Home -> Law Blog Directory -> Corporate & Securities Law Blogs -> Jim Hamilton's World of Securities Regulation

Corporate & Securities Law

: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

UK Financial Services Secretary Criticizes EU Fund Manager Directive Proposal

Paul Myners, the UK Financial Services Secretary to the Treasury, said that European Commission?s Alternative Investment Fund Managers draft directive is a "flawed" document that requires "major surgery." According to Mr. Myners, in remarks delivered to an inestment management industry group, "imposing ill-considered rules in haste would be counterproductive, whether at European or national level."

The European Commission proposed its directive on alternative investment managers this spring. The measure would provide broad regulation of managers of hedge funds and all private equity funds with 100 million euros of assets under management. The Directive on Alternative Investment Fund Managers is designed to create a comprehensive and effective regulatory framework for hedge and private equity fund managers at the European level.

The secretary cautioned against protectionist impulses, stating that

It is perhaps easy for other European countries to make political capital out of demanding intrusive regulation of an industry of which they have little or no direct experience. But it is woefully short-sighted, bordering on a weak form of protectionism. Europe has a lot to gain from a thriving alternative investment industry and it is important to make that case with conviction.

He also criticized the directive's approach to custody and asset verification. According to the secretary, there is no reason why the custodian should be a bank. If a firm is authorized to safeguard client assets, it should also be permitted to safeguard the assets of a fund, he reasoned. Delegation of custody is essential to investment, as a single lead custodian cannot realistically have a local presence in all the markets a fund might choose to invest. "Imposing strict liability for delegated custodians would impose large capital costs, make investing in some emerging markets impractical and increase costs to investors," cautioned the secretary.

Another area of concern is the directives's approach to the imposition of leverage caps. As described by Mr. Myners, the EC proposed strategy-by-strategy limits on leverage at the fund level to be set in level 2 implementing measures. He noted, however, that the systemic risks posed by the leverage of any one fund can only be assessed in the context of wider market conditions. In his view, capping leverage on a fund-by-fund basis would not provide effective protection. Leverage caps would also not help protect the solvency of prime brokers, he stated, because this requires effective banking solvency rules.

With regard to portfolio company disclosure. The secretary asserted that " we should actively encourage private equity to provide more funding, not burden it with unnecessary rules or regard it prejudicially as an unwelcome form of capital or skill." Accordingly, he opposes the Commission?s proposal to impose what he described as "stringent and costly disclosure requirements on the portfolio companies of EU private equity funds" which, with relatively low thresholds set forth in the directive, would apply to rather small companies. These administrative costs would put these companies at a competitive disadvantage by effectively forcing them to disclose details of their business plan to competitors. The secretary stated that these provisions require "radical rewriting if it is to be retained at all."

The secretary's remarks may be found here.

Full post as published by Jim Hamilton's World of Securities Regulation on July 07, 2009 (boomark / email).