IRELAND: IFSRA express concern on AIFM Directive

Tuesday July 14 2009

IFSRA has expressed concerned of the proposed Alternative Investment Fund Managers Directive. During an opening address, Martina Kelly, Financial Regulator to the Joint Committee on European Scrutiny while welcoming many aspects of the AIFM expresses some reservations.

Some of IFSRA `s key concerns mentioned are:

Scope of the Directive

There are many questions in relation to the scope of the Directive. It refers to managers of alternative investment funds (or AIF) and AIF refers to investment funds other than those authorised as UCITS, whether established within the European Union or in third countries. However “manager” in the context of an investment fund can have many meanings. It can include an investment manager and also the board of directors in the case of a corporate investment fund. The proposed text indicates that manager could also include a fund administrator, appointed by the manager or by the AIF to provide fund administration services.

Minimum or maximum harmonisation

The extent to which this proposal could be regarded as minimum or maximum harmonisation is very unclear. For example, on the one hand it provides (in Recital 8) that the Directive does not regulate AIF and therefore does not prevent Member States from adopting or from continuing to apply additional requirements in respect of AIF established on their territory. However later text (Article 25 (4)) provides that Member States may only impose additional limits to the level of leverage that an AIFM can employ in exceptional circumstances. Most Member States authorise and regulate AIF and impose a regulatory regime based on the nature of the AIF and its investors. It will be important to clarify therefore the extent to which these regimes may continue to apply.

Management Company passport

The Directive provides that a manager will be able to provide services in other Member States without further authorisation. However as AIF are not regulated under the Directive it is not clear how a manager in one Member State could establish an AIF in another Member State under national legislation.

Depositaries

The requirement that each AIF must have a depositary is reasonable but the necessity for the depositary to be an EU credit institution is of concern. Irish AIFs are required to have an independent depositary but this entity may be established as a subsidiary of an EU or non-EU credit institution, provided the liabilities are guaranteed by the parent.

This is a stricter requirement then for UCITS and we also believe that it is inappropriate to have a stricter standard of liability for AIF then for UCITS. The European Commission recently launched a public consultation on the UCITS depositary function. The Committee of European Securities Regulators (CESR) is also considering similar issues.

IFSRA is of the opinion that this proposal should await the outcome of both EC and CESR Initiatives.

Leverage

Irish authorised Qualifying Investor Funds are not subject to any regulatory imposed investment restrictions. The Irish QIF regime works well and QIFs are recognised as avoiding many of the problems associated with hedge funds worldwide, due in part to the requirement to have an independent depositary and services provided by Irish fund administrators. Under the proposal, a limit on leverage may be imposed. There is no evidence that such a restriction is necessary and it would in any event be difficult to implement in practice, not least because leverage can be employed in various ways for example through borrowings and also through the use of derivatives.

Independent valuer

It is proposed that each AIF under management must have appointed a valuer, independent of the manager. While it is important that an AIF is subject to independent valuation, in particular where assets cannot be valued by reference to market pricing, responsibility for valuation must rest with the manager and not a third party which is not subject to prudential regulation. The Directive proposals are based on a concern that many hedge funds did not have appropriate valuation policies and invested in assets for which transparent pricing was not available. This is a valid concern, particularly in the context of unregulated AIF, but the proposal should focus on the valuation process, perhaps by reference to the principles set out by the International Organisation of Securities Commissions (IOSCO) in this area.

“These are some of our principal concerns although there are others including the disclosure requirements which will apply to private equity funds, the overlap with other EU Directives and the restrictive rules on delegation, which in the latter case go beyond delegation rules which apply to UCITS management companies. We also believe that the proposed capital requirements are unnecessary and will impose significant additional costs to Irish AIFM” she added .

Click on the above link for the full speech