EN Official Journal of the European Union C 18/90

Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the European Parliament and of the Council on alternative investment fund managers and amending Directives 2004/39/EC and 2009/…/EC’

COM(2009) 207 final — 2009/0064 (COD)

2011/C 18/16

Rapporteur-general: Mr GRASSO

On 3 June 2009 the Council decided to consult the European Economic and Social Committee, under Article 47(2) of the Treaty establishing the European Community, on the

Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC

COM(2009) 207 final – 2009/0064 (COD).

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee’s work on the subject, adopted its opinion on 1 February 2010. On 16 February 2010 the Committee Bureau instructed the Section for the Single Market, Production and Consumption to review the opinion.

The European Economic and Social Committee, in accordance with Rule 20 and Rule 57(1) of the Rules of Procedure, appointed Mr Grasso as rapporteur-general at its 462nd plenary session, held on 28-29 April 2010 (meeting of 29 April), and adopted the following opinion by 136 votes to two with three abstentions.

1. Conclusions and recommendations

1.1 The European Economic and Social Committee (EESC) welcomes the proposal. Despite the fact that certain types of alternative fund have undoubtedly helped to increase leverage and risks in the financial system, this sector was not the source of the main risks to the stability and sustainability of the financial system in the crisis that followed the turbulence in the subprime mortgage market. This view was recently endorsed by the UK Financial Services Authority (FSA) in its February 2010 report on Assessing the possible sources of systemic risk from hedge funds, where it claims that ‘major hedge funds do not represent a destabilising credit counterparty risk’. The EESC takes note of the debate that the proposal has generated and, in particular, of the proposals from the Council of the European Union and from the European Parliament (rapporteur: Gauzès). The EESC too has a number of comments and recommendations to make with a view to rectifying certain of the proposal’s decisions and approaches that, without significantly benefiting investor protection and market integrity, could penalise not just the alternative funds sector but the financial system as a whole. The EESC takes as reference point for its observations the opinion (1) issued in 2009 about private equity and hedge funds, which stated that, within the economic framework of the European market economy, their impact in social and employment terms is more serious than their economic and financial impact.

1.2 The Greek crisis placed the issue of sovereign debts in the spotlight. The EESC notes the different views which emerged regarding the role hedge funds may have played in exacerbating the crisis. The EESC believes that this point calls for urgent attention and analysis.

1.3 The directive introduces a harmonised regulatory framework for the alternative funds sector, addressing, inter alia, the need for proper monitoring of macro-prudential risk for the European financial sector. The directive also includes detailed rules which the EESC feels would be difficult to adapt effectively to the wide range of products produced by the sector. The EESC therefore calls for a more functional approach to be adopted to take into account the great variety of products covered by the definition ‘alternative funds’.

1.4 The EESC considers it essential for discussions to be launched without delay with the authorities of major non-EU countries, to encourage the adoption at international level of common banking supervision standards in the area of alternative investment funds, along the lines of those recommended by the Basel Committee for the banking sector. Otherwise, it could be easy to dodge the rules, transferring certain activities beyond the area covered by European regulations. That would jeopardise the competitiveness of major sectors of the European financial industry, with harmful effects in terms of both jobs and creating well-being and wealth. Establishing the future European Securities and Markets Authority (ESMA) could facilitate implementation of the rules, particularly as regards the cross-border segment.

1.5 Inter alia, the directive introduces the possibility of setting limits to debt financing. The EESC is not opposed to this, but calls for the criteria for establishing these limits to be clearly stated for the different kinds of product, along with the safeguards that will be put in place to limit the pro-cyclical effect.

1.6 The EESC believes that, in order to ensure market transparency and protection of investors, the requirement to submit key information should be extended to all companies. The information should be differentiated according to the products and thresholds. In any case, the EESC believes a more in-depth empirical analysis to be necessary here than has yet been carried out by the Commission.

1.7 As regards the requirements for companies managing private equity funds to provide information, the EESC supports the aim of increasing transparency in this connection, especially if the goal is to protect stakeholders such as minority shareholders and employees. At the same time, it feels that these rules should not penalise private equity funds excessively, to the benefit of other investment vehicles owned by private or institutional investors. Lastly, the proposal provides for exemption from these requirements for funds which invest solely in SMEs. The EESC stresses, however, that protection of investors and market integrity are non-negotiable principles which must be applied to all companies managing alternative investment funds.

