Parliament gives green light to hedge fund rules

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The European Parliament approved today (11 November) new rules to regulate managers of hedge funds and private equity groups from 2013, ending long and bitter negotiations over how tough the new regime should be.

The bloc's assembly overwhelmingly backed the rules by 513 votes to 92 with three abstentions.

The package had already been agreed informally with EU member states who have joint say with the Parliament on the rules.

It marks the first set of EU rules to directly regulate the sector, which although widely considered not to have been a cause of the financial crisis, was still believed to be too opaque and lightly regulated.

Managers of all alternative investment funds, which also include real estate funds, must register to operate in the EU and report data to supervisors and meet capital requirements.

The EU assembly beefed up the draft proposals by including pay rules and restrictions on asset stripping on the private equity sector in a bid to stop them buying assets just for the short term.

The new regime dovetails with global efforts to shine a light on all parts of the financial markets – the United States has approved similar rules on registration and reporting but the EU rules go further.

The bulk of the EU's hedge fund and private equity sector is based in Britain which was locked in long negotiations with France who wanted a tough regime for non-EU managers.

(EURACTIV with Reuters.)

According to European Commission President José Manuel Barroso, the adoption of the directive means that hedge funds and private equity will no longer operate in a regulatory void outside the scope of supervisors. 

"The new regime brings transparency and security to the way these funds are managed and operate, which adds to the overall stability of our financial system. After important decisions on a new European supervisory architecture earlier this autumn, today's directive - which coincides with the G20 Summit meeting in Seoul - is another example of how the EU is leading the way in implementing our G20 commitments," he said.

EU Internal Market Commissioner Michel Barnier said that the landmark agreement provided the foundations for a more stable and secure financial system in Europe.

"We must now build on these foundations by introducing strong and intelligent regulation for all financial markets, products and actors," he said.

"The directive will increase transparency, reinforce investor protection and strengthen the internal market in a responsible and non-discriminatory manner. It will also make full use of the opportunities afforded by the new European supervisory authorities to strengthen supervision and to enhance the macro-prudential oversight of this sector," he added.

Luxembourg MEP Robert Goebbels, negotiator for the Socialists & Democrats group, noted that overall, whilst the legislation is not perfect "it will shine a light into the dark hole of world finance".

"We have not just new measures for private equity funds but we have given the new EU supervisory authority an additional 72 specific powers to ensure it can do its work properly," said Goebbels. 

UK Conservative MEP Syed Kamall, the European Conservatives and Reformists group's rapporteur on the directive, said that the new rules should be welcomed with a degree of caution.

They will be costly for Europe's hedge fund and private equity industries but funds will also be able to sell across the EU without the individual scrutiny of every member state, thus strengthening the Single Market, he said.

Kamall warned that the directive could have disastrous consequences for financial institutions, pension funds and venture capital investment. 

"Instead, we have a directive that promotes transparency without closing our markets," he said. "This compromise is not just good for London's financial district but also for the pension funds and entrepreneurial projects, often in developing countries, that would have been affected if we had restricted investment opportunities."

The Greens, which voted against the final legislative compromise, said the EU had regrettably missed an opportunity to introduce more stringent rules. French Green MEP Pascal Canfin, who was shadow draftsman for the Greens on the proposals, noted that among the most worrying loopholes, European investors will still be able to invest in funds that do not comply with the rules set out in the legislation.

"We are concerned that the provisions on the access of third country funds to the European market are insufficient. The directive grants a passport to funds situated in third countries but it does not grant power to the European authorities to ensure that managers situated in third countries truly comply with the directive," he said, adding that the deal also failed to provide proper regulation on the use of financial leverage.

Echoing the Greens, the Nordic Green left group in the Parliament also talked of a missed opportunity.

"Funds that do not comply with the new rules can still be 'passively marketed' within the EU despite the fact that Commissioner Barnier has called for passive marketing to be urgently regulated. That's like banning someone from selling rotten eggs at the market but letting him go on advertising them," German GUE/NGL MEP Jürgen Klute said, regretting the watering down of much of the initial compromise, especially a section on information rights for workers.

French European People's Party MEP Jean-Paul Gauzès underlined that the European Parliament's intervention had been decisive on some highly political topics such as "relations with third countries and capital investment," but also in more technical matters, such as fixing the responsibilities of the depository.

"The European Parliament was also able to weight in negotiations to strengthen the role of ESMA, the European Securities and Markets Authority," he said.

"We must now continue with our legislative work on other proposals currently on the table such as the revision of the Market in Financial Instruments Directive (MiFID), capital requirements, and rating agencies. The reform of the financial architecture is only pertinent if it is global," Gauzès concluded.

"We continue to have serious concerns about specific proposals in the AIFM [Alternative Investment Fund Managers] Directive, which could have a serious impact on the financing of SMEs and particularly innovative enterprises," said Uli Fricke, chairwoman of the European Private Equity and Venture Capital Association.

"At no point during this legislative process has the full impact on this important part of the economy been fully evaluated. Securing access to finance for SMEs and innovative companies is a key political priority for the EU. This contradictory and unintended consequence must be addressed," she added, calling on the EU for greater political consistency in the implementation phase.

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. 

The draft laws were based on a report drafted by the former Danish MEP and Prime Minister Poul Nyrup Rasmussen in 2008, which was subsequently adopted by the European Parliament.

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.

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