EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 30.4.2009 
SEC(2009) 577 
  
COMMISSION STAFF WORKING DOCUMENT 
Accompanying the 
 
Proposal for a  
 
DIRECTIVE OF THE EUROPEAN PA RLIAMENT AND OF THE COUNCIL  
 
on Alternative Investment Fund Managers  and amending Direc tives 2004/39/EC and 
2009/…/EC 
  
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  
 
  
{COM(2009) 207} 
{SEC(2009) 576} 
 
EN 2   EN EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  
The financial crisis has exposed  a series of vulner abilities in the fina ncial system. These 
necessitate a comprehensive review of regul atory and supervisory frameworks for all 
significant actors in European  financial markets. As de scribed in the Commission's 
Communication for the Spring European Council and in accordance with the conclusions of 
the G20, the Commission is committed to ensuring that ' all relevant actors … are subject to 
appropriate regulation and oversight '. This requires filling gaps in areas where European and 
national provisions are incomplete. 
One such area concerns the activit ies of the managers of Alternative Investment Funds (AIF), 
defined as all funds that are not harmonised under the UCITS Directive1. The AIF sector is 
large – managing around €2 trillion in assets at  the end of 2008 – and diverse. AIF managers 
(AIFM) employ a wide range of in vestment strategies and techniques and invest in an array of 
financial and physical assets. He dge funds, private equity funds, commodity funds, real estate 
funds and infrastructure funds, among others, fa ll within this category. In view of the risks 
that these investments entail, investment in AIF is restricted primarily to professional 
investors. 
The activities of AIFM pose a seri es of risks for their investor s and counterparties and for the 
efficiency and stability of financial markets (s ee Table 1). The nature and intensity of these 
risks varies between business models. For exam ple, macro-prudential ri sks associated with 
the use of leverage relate primarily to the activities of hedge funds and commodity funds; 
whereas risks associated with the governance  of portfolio companies are most closely 
associated with private equity. However, ot her risks are common to all types of AIFM. 
Table 1: Overview of key risk areas 
Macro-prudential 
(systemic) risks, relating in particular to the use 
of leverage • Direct exposure of systemically important banks (as the providers of leverage) 
to the AIFM sector  
• Pro-cyclical impact of herding behaviour, risk concentrations in particular 
market segments and ('forced') deleveraging which are transmitted to the 
counterparties through asset prices and market liquidity  
Micro-prudential risks • Possible weaknesses in internal risk management systems with respect to 
liquidity risks, market risk, counterparty risks (credit and settlement risks, 
especially in the case of shor t selling) and operational risks 
Investor protection • Gaps in investor disclosure on investment policy, risk management, internal 
processes etc as barrier to effective due diligence 
• Conflicts of interest and failures in fund  governance, in particular with respect 
to remuneration, valuation and administration 
Market efficiency and integrity  • Impact of dynamic trading and short selling techniques on market functioning  
• Potential for market abuse in connection with certain techniques, for example 
short-selling. 
Impact on market for corporate control • Lack of transparency when building stakes in listed companies (e.g. through 
use of stock borrowing, contracts for difference), or concerted action in 
'activist' strategies 
Acquisition of control of 
companies by AIFM • Potential for misalignment of incentives in management of portfolio 
companies, in particular in relation to use of debt financing 
                                                 
1 Directive 85/611/EEC on Undertakings for Collectiv e Investment in Transferable Securities (UCITS). 
 
EN 3   EN • Lack of transparency and public scru tiny of companies subject to buy-outs 
The financial crisis has shed further light on th e role that AIFM play in financial markets. 
While AIFM were not the cause of the crisis, recent events have placed severe stress on the 
sector. Many AIFM have expe rienced liquidity problems as they struggle to manage the 
mismatch between the degree of liquidity promised to investors and the illiquidity of their 
investments. In some cases, adverse impacts have  been felt by the wider market. For example, 
the abrupt unwinding of large, leveraged posit ions by hedge funds in response to tightening 
credit conditions and investor  redemption requests ha s had a procyclical impact on declining 
markets and may have impaired market liquidity. 
Problem definition 
The core concern of this impact assessment is whether current regul atory and supervisory 
arrangements for the AIFM sector in the EU represent a sound ba sis for monitoring and 
controlling these risks. In particular, the repor t considers whether the cross-border dimension 
is taken into account adequately, given the in ternational nature of  AIFM investors and 
counterparties and their active role in  financial markets throughout Europe. 
Despite this interconnectedness,  the regulatory environment fo r AIFM is currently highly 
fragmented. While AIFM are subj ect to certain cross-cutting provisions of Community law, 
there is no Community regulation targeted directly at AIFM. This does not mean that AIFM 
are unregulated: many are subject to regulation and supervision in the Member States in 
which they are established. However, the sc ope and content of national regimes vary 
significantly, for example with regard to the requirements for the registration and 
authorisation of AIFM, regulator y reporting and standards for i nvestor disclosure and risk 
management. 
 
