Saturday, April 07, 2012

US Hedge Fund Industry Comments on ESMA Concept Release on EU Hedge Fund Directive

So long as a US or other non-EU hedge fund manager is not a letter-box entity, said the Managed Funds Association, an EU delegate of that US fund manager would be a MiFID firm rather than a firm under the Alternative Investment Fund Managers Directive. In a comment letter to the European Securities and Markets Authority, the MFA agreed with ESMA’s proposal that no authorization as an alternative investment fund manager under the AIFMD is required when the performance of either the portfolio management or the risk management function is done under a delegation arrangement with a fund manager in accordance with Article 20 of the AIFMD.

However, the alternative investment fund manager concept relates both to EU as well as to US and other non-EU fund managers. In the case of a US or other non-EU hedge fund manager, noted the association, which is not itself authorized under the AIFMD, the delegation arrangements would not specifically be in accordance with Article 20. This would be the case where, for example, a US hedge fund manager appoints an EU-based entity, typically authorized as a MiFID firm, as its delegate for the purpose of carrying on portfolio management activities in relation to a hedge fund managed by that US fund manager. The EU delegate does not typically have any contractual relationship with the fund, said the MFA, its sole client is generally the US fund manager.

In such circumstances, in accordance with ESMA’s proposal, the EU delegate should be authorized as a MiFID firm rather than an AIFMD firm. The association agrees with ESMA that the key issue is that the delegation by the US hedge fund manager should not be to such an extent that the fund manager becomes, in essence, a letter-box entity and can no longer be considered the manager of the fund.

The MFA also noted that Article 5(1) of the hedge fund Directive requires that a fund have a single fund manager. Assuming the actual hedge fund manager, regardless of domicile, is not a letter-box entity, that fund manager would be the single fund manager for the relevant hedge fund. In the view of the MFA, it does not matter that the hedge fund manager may not be in the EU and may thus not be delegating in accordance with Article 20 of the Directive. If the US fund manager is not a letter-box entity, reasoned the MFA, an EU delegate of that fund manager would be a MiFID firm rather than an AIFMD firm. The association urged ESMA to clarify that its approach on delegates of mangers of hedge funds and other alternative investment funds includes situations where the fund manager is a US or other non-EU fund manager.

On a separate issue, and given the significance of the terms open-ended and closed-ended in other EU contexts such as the Prospectus Directive, the MFA was encouraged by ESMA’s statement that its proposal for a definition of closed-ended is relevant only in the context of the AIFMD and is without prejudice to equivalent definitions in other pieces of EU legislation.

That said, the MFA said there is a benefit to considering how Member State regulators have looked at the issue of what may be considered to be open-ended or closed-ended in the investment funds context. In this regard, the MFA noted that, under the UK open-ended investment company regime, the Financial Services Authority considers that six months would be too long to be a reasonable period for an open-ended scheme. The MFA believes that six months would be an appropriate threshold to consider whether an alternative investment fund is open- or closed-ended, rather than the one year proposed by ESMA.