Investors welcome revised EU fund rules

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Investors on Friday welcomed revised European Union plans to clamp down on alternative investment funds, saying the proposals were a workable compromise.

The latest draft comes after months of wrangling following the controversial first draft of a new EU alternative investment fund regime, outlined in April.

That provoked an outcry from many investors including pension fund managers and investment trusts, as well as private equity funds, hedge funds and regulators who said the plans were unworkable.

The first draft proposed to ban any fund based in Europe, whether a pension or an insurance fund, from investing money in funds based outside Europe, whether in Asia, Switzerland, the US or the Channel Islands. Nor would EU-based investment managers have been able to delegate the management of funds to managers outside Europe.

One investor said: “This would have completely upset the business models of all big global asset managers”.

However, Dick Saunders, chief executive of the UK’s Investment Management Association, said the latest revised draft of the directive – driven by Sweden, the current holder of the European Council presidency – was a “substantial step in the right direction”.

“People can live with these rules. They couldn’t live with the previous draft,” he said.

So-called ”private placement” rules remain in place in the new draft, meaning that non-EU funds can be sold to professional investors subject to the rules of individual EU states.

The rules on depositaries, who would have been liable for losses incurred by sub-custodians under the previous draft, have also been redrafted and eased, Mr Saunders said. “These are not far from being acceptable,” he added.

The new draft also addresses other contentious areas, such as restrictions on funds’ use of leverage.

However, Peter Grimmett, head of fund regulatory development at M&G, the fund management arm of UK-based insurer Prudential, warned that the proposed legislation still had to be ratified by the European parliament.

“We are concerned that the council and the parliament are working at different speeds and off a different version of the directive. It is quite possible that parliament could take a completely different view of things and go in another direction.”

He said he was also concerned by the EU’s swipe at hedge fund managers’ pay, which would affect many types of asset managers, including UK authorised retail schemes such as property funds.

Mr Grimmett said: “The proposals for remuneration, although not necessarily unexpected, have the effect of covering all alternative funds, not just hedge funds”.

Managers have pointed out that the restrictions on pay simply replicate the capital adequacy directive for bankers. For example, firms would be required to establish independent remuneration committees, and managers would not be able to use fees earned from successful parts of their businesses to pay staff working in areas that are not performing so well.

Fund managers would also have to defer up to 60 per cent of their pay over as much as three years.

Simon Walker, chief executive of the British Venture Capital Association said: “The draft directive’s proposals on remuneration for alternative investment funds don’t fit the private equity model and could leave investors worse off.

“There may be justification for controlling bonuses in systemically important institutions whose failure can to lead taxpayer-funded bail-outs. For other businesses, particularly involving sophisticated professional investors, remuneration is a matter negotiated between owners and managers and should remain so.

“The fund industry is wide and diverse; the financial services industry is even wider and more diverse. One-size-fits-all policies simply won’t work.”

Some private equity bosses said privately that most of the new proposals on pay were relatively inoffensive, but they feared they could be “the thin end of the wedge”.

Several big London hedge funds said they taking legal advice on the new rules.

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