A law of unintended consequences

The headline from the Wall Street Journal Europe on Monday 27 July 2009 declared: "US Enters Fund Debate". It referred to a story claiming that Washington has joined the UK in lobbying the EU for less stringent regulations than those contained within the draft directive for Alternative Investment Fund Managers.

Oddly, the article refers to a "little-noticed speech last month", quoting a member of the US Department of Treasury. Someone must have given the WSJ a prod about this. The speech was delivered a full month previously and, as it was to the European Forum of Deposit Insurers in Paris, would surely have gone unnoticed without intervention. What is more, the text of the speech itself is so couched in diplomatic language that it's hard to discern that the US is joining the debate at all, rather than going through the usual platitudes about international cooperation on regulatory affairs.

However, the international tide does seem to be turning against the Directive. Indeed, Sharon Bowles, a British MEP and the new head of the European Parliament's Economic and Monetary Affairs Committee, has been quoted as saying that the AIFM Directive is at risk of having "unintended consequences", with investors facing "excommunication" from global capital markets if it is implemented unchanged.

What are some of these consequences? Let's compare what the US is proposing by way of regulation for the funds management industry with the EU's proposals. Whilst there is a common thread in some respects, for example the requirements for fund managers to register with the authorities and having to report to them certain information, there are glaring differences.

A proposed EU requirement would, for example, place an obligation on the part of the manager of an EU fund to make certain information available to a target company's shareholders and employee representatives about its "development plan" for the business, as well as its policy for "external and internal" communication as regards employees. The disclosure requirements will apply just to EU funds and do not appear to be limited to target companies just in Europe.

So, if an EU fund wants to make an acquisition of a target company anywhere it will have to provide the relevant information, whereas neither non-EU funds nor, in fact, any other acquirer, will have to provide that information. Similarly, a non-EU fund making an acquisition in the EU will not have to provide this information, putting it at a competitive advantage to EU funds making the same acquisition. Information is generally jealously guarded and, of course, once a statement is made about these matters, if circumstances change there could be liabilities attached to the fund manager if they do not appear to be true.

Was this intended to prejudice and disadvantage EU fund managers? Let's hope this is just an "unintended consequence".

Similarly the idea of "fortress Europe", with the EU attempting to build walls to keep everything nicely and safely inside by preventing non-EU approved managers from raising capital, is at odds with the it's stated aim of the free movement of capital. Preventing non-EU funds from raising money in the EU will simply mean that professional investors will not have access to the opportunities those funds can provide. This is to the detriment of the very people that the EU was seeking to protect in the first place; namely everyone within the EU. Surely, another "unintended consequence".

This brings to mind a twist on the cry "The British are coming!", mythically attributed to Paul Revere for his legendary "midnight ride" during the American revolution. The AIFM Directive in its current state seems to reflect an assertion on the part of regulators that "The Americans, and everyone else, are coming, but we're going nowhere!".

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• Topics
• Regulation
• UK / Ireland