2. Introduction

2.1 The term ‘alternative investment funds’ refers to all funds which are not covered by the UCITS Directive: for example, hedge funds, private equity funds, venture capital, real estate funds, infrastructure funds and commodity funds, concerning, inter alia, the sector which, in the terminology used by the De Larosière Report, is defined as the ‘parallel banking system’.

2.2 In 2009, the EESC prepared an opinion on hedge funds (HF) and private equity (PE). The opinion did not consider the AIFM Directive. It was focused solely on the impact of these funds on employment and social issues. We note that the proposed AIFM Directive has generated a large debate mainly concerning employment and social issues. The EESC feels that the conclusions and recommendations of that opinion are an important reference for the discussion about the directive.

2.3 As also stressed by the De Larosière Report, the financial crisis was brought on by excess liquidity, significant imbalances in the financial and commodity markets and other macro-economic factors. The abundance of liquidity had led to the risk inherent in liquidity itself being overlooked – in the processes of risk management and control this risk received less attention than credit and market risks both from operators and in terms of prudential rules.

2.4 We cannot now afford to turn a blind eye to the problem and refuse to learn from a mistake which has cost the financial world dear and could have been genuinely fatal. Liquidity requires financial markets and systems which are as transparent as possible.

2.5 The directive must provide an opportunity for real progress towards transparency in the alternative funds sector, which has certainly proved lacking.

2.6 The EESC believes this to be necessary, not because of faults, shortcomings or risks in the sector, but merely because of the vital need to put transparency and liquidity at the heart of the agenda.

2.7 The proposals currently being discussed within the EU on European financial supervision at both macro and micro level are absolutely essential to ensure the survival of the Single Market (2).

2.8 In the USA, President Obama has launched a process for radical change and innovation in the regulatory and supervisory system. It is still too early to assess the results that the US initiatives will yield.

2.9 In this initiative, the EU must take steps to ensure that international endeavours are made without delay to encourage market transparency and integrity. However, it stresses that regulation alone will not be able to solve problems which can be caused by unwise behaviour on the part of professional investors.

2.10 The EESC endorses the six high-level principles for the regulation of hedge funds proposed by the International Organisation of Security Commissions (IOSCO) in June 2009. IOSCO has now (25 February 2010) published systemic risk data requirements for hedge funds. These cover eleven different categories of data. The EESC recommends that the Commission take these principles as a basis and implement them for AIFM regulation in the proposed directive.

2.11 While IOSCO has completed an analysis of the risks to the financial system posed by private equity, no regulatory proposals have yet been made. The EESC recommends that the Commission adapt the IOSCO hedge funds principles to fit the profile of private equity ones.

3. The proposal for a directive

3.1 The proposal is intended to regulate fund managers rather than products. The decision not to regulate products directly is based on the fact that alternative investment funds can only be defined by exclusion, as they are not funds harmonised by the UCITS Directive, and the Commission therefore believes that any attempt to regulate products directly would rapidly become obsolete.

3.2 However, many aspects of regulating fund managers necessarily have significant implications for the operating arrangements and characteristics of the funds themselves.

3.3 The proposal has two key objectives:

— to allow more effective micro- and macro-prudential supervision, which requires in-depth understanding of the sector’s dynamics that goes beyond national borders;

— to encourage market integration and development of the Single Market, offering managers a kind of European passport for their products, with clear benefits in terms of economies of scale and options for investors.

3.4 These key objectives can be pursued through a structured set of specific initiatives which give shape to the various elements of the proposal:

3.4.1 All AIFM whose assets exceed certain thresholds must be subject to authorisation. Managers managing total assets of less than EUR 100 million are exempt from the provisions of the proposed directive. The threshold rises to EUR 500 million where managers only manage unleveraged funds and investors are not granted redemption rights for the first five years of funds’ existence.

3.4.1.1 Authorisation is granted by the competent authorities of the home Member State. It is subject to compliance with highly structured organisational and transparency requirements.

