The European Commission yesterday (29 April) proposed a mild 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.
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, “since it is the manager who is responsible for all key decisions,” argued EU Internal Market Commissioner Charlie McCreevy.
However, critics recalled that the Commission had pushed for regulation of so-called UCITS funds – EU funds marketed to retail investors – as a means of increasing guarantees to investors.
Moreover, the exemption of funds from the proposed new regulation will leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes have been strongly criticised during the current financial crisis.
Following heavy pressure from the Socialists in the European Parliament, McCreevy decided to lower the threshold under which managers would not be subjected to the new regulation. Instead of €250 million managed, the new minimum is now €100 million. Even so, the Commission reckons that less than a third of hedge-fund managers will be covered by the directive.
McCreevy gave a helping hand to this under-pressure €2 trillion industry, which is seen as a key “alternative source of capital” for companies.
Indeed, he proposed to make it easier for hedge-fund managers to market their products throughout Europe. Under the new rules, once a manager is registered in an EU country, he will be able to act across EU markets.
In addition, three years after the entry into force of the directive, the EU market should also be opened to third-country funds, like those based in fiscal havens, provided that they comply with “stringent requirements on regulation, supervision and cooperation, including on tax matters,” reads a Commission press release.
“The management of offshore funds is an important feature of hedge-fund and private-equity business models. The proposal will provide a safe and secure framework for it to continue,” McCreevy said during a press conference.
The Commission adopted a milder approach towards private equity, which is not considered to pose systemic risks, but has been widely criticised for its impact on the employees of the companies it buys out. The threshold under which they will be exempted from regulation is €500 million.
While presenting his legislative proposal, Internal Market Commissioner McCreevy underlined that "this is the first attempt in any jurisdiction to create a comprehensive framework for the direct regulation and supervision in the alternative fund industry".
"We shall be discussing with our international partners in the coming months to make sure the very exacting standards we are proposing for the European industry are also applied in other jurisdictions," he added.
The reaction from the Socialists was fierce. Party of European Socialists (PES) President Poul Nyrup Rasmussen said: "This directive has more holes than a Swiss cheese."
He complained that the proposal "covers only EU-based fund managers". Moreover, "the registration proposed is a formality with no real requirements" and "the capital requirements are miniscule (calculated as 0.02%)," Rasmussen said.
There is "nothing on market disruption by non-EU funds," "no regulation of naked short-selling," "no specific protection of institutional investors," and "nothing on tax evasion," he continued.
On the other hand, the Conservatives widely supported their fellow party member McCreevy. "We consider that the proposal is a good step in the right direction, but perhaps not enough," said Jean-Paul Gauzès, EPP-ED coordinator in the Parliament's committee on economic and monetary affairs.
As for the industry, the Investment Management Association (IMA), representing the UK asset management industry (the biggest in Europe), welcomed the provisions suggested by McCreevy. "The IMA has long been calling for firms to be able to distribute hedge funds, property funds, and other non-harmonised funds cross-border to institutional investors. The proposed directive incorporates this," commented IMA Director of International Relations Jarkko Syyrila.
Although perceived as much milder than expected for the hedge fund industry, the directive displeased the sector. "Hastily prepared and without consultation, the directive contains many ill-considered provisions which are impractical and may prove unworkable. The unintended consequences of these measures may put thousands of jobs in several major European industries under threat and slow down any economic recovery," warned Florence Lombard, executive director of AIMA, which represents the global hedge fund industry.
The private equity industry reacted in a similar manner: "While we welcome the Commission's distinction between hedge funds and private equity, we are deeply concerned that the thresholds set out today punish middle-market companies, which lie at the heart of corporate Europe. We estimate that around 5,000 portfolio companies will have to comply with costly and unwarranted disclosure rules that go beyond even those required by publicly-listed companies," said Jonathan Russel on behalf of EVCA, the European private equity and venture capital association.
Private equity and hedge funds are private capital pools. Private equity invest in companies, mainly by acquiring businesses to sell them at a higher price: so-called 'buy-outs'. Hedge funds are investment vehicles which exploit market imperfections to make returns even when markets are underperforming.
Private equity and hedge funds are very lightly regulated. This allows them to make investments and take risks that other actors cannot take. Following the financial turmoil in the US and Europe, the European Parliament decided to address the issue. Although the crisis was not directly determined by hedge and private funds, it is widely acknowledged that they have made it worse.
In September, the Parliament adopted two resolutions urging the Commission to regulate private equity and hedge funds more tightly. The texts sprang from two reports drafted by Party of European Socialists President Poul Nyrup Rasmussen (see his September 2008 interview with EurActiv) and EPP-ED MEP Klaus-Heiner Lehne.
The G20 in London at the beginning of April supported global regulation for hedge funds (EurActiv 02/04/09).
- European Commission:McCreevy's speech(29 April 2009)
- European Commission:Memo on alternative funds draft directive(29 April 2009)
- European Commission:Website of Internal market DG on alternative investments
- European Commission:Press release on alternative funds draft directive(29 April 2009) [FR] [FR] [DE]
- European Socialist Party:Comment on alternative funds draft directive(29 April 2009)
- EPP-ED Group:Comment on alternative funds draft directive(29 April 2009)
Business & Industry
- AIMA:Comment on alternative funds draft directive(29 April 2009)
- IMA:Comment on alternative funds draft directive(29 April 2009)
- Jean Quatremer (Libération):La Commission protège les fonds spéculatifs contre les Etats membres et le Parlement européen
- Hedge Fund Investors