New compromise suggested on AIFM Directive

John Bakie
07 September 2010

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As Europeтs politicians return from the summer recess, negotiations over the final shape of the Alternative Investment Fund Managersт (AIFM) Directive have resumed. A revised compromise on the Directive, issued by the new Belgian presidency, will now be discussed ahead of an expected vote. John Bakie reports

The Belgian government has released a new compromise document to replace the general approach agreed earlier in the year under the former Spanish presidency. This has yet to be agreed by the European council, but is likely to lead to some relaxation of the rules.

However, the document makes no change to two of the most controversial aspects of the AIFM Directive, namely the third country rules and regulations for those acting as depositaries.

Third country rules, which have proved a major point of contention between the European parliament and council, have no specific changes in the new document. Instead, additional text will be included after the parliament, commission and council have discussed the matter further and reached an agreement, leaving room for possible changes in the regulations.

Concerns over the potential impact the regulations could have on depositaries were also not fully addressed. Under the AIFM Directive rules, depositaries, which hold cash to be invested by private equity funds, could be liable should a private equity or hedge fund collapse.

The latest text gives a clearer definition of liability, saying depositaries would not be liable for losses if they could prove "that the loss has arisen as a result of an external event beyond its reasonable control". While this is still likely to lead to heightened costs for LPs, it should cushion the effects to some extent, as the previous text left depositaries open to extensive liabilities.

The Directive is next due to be discussed and voted on by 21 September, though it could be held up if the three main European bodies fail to come to an agreement.