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UK lawmakers: EU hedge fund plan threatens economy

Date: Thursday, February 11, 2010
Author: Huw Jones, Reuters

European Union plans to regulate managers of hedge funds and other alternative investments need changing to avoid damaging Europe's economy and curbing investor choice, a report by British lawmakers said on Wednesday.

In April last year the bloc proposed that managers in the EU must register, comply with leverage caps, appoint an independent valuer and make disclosures to supervisors.

The sector, which also includes property funds, was seen as too opaque and the EU plans dovetail with broader global efforts to learn from the financial crisis and shine a light on all parts of the financial system.

Britain is the EU's hedge fund and private equity hub, employing around 40,000 people. The report by the upper chamber House of Lords welcomed the draft EU law in principle but said the industry did not cause the recent financial crisis.

The new law is expected to take effect either in late 2012 or 2013.

The draft law imposes too many restrictions on managers who want to market non-EU funds in the 27-nation bloc or invest in non-EU funds, the report said.

"We believe that the government should not agree the directive unless it is compatible with equivalent legislation with regulatory regimes in third countries and in particular in the United States, in order to avoid a situation in which alternative investment fund managers lose competitiveness at a global level," the report said.

It also criticised the law's "one size fits all" approach.

"We recommend that the government seek to tailor the directive in a way that respects the differences between the types of funds it covers. A possible solution could be to establish broad principles in the directive," the report said.

The draft law was rushed out last year in response to heavy pressure from the European Parliament and had there been more consultation ahead of the draft, many of its "shortcomings" would have been spotted earlier, the report said.

"As this report says, this debate isn't academic and it isn't about 'fat cats' -- it's about our pensions and savings. If U.S. managers don't think it's worthwhile to sell in Europe, we're all going to suffer," said James Perry, a partner at Ashurst law firm.

Activist hedge funds were "perceived as villains" during the height of the financial crisis, particularly for their favoured strategy of short selling shares, the report said.

The draft law should be amended so that managers can use non-EU depositories for safe keeping of assets and to sub-delegate custody functions, the report said.

The European Parliament and EU states have the final say.

Members of the EU assembly have tabled well over 1,000 amendments, an indication of the haste in preparing the draft law, lawyers said.

"In its current format the AIFM regulations will put the UK and Europe at a significant disadvantage and make it much less attractive as a base for private equity investors," said Mark Spinner of Eversheds law firm.

Some of the British concerns, such as over-marketing non-EU funds and use of third country depositories, are already being addressed in compromises under discussion in Brussels.

The Alternative Investment Management Association, an industry body, has estimated that the European hedge fund industry has more than 250 billion euros of assets under management in the EU, generating some 4 billion euros in tax revenues annually.