With final technical advice in hand, the European Commission can now begin fine-tuning core provisions within the contentious Alternative Investment Fund Managers Directive agreed last year.
The European Securities and Markets Authority (ESMA), a new Paris-based body, was tasked by the Commission to work out all the kinks in crafting a new pan-EU framework for alternative investment funds, submitting its advice last week. The development means industry lobbyists should tweak their message to suit a more politically focused audience as opposed to one built for nonpartisan technocrats.
It was hoped by fund managers that ESMA would be the voice of reason during a rulemaking process that kicked off with politically charged discourse and posturing between European policymakers. As the agency responsible for enforcing the Directive, ESMA had less incentive to score political points and more reason to advocate a common-sense approach to supervising GPs.
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In some respects, ESMA did just that.The regulator took a more reasoned stance on certain proposals covering delegated functions to non-EU countries and the definition of leverage compared to what some politicians argued for during the first round of rulemaking. But in other areas, ESMA went the opposite way, exacerbating some industry concerns as the Directive began to take shape under its leadership. One of the biggest bones of contention continues to be around the role of depositaries, and how much say they will have over GPs’ investment decisions. And clarity is still needed on how non-EU countries can enter into cooperation agreements allowing their local players’ fund operations in the EU.
In a number of consultation responses the private equity industry stressed the impracticalities contained within less favourable ESMA proposals. As a technical thinker, ESMA could be convinced to pare back provisions which did not fully sync with market realities; the final advice shows that the lobbying campaign was hit and miss. But now that rulemaking is back with the European Commission, a new tactic, one more focused on political persuasion, should be adopted.
EU Commissioners have less understanding of private equity and hedge fund markets relative to regulators. It’s smart to explain the intricacies of alternative investments to politicians but it’s unlikely to fully capture their attention. As such the industry should take more care to emphasise the adverse economic consequences of poor political decisions, a captivating line during a time of market uncertainty.
The ideal industry response will strike a balance between investor protection and the reduction of red tape. Or in other words, it will be insufficient to point out the awkwardness of a particular provision without also explaining how changing it can lead to a better regulatory outcome for all.
Or, in similar vein, lobbyists might wish to point out areas in which the Commission goes above and beyond what’s been agreed during level I negotiations. Should the Commission overreach its boundaries during secondary rulemaking, it could face a court challenge from stakeholders.
At any rate, the Directive will re-enter the political fray, with the Commission expected to publish its level II implementing measures by June. As such, lobbying campaigns should remain in full-swing. ESMA will continue offering policymakers further guidance on specific areas relating to remuneration policies and the calculation of leverage for instance, but industry concerns should be trumpeted loudest when commissioners are within earshot.