EU ministers back new hedge fund rules

EU ministers back new hedge fund rules
By Nikki Tait in Brussels
Copyright The Financial Times Limited 2010
Published: May 18 2010 12:47 | Last updated: May 18 2010 13:32
http://www.ft.com/cms/s/0/99d63a4e-626e-11df-991f-00144feab49a.html


Controversial new rules for hedge funds and private equity funds were on Tuesday backed by European Union finance ministers in Brussels.

The move follows a similar endorsement by a group of EU lawmakers on Monday – and means that regulation of the industry in Europe has now moved much closer.

There are, however, significant differences in the detailed regulation proposals agreed by the member states’ ministers and parliamentarians. As a result, there will have to be potentially difficult negotiations between the member states, parliamentarians and eurocrats at the European Commission in an effort to arrive at a single common set of rules that all three parties are willing to support.

Those discussions will start on May 31. It is hoped that the issue could be finally resolved before the long summer break in Brussels, which starts at the end of July.

Tuesday’s approval of draft rules by finance ministers proceeded smoothly and quickly, without any public intervention by George Osborne, who is on his first visit to Brussels as UK chancellor.

Britain, which is home to about 80 per cent of Europe’s hedge fund industry, has been particularly unhappy about aspects of the proposed rules – arguing that they are unnecessarily burdensome and discriminatory.

But the UK did win a concession in the wording of the declaration. The EU countries’ statement said that ministers had noted “the concerns expressed by some member states on certain aspects of the… proposed general approach, in particular as regards to the third country provisions”. Future negotiations should take these concerns into account, it added.

The so-called “third country” issue refers to the terms on which funds and managers based outside the EU can market to professional investors within the bloc. The proposal backed by EU finance ministers on Tuesday would give national authorities a say over this, and not provide conditions under which EU-wide marketing rights could be obtained.

This has worried some countries based outside the EU – including the US, where a large portion of the global hedge fund industry is housed. It is also of concern to the UK, since many London-based fund managers run their funds through offshore jurisdictions, such as Jersey, for tax reasons.

By contrast, under the parliamentary version approved by the parliament’s economic and monetary affairs committee on Monday night, funds and managers outside the EU would be able to get EU-wide marketing rights, provided strict conditions were met. This stance is preferred by Michel Barnier, EU internal market commissioner. “I’m in favour of equal treatment once managers respect the (EU) rules to the letter,” he said on Monday.

But hedge funds, investors and others in the industry are deeply unhappy about some of the other clauses which are now incorporated into the parliamentary text, and will be lobbying hard to get changes made in the course of the three-way negotiations.

One big concern is a clause which says that professional investors based within the EU can only invest in shares or units of funds outside the bloc if five strict conditions – dealing with anti-money-laundering rules, co-operation agreements, tax policies and the like – are met.

This, they warn, could severely restrict the ability of professional investors to invest as they see fit. “We are concerned that this will ultimately reduce returns to savers and pensioners and prevent investors from diversifying risk,” said Kerrie Kelly, director general of the Association of British Insurers.

That sentiment was echoed by hedge funds themselves. “This will have negative social consequences across the EU because it will be European institutional investors like pension funds who will be affected,” said Andrew Baker, chief executive of the Alternative Investment Fund Management Association.

Still to be settled
● “Third country rules”, the conditions under which funds and managers based outside the EU can market to professional investors within the bloc.
● EU-wide marketing rights, a so-called “passport” allowing a fund to be marketed anywhere in the EU providing certain standards are met.
● Whether national authorities within the EU should still have some discretion to decide whether funds can market within their own jurisdictions, under private placement regimes.
● Remuneration rules, where parliament and member states take a different approach.
● The ability of EU-based professional investors to buy shares or units in funds based outside the bloc.