April 29 marks the one-year anniversary of the European Commissions publication of its controversial Alternative Investment Fund Managers directive, a proposed piece of far-reaching legislation that could restrict Europes access to global alternative asset managers. But instead of allowing their deep ideological rift to show in public, the European Unions Council of Ministers decided last month to set aside a debate on the proposal.
For their part, U.S. and U.K. politicians are hoping an agreement can be reached with global peers at the G-20 summit in Canada in June. The two countries are concerned about the creeping protectionism of the bill, in which non-EU managers would have to prove equivalence of regulatory status with EU managers. Countries including Denmark, France and Germany want the EU to come down hard on the alternatives sector in the wake of the financial crisis.
The Economic and Financial Affairs Council gathering of finance ministers from the 27 EU states was due to discuss the directive at its meeting on March 16 but couldnt find enough common ground.
In particular, the U.K. has opposed clauses restricting the investment flexibility of hedge funds and private equity on the basis that they may damage the competitiveness of the European fund market. Up to 70 percent of European hedge funds are U.K.-based.
Todd Groome, chairman of the Alternative Investment Management Association, a hedge fund industry group, applauds the decision to debate the directive at a global forum. We want Brussels to be aligned with the U.S., U.K., Singapore and Hong Kong, he says. The process was getting away from the G-20 mainstream. This should refocus the debate on financial stability.
Prime Minister Gordon Brown claimed credit for taking the AIFM off the agenda, saying it was important to discuss the issues in a global rather than an EU context. The U.K. election in June may also be a distraction, as the future of the Financial Services Association may be in doubt if the Conservative party wins power.
U.S. officials remain wary. In a recent letter to Michel Barnier, EU commissioner for internal market and services, Treasury Secretary Timothy Geithner said he was concerned that the directive would deny U.S. firms access to EU markets.
Industry stability may also be at risk. Robin Minter-Kemp, managing director of London-based Cazenove Capital Management, says that while the requirement for independent custody and valuation may be useful, other clauses may restrict hedge funds and take a bite out of demand. There will be a cost to this, and experience suggests that cost will be borne by the investor, he tells II. It may raise barriers to entry for skilled managers and as such reduce choice. There is a danger of slaying the golden goose.