EU Reaches Compromise on Regulations for Hedge Funds

Date: Wednesday, October 27, 2010
Author: Ben Moshinsky, Bloomberg

Hedge-fund and private-equity regulations that will restrict bonuses and require increased disclosure were approved by European Union negotiators representing the European Parliament and 27 member states.

The accord will allow the rules for hedge-fund managers to become part of EU law as soon as next year.

Finance ministers from the EU agreed on a compromise at a meeting in Luxembourg last week to give the European Securities and Markets Authority powers over a so-called passport system for non-EU hedge-fund managers. The Brussels-based European Commission proposed the rules last year.

“The commission’s initial draft was a very wrinkly shirt and we have managed to iron out many of the wrinkles,” Syed Kamall, a U.K. Conservative member of the EU parliament, said in an e-mail.

The passport would give managers access to investors across the EU with a single registration, in return for complying with transparency rules.

“I am particularly pleased by the truly European character of this directive,” Michel Barnier, the EU’s financial services commissioner, said in an e-mail.

“By guaranteeing a high level of transparency and protection throughout the industry, the directive will allow us to create a passport for all fund managers,” Barnier said.

Asset Stripping

Private equity managers will face tougher rules on asset stripping as part of the law. The rules place limits on the selling of assets immediately following a corporate takeover.

Private investors will also be required to provide information on their strategic plans to employees of companies they control.

The rules stop short of preventing hedge funds based outside the EU without a passport from taking EU investors’ money, a process called passive marketing.

“The deal reached today falls far short of what is required to effectively regulate hedge funds,” Pascal Canfin, a French Green party lawmaker, said in an e-mail.

“While these funds cannot be actively marketed in the EU, there is nothing to stop an investor from buying the parts of the funds that are managed outside the EU,” Canfin said.

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net