LONDON (HedgeWorld.com)–The Alternative Investment Management Association, in a comment submitted to the United Kingdom’s Financial Services Authority, has made the case for exempting hedge fund managers from increased disclosure requirements concerning soft commission and bundled brokerage arrangements.
The comment comes a month after the FSA sought to clarify its position on the transparency and accountability issues that arise when investment funds pay for a bundle of services, including research, with their commissions to brokers. In a November policy statement, the FSA praised industry groups for their efforts to develop a self-regulatory regime in accordance with its guidelines.
The Investment Management Association, a trade group chiefly representing traditional investment funds, has been developing a “comparative disclosure” model for all U.K. fund management clients, in collaboration with the National Association of Pension Funds and the London Investment Banking Association. The FSA said that it is encouraged by their progress.
The FSA also acknowledged that certain types of investment management firm and industry activity may warrant “differential treatment that takes account of their specific circumstances,” and it said that it would give further consideration to the scope of proposed regulation early in 2005.
This acknowledgement was a sonata to the ears of the AIMA, which in its comment, filed Dec. 17, said that it had “first thought that it would review the IMA/NAPF improved disclosure model, with a view to adapting or adopting it for use in the alternative investment management industry.” But it has now decided, rather, to seek exemption from that model because it is being framed for pension fund interests, whose requirements and investment perspectives are very different from those of hedge fund investors.
There are two pertinent differences between the AIMA’s membership and that of the IMA/NAPF. First, hedge fund managers’ clients are sophisticated investors. Second, hedge funds are intermediate customers and offshore. The FSA itself “recognizes these facts for the purposes of the regime applicable to financial promotions in the United Kingdom, acknowledging that hedge fund interests may only be marketed to such sophisticated investors,” the comment said.
Within the hedge fund context, the use of soft money to pay for research performs a valuable function. It allows small startups to fund the information that they need to make profitable use of their entrepreneurial skills. Excessive restriction of these arrangements may stifle the competitive edge of the industry in the United Kingdom, weakening that country’s international financial position.