Monday, August 08, 2011

Germany Supports EU Hedge Fund Directive in Which It Played a Key Role

The German Finance Ministry supports the EU Alternative Investment Fund Managers Directive, which recently came into force. The Directive regulates managers of alternative funds in Europe, including hedge funds and private equity funds. The AIFMD was published in the European Union’s Official Journal on July 1, 2011.

From the beginning Germany pressed for a quick accord and played an active mediating role. Shortly before the decisive session, Federal Minister of Finance Dr. Wolfgang Schäuble talked personally with many of his EU colleagues urging them to reach agreement on the Directive, an effort that met with success. The legislative solution offers a robust regulatory framework for the mangers of alternative funds in the EU, noted the Finance Ministry, and sets an important milestone in the implementation of the G20 reform agenda for overcoming the financial crisis.

The Directive is designed to better monitor systemic risks and to protect investors. While acknowledging that the Directive is aimed in the first place at professional investors such as insurance companies and pension funds, the Finance Ministry emphasized that it is also in the interests of individual citizens of the EU that their pension fund should invest in regulated and supervised fund products.
The agreement comprises the three aspects of admission, supervision and rules regarding valuation and remuneration. Heretofore managers of alternative funds have been unregulated at the EU level. In Germany, there have been concerns around special funds and open real estate funds. The Ministry believes that existing German rules on alternative funds can be adapted to the future European standards.

Under the Directive, managers of hedge funds and other alternative funds will need a pan-EU admission issued by the respective national supervisory authority. Beginning in the year 2013, European fund managers will receive an EU passport which will permit them to market their funds throughout the entire European Union. Then, beginning in 2015, foreign fund managers will also be permitted to apply for an EU passport. The prerequisite for admission will be that fund managers must hold minimum capital in an amount appropriate to the risk profile of the fund they manage. They must also prove that they have an adequate system of risk management in place. Furthermore, a custodian bank must hold the fund’s assets in safekeeping in the interests of the investors.

Fund managers will be regularly supervised. The national supervisory authorities of the EU Member States will co-operate closely with each other when the fund and the manager are based in different Member States. The new EU financial market supervisory authorities will receive from the national supervisors the information they need about the managers of the funds, such as the debt-equity ratio and the investment strategy of large hedge funds.

The valuation of the fund’s assets often serves as the basis for calculating the manager’s remuneration as well. In order to prevent manipulation, the fund manager must entrust the valuation to an organizationally independent unit in his or her enterprise. In addition, the valuation will be checked by the custodian bank. Fund managers have extensive disclosure obligations to their investors and to regulators. For example, they must inform investors about the investment strategy they intend to follow and the valuation method they employ. Regulators must be informed, for example, about the fund’s risk profile or about any short selling which takes place.

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