Alternative Investment Management Association – Industry view Private fund adviser rules
The proposal to adopt and amend certain rules applicable to advisers of private funds will alter the longstanding, widely used business arrangements of private funds.
The
Jack Inglis is chief executive of the Alternative Investment Management Association (AIMA)
A TALE OF TWO REGIONS
For many years after the global financial crisis, markets were overhauled world- wide, but arguably the most existential waves of new rules for alternative asset managers rippled across Europe, creating new guardrails and checks and balances against the excessive risk-taking of the type that led to the crash. Today, however, the pendulum has deci- sively swung back across the Atlantic. As regulators in the UK and Europe are try- ing to balance rulemaking with avoiding overly burdensome requirements, the Securities and Exchange Commission (SEC) has mounted a radical campaign for greater oversight and prescriptive con- trol in lieu of taking a more principles- based approach. Since 4Q 2021, the SEC has released doz- ens of proposals, some of which represent an alarming overreach in the supervision of the asset management industry and its ecosystem of service providers. In addition to proposals to change the US market structure, the SEC has proposed two bundles of rule changes that mark a sea change for advisers and the fund man- agement industry.
most egregious features
include restricting fee structures. The proposal also offers no grandfathering for existing contracts, which would require a costly re-papering exercise by the indus- try. It would also alter the liability stand- ard for advisers, which may lead to some no longer offering certain strategies.
Securities dealer proposal
The SEC has proposed relatively low determining thresholds, which if met would mean that an investment adviser or fund would need to be registered as a securities dealer even though they do not engage in traditional dealing activities. This could significantly impact the trad- ing and investment strategies, operations, risk management, compliance and reporting functions of AIMA members. It also risks damaging US treasury market liquidity by discouraging bond trading.
The UK Away from the tense mood in the US, the UK’s regulatory environment is enjoying a renaissance. The broad package of rule changes – known as the Edinburgh Re- forms – was announced late last year and promised to “drive growth and competi- tiveness in the financial services sector”. The Chancellor of the Exchequer used his annual Mansion House speech to unveil a swath of more detailed proposals for amendments to the rules governing UK’s investment industry.
The main three changes related to the alternative investment industry bring wel- come reforms to short-selling rules, the re-bundling of payment for research and securitisation. For short selling, the gov- ernment will replace the public disclosure regime based on individual net short positions with an aggregated net short po- sition disclosure regime. It will also dou- ble the threshold for net short position reporting to 0.2% of issued share capital. For research payments, managers will once again be allowed to buy research on a bundled basis.
This is encouraging given our efforts to encourage authorities on both sides of the Atlantic to come up with a workable solu- tion to the clash of their respective rules on research payment. Finally, the UK is changing the securitisa- tion framework by narrowing the institu- tional investor definition to exclude non- UK AIFMs, removing any uncertainty.
In summary The trajectories of regulation in the UK and the US are, for now, clear, and juxta- posed. Whether the comparison of the alternative investment markets in these two jurisdictions – with one thriving and another being stifled – will give the pow- ers that be in the US pause for thought is yet to be seen, but it’s unlikely that the pendulum of regulatory scrutiny will swing away any time soon.
The only certainty is that the regulatory landscape is likely to remain highly liquid and AIMA in its role as a leading voice for the industry will remain vigilant in order to help our members and the wider indus- try navigate these changes successfully.
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ISSN: 2045-3833 Issue 126 | September 2023 | portfolio institutional | 11
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