Funds regulation: managers must learn to live in ‘lawyers’ paradise’

Attendees at The Lawyer’s funds summit gear up for reshaped environment. By Joanne Harris

When it comes to investment funds there is only topic that ­matters at the moment. It may be impenetrable for those outside the industry, but the EU’s Alternative Investment Fund Managers (AIFM) Directive is set to change the way things work.

It is therefore no surprise that the directive was the major theme at The Lawyer’s first-ever funds summit, held in Brussels on 25-26 November.

A stellar line-up of funds lawyers, regulators and investment professionals gathered to debate the implications of the directive as well as other changes to funds regulation and practice.
Jarkko Syyrilä, deputy director general of the European Fund and Asset Management Association, said the “regulatory tsunami” ­hitting the industry would be a “lawyers’ paradise”.

The acronym-filled world of funds regulation might not seem like heaven, but with plenty more regulation expected in the next year the lawyers present at the summit paid close attention to what their peers had to say.

In the immediate future the implications of the AIFM directive are top of the list. The directive was passed in early November after 18 months of often heated debate between politicians and the industry.

Although everyone at the summit agreed that the final version is a better outcome than the original European Commission document suggested, speakers still criticised the legislation and the process.

“I think we have a right to expect better from legislation than ’it’s not going to do any harm’,” said Investment Management ­Association (IMA) chief executive Richard Saunders in his keynote speech.

Saunders told the audience the legislative process had resulted in a directive with “far too much detail at level one”. Normally EU directives are fleshed out at the ’level two’ stage, once they have been passed by the European ­Parliament but before implementation. The delegation of power to the European Securities and ­Markets Authority (Esma) – a body that is still in the process of being created – is worrying a ­number of people.

Jiri Krol, director of policy and government affairs for industry group the Alternative Investment Management Association, said he expected the debate would be as politicised at level two as it was at level one.

“As far as level two’s concerned, we’re entering into an unknown era, so yet again we’re going to be a lab animal,” Krol added.

Delegates were concerned that barriers to entry for asset managers have risen to such an extent that it will, in future, be impossible for new hedge fund managers to set up. Bigger asset management companies, meanwhile, are trying to work out what regulation means for them and their investors.

Rhodri Mason, head of Ucits [Undertakings for Collective Investment in Transferable Securities] management at the world’s largest hedge fund company Man Group, said the requirements of the legislation should not materially change the way investors operate.

“The regulation shouldn’t be doing anything the investor wasn’t doing themselves if they were doing operational due diligence correctly,” Mason pointed out.

Nevertheless, the effect on investors is at the forefront of managers’ minds. Stephen Crocombe, managing director of product development and range management at BlackRock, described the process of fund consolidation the company has gone through recently following the merger between BlackRock and Barclays Global Investors at the end of 2009.

Crocombe said the company had to consider upcoming ­regulatory changes as well as the knock-on effect on investors in funds that have shifted structure or domicile.

“I think it would be a real tragedy if Dutch postmen end up with fewer assets in their ­pension pots because we’ve had to move them to a less efficient jurisdiction,” said Crocombe.

The debate over which jurisdiction is best fitted for the future of asset management was not resolved at the summit, although lawyers from all the major funds centres made convincing arguments. Mourant Ozannes partner Gavin Farrell suggested that the Cayman Islands, Guernsey and Jersey all have pluses and minuses and that future popularity would likely be determined by a “herd mentality” among managers and investors.

Meanwhile, representatives from Luxembourg, Ireland, Malta and Gibraltar were able to point to the outcome of the AIFM directive as well as forthcoming changes to the EU’s Ucits directive as reasons for staying onshore.

Dillon Eustace partner ­Donnacha O’Connor said Ireland’s financial woes should not affect the funds sector too badly.

Although O’Connor revealed that clients had expressed concerns about the recent bailout, he added that the Irish government had vowed to keep taxes on funds at current levels. Regulations governing the custody and segregation of assets should also mean that assets held in Irish funds are safe and that the cost of service provision will not rise.

Despite Europe being the ­principal focus of the summit, attention also turned to emerging markets. Many in the investment industry believe places such as China, India and Latin America are the future both for sourcing capital and for finding investment opportunities. The consensus is that Cayman remains the most popular domicile for funds aimed at investors in emerging markets, although ­getting into the market is not as simple as just picking the right jurisdiction.

The next year is certain to be busy for funds lawyers and their clients, no matter what the type of investment or the jurisdiction in which they are based. The detail of the AIFM directive and the changes to Ucits, which kick in in July, will occupy everyone’s minds for some time to come.

Summit overheard

Richard Saunders, chief executive, Investment Management Association: “The AIFM directive is the most extraordinary story of ­political mismanagement.”

Ugo Bassi, head of asset management unit, ­directorate general internal market and services, ­European Commission: “We’re where we are and it’s better to talk about the future than the past.”
Jon May, general counsel, Marshall Wace: “The hedge fund sector has been ­nimble, not bureaucratic, but it’s been compliant.

The directive’s going to reduce over time the ­entrepreneurial nature of hedge funds, and that’s going to be bad for investors.”

Stephen Crocombe, managing director product ­development and range ­management, BlackRock: “Alternatives will really become ­mainstream when you stop calling them ­alternatives.”
Chris Ashworth, general counsel, Knight Vinke: “Investors are stronger and more important in the relationship than they realised they were, and they’re now starting to exercise some
of that influence.”

Rhodri Mason, head of Ucits management, Man Group: “Five years hence we won’t be talking about Ucits versus Cayman, we’ll be talking about onshore versus offshore in the truest sense.”
Jasveer Singh, head of legal, Man Group: “Flexibility, flexibility, flexibility – that’s the priority for us.”