angela Merkel, meanwhile, was unable to hide her disappointment over what she regards as a setback, criticising the British Prime Minister’s intervention during a speech to the Bundestag the day following the vote’s postponement.   

However, with further time now secured, it is the growing involvement of the US – highlighting the Directive as an international issue – that could prove the trump card. The US had been concerned for some time, but had dallied over an overtly political solution. Instead, the White House had relied on the private sector and individual politicians to get its message across. Senators and hedge fund lobbyists clocked up air miles, with regular transatlantic jaunts aimed at tempering the draft’s more protectionist aspects. Although this softly, softly approach worked during the Swedish Presidency, the situation deteriorated following Spain’s assumption of the role, forcing the US Treasury to become fully engaged.

A well-placed source told HFMWeek that Geithner’s campaign started “quietly”, as he placed calls to key members of the Commission and European politicians in February. When this failed to slow down the juggernaut, the Treasury Secretary put pen to paper, knowing that his expression of concern, that “various proposals would discriminate against US firms”, would be leaked to the European media. Geithner himself was also under pressure, with US managers vigorously lobbying his department to do something “quickly” about the perceived protectionism.
Appreciation for the Directive’s international implications is growing and with the vote in Council now postponed until May, third-country finance ministers – including Geithner – will have the chance to feed into the process at an April G20 meet in Washington DC. With the US becoming increasingly agitated with the EU’s stance, it’s an opportunity unlikely to be missed.       

Across in the EU Parliament, disagreement on key topics, along with the postponement in Council, has resulted in the lower chamber’s own rescheduling: The Economics and Monetary Affairs (Econ) committee this week pushed back the vote on its own version of the AIFM Directive from 12 April to 27 April.

As in Council, third-countries remain one of the more inflammatory areas, as demonstrated last Wednesday, when Econ gathered for the second of its discussions regarding potential amendments to its draft, the Gauzes Report. Throughout the debate, rapporteur and draftsman Jean-Paul Gauzés – who has faced staunch criticism for his recent u-turn on the third-countries conundrum – maintained a defiant silence on the issue.

Gauzés sent shockwaves through the funds community earlier this month by retracting his ‘two-tier’ marketing proposals which would have allowed national private placement rules to remain intact. He now favours EU-defined equivalency rules defined during a five-year transitional period, and this stance was reiterated in last Wednesday’s pre-meet note.

Gauzés may have stayed tight-lipped, but the issue was well-represented nonetheless. The International Monetary Fund’s chairman, Dominique Strauss-Kahn, gave a short presentation on the importance of international co-operation prior to the meeting, while several MEPs, including Peter Skinner, raised “fortress/prison Europe” concerns.

“The transitional period is quite short really for any discussions on equivalence,” said Skinner, speaking to HFMWeek after the meeting. “It doesn’t just involve the US and Asia, it’s elsewhere in the world, so once the Directive comes into force it would clearly set the cat among the pigeons, because a lot of countries around the world will say, ‘you’re pushing us to do this with your ideas of what it should look like’. These standards have to be global and they have to be done on a co-operative basis,” he added. “They could be done through Iosco or through other international bodies.”

Gauzés’ stony silence came as little surprise to Skinner – the rapporteur had zealously outlined his intentions in a private meeting the pair shared the day before.

Issues may divide – with third-country, scope and depository articles the main offenders – but MEPs appear united both in their general support for Gauzés and their drive for an April vote. Following the rescheduling of the vote in council, Econ – behind in the process from the start – now has the opportunity to complete, and vote through, its version of the Directive first. “Parliament is ahead, and when it is ahead it can do a lot of good,” said Gauzés, closing the afternoon’s meet.

As a twin-track legislative system, the chamber that completes its version first puts pressure on the second to follow its lead. However, Skinner warns, with the Directive’s third-countries section now making waves internationally, Parliament needs to be careful not to create a tsunami of discontent, one that could scupper the entire political process.     

“If Parliament goes with a more radical view, it puts Council back in the driving seat as it comes later on to negotiate whether or not it will accept this,” he said. “If Council reject this legislation then of course regulation of hedge funds, private equity and all the rest is lost. So there is something to lose for everybody.”

According to Skinner, what’s missing is a direct political leadership from the Commission, notably Michel Barnier, the European commissioner for the internal market. If Barnier were to admit that EU-dictated equivalency provisions contradict the power of the commission to conduct discussions at an international level on equivalent standards, then the pressure on Gauzés to retreat would be overwhelming.

The next few weeks are critical, therefore. Lobbying will intensify as groups and MEPs on both sides consolidate support in time for the Econ vote. Skinner rates the chances of a favourable outcome as 50/50.

European Pension bodies – including the UK’s National Association for Pension Funds – are expected to step up lobbying efforts in coming days, as is industry trade body The Alternative Investment Managers Association (Aima). One of the industry’s loudest voices on the European stage, Aima is continuing to pursue a “sensible” route, a senior source told HFMWeek, and it believes that progress can still be made. “We would like to get to this point – and I think we will do – where national discretion will be allowed,” said the spokesperson. “This is the real art. It will be sloppy – but there will be further compromises and co-operation, particularly as the more overarching global regulator approach of the G20 catches up.”

From the outside looking in, the situation may be bleak, especially for those who pessimistically consider last week’s postponement a stay of execution. Yet, once inside Brussels’ complex regulatory bubble, the atmosphere becomes more palatable. AIFM lobbyists again have time on their side and international pressure is mounting.
Optimism, it would appear, is back on the table.