3.4.1.2 Managers must be domiciled in the EU. Administrative tasks can be delegated to non-EU entities: the role of depository can only be played by credit institutions established in the EU. Subdelegation is explicitly prohibited, except of the role of depositary, and in any case subject to stringent conditions.

3.4.1.3 The directive gives the Commission the task of setting leverage limits, in order to secure the stability and integrity of the financial system.

3.4.2 Compliance with the requirements laid down by the directive would enable managers to freely market their products to professional investors (according to the definition in the MiFID Directive) in all Member States. Managers can also distribute funds domiciled in third countries, but are subject to a number of conditions to avoid further risks being introduced on markets and distortion of taxation systems.

4. EESC assessment

4.1 The EESC has already issued an opinion commenting on the De Larosière Group’s recommendations (3), and fully agrees that there is a need for supranational supervision, which, however, requires a sufficiently uniform regulatory framework. The setting-up of the new European supervisory authorities does not remove national supervisory bodies’ powers, and so it is important that the European supervisory authorities draw up a common supervision rulebook. Greater understanding and transparency in the alternative investment funds sector could be important to increase market integrity and protection of investors and establish effective macro-prudential supervision. The directive could be an opportunity to pursue this important objective, provided that unnecessarily burdensome restrictions are avoided. This is why the Committee advocates particular caution and attention when calls for regulation exceed the minimum information framework required for micro-prudential supervision.

4.2 The EESC believes that a regulatory framework that strengthens conditions for better quality governance criteria for Alternative Investment Fund Managers urgently needs to be defined. This condition is more important than many other detailed rules that will raise costs for companies without necessarily increasing guarantees for the market, as firmly emphasised in Recommendation 1 of the De Larosière Report.

4.3 The EESC also draws attention to two other points raised in the De Larosière Report, which, in the context of the review of the Basel 2 framework, points out that the crisis has taught us two important lessons:

— the crisis has shown that the economic and financial system should hold more equity capital;

— the crisis has revealed the strong pro-cyclical impact of the current regulatory framework, which, instead of having a dampening effect, has amplified market swings.

4.3.1 The proposal to set limits to debt financing and the level of leverage employed by funds (the so-called leverage cap) is a step in the right direction, namely that of raising capital requirements. Indeed, the EESC shares concerns about the risk that excessive leverage introduces to the financial system: when addressing over-indebtedness, other aspects of funds, such as their size, must, in any case, be taken into account as well. The EESC calls for the possibility to be assessed of setting a clearly-defined leverage ceiling.

4.3.2 To keep systemic risk under control, it should be borne in mind that the largest banks are often primary brokers and therefore lenders of funds for hedge funds. Controls on these primary brokers are just as important as controls on fund borrowers. When revising the Capital Requirements Directives concerning banks, the relevant authorities should ensure that these loans are covered by sufficient capital.

4.3.3 Lastly, the fact that the leverage cap tends to be pro-cyclical must be taken into account. Indeed, the leverage cap is likely to be exceeded when the value of investment falls, with the result that the manager may be forced to liquidate their assets in order to get back within the limit, pushing the market value of these assets down further. The EESC has already addressed the issue of pro-cyclicality in the legislative framework in its opinion on the De Larosière Report: although it acknowledges that it might be difficult to establish when to relax and when to tighten constraints, it feels that some flexibility in certain constraints could limit pro-cyclicality in legislation.

4.4 The EESC is concerned about the issue of de minimis thresholds below which companies would not be covered by the rules of the directive. As a general rule, the EESC believes that all companies should be required to record and subsequently submit the key information necessary to ensure the minimum pre-requisites for genuine market transparency and protection of investors.

4.4.1 In order to secure transparency and investors’ protection, more detailed information should be required, possibly differentiated by products and thresholds. On this subject, however, the EESC feels that a more in-depth empirical analysis than has yet been carried out by the Commission is needed in order to find an appropriate criterion for setting these thresholds.

4.4.2 The EESC believes that the newly published IOSCO systemic risk data requirements for hedge funds (which can be adapted for other AIF) provide a way forward. Eleven categories of data are specified, from information on management and advisors, which should be required of all funds, to information on borrowing, risk and counterparty exposure, which would be most needed from large leveraged funds. These guidelines have international support, derive from G20 and FSB initiatives and will come into effect in September 2010.

