European Union finance ministers approved a draft law to tighten hedge-fund regulations in the face of objections from the U.K. The proposal, which would impose transparency standards on hedge-fund managers based outside of the EU, was adopted at a regular ministerial meeting in Brussels today. The draft law also would set restrictions on investment managers’ bonuses and on the use of debt.
Hedge funds and private-equity firms are under the scrutiny of lawmakers worldwide, who say they are partly to blame for the financial crisis. Then-U.K. Prime Minister Gordon Brown warned in March that the Alternative Investment Fund Managers Directive may threaten the country’s pre-eminence in the financial- services industry. The U.S. has also opposed the draft law.
“We’re a community and that means that there can be decisions against an individual member state,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels.
Today’s agreement among ministers may set up a clash with the European Parliament’s economic and monetary affairs committee. The Parliament panel yesterday approved a measure to force hedge-fund managers outside the EU to agree to transparency standards in exchange for a so-called passport to market to investors in the bloc.
The draft from the finance ministers requires managers to register in each EU country they want to market their funds.
‘Bad For Investors’
“Ultimately it’s really bad for investors,” Ana Haurie, managing director of London-based Dexion Capital Plc, which manages a $1.7 billion fund of hedge funds, said in an interview. “If you’re limiting where you can invest there will be a consequence. Just because a fund is operated through the Cayman’s doesn’t mean these funds are cowboys.”
Final EU approval of any measures requires an accord between the Parliament and EU national governments in a process that could take another year or more.
Finance ministers said they would be “taking into account the concerns expressed” by the U.K. over the treatment of hedge-fund managers based outside the EU, according to a statement issued in Brussels today.
The U.K., where 80 percent of European hedge funds are based according to a report last year from the Financial Services Authority, didn’t have enough support among ministers to stop the law from taking another step toward being implemented.
‘Difficult’
The Parliament’s negotiations with finance ministers “will be difficult,” said Jean-Paul Gauzes, the French lawmaker who sponsored the bill in the assembly. “The devil is in the detail.”
Gauzes said today that the goal of the Parliament is to fast-track negotiations with national governments, overcoming “strong divergences” between the texts. “But that doesn’t mean an accord at any price.”
Michel Barnier, the EU’s financial services commissioner, said yesterday that he would work with finance ministers and the Parliament after this week’s votes to get “a dynamic compromise,” which keeps “the integrity of the internal market.”
The overall Parliament bill, which would see investment managers subject to restrictions on bonuses and debt leverage, was passed with 33 votes in favor, 11 against and three abstentions. It was opposed by U.K. conservative members of the committee.
‘Fortress Europe’
“We’ve adopted protectionist, fortress Europe policy,” Syed Kamall, a U.K. conservative lawmaker, said after yesterday’s vote.
The rules will “reduce the return of pension funds” and could “lead to retaliation” from lawmakers in countries outside the EU, Kamall said.
Finance ministers in March put off a vote on the directive under pressure from the U.K., which sought to modify the proposed rules. Spain, which holds the EU’s rotating presidency, said last week it would push ahead with the legislation without U.K. support.
Private-equity and venture capital managers will be subject to leverage limits and transparency rules, which industry groups said would limit investment in small to medium-sized companies.
The law “still poses a grave threat to innovative companies backed by venture capital,” Javier Echarri, secretary general of the European Venture Capital Association, said yesterday in an e-mailed statement. “Unwarranted disclosure requirements would leave these ideas-fuelled companies at the mercy of unfair and damaging competition.”
Barnier said yesterday he prefers portions of the Parliament’s legislation giving hedge funds based outside the EU a passport to operate across the bloc rather than forcing them to register in each of the 27 member states.
He said the transparency proposal approved by the Parliament is preferable to the one considered by EU finance ministers today.
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