01/06/2010 Author: Tony Griffiths

The next stage

The controversial draft AIFM Directive has now passed votes in the EU's two legislative chambers, bringing to an end the first part of the proposal's journey into law. With opposition in the hedge fund industry still strong, and discussions on the final shape of the legislation due to begin, is there still time to effect change?

After weeks of postponements, lobbying and back-room deals, the EU’s two legislative chambers finally got to vote on their respective versions of the Alternative Investment Fund Managers (AIFM) Directive. The delays – in part a legacy of the UK’s outgoing Labour government – had bought lobbyists time, but, in the end, the additional hubbub amounted to little in the way of progress. Both versions were approved with minimal fuss, in Parliament’s Econ committee on 17 May and Council’s Ecofin, the group of European finance ministers, the following day, as dissenters bowed to a hushed sense of the inevitable.

This is by no means the end of proceedings. With their own versions approved, Parliament and Council will now come together, along with the EU Commission, during the trilogues to hammer out a final, solitary compromise document to be voted on by all MEPs, potentially in July.

“Now the real work starts,” said Andrew Rubio, CEO of Throgmorton, one of the UK’s largest professional services providers to the hedge fund. “There will be intense lobbying on the wording and to make sure concessions are reached in order for the two sides to come closer together.”

The Alternative Investment Management Association (Aima), an ardent AIFM lobbyist, still hopes to feed into the trilogues, though it admits opportunities have been restricted. “It will be difficult because the parameters have now been set,” an Aima source said.

Newly appointed UK chancellor George Osborne emerged from his first European battle insisting there was still “much to play for”. But it was clear that the UK’s new coalition government had chosen to save its bartering chips for a later date.

Reports have suggested that the UK will choose to play its hand during the coming debate on Europe’s new regulatory super-bodies, including the European Securities and Markets Authority (ESMA), the successor to The Committee of European Securities Regulators (CESR). Concerns are that ESMA could be granted greater power to interfere with the day-to-day operations of hedge funds – a possibility the UK will contest vehemently.

More immediate efforts will be focused on the AIFM Directive though. The post-Ecofin note acknowledged member states’ concerns, “in particular as regards to third-country provisions”, confirming that the perennial flashpoint of the draft’s marketing restrictions for non-EU registered funds will remain the key battleground during the trilogues.
In the aftermath of the two votes, Aima highlighted Econ’s “unworkable” third-country provisions as an example of the “highly politicised” nature of the parliamentary process. Econ MEP Peter Skinner “abstained overall on support for the legislation” during voting, he said, largely in protest of its third-country stance. Other Econ members acted likewise, but not enough to halt progress.

The process remains a political game and differences are still emerging. From some unlikely sources too. Last week’s shock move by the German regulator to ban almost all short-selling was condemned by, among others, Germany’s AIFM ally France.

There is room to manoeuvre then, and concessions will have to be made on both sides. Is the UK willing to put all its eggs in one basket, by surrendering secondary concerns to win the third-countries fight? “It’s hard to say,” said Rubio. “They may be willing to sacrifice a few points but with an ultimate desire to get the right outcome on third countries. There’ll be a lot of pressure on that because it appears to contradict the G20.”

In terms of footholds, Aima remains hopeful for headway in areas where the two documents differ. “The text approved by the Council is much more practical and realistic than the Parliament one, particularly on the crucial issue of third countries, where the Council text does allow for national private placement regimes,” said Andrew Baker, Aima’s chief executive. The depository fight may be over, however, with both sides similarly hard-line, reducing choice and upholding strict liability.

Even if efforts to reconcile the texts pick up pace, for now, the volatility in both markets and moods make shocks and uncertainty the only guarantee. “It’s unlikely to be implemented until September 2012 and we’re still seeing US managers coming to Europe,” Rubio notes. “I think a lot of managers are saying ‘let’s make hay while the sun shines’ – there’s nothing they can do in the interim until there’s a clearer picture.