The European Commission’s current draft directive to regulate alternative fund managers operating in the European Union could prevent Canadian hedge funds from attracting capital in the EU, the Alternative Investment Management Association – Canada Inc. is warning.

The draft directive has been under development for the past year in the wake of the global financial crisis. It would force alternative investment firms in Canadian, U.S. and other foreign countries to comply with a new set of requirements that would effectively prevent them from attracting capital within the EU, according to AIMA Canada.

“In its current form the directive will significantly restrict the ability of alternative fund managers from non-EU countries such as Canada to do business and raise capital in the EU, as well as having negative effects on the ability of institutional investors in the EU to access investment management expertise outside the EU,” said AIMA Canada chairman Gary Ostoich.

Canadian alternative investment managers have traditionally looked to the EU as an important source of capital. The implementation of the current directive would have a material effect on the growth of the Canadian alternative industry going forward, and would force funds to essentially remove existing current EU clients from their funds, according to AIMA Canada.

If adopted, Ostoich warns, the directive could result in counter measures from other countries.

The U.K.-based Alternative Investment Management Association has issued similar warnings, calling the directive protectionist.

U.S. Treasury Secretary Timothy Geithner also expressed concern around the draft directive. In a letter to British Chancellor of the Exchequer Alistair Darling, he said the draft directive would discriminate against third country funds and fund managers.

“It is my hope that this provision will be revised to provide non-EU funds, fund managers and global custodians the same access as their EU counterparts and promote a single market,” Geithner wrote.

He noted that U.S. legislation will treat all advisors and funds operating in the U.S. equally regardless of their origin – domestic or non-U.S.

Ostoich said AIMA welcomes aspects of the directive that were previously agreed to by G20 member countries, such as the reporting of systemically relevant data by managers to their national supervisors in the interests of financial stability, and the registration and authorization of managers.

But the elements of the directive relating to depositaries and marketing, among others, could have unintended and potentially damaging consequences.

“We are hopeful that our input, and that of other international stakeholders, will result in the development of a sensible consensus agreement on revisions to the directive that will allay legitimate concerns related to the current draft,” Ostoich said.

AIMA said the directive should focus on three key issues: registration and authorization; reporting on systemically relevant data; and a workable passport.

“This would create a progressive operating framework for the industry within the EU that would address concerns relating to systemic risk,” Ostoich said.

IE