EU rejects US claims of hedge funds regulation rift

Background

On 29 April, the European Commission proposed a new set of rules for hedge funds and private equity firms, requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term. 

The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks. 

The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that the exemption of funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.

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Michel Barnier, EU Commissioner for the internal market, received a letter from US Treasury Secretary Timothy Geithner on 1 March warning that a draft EU law, the Alternative Investment Fund Managers Directive (AIFMD), not only discriminated against US funds but would lead to an Anglo-American drift from the EU.

"The letter expressed some concerns about something that does not exist," a spokesperson for Barnier said on Thursday (11 March), rejecting Geithner's claims that the AIFMD discriminate against US funds.

Barnier is reportedly preparing a reply to Geithner's letter, according to sources at the Commission who did not want to disclose the contents of the letter or when it would be sent.  

Barnier is expected to tell Geithner that plans to regulate alternative investment funds are in line with the goals of increasing market transparency as set out at the G20 talks of world leaders in Pittsburgh, the EU spokesperson told the Brussels media yesterday (11 March).

EU, US funds at odds

US funds operating in London are increasingly nervous that the draft AIFMD will prevent them from locking EU investors.

These echo Geithner's concerns that the draft so far contains new rules that would prevent non-EU funds from marketing to EU investors.

"The US and other countries will likely consider tightening their own rules on EU managers and distributors marketing EU and other funds to US investors to retaliate against the AIFMD," argues London-based lawyer Martin Cornish of Katten Muchin Rosenman Cornish.

According to other analysts the EU logic behind these rules is to prevent unregulated hedge funds to market potentially risky products – such as derivatives -- to EU investors.

Historically, American funds have not sold directly to EU investors. For fiscal reasons, they have marketed their services through tax havens, like the Cayman Islands.

The EU rules therefore go way beyond restricting products from US soil but also from offshore funds, warn analysts.

EU finance ministers are expected to give the draft directive the seal of approval at their next meeting on 16 March, once they have ironed an outstanding spat on so-called third country rules (EurActiv 05/03/10).

In the coming weeks, Michel Barnier is expected to meet Geithner in Washington to talk about global accounting rules, financial regulation and public procurement rules.

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