Hedge funds and retail funds: EU Legislators reach deal on updated rules

The updates will strengthen investor protection, improve company’s access to finance from sources other than banks, better tackle greenwashing, and help complete the customs market union by limiting national approaches, when it comes to the marketing of alternative investment funds (AIFs).

Two key pieces of legislation were amended under the stewardship of Isabel Benjumea (EPP, ES), for the European Parliament. The Alternative Investment Fund Managers Directive (AIFMD and commonly known as the hedge funds directive) and the Directive relating to undertakings for collective investment in transferable securities (UCITSD), which governs mutual funds suitable for retail investors.

Reacting to the deal, Ms Benjumea said, “We are paving the way towards a significant advancement towards the completion of the Capital Markets Union, with stronger and more ambitious regulation in this industry to compete with counterparts in the United States and Asia. While our European markets have grown significantly in recent years, there is still much room for improvement and growth. The provisional political agreement on these two directives aligns with that objective”.

Completing the Capital Markets Union

The updated legislation also contributes to the agenda of completing the capital markets union in that it removes provisions which allowed member states to adopt their own rules, leading to discrepancies across the EU. For example, MEPs insisted and secured that the rules on funds that make loans should apply differently for funds that part-own the companies in question – so-called shareholder loans. This will ensure a uniform exemption across the EU. MEPs also secured harmonised rules regarding the notifications to be made concerning the use of liquidity management tools.

Better protection for investors

The updates improve protection of investor interests by ensuring that the investment fund managers, which delegate their functions to third parties, adhere to the same high standards applicable across the Union. There will also be more information automatically provided at the time of a fund manager’s authorisation about the delegation arrangements they intend to put in place.

The rules will also facilitate liquidity risk management by managers of open-ended alternative investment funds and retail funds, requiring them generally to have at least two liquidity management tools to cover situations when liquidity issues arise (such as when many investors wish to redeem their investments at the same time).

Addressing greenwashing

The updates also seek to fight ‘greenwashing’ and ensure that investors are not misled into investing into funds that pretend to be ‘green’ but are not so. ESMA is tasked to produce guidelines on when the names of funds could be unfair, unclear or misleading to the investor.

Improving access to finance

The new rules introduce common minimal rules regarding direct lending by AIFs to companies. These rules will allow loan-originating funds to operate cross-border and ensure that they can be an alternative source of funding for companies in addition to bank lending. The updates foster growth and competitiveness of loan industry in Europe to have a better market with clear-targeted rules.

Background

The Alternative Investment Funds Manager Directive (AIFMD) was first adopted in 2011 to establish a regulatory framework covering the activities of the AIF sector. It was designed as part of the policy response to the global financial crisis with a view to increasing the regulation and supervision of the financial industry.

While the AIFMD framework is considered to broadly be working well, some targeted changes were considered necessary to better integrate the market for alternative investment funds, ensure investor protection and better monitor risks to financial stability posed by AIFs.