EU Alternative Investment Funds Regulation: Still No Respite for Regulators and Fund Managers
After two years of negotiations among the European Commission, European Parliament, and Council of the European Union (composed of representatives of the 27 EU member states) as well as intense industry lobbying, the much-debated Alternative Investment Fund Managers Directive (AIFMD) was finally adopted on 8 June 2011. Alas! This was only the beginning.
The Directive, which was part of the EU authorities’ response to the financial crisis, created a regulatory and supervisory framework for asset managers in a diverse sector encompassing hedge funds, private equity funds, real estate funds, commodity funds, infrastructure funds, and others. It had far-reaching objectives and tackled a broad range of issues, including authorization and registration of AIFMs, marketing, transparency requirements, valuation, leverage, risk management, liquidity, depositories, governance, remuneration, and conflicts of interests.
The respite for regulators, practitioners, and other stakeholders who had to grapple with these issues was short-lived, however. Indeed, AIFMD implementing measures are yet to be worked out. Therefore, in July — just a month after the Directive’s adoption — the newly established European Securities Market Authority (ESMA) published a 436-page consultation on implementing measures needed to develop the specifics of the new regime.
One of the obligations of alternative investment fund managers under this Directive is “to act honestly, with due skill, care and diligence and fairly in conducting their activities” and “to act in the best interests of the AIFs or the investors of the AIFs they manage and the integrity of the market”. This obligation was in line with the opinion expressed by CFA Institute members in an October 2009 survey, in which 97 percent of respondents supported mandatory requirements to achieve those objectives.
In this consultation, ESMA asked which criteria could be used by the competent national authorities of the EU to assess whether alternative investment fund managers are in compliance with these obligations. We believe that one such criterion could be the voluntary adoption by an AIFM of a high-quality, comprehensive, and well recognized global code of conduct. We recommend that the CFA Institute Asset Manager Code of Professional Conduct, which outlines the ethical and professional responsibilities of firms that manage assets on behalf of clients, be recognized by national competent authorities for this purpose. In addition to being an easy standard for regulators to put into practice, another advantage is that such a code can be easily and quickly adapted in response to changing market conditions and practices, integrating lessons learnt along the way.
We will see whether this recommendation is put forward by ESMA, when it submits its final advice to the European Commission by 16 November. But, in any case, this is not the end of the tunnel for those who work in the alternative investment funds business. Indeed, once the implementing measures of the AIFMD are finalized by the European Commission, the industry will need to implement them by July 2013, meaning there will be little time for the industry to digest and adapt to these new groundbreaking requirements.