Swedes push for regulation deal

The regulation of hedge-fund managers is a priority for Sweden, which took over the presidency of the Council of Ministers yesterday (1 July) and is pressing for agreement by the end of its six-month term.

Significant revisions to the European Commission's initial proposal are expected, because the draft law has been criticised repeatedly since it was published in April. A majority of member states are dissatisfied, with some wanting to toughen up the requirements for the marketing of offshore funds and others wanting to scrap them entirely.

G20 demands

The Commission's proposal was a response to demands from the G20 group of countries and from MEPs for proper regulation of the sector, which is blamed in some quarters for exacerbating the financial crisis. Germany and France have led calls for tough regulation in the EU.

The proposal would impose information and transparency requirements on the managers of hedge funds and other ‘alternative investment' vehicles, such as private equity funds. It would set minimum capital requirements and oblige managers to put in place effective safeguards against risk.

It also foresees the creation of an ‘EU passport' scheme that would allow offshore funds to be marketed throughout the EU, provided that the fund's home country meets certain regulatory and supervisory standards.

National officials have so far held two discussions on the draft. The Swedish presidency now plans to turn up the heat. It has scheduled three meetings this month, with the first on Monday (6 July).

The Commission has proposed that the law should cover all fund managers with portfolios worth at least €100 million. A more generous threshold, of €500m, would apply to managers who have not leveraged their funds and who apply a five-year lock-in period for investors.

Charlie McCreevy, the European commissioner for the internal market, earlier this week urged national governments not to over-burden the sector with regulation.

“I would hope that in the debate ahead, people on all sides would bear in mind that Europe is going to need all the investment it can to move out of the crisis,” he said. “We must not end up making Europe an unattractive place for investors.”

Poul Nyrup Rasmussen, a Danish Socialist MEP who drafted a European Parliament report on hedge funds, has said he suspects that the proposal will leave loopholes that will allow managers to escape regulation.

Concerns

The hedge fund and private equity industries say the Commission is going too far. Thomas Deinet, executive director of the Hedge Funds Standards Board, an industry body, this week (29 June) told a meeting organised by the Centre for European Policy Studies that the proposal would “severely restrict European investors' access to funds abroad” and was “protectionist in nature”.

Speaking in a personal capacity at the same event, Ravi Bulchandani, the head of alternative investments for Barclays Wealth, said the idea that managers with €100m under management could present a systemic risk to the financial system was “wide of the mark”.

Javier Echarri, secretary-general of the European Venture Capital Association, said that the directive “would set an artificial threshold below which business would be impossible”.

The draft “goes completely against the kind of open trade that the EU has been promoting”, he said.