City targets US help in EU hedge fund fight

Date: Thursday, July 9, 2009
Author: FT.com

The EU directive, a response to public anger at the excessive risk-taking that led to the credit crisis, would require many hedge funds and private equity firms to register with regulators and disclose more about themselves and their investments.

They would also have to meet increased minimum capital requirements and limits on borrowing, which have triggered threats from some big UK hedge funds to move overseas unless the plan is rewritten.

Direct lobbying of the US Treasury and key financial committees in Congress is a shift in strategy from the corporation, which holds regular meetings with members of the New York financial establishment.

“We’ve had worrying trends that the Anglo-Saxon model is being seriously questioned in terms of a more centrist approach to economic management,” said Stuart Fraser, head of the City’s policy and resources committee.

Mr Fraser, also a director at UK stockbroker Brewin Dolphin, told the Financial Times there was a danger of “tit-for-tat regulation” between Europe and the US. “We need to harmonise the regulation,” he said. “Why have two different standards, which would be bad for global trade and for the City of London?”

Alternative investment funds based outside the EU would be forced to comply with the directive or an equivalent standard after a three-year transition period. Otherwise they would be banned from marketing to European investors.

Private equity bosses have given warning that this could trigger a protectionist backlash. “You are opening the door to all sorts of responsive legislation, not only in the US but also Asia,” Jonathan Russell, chairman of the European Private Equity and Venture Capital Association, said.

European regulators say the directive would make life easier for non-EU funds, as a passport system would mean they would need to seek approval only once, rather than from each different country, to market to European investors.

Under current US proposals, hedge funds would have to register with the Securities and Exchange Commission and both they and private equity firms would have to disclose more information.

But most US proposals for financial regulation have focused on the systemic risks in banks and insurers, not alternative investment funds.

Lord Myners, the UK’s City minister, said the directive was “flawed” and showed “poor understanding” of the alternative investment industry. The British government was working hard to improve it.