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Alternative investment fund implementation measures "override agreed proposals", EBF warns

Draft proposals which will be used to implement the new European regulatory regime for alternative investment funds "override agreed proposals" and do not provide sufficient legal certainty, the European Banking Federation (EBF) has warned.16 Apr 2012

The draft delegated Regulation containing implementation measures for the Alternative Investment Fund Managers Directive (AIFMD), which will take effect from 2013, contradicts the "widely agreed upon" advice of the European Securities and Markets Authority (ESMA), it said.

The EBF, which represents the interests of over 5,000 European banks, is particularly concerned that the new plans impose "a level of responsibility beyond the reasonable control" on the bank which holds assets on behalf of a fund affected by the new rules, for example a hedge fund or private equity fund. It added that legislative certainty was "crucial" given the level of liability these 'depositary' banks will have.

"The EBF finds it most regrettable if a balanced approach cannot be found and it urges the Commission, MEPs and EU Member States to consider the concerns of its members," it said in a document (10-page / 174KB PDF), published on its website.

The AIFMD aims to create a harmonised regulatory structure for alternative investment fund managers across the EU and will apply to any person or company whose regular business is managing one or more alternative investment funds - including hedge funds, private equity funds, real estate funds and a wide variety of other types of institutional fund. Under the AIFMD, that person cannot be authorised to act as an alternative investment fund manager unless it also provides portfolio management and risk management functions.

Included in the AIFMD are 50 so-called 'level 2 measures' which must be specified by the European Commission, covering "almost all" areas of the new Directive with the exemption of its scope and specific provisions for the managers of a certain type of fund. The new Regulation, which has been circulated to national regulators but has not been made public, will make these directly applicable to EU member states without the need for transposition into national law.

The Regulation is due to take effect in July, according to a legislative programme (100-page / 407KB PDF) published by the Commission at the start of this month.

In its response, the EBF said that depositary banks' due diligence, segregation and oversight duties "should not go beyond" those set out in the AIFMD. "The European Commission should clearly and positively identify the circumstances and the areas where the depositary can perform effectively its due diligence duties on a reasonable basis," it said.

It added that depositaries should only be considered to have "custody" of financial instruments where the bank has "unfettered control", and that any implementing measures must "provide legal certainty" on when depositary banks will be considered liable for those financial instruments.

"Financial instruments which are provided to either market participants or market infrastructure in support of clearing or settlement activities should not be deemed as held in custody," it added.

The EBF's comments follow similar concerns raised by hedge fund operators earlier this month. The Alternative Investment Management Association (AIMA) is concerned that EU member states were only given two weeks to respond to the text, which it claims will have a disproportionate impact on how fund managers in non-EU jurisdictions can access European investors.

"We fully respect the Commission's right not to follow ESMA's advice when producing secondary legislation," said Andrew Baker, AIMA chief executive. "However, there should be more transparency and better consultation if the Commission has decided to depart from the advice in... crucial areas for the global asset management industry."

He added that the Commission should clarify whether third country regulators will be forced to sign 'cooperation agreements', agreeing to apply EU standards to European investors in those territories, in the Regulation's final text. "These would be extremely problematic if not impossible to conclude," he said.