New EU-wide rules on the marketing of alternative investment funds overcame the final hurdle on Thursday when the European Parliament adopted the directive which will impose registration, reporting and initial capital requirements on these funds. Parliament successfully pushed through chapters on asset stripping and remuneration principles, as well as strongly influencing the rules on the passport system, depositary liability, capital requirements and the use of leverage.
The EP, under the leadership of Jean-Paul Gauzès (EPP, FR), won concessions from Member States in a number of areas aimed at increasing economic stability and investor security, the two key priorities for Parliament all throughout the process. The legislation introduces pay rules and restrictions on asset stripping, points that were both initially not dealt with by the Commission proposal and strongly resisted by Member States. The EP - which approved the directive today by 513 votes to 92 with 3 abstentions - also successfully pushed for strict liability of depositaries, who are key players in the running of these funds, to ensure that damages can always be claimed by the investors.
Special attention to asset stripping by private equity funds
Parliament insisted from the outset on the need to combat asset stripping, which was not covered by the Commission proposal and the inclusion of which was resisted by Member States during negotiations. The directive now includes a number of provisions to this end, relating primarily to limits on distributions and capital reductions within the first two years that a company is taken over by a private equity investor. This is intended to deter private equity investors from attempting to take control of a company solely in order to make a quick profit.
Thanks to Parliament, strong information and disclosure requirements are to be imposed on private equity investors, particularly regarding information for shareholders, employees and their representatives on the planned strategy for the company.
Depositary liability has been increased in comparison to the initial positions of Council and the Commission to prevent further Madoff-style scandals. The directive requires that if a depositary legally delegates its tasks to others, it must provide a contract which allows the fund or the fund manager to claim damages against the entity to which the tasks are delegated. This should ensure that at no point in the chain will liability be irretrievably lost. MEPs also secured a requirement that the AIF investors concerned must be informed about the potential delegation of liability and the reasons for this.
Marketing passport for everyone without a free-for-all culture
Today's agreement will enable non-EU AIF and AIF managers to market to investors across the EU without first having to seek permission from each Member State and comply with different national laws. This was a bone of contention between Parliament and some Member States, with Parliament pushing for a marketing passport to be granted to non-EU players. Parliament allayed these Member States' fears by proposing the provisions now in the text whereby AIF and AIF managers will obtain passports only if the non-EU country they are located in meets minimum regulatory standards and has agreements in place with Member States to allow information sharing.
The directive's rules are to take effect by 2013, and four years after this the Commission will undertake a general review of the rules. ESMA and the Commission will also have the considerable task of fleshing out the details of how the directive works, through guidelines and implementing legislation.