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US takes row over EU hedge funds directive to Brussels

Date: Tuesday, September 1, 2009
Author: Ruth Sunderland, Guardian

A group of American Congressmen are flying to Brussels this week to dispel tensions over hedge funds

A delegation of American congressmen is flying into Brussels this week to dispel mounting trade tensions between the US and Europe over hedge funds.

Worries centre on the European Commission's directive on alternative investment fund managers. The hedge fund industry claims that if it is enacted according to the current draft, it could cost European pensioners up to 25bn a year by shutting out American and other non-EU based investment vehicles. That would result in a major reduction of choice for large investors, who as a consequence would suffer increased costs and lower returns.

Among the disputed provisions are proposals to make US hedge funds submit to a three-year waiting period before being allowed to market themselves in Europe. It would also subject hedge funds, private equity and other alternative investments to a battery of tests.

These include limits on how much debt such funds can take on; a requirement to hold capital to cover potential losses and redemptions; and strict disclosure requirements for private-equity portfolios. The directive would apply to all funds and financial firms wanting to market themselves in the EU. It is feared that the so-called "equivalence test" will freeze out US companies, because the directive goes much further than proposed changes across the Atlantic.

City minister Lord Myners is among those who has expressed concerns the directive may lead to "a weak form of protectionism" by pulling up the drawbridge for US and other non-European hedge funds. The UK is home to 80% of Europe's hedge funds.

The Brussels-bound delegation is led by Congressman Paul Kanjorski, who chairs the financial services subcommittee on capital markets. He and his colleagues will meet members of the European Parliament's economic and monetary affairs committee, chaired by British MEP Sharon Bowles. The visit follows a Senate delegation on Friday led by Richard Shelby, the top Republican on the banking committee. Bowles said she would not be surprised if her committee had to file more than 1,000 amendments to the draft directive. She added: "We have to find a way of putting the brakes on financial markets but we don't want to leave them with square wheels. We don't want legislation that becomes protectionist in some way. This will need an awful lot of tweaking to make it workable but to be fair it is not abnormal for a first draft not to be perfect, particularly when it has been done under pressure."

At the meeting with Shelby, the idea was floated of having a resident expert from the US to advise the European committee and vice versa. The regulation of hedge funds and other areas including private equity has set Wall Street and the City at loggerheads with the EU, where some nations, led by Germany and France, have been calling for draconian measures.

The hedge fund industry argues the crisis was caused by banks, and that the draft directive emanates from countries such as Germany, where politicians have made clear their dislike of so-called "locusts."

Countries will aim to agree a version of the rule changes before the September G20 meeting in Pittsburgh, where regulatory reform will be high on the agenda.