Large investment managers including BlackRock, Axa and Allianz have criticised the delegation of duties aspect of the Alternative Investment Fund Managers’ Directive (AIFM) in a letter seen by the Financial Times to Michel Barnier, the European Union’s financial reform administrator.
They fear restrictions on investment management companies delegating portfolio monitoring work to GPs in other countries would limit and increase the cost of cross-border and global investment, the FT report said.
The directive’s draft rules don't make it illegal to delegate but they do make it much harder to do so, as the rules are very prescriptive on what, how and to whom you may delegate, said one London-based private equity lawyer.
“A lot of existing fund structures depend on a high level manager of the fund delegating often to a group affiliate the day to day investment activity so the high level manager has a supervisory role, an oversight role,” said William Yonge, hedge funds and financial regulatory partner at law firm Morgan Lewis, in an interview with PE Manager.
The directive states a manager must remain in charge of its basic functions and not become a “letter-box entity”. This is when a manger delegates so many of their responsibilities the individually delegated tasks substantially exceed the tasks remaining with the manager.
A spokesperson for Barnier told the FT that “what the rule on letterbox entities aims to prevent is the system where a few ‘breakfast directors’ meeting every six months to sign off on investment decisions masquerade as an alternative fund manager”.
Under the AIFM a manager must justify its entire delegation decisions with objective reasons and the delegate must have “enough experience and adequate resources to perform the tasks.
Where delegation relates to portfolio or risk management it may “only be made to undertakings which are authorised or registered for the purpose of asset management and subject to supervision,” according to a client memo from law firm Mayer Brown.
Any delegation must not bypass the directive and must be under financial supervision, for example under the scope of the Financial Services Authority in the UK.The manager must also be able to monitor the delegated activity and instruct the delegate on the tasks it undertakes.
When asked what effect this aspect of the directive would have if implemented under its current guise Yonge said “fund managers would have to think about restructuring their entire operations, re-thinking the use of offshore managers or tooling up those offshore managers to a much greater extent than hitherto.”