Alternative investments and regulation
Published: 01 June 2016
1. Increased regulation since the global financial crisis and adherence to industry sound practices have considerably strengthened investor protection and provided for greater transparency.
Before the global financial crisis, there were significant inconsistencies in how different jurisdictions regulated alternative investment fund management firms. Some countries required firms to register with the national regulator and report details about their activities. Other jurisdictions had a lighter touch. After the crisis, policymakers and practitioners strove to construct a global system of oversight and supervision capable of identifying the build-up of excesses and stresses in the financial system, and addressing them in a timely, effective and consistent manner. The goal was to mitigate systemic risk and market melt-downs, and the related negative effects on the real economy.
A fundamental premise underpinning the policy discussions was a desire to improve transparency; both at the market and counterparty level, and with and among supervisors. The global hedge fund industry, through AIMA, in February 2009 announced its support for a variety of policy initiatives focused on improving transparency. These included mandatory manager registration and the periodic reporting by larger managers of systemically relevant information to supervisors and other macro-prudential authorities. These principles went on to be adopted universally.
Key regulatory measures that have been introduced since the global financial crisis include: the AIFMD (the Alternative Investment Fund Managers Directive), which governs how EU-based hedge fund management firms operate while regulating access to Europe for non-EU firms and non-EU funds; the Dodd-Frank Act, which requires US-based hedge fund firms and certain non-US firms to be authorised and supervised by the US authorities and also imposes rules on the use of derivatives and other financial instruments used by hedge funds and others; FATCA (the Foreign Account Tax Compliance Act), a new tax system for US citizens and institutions with investments and assets outside the US, which has global scope and relevance to hedge funds and their investors; and the JOBS Act (Jumpstart Our Business Startups Act) in the US, which has created the potential for alternative investment fund businesses to be more ambitious in terms of marketing and communications.
For more information about these key regulations, click here.
2. There is no such thing as an unregulated alternative investment management business. Such firms are authorised and supervised by their national regulators.
Alternative investment management firms are subject to strict operational standards and organisational requirements such as conflicts of interest and conduct rules, protection of client assets as well as prudential regulations on liquidity and risk management. They are subject to strict operational standards and must meet organisational requirements such as rules on conflicts of interest and market conduct. They must comply with regulations that govern the protection of their clients’ money. These firms also must follow prudential regulations on liquidity and risk management.
3. The alternative investment management industry supports regulation that is fair, proportionate and globally consistent, enhances investor protection and helps to build a more robust financial system.
The industry supports policies and regulations that protect and enforce investors’ property, shareholder and creditor rights in a fair, equitable and proportionate manner. In terms of regulatory consistency, the industry believes that all financial markets participants should be regulated in an appropriate and proportionate manner. Consistent and effective regulation of the financial sector, and the alternatives sector in particular, should reflect the value of the industry to market liquidity and efficiency, the interests of its investors and the economy at large.
In terms of building a more robust system, we believe it is desirable to have diverse participants in the financial markets with different capacities to take on particular risks. Micro prudential regulation, which does not recognise the different risk-bearing capacities of various financial actors, could increase homogeneity of participants in the market. Rules that produce the same responses to economic shocks will aggravate those shocks.
AIMA believes that capital markets are crucial in the financing of the economy and alternative investment managers play an ever-increasing role in the entire chain of investing and financial intermediation, contributing to market depth, sophistication, transparency and thus its ability to support growth.
Further readingRegulating Capital Markets - AIMA's policy principles (2013)