4.5 The above points are related to the fact that the alternative funds sector is too varied to put a perfectly homogeneous regulatory framework in place for all the different products it covers. In practice, management companies specialise in specific areas (such as real estate funds, hedge funds and private equity funds). The proposal focuses only on leveraged funds and private equity funds. As stressed by the EESC Opinion on the impact of funds on industrial change (rapporteur: Mr Morgan), the diversity of alternative funds is such as to require a more differentiated approach.

4.6 The EESC hopes that Commissioner Barnier’s initiative of introducing a single European passport extended to managers and funds which are not domiciled in the EU marks the launch of joint international solutions.

4.6.1 The EESC agrees with the possibility offered of also putting investment funds domiciled outside the EU on the same footing. It calls on the Commission to ensure that the quality and transparency standards of non-EU managers and funds are genuinely equivalent to standards in the EU.

4.6.2 Since the directive’s objective should also be to improve the guarantees provided by funds from outside the EU, and not to penalise them and effectively exclude them from the single market, the EESC calls for immediate clarification concerning what requirements these funds will have to meet in order to enter the single market freely.

4.7 The EESC feels that if adoption of the directive does not go hand in hand with similar measures in the major non-EU countries, it could be easy to dodge the rules, transferring certain activities to outside the area covered by European regulations. That would jeopardise the competitiveness of major sectors of the European financial industry, with harmful effects in terms of both jobs and creating well-being and wealth.

4.8 The EESC enquires about the reason behind the rule that the depositary has to be a credit institution. Independent depositaries can be an important guarantee against fraudulent or harmful practices for investors. Introducing more stringent rules is undoubtedly to be welcomed. However, the EESC calls for clarification of why it is intended to restrict the role of depositary to credit institutions, given, not least, the fact that the MiFID Directive authorises other brokers to take custody of clients’ business.

4.9 Alternative funds also include private equity funds, which invest in the share capital of non-listed companies.

4.9.1 Private equity is an important source of risk capital for start-ups and innovative companies, not to mention expanding or restructuring companies. The EESC has already discussed (4) the impact that private equity funds can have on the economic system and industrial change.

4.9.2 The proposal for a directive dedicates a number of articles (Chapter V, Section 2) specifically to funds that acquire a controlling influence in non-listed companies (more specifically to funds that acquire 30 % or more of the voting rights).

4.9.3 The information to be provided is quite detailed and, in many respects, specifically templated on information requirements for the takeover of listed companies. It is also necessary to draw up a similar corporate governance code to the one for listed companies. All this information must be provided to the company, the shareholders, employee representatives and the employees themselves.

4.9.4 The EESC welcomes the scope and depth of the proposed governance, information and communication obligations, especially if they are intended to protect the interests of stakeholders such as minority shareholders and employees. Moreover, it feels that these rules should not penalise private equity funds to the benefit of other investment vehicles owned by other private or institutional investors.

4.9.5 The EESC calls for the application of these rules from 25 % of the voting rights onwards and for the corporate governance code to explicitly safeguard collective labour agreements in force. The potential consequences for employees must be shown and the information must be given accurately and without any delay. Non-compliance with the information and consultation requirements must lead to the consequence that any decision taken by the AIFM and/or target company have no legal effect.

4.9.6 The EESC suggests that the directive should introduce minimum solvency and liquidity ratios for the target companies. Dividend payouts should be limited to one disbursement per year and should not exceed earnings. For target companies not fulfilling the minimum ratios there should be no dividend payout.

4.10 These information obligations do not apply to acquisitions of control in SMEs. The EESC criticises this point of the directive because protection of investors and market integrity are non-negotiable principles which must be applied to all companies that manage alternative investment funds.

Brussels, 29 April 2010. The President of the European Economic and Social Committee Mario SEPI

(1) OJ C 128, 18.5.2010, p. 56.

(2) Opinion on Macro and micro prudential supervision.

(3) OJ C 318/2009, p. 57.

(4) OJ C 128, 18.5.2010, p. 56.