Following months of political wrangling, a significant breakthrough was achieved on 19 October 2010 in negotiations on the terms of the proposed Alternative Investment Fund Managers Directive (“AIFMD”). EU finance ministers meeting in Luxembourg agreed to support the Belgian compromise proposals (Belgium currently holds the rotating presidency of the EU Council).
Third Country AIFM
The most contentious aspect of the negotiations related to whether third country (non-EU) based managers (AIFM) would be allowed to access the passporting provisions of the AIFMD and whether national private placement regimes would be allowed to continue. In order to break the deadlock, the Belgian Presidency proposed a dual system which will see the passport introduced two years after the implementation of the AIFMD (which is expected to be transposed into national laws in early 2013), followed by a potential phasing out of national private placement regimes after 2018.
It is now expected that further discussions will take place between officials of the Belgian Presidency and Members of the European Parliament, with a view to tabling the draft Directive for a final vote on or before 12 November 2010.
Whilst most of the recent press coverage on the AIFMD has focused on discussions relating to arguably the most hotly contested issue of the Directive, namely third country funds and the EU passport, there are a number of other contentious issues.
Although there has been significant movements in relation to parties who can act as depositaries, including prime brokers for hedge funds and less regulated entities for long term closed-ended funds, the one fundamental issue that is still highly problematic is the strict liability regime pursuant to which the depositary would be liable to the Alternative Investment Fund (“AIF”) or to the investors of the AIF for the loss of financial instruments held in custody. A carve out has now been included in the latest Belgian text where custodian activities are delegated to a third party and such delegation is appropriately conducted and there is a written contract between the depositary and the third party that explicitly transfers the liability of the depositary to that third party in circumstances where the AIF would have a direct right of action against the third party.
The latest compromise proposal retains the disclosure requirements for all AIF, including private equity funds. These would still require, for example, a private equity fund with EU investors to disclose its business plan for any portfolio company it controls to the AIF and its other shareholders.
The compromise text removes all regulatory provisions relating to short selling, thus leaving such arrangements to be dealt with separately under separate legislative provisions.
The latest compromise text widens the categories of staff of an AIFM who are subject to the remuneration policy to include risk takers, control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. Furthermore, members of the remuneration committee must be members of the management body not performing executive functions in the AIFM concerned.
A key proportionally principle has been included in the remuneration policy so that an AIFM is obliged to follow the remuneration policy “in a way and to the extent that it is appropriate”. However, this has been included in an annex and not the main provisions of the proposal, which means the drafting is far from ideal and a truly proportionate implementation is still not ensured.