SPEAKER’S CORNER
DALE GABBERT PARTNER, REED SMITH
FOLLOWING recent controversy surrounding the draft directive for EU hedge fund regulation, some perspective has returned as the Swedes take control of the EU Presidency and attempt to untangle the issues and build some consensus among stakeholders.
One of the big areas identified by the Swedes is the need to be more consistent with other directives. In particular, they identify that the capital and authorisation requirements appear to overlap with MiFID and UCITS IV.
They appear to be tending towards reconciling the draft directive with UCITs and MiFID while eliminating the overlap with the Transparency and Prospectus Directives. It is striking that they are willing to consider deleting the entire section on reporting of acquisition of a controlling influence.
The paper is also strong on dealing with the lack of compatibility of certain parts of the draft directive with “real world” asset management. The sections on the depositary and delegation provisions are cogent and clearly the Swedes have taken on board industry feedback, observing that, “given the global character of the activities of many market players, the current draft does not seem workable.” Likewise it is clear that they are not sympathetic to the third country delegation provisions, suggesting that one option would be to delete the articles relating to delegation of administration and valuation to non-EU countries entirely and instead rely on the general provisions.
BE CONSISTENT
More diplomacy is clear in their response on the provisions dealing with non-EU funds and non-EU fund managers where they simply state that the draft directive should be “so far as possible, be consistent with global standards”, although it seems clear that they are critical of the inherent protectionism of the third country provisions.
There is also good commentary on leverage, the lack of clarity of key definitions and the need for a level playing field among different types of alternative managers. It looks likely that at least some closed-ended funds will be removed from the scope of the directive. Leverage limits are scrutinised, although rather disappointingly the plethora of possible solutions still leaves it unclear as to who will have the final say as between the Commission and home state regulators.
The paper is somewhat weaker on the provisions on valuators and it is unfortunate that, although they distinguish between different types of funds including hedge funds, private equity funds and closed-ended funds, they do not question the issue whether the directive should even be attempting to regulate such a broad range of funds.
Overall, however, this is a move in the right direction.