EN 4   EN The report considers two related problems associated with th is regulatory fragmentation: 
• First, regulatory fragmentation may inhibit the effective regulation, supervision and 
macro-prudential oversight of AIFM  by failing to take account of the cross-border 
dimension of their activities. This may result in incomplete or inconsistent monitoring and control of the macro-prudent ial, micro-prudential and ma rket efficiency risks and 
weaknesses in frameworks for ensuring investor protection. 
• Second, it may also impede market integration and the development of the single 
market  by creating barriers to the efficient cr oss-border distribution of AIFM products. 
This may prevent AIFM from achieving the av ailable economies of scale and investors 
from diversifying their portfolios optimally. 
The report concludes that, wh en judged from an EU persp ective, the current regulatory 
environment does not represent a comprehens ive or effective basis for monitoring and 
responding to risks posed by AI FM to their counterparties a nd the financial system. The 
European dimension of the public good to be protected by regulation an d supervision is not 
sufficiently taken into account.  
In particular, the absence of a consistent ap proach to the collection of relevant macro-
prudential data from AIFM (for example on le verage and risk concentrations) and of an 
effective mechanism for macro-prudential aut horities to share this information at the 
European or global level is a significant barr ier to effective macro- prudential oversight. 
Moreover, the absence of a consistent standard of supervision and regul atory protection across 
the EU is a source of uncertainty for investors and counterparties. 
Objectives: 
In response to these problems, the report define s as an over-arching objective the achievement 
of a comprehensive and effective regulatory a nd supervisory framework for AIFM in the EU. 
The report recognises that some of the risks described are not unique to the AIFM sector and 
hence are better addressed by cr oss-cutting initiatives. These include measures to address 
concerns in relation to short-selling and to the transparency of certain techniques for the acquisition of voting rights in li sted companies. In addition, the report notes that other 
elements of the broad reform agenda announ ced in the Communication Communication to the 
Spring European Council will impact on the AIFM sector.  
However, many other risks relate  directly to the activities of  AIFM and as such warrant a 
targeted response. The specific objectiv es of this response would be to: 
• Ensure that all AIFM are subj ect to appropriate authorisatio n and registration requirements 
• Provide a framework for the proper m onitoring of macro- prudential risks  
• Ensure the proper monitoring and li mitation of micro-prudential risks 
• Provide a common approach to the protect ion of professional investors in AIF 
• Enhance public accountability of AIFM holding controlling stakes in companies 
• Develop the single market in AIF 
 
EN 5   EN • Ensure that actions are proportionate to the ri sks posed and appropriately differentiated to 
take account of differences in AIFM business models. 
What type of action is needed to achieve these objectives? 
In assessing the appropriate form of a res ponse to the problems identified, the impact 
assessment addresses a series of key questions as to the target and scope of that action, before 
proceeding to consider the level at  which such action should be taken. 
Which parts of the value chain should be targeted? 
The report finds that the objectives could best be  achieved by an approach targeted at the level 
of the AIFM. While the AIF is merely a legal structure for the pooling of assets and has no 
economic life of its own, the AIFM is responsibl e for all key decisions in relation to the 
management of the fund. These include decisions on investment; the use of leverage; the governance structure and internal systems for risk management a nd the avoidance of conflicts 
of interest; the management of relationships with investors, counter parties and regulators, 
including the provision of inform ation; the organisation of admi nistrative functions (including 
valuation), safekeeping of assets and audit, ev en if these functions are delegated to third 
parties. The risks therefore lie almost exclusively at the level of the AIFM. 
The report notes, however, that an approach targeted at the AIFM would need to be 
supplemented by appropriate controls on third pa rty service providers (such as valuators and 
depositaries). Moreover, robust c ounterparty risk management by lenders plays a vital role in 
mitigating the risks posed by AIFM to the banking sector. 
What is the appropriate scope fo r action: should specific AIFM business models be targeted, 
or is a more horizontal approach preferable? 
The report then considers the case for targeti ng specific business models or for developing a 
horizontal approach to the AIFM sector. It conc ludes that a horizontal approach would be the 
preferred option, provided that it is designed so  as to be proportionate and sensitive to the 
differences between business mode ls. Individual business models would be difficult to define 
in a precise and legally robus t way and any such definitions  would create opportunities for 
regulatory circumvention. In addition, many of the risks to which these actions respond are 
not limited to individual business models but ar e found to a greater or lesser extent throughout 
the AIFM universe. Wider coverage would thus  ensure that risks were controlled in a 
comprehensive way. 
The preference for an 'all-encompassing' measur e does not imply that a 'one-size-fits-all' 
approach is appropriate. An appropriately designed measure would be sensitive to the 
differences in business models, with provisions  targeted at the risks posed by particular 
activities.  
How much of the AIF value chain should be require d to be located in the EU for action to be 
effective? 
For the regulation and oversight of  AIFM activity in the EU to be effective, the AIFM would 
need to be located in the EU. However, the re port recognises that impo rtant parts of the AIF 
value-chain often reside in off- shore jurisdictions, in particular the AIF itself and key third-
party service providers. 
 
