Hedge funds and private equity investors should be obliged to be more open

Date: Friday, June 27, 2008
Author: Asuntos económicos y monetarios

The Legal Affairs Committee wants the Commission to propose new rules so that companies are not left in the dark on the investment policies of hedge funds or private equity investors who buy up their shares. They also want EU-wide measures to prevent asset stripping of companies targeted by private equity investors, and for much more light to be shed on pay and bonus packaged for fund managers.

MEPs in committee unanimously approved the report by Klaus-Heiner Lehne (EPP–ED, DE) which would - if approved by the plenary - become a formal request to the Commission to put forward EU legislation.

Transparency on investment policies

The EP committee proposes to oblige hedge funds and private equity funds to disclose and explain - vis-à-vis the companies whose shares they acquire or own, retail and institutional investors, prime brokers and supervisors - their investment policy and the associated risks.

The committee called for new rules to enhance transparency of voting policies of hedge funds. The Commission is urged to explore whether reporting requirements should also apply to the agreements between several shareholders, as it is not the case today.

Contract terms and risk management

The committee also asks the Commission to investigate the possibility to apply, to alternative investments, contract terms allowing for a clear limitation of risk, for measures to be taken if thresholds are exceeded, for a clear description of lock-up periods and for explicit conditions concerning cancellation and termination of investment contracts.

Encouraging transparency for payouts to managers

The committee calls for full transparency over managers' remuneration systems, including the use of stock options, through formal approval by the general meetings of the company's shareholders.

Moreover, a code of best practice should be established, according to the adopted text, in agreement with the industry, to introduce financial incentives which discourage excessive risk-taking behaviour. MEPs in committee propose a one-stop-shop website with a register of those market players complying with the code of conduct.

Money laundering

The report asks the Commission to investigate the issue of money laundering, specifically in the context of hedge and private equity funds, and put forward legislation if necessary.

Asset strippers not welcome

MEPs want the Commission to propose rules forbidding "asset stripping" by investors who misuse their financial power in a way that merely disadvantages the company acquired in the long term, without having any positive impact on its future - or the interests of employees, creditors and business partners. They therefore propose common EU rules to guarantee capital maintenance of companies.

Regarding private equity funds, Members in committee suggested, among several proposals, that the Commission should address the issue of irresponsible lending to private equity funds, where banks disclaim any responsibility for what the loan is used for and where the money that repays the loan comes from.

Procedure in plenary

A absolute majority of MEPs is required to approve this report at plenary stage, according to the legislative initiative procedure, Rule 39 of EP Rules of Procedure (see link below).

25/06/2008

In the Chair : Giuseppe GARGANI (EPP-ED, IT)

Procedure: Legislative initiative (Rule 39)
Plenary vote: September I (Strasbourg)