Regulation of Hedge Funds: AIFM Directive in Italy and France

The Regulation Of Hedge Funds and The Implementation Of The AIFM Directive In Italy and France Date: May 15, 2022 Presented by: Dr. Ana Maria Fagetan (University La Sapienza of Rome) Hedge Funds Regulation In Italy - Italy is among the first European jurisdictions to explicitly adopt, in 1999, specific regulations for hedge funds as well as fund of hedge funds (FOHF). - Hedge funds represent not a legally defined term under the Italian law, known rather as "speculative funds", a designation making no difference between single-manager funds and funds of hedge funds (FOHF). - The key norm is Treasury Decree no. 228, as amended further developed, mainly through the 1999 and 2005 Bank of Italy Regulations with the latter indicating the adoption of a somewhat more liberal approach to alternative investment fund regulation. - There were several regulations acknowledging hedge funds, or for a better accuracy, their Italian synonym: speculative funds / speculative funds in compliance with the Italian regulatory system. These regulations were the Decree n. 58/98 and the already mentioned Ministerial Decree n. 228. Therefore it was only in 2008, with the enactment of the Law Decree n. 185, that the international concept of hedge fund started to be acknowledged in Italy, too. - The minimum initial investment or threshold for speculative funds was set at EUR 500.000 while the Italian law also stipulated a maximum of 200 investors per fund. Moreover, speculative funds could only be distributed on a private placement basis, with authorization of CONSOB the regulator for Italian securities. - Hence, while Italian law did not statutorily restrict hedge funds to designated categories of professional investors the Treasury Decree did not explicitly require that the 200 investors should be "qualified investors" - its effect was to limit the marketing of speculative funds exclusively to those public or private investors having increased net value. - In terms of investment policy, speculative funds can invest freely, without any restrictions, adopting the investment strategy of their choice, without being subjected to the prudential supervision rules of the Bank of Italy, which apply to common collective investment schemes. Similarly, there are no restrictions regarding the portfolio diversification applicable to Italian speculative funds. The AIFM Directive Impact On The Italia Regulatory Regime  The AIFM Directive aims to prevent any negative consequences for all financial market participants as well as the underlying market security through specific rules regarding inter alia, own funds, gearing ratio, conduct of business rules, rules regarding manager's remuneration, information and/or disclosure rules, financial accounts provisions.  The inconvenience of the previous fiscal regime: The previous tax system of Italian investment funds was based on the principle of taxation of the increase of the funds' net asset worth during each year which was falling under a tax at a rate of 12,50% that had to be paid at fund level instead of by the investors.  The income from foreign funds with EU passport falls under a withholding tax at a rate of 12,50% (20% for the income payable and realized starting from January 2012), the investors being the ones paying this tax in accordance with a cash basis when they receive the income realized, through the periodic distributions by the fund or though the trade or redemption of their units.  There were several disadvantages associated to the application of this different tax regime for Italian investment funds.  First, Italian investment funds presented the lowest performances even when their returns equaled those achieved by the other foreign funds with EU passport because they had to pay an yearly tax on the increase of their net asset worth and to indicate in their financial statements their net returns of this tax.  Second, by paying the tax on the increase of their net asset value, Italian investment funds were unable to reinvest the money used for paying this tax.  Consequently, they obtained lower yields than those of the other foreign funds with EU passport not subjected to the tax in their location country.  The factor with the greatest impact on the different investment market in Italy related to risks and opportunities is represented by the initiation of marketing of European passport products if tax harmonization issues are solved  Giulio Tremonti best advocated the need for hedge fund regulation, also requesting to tighten the regulation in this industry. He also requested the supervision of funds by banks. Therefore the threat to the domestic industry is evident: there will be no further need for Italian hedge funds and the path will be clear for repositioning of management and for UCITS products.  There is another explicit risk (though for customers it may turn it into a chance): the decrease of the number of domestic players in the industry, all to the advantage of global asset managers with centers of expertise positioned in other European capitals. By contrast, this process could be a benefit for the market, if its transparency, the interests and benefits of final customers are considered.  The general opinion is that a more regulated industry at the European level could become an obstacle for future development of the Italian hedge funds industry Therefore, it seems that Italy will be on the same side with the UK and the US, as all three are in favors of an adjustable point of view on hedge fund regulation. Hedge Fund Regulation In France - The adoption in France of the AIFM Directive has changed the framework of the European hedge funds industry. As a consequence, there has been a limitation of the range of available vehicles for hedge funds. Currently there are only several vehicles that may be used for hedge funds: 1. Alternative funds of funds, which can be used by nonprofessional investors, 2. General purpose funds and 3. Specialized professional funds, which are only for professional investors. - It is supposed that there are three basic subjects to be regulated in terms of hedge funds. Thus, the primary objective of the strategic plan established by France is the investor protection. The second objective is to reinforce their risk policy and the third objective is t is to encourage Paris as a capital, but also France as a financial crossroad develop a fine relation involving the investor security and a dynamic financial market, particularly due to Brexit, as this new opportunity emerged. The Impact Of The AIFM Directive On Th French Regulatory Framework  France is somehow in a middle of a battle against the UK due to its over- zealous government controlled by beliefs and national concerns. Some British observers tended to appreciate that the AIFM Directive represented a straight assault on the UK, orchestrated by French officials.  The AIFM Directive should not significantly affect French managers because French regulators already control investment managers.  Since French regulatory framework is strict, an even stricter one will not affec managers that much. However, the French authorities are deeply aware of the improvement in the UCITS area, as this is the main cause that makes many French asset managers prefer to move their operations to Luxembourg.  During the uncertainty of Brexit a lot of hedge funds moved their operations to Paris.