The European Securities and Markets Authority's (ESMA) released new guidelines on how fund managers subject to the Alternative Investment Fund Managers Directive should meet the bill’s reporting requirements – and it's thrown something of a curve-ball GPs’ way.
In an unexpected move, the pan-EU regulator asked its national counterparts to consider going above and beyond the guidelines' requirements. It now wants the disclosure regime to cover funds’ liquidity profiles, how funds measures risk, exactly how much leverage funds carry, and the number of transactions carried out using high-frequency algorithmic trading techniques.
It’s hard to argue against more transparency. But are these additional requirements really worth the extra reporting burden as far as private equity is concerned? After all, relatively few GPs leverage their funds and hardly any engage in high-frequency trading (almost by definition). These requirements are clearly designed with hedge funds in mind; it's hard to see how forcing private equity managers to report on them will benefit anyone.
And the bad news is that industry legal experts expect most – if not all – national regulators to follow ESMA’s lead. “ESMA is telling the other regulators that it thinks strongly that this other information should be collected because they feel it’s relevant,” one regulatory lawyer told PE Manager. “ESMA actually put the boxes in its reporting template for regulators to collect this data too. My expectation is that it will very much be standard across Europe.”
To make matters worse, it may be up to two months before national regulators confirm whether they intend to adopt or reject ESMA’s suggested reporting rules. That makes it difficult for chief compliance officers working to satisfy the directive’s reporting requirements to put the final touches to their internal reporting systems and data collection procedures. In a related issue, the industry must wait to see if national regulators will allow fund managers to use reporting templates provided by ESMA to populate their answers and submit reports; there’s a possibility that national regulators will require fund managers to follow their own bespoke templates.
On the plus side, ESMA is at least providing those GPs that are taking advantage of the one-year compliance grace period with some extra time to file their first AIFMD reports. Initially ESMA wanted all GPs subject to the directive to begin submitting reports by January 31 2014 (February 15 for funds of funds). But following push-back from the industry and some national regulators, ESMA is now suggesting that GPs begin filing their reports only after they become authorized.
And because fund managers are already revamping their existing reporting procedures and policies to reflect all this new regulation – the US Foreign Account Tax Compliance Act is the obvious example, but there's also been increased attention on Know Your Customer and Anti-Money Laundering rules – satisfying ESMA’s suggested extra reporting requirements may prove to be less hassle than some envision.
Nonetheless, this latest uncertainty around AIFMD reporting represents yet another unwanted compliance headache. And it's another example of the damage that can be done when regulators try to take a 'one size fits all' approach to a very diverse industry.