EN 6   EN The report recalls that since th e risks lie almost exclusively at the level of the AIFM, the 
domicile of the AIF does not jeopardise the achievement of the objectives. However, certain third-party services, for example valuation a nd asset safe-keeping, are critical to the 
protection of investors yet are often conducted off-shore for certa in types of AIFM. In these 
instances, an effective response to  the risks would requir e effective controls to be put in place 
for these activities. 
What is the appropriate level for action? 
The report assesses five options: 'do nothing', self-regulatory approaches, amd legislative 
action at Member State, European or international level. It concludes that the effective monitoring and mitigation of AIFM-related risk s requires legally binding and enforceable 
measures to ensure a high standard of regul ation and oversight throughout the EU. Industry-
developed standards may have a role to play in informing these provisions and in providing 
additional guidance to industry.  
Member States could in princi ple upgrade their own regulatory and supervisory arrangements 
and seek to improve cooperation between juri sdictions. However, an uncoordinated approach 
would risk failing to take account of the cross- border nature of risks and binding cooperation 
and information-sharing agreements may prove el usive. Moreover, it could not be guaranteed 
that single market freedoms would be achieved. 
It is therefore considered that legislative action at the EU level offers clear advantages, both in 
terms of risk monitoring and control at a pa n-European level, and in providing a secure 
framework for pan-European AI F distribution. Give n the potential for international risk 
spillovers, action in the EU would ideally be coordinated with inte rnational action in this area. 
The development of a robust framework in Eur ope could provide a useful starting point for 
global discussion and sharing of information. 
Subsidiarity 
The report argues that European action in this ar ea would respect the prin ciple of subsidiarity 
by virtue of the inherently transnational nature of the risks and the need for a high degree of 
consistency in the requirements placed on AIFM and in the information collected from them. 
Article 47(2) of the EC Treaty would pr ovide the legal basis for such action. 
With regard to the choice of instrument, a Dir ective would provide for the appropriate balance 
between harmonising key risk control measures a nd allowing Member States the flexibility to 
incorporate these provisions in national law. A European regime  could also provide sufficient 
flexibility for Member States to implement additional requirements to AIFM operating in a 
purely domestic environment; and if  appropriate to provide a regime for the distribution of 
certain types of AIF to retail investors.  
Provisions of a potential pr oposal and expected impacts 
The final section discusses how action in this  area could be struct u r e d  s o  a s  t o  b e  
proportionate to the risks posed and to avoi d creating excessive ad ministrative burdens. 
General provisions 
The report describes a set of general provision s to be applied to all AIFM. These would 
include authorisation requirements designed to provide the competent authority with 
 
EN 7   EN sufficient assurance that the AIFM is fit and proper, holds sufficient capital, and has the 
appropriate arrangements in place for inter alia  risk management, valuation, asset safe-
keeping, audit and the management of conflicts of interest. Additional provisions would seek 
to ensure that AIFM provide appropriate and timely information to investors on their 
investment policy, fees and internal systems; and to regulators on the nature of the AIF 
managed and on major positions and risk concen trations. Subject to these requirements, 
AIFM would be granted the right to provide thei r services in all Member States (subject to 
notification) and to market th e AIF they manage to professi onal investors throughout the EU. 
In order to be proportionate, these requireme nts would apply only to AIFM managing a total 
of €250mn or more. For smaller AIFM, the add itional administrative burden and the burden 
for supervisors would outweigh the marginal bene fit in terms of the mitigation of the risks 
associated with their activities. 
Activity-based provisions 
In addition to the general provisions, a number of provisions would apply if and only if the 
AIFM engaged in particular activities. These would be sensitive to the differences in AIFM business models and calibrated to  the risks posed. In particular: 
• AIFM using leverage systematically  and at a relevant scale w ould be required to provide 
additional disclosure to investors and would ha ve to report to competent authorities on the 
use of leverage; and 
• For AIFM acquiring stakes in companies , additional information and disclosure 
requirements would be triggered once an AIF reached a controlling stake in a (non-SME) 
company; and if an AIFM delists a compa ny, reporting obligations as required for listed 
companies would continue to apply for a temporary period. 
Administrative burdens 
The requirements of the proposed measure would create some administrative burden on 
AIFM. The additional cost would depend primar ily on the national requirements already in 
place in the home country. These additional cost s to AIFM (and their supervisors) would be 
justified by the enhanced supe rvision and the benefits to AI FM in terms of cross-border 
provision of AIFM services and AIF marketi ng to professional investors upon a simple 
notification procedure.  
Due to uncertainties about costs, it is not possible to assess or to quantify precisely the impact 
of the proposal on the competitiveness of EU-domiciled AIFM.