The chair of the European Securities and Markets Authority has written to the European Commission asking for clarity on the extent to which UK-based hedge funds and private equity firms can run funds – and take in money from investors – inside the EU after Brexit.

The 26-page letter comes as the UK’s post-EU transition period nears its end on 31 December, and with negotiations on a new ongoing relationship between the two still stalled, though due to restart on 19 August.

One of the key points of tension has been whether or not London’s finance firms can still enjoy access to European markets.

Steven Maijoor, the chair of the European markets regulator, wrote to Valdis Dombrovskis, the EU’s economic affairs commissioner, in light of the upcoming review of the Alternative Investment Fund Managers Directive, which sets rules for hedge funds, private equity firms, some property funds and other kinds of investments.

One of Maijoor’s concerns is the issue of “delegation” – the rules that allow the firms that manage such funds to set them up in one country, where it may be tax advantageous, and manage them from another.

With Europe’s two chief centres for fund-domiciling being Ireland and Luxembourg, and the continent’s principal hub for portfolio management being London, Maijoor drew particular attention to the importance of “supervisory convergence in the asset management sector in the context of the UK withdrawing from the EU”.

The regulator is worried that after the transition period, many Alternative Investment Management funds on sale to EU investors will end up with “the majority of their operational duties” carried out by companies “potentially outside of the EU”.

“Against this background, further legal clarifications on the maximum extent of delegation would be helpful,” Maijoor wrote, adding that he wanted to “ensure authorised…management companies maintain sufficient substance in the EU”.

Maijoor also said the Commission should consider reviewing its criteria for when an alternative investment fund manager should be considered a letter-box entity and no longer a manager. This includes the types of assets the fund manager acting on behalf of the entity is invested in, as well as the geographical and sector spread of the investments.

The letter, sent on 18 August, also pointed out the “increasing use of secondment arrangements” within private equity firms and hedge funds. These arrangements can mean staff from professional services firms or consultancies work for the companies on a temporary basis – and sometimes doing work from offices outside of the EU, rather than on a delegation basis.

“This raises questions whether those secondment arrangements are in line with the substance and delegation rules set out in the AIFMD and UCITS frameworks,” Maijoor wrote.

Source: Private Equity News

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