EU AIFM - Update No. 3

19 November 2009

SWEDISH PRESIDENCY AMENDMENTS

We have been consistently pushing to see progress made on a number of key issues, including capital requirements, disclosure and independent valuers.

On Thursday, 12 November, the Swedish Presidency of the European Council of Ministers published a revised draft of the proposed Directive that includes significant amendments in several areas:

·         Capital requirements
Capital requirements are lower and correspond more closely to the minimal risks to investors of private equity and venture capital management companies facing wind downs.

·         Valuations
The requirement for an independent evaluator is deleted from the Directive and independence of the valuator function is only required where appropriate.

·         Depositary issues
Depositaries are still required but can now be either an EU credit institution or an investment firm authorised under MiFID; however, the Swedish amendments still do not go far enough to tailor depositary issues to the private equity industry in particular.

·         Delegation
An "authorised AIFM" under the Directive has broader powers to delegate its functions and is only required to notify the competent authority rather than seek authorisation as originally proposed.

·         Transparency requirement
Amendments keep transparency requirements low and some disclosure requirements have been softened further; in particular the requirement to disclose development plans has been deleted. Disclosure terms on portfolio companies are also improved with "controlling influence" rising to 50% (from 30%).

·         Third country issues
The amended Directive no longer includes the counter-productive definition of market and third-country regime rules; however the revised version still does not go far enough to ensure the free movement of capital, particularly in the case of 'third country' fund managers.

·         Remuneration measures
The amended version includes a new section referring to rules when establishing and applying remuneration policies for staff whose professional activities have a material impact on the risk profiles of funds they manage. The BVCA, along with other European bodies, has been vocal on this addition, pointing out that the remuneration debate around banks and other financial institutions threatens to spill unnecessarily into the long term investment arena, where the risks posed are far fewer and controls on remuneration could detrimentally affect investors. We maintain publicly that the private equity and venture capital pay structures should be left well alone and positioned as a model for the rest of the financial sector.

The Swedish Presidency's draft Directive can be viewed on the European Parliament website here. 

BVCA Council and Committees are currently reviewing the revised draft and will be making recommendations shortly.  It is worth noting that although this draft is by no means final and we anticipate more revisions before the Directive is passed. The latest draft will form the basis of further discussions, in which the BVCA will be thoroughly involved.

GAUZES REPORT

The EU's Economic & Monetary Affairs Committee - the main committee in the European Parliament focusing on the Directive - has confirmed that its report on the Directive will be published on 2 December by its appointed rapporteur, Jean-Paul Gauzès MEP.  We expect this report to generate further amendments to the Directive and are working hard to ensure that any changes have a positive impact on the private equity industry.

When this report is made public, it will be available via our website in the In Europe section.