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AIFM Directive may still be strengthened, warns Rasmussen

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EUROPE - Members of the fund management community have reacted angrily to suggestions that the scope of the European Union's Draft Directive on Alternative Investment Fund Managers (AIFM) could be widened, and its provisions strengthened rather than weakened, before it becomes law.

The warning came from Poul Nyrup Rasmussen, member of the European Parliament and president of the Party of European Socialists, at a debate hosted by centre-right think tank the Policy Exchange and the City of London Corporation today.

Rasmussen, Denmark's prime minister from 1993 to 2001 is a key architect of the draft directive and a long-time critic of the lack of regulation of hedge funds and private equity in the European Parliament.

Rasmussen was pressured by a number of delegates and panelists, including UK financial services secretary and ex-CEO of Gartmore, Paul Myners, on the "lamentable lack of public consultation" behind the directive and the absence of proper impact assessment at European level to match that provided by the UK's Financial Services Authority (FSA).

"We have the time to do that and we are prepared to do that," said Rasmussen. "It would be foolish not to do that, as we don't want unintended consequences." But he added that he felt the current draft represented a "relatively mild directive" and warned delegates not to expect "an impact assessment carried out with a view to watering it down".

Lord Myners welcomed the prospect of an impact assessment before angrily attacking Rasmussen: "I am astonished to hear that you've already decided that this assessment will lead to the conclusion that the directive needs further strengthening," he said.

Fund managers may have much to fear.

Rasmussen acknowledged criticism of the directive's "one-size-fits-all" structure, which lumps hedge funds in with private equity, property and other products, suggesting that it could be amended to create a "diversified set of standards within the directive" under a small number of comprehensive rules that would apply to all entities.

But in all other respects he would choose to move the directive further from the industry's position, pressing for stronger transparency, reporting and capital-requirement standards and even suggesting that regulation should be applied at fund level rather than fund-manager level.

While accepting that hedge funds and private equity firms were not the direct cause of the financial crisis, he did observe that the crisis started with the collapse of two Bear Stearns funds and maintained that the "2 and 20" fees culture and over-ambitious return targets led to unsustainable leverage which was "part of the problem".

Serious questions also arose over the scope of the directive. Both Myners and Jonathan Russell, managing partner with private equity giant 3i and chairman of the European Venture Capital Association (EVCA), complained that it effectively discriminates against companies owned by private equity firms and reduces their ability to compete with their peers.

"There is no reason to penalize private equity-owned businesses by imposing rules that would not apply to family-owned businesses or subsidiaries, for example," said Myners. "Poul says that he wants to avoid regulatory arbitrage, but these discriminatory rules would encourage exactly that."

On the hedge funds side, Rasmussen was asked, given that it was auto-manufacturer Porsche that executed one of the biggest ever "short-squeeze" strategies, on Volkswagen stock, in 2008, whether it made sense to focus regulation exclusively on alternative investment fund managers, to which he responded: "No."

"Poul has revealed himself today," said Russell. "He's been talking about 2-and-20 and performance levels being too high and all these silly things. Is this directive really about this, rather than about systemic risk and producing good regulation that answers the public concern?"

Myners urged the funds industry not to give up hope. "Those who lobby constructively, offering solutions as well as pointing out problems, will get a fair hearing anywhere in the EU," he said. He singled out the hedge fund industry for their effective and constructive lobbying, suggesting that private equity needed to improve their efforts.

But many will have come away from this debate feeling powerless to prevent what looks like a further slide of the directive away from their preferred position.

If you have any comments you would like to add to this story, contact Martin Steward on +44 (0)20 7261 4621 or email

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