On Armistice Day last year, another peace was reached: the final text of the new EU Alternative Investment Fund Managers (AIFM) Directive was signed. The new legislation, which was finalised on November 11, 2010, marks the first time that an EU directive will regulate the activities of 'alternative investment fund managers' – the EU term for hedge funds, private equity, venture capital et al.

After months of battles, both internally between the European Parliament, the European Council and the European Commission, and externally with the industries the directive seeks to control, the contentious legislation is now moving to its level two implementation stage.


Reputational harm

The directive introduces tough disclosure and transparency requirements, minimum capital requirements, and specific prohibitions on asset stripping. It may also have a knock-on effect on FDI by creating regulatory uncertainty and, some say, may potentially undermine the reputation of the EU as an investment destination. 

One of the most contentious elements of the directive, and probably the most important in terms of FDI, is the issue of different treatment between EU and non-EU AIFMs, because it sets up the need for equivalence for non-EU AIFMs if they want to market themselves within EU borders. This means non-EU jurisdictions (which, of course, includes offshore and the US jurisdictions) will need to introduce equivalent regimes. 

Furthermore, the directive introduces an EU 'passport' that enables EU AIFMs based in one EU country to market themselves throughout the EU. This immediately intensifies the tension between non-EU and EU alternative investment funds.

Critical issue

Simon Horner, public affairs manager at UK industry body the British Private Equity & Venture Capital Association (BVCA), explains just how critical the issue of 'passporting' became. “Throughout the negotiations, the EU suggested that non-EU AIFMs would not be able to obtain EU passports. In the end, the US had to step in to stop this from happening,” he says.

The final text states that the EU passport system will eventually be open to non-EU AIFMs after a transition period (2013 to 2015) and once they have equivalent regulatory regimes. In the short term, however, non-EU AIFMs must go to each national regulatory body to do business in the EU. 

The BVCA believes this is burdensome and creates uncertainty for investors and for FDI. Mr Horner poses the question: “So much investment comes from the US, for instance. Can the EU really afford to add regulatory uncertainty on top of all the other problems it has?”

A welcome compromise

But not everyone is pessimistic. Geoff Cook, chief executive of Jersey Finance, the representative body for financial services in the offshore jurisdiction, is bullish. He welcomes the “compromise directive”. “Jersey is pleased to confirm that it will meet the agreed criteria for ongoing market access into Europe. A number of established asset managers have chosen to relocate here in the past 12 months,” he says.

The EU must now produce the directive’s 'implementing measures', a task that has been given to the new regulatory body, the European Securities and Markets Authority, based in Paris. Vive la différence?