‘Alternative’ fund managers face rule change

Date: Monday, April 6, 2009
Author: FT.com

Sweeping new rules would require all hedge fund and private equity managers in Europe to detail their activities to financial regulators and meet minimum capital requirements.

A draft of a proposed European Union directive, seen by the Financial Times, makes clear that the new regulatory emphasis for “alternative” funds will be on managers, rather than funds directly. It will apply equally to hedge fund and private equity managers, as well as those handling other vehicles such as commodity and real estate funds.

The new rules, the first of their kind in the world, are being drawn up following heavy pressure from world leaders – most recently at the G20 – to extend the regulatory net to all players in the financial markets. But while hedge funds seemed relatively sanguine about the EU’s approach on Friday, the proposals were immediately attacked as “illogical and disproportionate” by the private equity industry.

“In sharp contrast with the hedge fund industry, private equity does not represent any systemic risk. We are very unhappy,” said Javier Echarri, secretary-general of the European Private Equity & Venture Capital Association.

The draft legislation seen by the FT is still being discussed within the European Commission and with interested parties. It will then require approval by both the European parliament and member states and is subject to further amendments.

But key points suggest that lawmakers are considering imposing a ban on “naked” short-selling, the selling of securities that are not owned or borrowed. Capital requirements would require a manager to hold a base sum plus 0.02 per cent of the amount by which his portfolio exceeded €250m ($340m), although this appears to be lower than current UK rules. The draft indicates that managers of portfolios worth less than €250m could enjoy a de minimis exemption. But anyone managing a leveraged fund, that is, with large borrowings, would face additional disclosure requirements and have to tell the financial authorities both about overall leverage and details of where the money was coming from.

By: Nikki Tait in Brussels and James Mackintosh and Martin Arnold in London