EVCA: EU directive has 'long way to go'

The EU directive that would impose new regulations and restrictions on private equity funds has reportedly received more than 1,000 proposed amendments from Members of the European Parliament (MEP). Meanwhile, the UK has again warned of the potential damage to European investors.

Javier Echarri, secretary general of the European Venture Capital Association, told the Daily Telegraph that the level of feedback from MEPs was unprecedented, and showed that there is a “long way to go to get the directive into an acceptable shape”.

There is there is a long way to go to get the directive into an acceptable shape Javier Echarri

Dan Waters, director of conduct risk for the UK’s Financial Services Authority(FSA), said in a speech this week that if passed as written the “Directive on Alternative Investment Fund Managers” would block up to 35 percent of the world’s private equity funds from accessing EU investors. The directive requires any fund that wants to market to EU investors prove that it is subject to sufficiently rigorous regulation in its home country. This would be a particular blow to US-based asset managers, as the US currently does not qualify as an “equivalent” regulatory regime, and US funds would not qualify for a fundraising “passport”.

With the UK – home to 60 percent of Europe’s private equity industry – taking the lead in opposition to the directive, the FSA last year released a report claiming that the regulations could impose substantial one-off compliance costs of up to €3.2 billion on alternative investment fund managers, while driving capital to non-EU competitors. In November Waters also testified about the potential negative impact of the directive before the UK's House of Lords, whhich shortly after met with members of the European Commission in Brussels to press these concerns.

While a final AIFM directive was at one point expected to be passed by mid-2010, the large number of MEP amendments received by Jean-Paul Gauzes – rapporteur for the European Parliament’s Committee on Economic and Monetary Affairs –  may push a final vote further off. Before a vote can occur, the proposed amendments to the separate European Council and European Parliament versions of the directive must be reconciled. Gauzes, who is responsible for guiding the Parliament process, has already made 135 amendments to the first draft himself.

Among his proposals, announced last year, were subjecting fund managers to restrictions on pay similar to those for bank staff, as well as widening the scope of the directive to cover all managers of alternative investment funds, not just those at the larger end of the spectrum. Parliament and Council must also resolve differences over the use of depositories and marketing of EU-based funds in third countries.

A recent memo from law firm Mayer Brown said that while much ground still needs to be covered before the directive is transformed into an “workable” piece of legislation, a continued divide between the Council and Parliament over such issues will likely benefit the industry’s lobbying efforts.