EU to water down hedge fund regulation


The hedge funds row might soon be over, say EU sources, who claim regulation is in sight. Reportedly, funds will likely be able to choose between getting an EU passport to gain access to national markets or getting the private and less stringent licences that they are used to. 

A stalemate between the European Parliament and member states on the draft regulation is coming to an end as both sides warm up to the idea of letting hedge funds decide whether they want to get an EU passport to operate throughout the EU 27 or apply to countries' regulators privately, according to EU sources.

"This is a serious possibility," said a source close to talks on the Alternative Investment Fund Managers Directive (AIFMD).

The EU passport was designed by MEPs who believe alternative asset managers played a part in exacerbating the financial crisis.

The licence would require hedge funds and private equity firms to agree to "tick-box" transparency standards to obtain the so-called passport to market to investors in the EU bloc.

The passport has also received the backing of EU Internal Market Commissioner Michel Barnier, who said he would prefer to give hedge funds based outside the EU this option rather than forcing them to register in each of the EU's 27 member states.

The compromise, which is being hatched at weekly talks between the European Commission, the European Parliament and representatives of the 27 member states, would allow alternative investment funds to either pursue an EU licence or pursue a private placement regime – that is, the status quo – to give non-EU funds access to investors within their borders.

An EU passport would have obvious advantages for funds, but critics argue that it represents unchartered territory as it would be administered by a body that is not yet in operation, the proposed European Securities and Markets Authority.

"The administration [of a passport] could potentially take months or years to process. We just do not know," argues an undisclosed industry source against the idea.

Though the EU talks were reportedly at a stalemate, with neither member states or MEPs willing to cede their positions, this compromise could move a vote on the AIFMD to September, putting the EU back on schedule to have the regime in place by January 2011.  

In April 2009, 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 (EURACTIV 30/04/09). 

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 exempting 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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