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Brussels, 29 April 2009

Financial services: Commission proposes EU framework for managers of alternative investment funds

The European Commission has proposed a Directive on Alternative Investment Fund Managers (AIFM). The proposed Directive is an important part of the European Commission's response to the financial crisis, as set out in the Communication on Driving European Recovery. It aims to create a comprehensive and effective regulatory and supervisory framework for AIFM in the European Union. AIFM, which include the managers of hedge funds and private equity funds, managed around €2 trillion in assets at the end of 2008. This is the first attempt in any jurisdiction to create a comprehensive framework for the direct regulation and supervision in the alternative fund industry. The proposal now passes to the European Parliament and Council for consideration.

Internal Market and Services Commissioner Charlie McCreevy said: "Alternative investement fund managers have become important participants in the European financial system and their activities have had a significant impact on the markets and companies in which they invest. There is now a global consensus – as expressed by the G20 leaders – over the need for closer regulatory engagement with this sector. In particular, it is essential that regulators have the information and tools necessary to conduct effective macro-prudential oversight. The crisis has also underscored the importance of robust risk and liquidity management systems and the need for reliable investor information as the basis for effective due diligence. I look forward to working with the European Parliament and Council to secure the adoption of this important piece of legislation."

The proposed Directive will require all AIFM within scope to be authorised and to be subject to harmonised regulatory standards on an ongoing basis. It will also enhance the transparency of the activities of AIFM and the funds they manage towards investors and public authorities. This will enable Member States to improve the macro-prudential oversight of the sector and to take coordinated action as necessary to ensure the proper functioning of financial markets. The proposal will help to overcome gaps and inconsistencies in existing regulatory frameworks at national level and will provide a secure basis for the development of the internal market.

The proposed AIFM Directive will:

  • Adopt an 'all encompassing' approach so as to ensure that no significant AIFM escapes effective regulation and oversight, while recognising the legitimate differences in existing business models and providing exemptions for smaller managers for whom the requirements would be disproportionate. Therefore, the Directive will only apply to those AIFM managing a portfolio of more than 100 million euros. A higher threshold of 500 million applies to AIFM not using leverage (and having a five years lock-in period for their investors) as they are not regarded as posing systemic risks. A threshold of € 100 million implies that roughly 30% of hedge fund managers, managing almost 90% of assets of EU domiciled hedge funds, would be covered by the Directive.
  • Regulate all major sources of risks in the alternative investment value chain by ensuring that AIFM are authorised and subject to ongoing regulation and that key service providers, including depositaries and administrators, are subject to robust regulatory standards.
  • Enhance the transparency of AIFM and the funds they manage towards supervisors, investors and other key stakeholders.
  • Ensure that all regulated entities are subject to appropriate governance standards and have robust systems in place for the management of risks, liquidity and conflicts of interest.
  • Permit AIFM to market funds to professional investors throughout the EU subject to compliance with demanding regulatory standards.
  • Grant access to the European market to third country funds after a transitional period of three years. This should allow the EU to check whether the necessary guarantees are in place in the countries where the funds are domiciled (equivalence of regulatory and supervisory standards, exchange of information on tax matters).


In the EU, investment funds can be broadly categorised as UCITS (Undertakings for Collective Investment in Transferable Securities) and non-UCITS (or non-harmonised) funds. The former are those that comply with the harmonised rules laid down in the UCITS Directive (85/611/EEC) and are authorised for sale to the retail market. For the purposes of the proposed Directive, Alternative Investment Funds (AIF) are defined as all funds that are not harmonised under the UCITS Directive.

The AIFM sector in the EU is large, with around €2 trillion in assets at the end of 2008. It is also diverse: hedge funds, private equity funds, commodity funds, real estate funds and infrastructure funds, among others, all fall within this category. They invest in a wide range of assets and employ different investment strategies and techniques. AIF invest in financial instruments such as stocks, bonds and other securities or commodities, as well as shares in real estate and infrastructure projects and controlling stakes in companies.

Investments in AIF are typically regarded as entailing a level of risk or other characteristics that render them unsuitable for retail investors. Access to many types of AIF has therefore traditionally been restricted to professional or institutional investors.

The activities of AIFM are currently regulated by a combination of Member State financial and company law regulation, as well as cross-cutting provisions of Community law. These laws have been supplemented in some sectors by industry-developed standards. However, recent events have demonstrated that the activities of AIFM are not sufficiently transparent and that the associated risks are not sufficiently addressed by current regulatory and supervisory arrangements. Crucially, the existing regulatory environment does not adequately reflect the cross-border nature of the risks posed: the impact of risks crystallising in the AIFM sector in one Member State will therefore also be felt beyond its national borders.

In recognition of these vulnerabilities, the European Commission, in the recent Communication to the Spring European Council on Driving European Recovery, committed to ensuring that all relevant market actors are subject to appropriate regulation and oversight and specifically to introducing a harmonised regulatory and supervisory framework for the alternative investment sector.

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