They also made improvements to the directive’s transparency and risk reduction rules. “This position will ensure better transparency and better investor protection while at the same time being on the side of the financial industry when it is working for the real economy”, rapporteur Jean-Paul Gauzes (EPP, FR) said minutes after the vote.
Under the legislation as amended by the committee, alternative investment fund managers (AIFMs) in third countries would have to comply with the directive in order to market funds around the EU. Funds such as private equity and investment trusts would be more lightly regulated than hedge funds and some other types of alternative investment funds (AIFs) would be completely exempted. The main changes put forward by MEPs to the Commission’s initial draft are intended to increase investor protection and transparency while at the same time reducing the potentiality protectionist dimension of the rules on access to the EU market from the outside. Negotiations are now expected to take place between MEPs and the Council of Ministers ahead of the first-reading vote by the full Parliament, scheduled for July.
The adopted text increases the disclosure requirements to investors by AIFMs in some fields and also proposes some new reporting requirements for the competent authorities. Most notably, new rules would require AIFMs to inform investors about maximum levels of leverage (borrowing) and the total amount of leverage used by an AIF, and to provide information on the domicile of underlying funds in case of “fund of funds” AIFs and the domicile of any master fund. Managers would also be required to provide a description of the past performance of the AIF, changes in liability if there is a contractual agreement between the AIFM and the depositary, and information about the role of sub-depositaries if these are being used.
The authorities would need to be informed about the overall leverage used for each AIF, the ways fees are paid and the amounts paid to the AIFM, and performance date of the AIF including the valuation of assets.
The authorities may ask for additional information from managers which they consider may pose important risks. The European Securities and Markets Authority (ESMA) may also require additional reporting in exceptional circumstances or in order to protect the stability of the financial system.
The committee suggested new features designed to reduce risk in the financial system. These include new rules on remuneration, selling of borrowed securities (short-selling) and marketing to retail investors.
On remuneration, the text requires that AIFMs adopt sound policies and practices that do not encourage excessive risk.
More specifically, it demands that remuneration policies for AIFMs be closely similar to those to be applied to banks. The text bans “naked short-selling”, a process of selling a security which is neither owned nor borrowed. It also requires managers regularly to disclose information on important short positions to national authorities. It also provides that ESMA may decide to restrict short-selling activities in exceptional circumstances or to protect the financial system’s stability. On marketing to retail investors, member states would have to ban the marketing of an AIF to retail investors on their territory if that AIF invests more than 30% of its funds in other AIFs which are prohibited from being marketed within the EU.
According to text adopted by MEPs, when an AIFM has more than 10%, 20%, 30% and 50% of the voting rights of a non-listed company, it must notify the relevant authorities and the investors in the AIF in question. The manager must provide information on the communication policy with employees, plans for conflict-resolution and indicate which persons are responsible for deciding on business strategy and employment policy.
Finally, AIFMs must give notice of any planned divestment of assets.
The adopted text puts forward a system which applies different levels of regulation according to the type of fund rather than a one-size-fits-all break-off limit. It will be the member state authorities which will establish who qualifies for lighter treatment on the basis of the directive’s rules. Private equity funds and non-systematically important AIFMs will be able to avoid full implementation of the directive. Other types of funds will be completely excluded from the scope of the directive such as holding companies, and banks and pension funds only investing their own money.
By: N. Peter Kramer
