Proposed regulations by the European Securities and Markets Association for non-EU hedge fund managers and funds would essentially prevent EU investors from investing in US and other non-EU hedge funds, said a global hedge fund association. In a letter to ESMA, the Alternative Investment Management Association said that the proposed regulations seek to reintroduce the concept of equivalence after it was rejected during negotiations leading to the passage of the Alternative Investment Fund Managers Directive. Under strict equivalence, said AIMA, it would be difficult for EU managers to delegate portfolio management to third country asset managers.
AIMA has significant concerns in relation to ESMA’s proposals for equivalence standards to apply in relation to the regulation of third country risk managers, portfolio managers and depositaries and the specific tasks to be performed by third country depositaries. It is absolutely clear on the face of the legislation, emphasized AIMA, that no equivalence assessment is required in relation to delegated third country portfolio or risk managers.
The Directive incorporates requirements for third country depositaries to be subject to regulation having the same effect as EU law. This is not an equivalence standard, maintained AIMA, it is a qualitative, outcomes-based assessment of the sufficiency, adequacy and suitability of the third country regime. In line with the spirit and text of the AIFMD, ESMA should assess whether the third country regulatory system provides for a similar level of protection for the hedge fund and its investors as under the Directive.
In attempting to impose equivalence standards, said AIMA, the draft goes beyond what is permitted by the legislation, which is a Level 1 event under the Lamfalussey process. The global association urged ESMA to ensure that the regulations, a Level 2 event, neither extend beyond what is permitted under Level 1, nor impose more stringent requirements than are necessary.
It is well documented, said AIMA, that during the Level 1 negotiations on the Directive, the concept of equivalence was thoroughly considered, discussed, and, importantly, dismissed, as it was apparent that it would be unworkable. AIMA believes that reintroducing this concept in the regulations would seriously undermine the political sovereignty of the legislative process. Moreover, the practical implication of the proposals is that some investments into non-EU jurisdictions would become very difficult, if not impossible. Further, the global hedge fund group found it difficult to imagine how ESMA could practically assess the equivalence of dozens of jurisdictions within the implementation deadline.