By Nathan Somogie
At an October 24, 2012 luncheon sponsored by the Investment Companies & Advisers Committee of the Boston Bar Association’s Financial Services Section, lawyers from several global asset managers met to discuss current legal and regulatory developments affecting firms that market financial products within the European Union. The discussion was led by Gareth Griffiths, Senior Legal Adviser at Baillie Gifford & Co., and Daniel Barry, Vice President and Associate General Counsel at Fidelity Investments.
Messrs. Griffiths and Barry began with the observation that in the wake of the financial crisis, there has been a proliferation of new regulations with extraterritorial reach. Just as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is causing foreign asset managers to carefully consider the impact of US regulations on their business models, new regulations in Europe are having a similar effect on US and global managers. Mr. Griffiths noted that the purpose of the discussion was not to review all of these new regulations in detail, but rather to focus on general trends that are developing in the European Union and on the goals and motivations of European regulators and the firms subject to their oversight.
The participants all agreed on the extraordinary difficulty of keeping up with the avalanche of new regulations in Europe and the US over the last few years. Due to the sheer volume of legal and regulatory changes, many asset managers have been forced to employ a type of “triage” to keep pace. Mr. Barry noted that firms have taken a range of approaches depending on their size and footprint in the EU. Some firms have taken a passive or “reactive” approach, waiting for legislation to become final and implementing changes as the effective date approaches. Other firms have taken a more proactive approach by monitoring proposed regulations (for example, through the use of subscription services) and working with counsel to evaluate their impact before they become final. And still others, particularly firms with a substantial European presence, are actively working through trade groups to emphasize the impact of proposed regulations and meeting with regulators to shape the outcome of legislation.
Mr. Griffiths raised a concern, shared by many participants, that the increasingly extraterritorial reach of these regulations is creating inconsistencies in compliance obligations for global managers. These inconsistencies are causing differences in the amounts and types of disclosure required for the same product offered across multiple regimes, requiring firms to incur additional compliance costs in tailoring offering materials to each regime’s rules. The increased costs have led many firms to address compliance at the level of product design. For example, some participants questioned whether it was even worth launching an existing “1940 Act” product in the current EU regulatory environment. It became apparent from the discussion that managers are adjusting product designs to accommodate the new regulatory environment leading Mr. Barry to emphasize the importance of identifying and resolving elements of legislation that appear to be inconsistent or that present challenges to a particular business model.
The participants then turned to a discussion regarding pending changes in the structure of the Financial Services Authority (FSA), the financial regulatory agency in United Kingdom, which is being divided into two separate regulatory bodies: the Financial Conduct Authority (FCA), which will focus on retail consumer protection and will inherit the FSA’s role as market regulator in the UK, and the Prudential Regulation Authority (PRA), which will oversee banks, insurance companies and other systemically important financial services firms. Participants noted that the impact of these structural changes—both on firms’ day-to-day interaction with regulators and on the UK’s influence at the EU level—is still unclear, though each firm’s relationship with the FCA may not change very much.
Messrs. Griffiths and Barry briefly reviewed some of the more recent developments in the EU regulatory environment, including the status of proposed revisions to the Undertaking for Collective Investment in Transferable Securities (UCITS), the set of EU directives that underpins regulation of open-end investment vehicles in Europe. The group also discussed the parallel regulatory scheme under the proposed Alternative Investment Fund Managers Directive (AIFMD), which will govern closed-end funds, hedge funds and other “alternative” funds. Mr. Barry noted that EU Member States have until July 2013 to transpose AIFMD provisions into national law. However, given the potential inconsistencies in ratification across Member States, as well as open questions about the jurisdictional reach of AIFMD, many firms continue to take a “wait and see” approach and plan to rely on private placement routes as long as possible.
The group also discussed recent and upcoming developments in the regulation of derivatives, including the European Market Infrastructure Regulation (EMIR), which will require certain over-the-counter derivatives contracts to be cleared through an authorized central counterparty. In addition, Mr. Barry briefly noted the European Commission Regulation on Short Selling and Certain Aspects of Credit Default Swaps, which became effective in November 2012 and, like the EMIR, is directly applicable to EU Member States (rather than requiring local transposition). The new short selling rules impose reporting requirements on firms outside the EU, though their applicability depends on where the securities are listed and whether the issuer is an EU sovereign.
Finally, Mr. Griffiths answered questions about his experience in dealing with certain aspects of Irish regulation of investment vehicles, including differences in the marketing and operation of UCITS funds and Qualifying Investor Funds (QIFs). The participants all agreed that the presentation was very helpful and noted in particular the usefulness of hearing how asset managers facing similar challenges were approaching the new EU regulatory environment.