On Thursday, the Private Equity Growth Capital Council (PEGCC) will file a letter with the European Securities & Markets Authority (ESMA) arguing that US fund managers are subject to sufficient regulatory oversight to seamlessly market their funds across Europe, pfm has learned.
Fund managers authorized under the Alternative Investment Fund Managers Directive (AIFMD), which went into effect in July, are provided a “passport” allowing them to hop across EU borders under one central marketing regime. At present only EU managers can take advantage of the passport, but ESMA will provide EU policymakers an opinion on whether the passport feature should extend to non-EU managers this July.
The directive states that ESMA must find “no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk” in recommending the passport option to non-EU managers.
In its letter, the PEGCC provides a rundown of the various rules and regulations covering the private equity industry, including the 1940 Investment Advisers Act and anti-fraud rules under federal securities laws to demonstrate investor protection. The letter also mentions heightened oversight of the industry by the US Securities and Exchange Commission, which began supervising GPs managing north of $150 million in assets as part of Dodd-Frank reform in 2012. On systemic risk, the letter notes the requirement of large fund managers to periodically file a Form PF, which US regulators will use to monitor signs of danger in the economy.
“What the PEGCC tried doing was make it as easy as possible to educate ESMA on how regulation works here in the states so they don’t end up going in the wrong direction when issuing its opinion,” said a source close to the trade body’s thinking. It is understood that private equity trade associations from other key jurisdictions are making similar cases.
The inclusion of non-EU managers under the directive’s passport feature has been a source of uncertainty in the industry. While many expect GPs from countries with strong regulatory regimes like the US and Canada to retain access to EU investors, some have raised doubts about less developed economies meeting a regulatory “equivalency” test required by the AIFMD. Others also speculate if unique AIFMD requirements such as appointing a depositary to provide oversight of fund cash flows will prevent countries from meeting this equivalency test.
The PEGCC admits the US and EU do not have identical regulatory regimes for private equity managers, but “just because the AIFMD and US regulations aren’t exact matches, that doesn’t mean they don’t offer the same protections in substance,” the source close to the PEGCC said.
Whether ESMA meets its July deadline to issue an opinion on the matter is another area of uncertainty. Because few EU managers have thus far begun using the passport, there are concerns about ESMA’s ability to properly assess the feature, which may prompt the regulator to request a time extension, sources tell pfm.