Chicago Journal of International Law

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The Alternative Investment Fund Managers Directive (Directive) is a European Union (EU) directive issued in response to recent economic crises with the goal of reducing systemic economic risk and protecting EU investors, primarily through enhanced corporate governance requirements, leverage limits, liquidity requirements, transparency measures, and disclosure requirements. The Directive regulates alternative investment fund managers and creates two harmonized regulatory regimes called “passport systems,” one for use by EU fund managers, and one for use by third-country fund managers. The passport system for EU fund managers is already in effect, but the European Commission has not yet implemented the passport system regulating third-country fund managers. The third-country passport system is a novelty in EU law and invokes unique policy issues. For example, both EU and third-country regulatory authorities face the challenge of supervising and enforcing compliance by third-country fund managers with the Directive. They also must determine how to address regulatory arbitrage that results from discrepancies in the legal frameworks of different jurisdictions. Furthermore, the Directive contains numerous vague provisions that are relevant to the implementation of the third-country passport regime; and the ways in which these provisions are interpreted will have significant consequences for stakeholders. This Comment constructs and applies a systemic cost-benefit analysis framework and assesses the merits of potential interpretations of the Directive’s provisions. The framework incorporates the Directive’s policy objectives, applicable regulations, and related EU financial law, as well as the private and social costs imposed by each interpretation. This Comment illustrates this framework’s utility by applying it to two vague provisions of the Directive that are significant in light of the pending expansion of the passport system to cover third-country funds and fund managers. In the course of analyzing these two provisions, this Comment raises important considerations that are relevant in evaluating interpretations of numerous other provisions of the Directive. Finally, this Comment suggests which interpretation is preferred for the two provisions examined and discusses important empirical assumptions and questions, highlighting relevant facts that may favor a different interpretation.