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Europe Delays Hedge Fund Rules Amid Trade War Threat

Date: Tuesday, March 16, 2010
Author: Bloomberg

European finance ministers meeting today in Brussels opted to delay plans to discuss hedge fund and private equity regulation that would have risked a trade war by limiting access to the European Union.

Transatlantic tensions grew last week when EU financial- services commissioner Michel Barnier vowed to defend the proposals after they were criticized by U.S. Treasury Secretary Timothy F. Geithner. Geithner said in a letter to Barnier the new rules may discriminate against U.S. funds. The plan would force funds based outside the EU to accept the rules if they attract investors from the 27-nation bloc.

EU officials meeting today removed the fund proposals from an agenda to be discussed by finance ministers. The aim remains to reach agreement during the first half of the year, an EU official said.

“Common sense is prevailing,” Stephen Burke, a director at hedge fund adviser IMS Consulting Group Ltd. in London, said today. “We’ve been rushing to the edge of a precipice, and now they’re holding back. It’s going to give us a bit more time to get the right outcome.”

Nearly two-thirds of institutional investors polled by the Brussels-based European Private Equity and Venture Capital Association said yesterday they would “substantially” reduce their holdings in European venture capital if the proposals go through, according to a survey of investors with 560 billion euros ($766 billion) under management.

‘Going Backward’

“The big danger is that the protectionist aspect of the directive could spark a trade war,” said Andrew Shrimpton, former head of hedge fund regulation at the U.K.’s Financial Services Authority who now advises hedge funds at London-based Kinetic Partners LLP, an industry consultant. “It’s going backward.”

Europe’s Alternative Investment Fund Management Directive, proposed a year ago, calls for limits on hedge fund borrowing, requires registration of funds with more than 100 million euros under management and imposes compensation restrictions.

One clause would mean European investors could only invest with managers domiciled in Europe, excluding funds based outside of Europe. Dutch pension plans have complained that it would limit their access to fund managers.

‘Hot Potato’

“The fund-raising provision, also called the ‘third- country’ provision, is the hot potato and is still disputed,” said Richard Wilson, partner at London-based Apax Partners LLP, and chairman of the European private equity association. “We would not want the third-country provision to be approved because the net result will be less capital raised for European companies and less choice for European investors.”

Barnier said yesterday “there’s still a way to go” before a final agreement on the directive.

“What’s important is that the council has a mandate to work and put forward a compromise as soon as possible -- that is to say, before June, July, with the European Parliament,” Barnier said, referring to the EU’s Council of Ministers, which is scheduled to discuss a possible agreement. Barnier was speaking to reporters after a meeting with Gary Gensler, chairman of the Commodity Futures Trading Commission, in Brussels yesterday.

U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy discussed the EU directive in London last week, and both said they had narrowed their differences, without giving details. The European Parliament is scheduled to vote on the law later this year.

Pay Restrictions

“I believe we can reach a solution” in the next few days, Brown told a press conference after the talks. “I am confident people around Europe want more transparency. People will see that we have not harmed, indeed we have protected, the interest of the financial sector around Europe.”

The U.K. opposes EU plans to impose the same pay restrictions on hedge-fund managers and private-equity firms that it proposed for bankers. Brown hasn’t said what his view is on the third-country fund proposal.

Chancellor of the Exchequer Alistair Darling has significant concerns over the proposals, a U.K. government official said yesterday. The official said the U.K. is particularly worried about how the EU directive affects the industry’s competitiveness.

The hedge fund industry’s largest trade group, the London- based Alternative Investment Management Association, said yesterday it expects Europe will be careful.

“We believe that the vast majority of European officials agree with the G-20 goals of achieving a regulatory framework that is global and avoids any kind of protectionism,” AIMA Chairman Todd Groome said in London.