European flag outside the Commission (Photo credit: Wikipedia)
The US hedge fund industry faced a host of new US regulatory challenges in 2012 -- but the icing on the cake came in December with the release of the EU's "Level 2" Implementation Regulations for the Alternative Investment Fund Manager Directive. The impact on many US hedge fund managers will be palpable, if only because of the time and resources which will be required to analyze this extremely complex set of requirements.
EU hedge fund regulations have been in the making in fits and starts since the financial crisis. The basic thrust of these pan-European regulations is to spread a net where all but the smallest managers can not operate in, or market into, EU countries without a "passport" which subjects the manager to disclosure obligations as well as requirements around use of leverage, liquidity risk, capital requirements, remuneration, liability standards, use of service providers and custody.
Particularly interesting to US managers, the Implementing Regulations released in December give guidance as to how EU-based investment teams will be regarded, and whether the presence of such employees will subject a US manager to the full brunt of the regulations. Another aspect of this issue which US managers may need to explore relates to managed account platforms, and to what extent a US-based platform that allocates to EU-based alternative investment fund managers will be required to comply.
In a process that is not at all analgous to how a US law gets passed, the legislative process in the EU can be somewhat daunting for US-based managers to assess. While viewed by most of the US-based industry as a regulatory scheme whose implementation was far off in the distance, it is worth noting that the release of the Regulations in December moved the EU regulations one step closer to finality, even containing an implementing deadline for EU member states of July 22, 2013. This means that EU members have a period of 3 months to object to these regulations (which may be extended to 6 months), however, if there are no objections, the July 22, 2013 date on which the rules will become effective will stand.
Implementation for non-EU managers are still subject to a phase-in of applicability through 2018, however the availability of this phase-in for any particular manager may be limited and should be carefully assessed. Reporting requirements may apply immediately starting in 2013.
The full text of the Implementing Directive can be found at http://ec.europa.eu/internal_market/investment/docs/20121219-directive/delegated-act_en.pdf.
