Although much of the focus has been on possible impacts on hedge fund and private equity managers, many mainstream managers and asset servicing providers doing business in Europe will be affected by the regulations, experts say.
The AIFMD applies to any fund structure that is not regulated under the Undertakings for Collective Investment in Transferable Securities, or UCITS. In the U.K. alone, there are about 2,000 funds affected, including institutional pooling vehicles.
“It's far more than (just hedge funds and private equity),” said Julie Patterson, director of authorized funds and tax at the Investment Management Association, a London-based U.K. industry group. “Ninety percent or more (of funds affected) are very plain-vanilla funds ... that don't happen to be UCITS funds.”
Large U.S. managers/custodians lobbying the EU include Northern Trust and BNY Mellon, while State Street, BlackRock and U.K. foundation Wellcome Trust submitted written responses to a call for evidence from the EU.
In April 2009, the European Commission surprised the money management industry when it proposed stringent regulations it said were designed to protect investors (Pensions & Investments, May 18, 2009). Since then, managers, institutional investors and industry groups have persuaded lawmakers in Brussels to drop many of the most draconian measures that some experts believed would have banned U.S. managers from marketing in Europe. A political agreement on the basic tenets of the new regulations was made in November.
Now, the European Securities and Markets Authority, comprising regulators from EU member states, has been charged with working out the details of the regulations, known as subordinate measures. By all accounts, ESMA has a dizzyingly complex task, ironing out 99 subordinate measures by the end of the year.
On April 15, ESMA began a consultation, gathering industry input on its work on the AIFMD.
“We're heavily involved in seeking to influence those discussions where we can,” said Ian Headon, Dublin-based senior vice president, product development and strategy, at Northern Trust Corp.
While ESMA is addressing very complex issues, some basic matters — such as defining terms — also need to be addressed.
“One of the central questions being worked out right now” is how a manager is defined under AIFMD, Mr. Headon said. “That is a pretty big factor in determining how the directive is going to affect everyone.”
For example, if a U.S. mutual fund hired a U.K.-based subadviser to manage some or all of its assets, which manager would be under European regulations? Arguments are being made for each side; it's up to EMSA to decide such details.
Experts say the depository issue within the AIFMD will likely have major impacts on all types of managers, as it could assign greater responsibilities and risks to custodians. For example, emerging markets managers in the EU could find their selection of investible countries limited by those in which their custodian is able to find acceptable subcustodial partners.
And for many hedge funds, use of a depository — or entity that holds and safeguards assets — will be completely new.
“To some extent, the whole way the fund works is going to have to be re-engineered,” Ms. Patterson said.
Paul Bodart, executive vice president and head of EMEA operations for BNY Mellon Asset Servicing, Brussels, said that “logically, fees should go up” as custodians' roles are expanded by the AIFMD. However, he doubt that will happen because “it's still a very competitive environment.”
In fact, Mr. Bodart sees the new regulations as a business opportunity. “We see the AIFMD as a (chance) to become (depository) for more hedge funds than before,” he said.