European Union countries agreed on Tuesday to impose new regulations on private equity and hedge funds, paving the way for a wide range of controls in the opaque sector.
The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks.
The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that exempting funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.
"The UK is committed to robust, proportionate and transparent regulation of hedge funds and private equity managers as agreed at the G20 summit in London. Investors will now be able to choose from a global range of funds meeting the highest regulatory standards."
"Today's agreement represents a significant advance from the situation in May, when member states were on the verge of voting through an agreement that would have closed the EU market to funds from third countries, undermining competition and closing off a source of investment to the EU economy. We believe this represents a good outcome for investors and the businesses they finance," Hoban continued.
"Today member states passed a fundamental stage towards an agreement on this important directive, an agreement which would not have been possible without the commitment and determination of the Belgian Presidency," said the EU commissioner for the Internal Market, Michel Barnier, welcoming the agreement.
"The text takes into account the numerous and legitimate requests of the European Parliament with whom we must now finalise this agreement. I wish to thank Jean-Paul Gauzès for the key role he played in these negotiations," Barnier continued.
"We are glad that European finance ministers have reached agreement on AIFMD. There is still much in the Directive that will be difficult to implement for the industry and there will be a heavy compliance burden that the industry will have to bear. But the impact will be far less severe than if something close to the original proposal had been agreed," read a statement from the Alternative Investment Managers Association (AIMA) in London.
"The European Parliament rapporteur for the AIFM Directive, Jean-Paul Gauzès (EPP, FR) welcomes the progress made between member states today, notably on the system to be applied to managers from non-EU countries and looks forward to convening another negotiation meeting next week," according to a statement from theEuropean Parliament yesterday.
Background
In April 2009, the European Commission proposed a new set of rules for hedge funds and private equity firms, requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term (EurActiv 30/04/09).The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks.
The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that exempting funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.
Agreement came as France and Britain ended a running battle over EU measures to rein in hedge funds, which some fear pose a threat to the financial system.
The rules are meant to add transparency, chiefly by putting the sector under the eye of a pan-European watchdog that France hopes will gather more powers and grow its 100-strong staff over time.
"Before, there wasn't any regulation, any supervision," said Michel Barnier, the European official in charge of financial reform, flagging 72 powers of intervention to be given to a new EU supervisory agency.
"There is going to be supervision now [...] European supervision. Lots is going to change."
Joerg Asmussen, Germany's deputy finance minister, applauded the deal, saying it meant Europe could hold its head high at a meeting later this week between finance ministers of the Group of 20 of the world's top economies.
"We wanted to have this guideline ready so we could travel to the G20 summit and say 'yes, we have rules in Europe for hedge fund managers and private equity managers'."
Many compromises
France backed down on its previous demands to give the new markets watchdog the responsibility for issuing EU licences for foreign funds to work across the bloc's 27 countries. In return, Britain agreed to delay the start of this new licensing scheme for foreign-based funds until around 2015.
"It is indeed a compromise," said French Economy Minister Christine Lagarde. "We could probably have come up with something better."
"We have had innumerable compromises," said Didier Reynders, the Belgian finance minister who helped broker a deal. "We have now got a final text fully supported by all."
The law will extend the range of information private equity and hedge funds must hand over, such as what products and on which markets they are trading.
It also subjects them to summary bans on short-selling, a power slated for the new EU markets agency.
The EU law, which is set to be waved through by the European Parliament next month, represents the end of a campaign by French President Nicolas Sarkozy to clamp down on a group of investors derided as "locusts" by a German politician.
But as popular interest waned in France and as Paris became increasingly isolated among Europe's big powers on the issue, his position looked increasingly hopeless.
Germany's Asmussen, whose growing frustration with France forced Lagarde to compromise, flagged a new system of guardians to monitor what is happening to investor money at a hedge fund as well as safeguarding the investments it has made.
This is intended to prevent sham investment schemes like that run by Bernard Madoff, who paid dividends to investors using their own money.
"They have the duty to disclose to investors and regulators," said Asmussen. "They also have to inform investors what their investment strategy is [...] and which leverage they plan to use."
The industry gave the new law a guarded welcome.
"There is still much in the directive that will be difficult to implement and there will be a heavy compliance burden that the industry will have to bear," said Andrew Baker, head of hedge-fund industry group AIMA.
"But the impact will be far less severe than if something close to the original proposal had been agreed."
(EurActiv with Reuters.)
The rules are meant to add transparency, chiefly by putting the sector under the eye of a pan-European watchdog that France hopes will gather more powers and grow its 100-strong staff over time.
"Before, there wasn't any regulation, any supervision," said Michel Barnier, the European official in charge of financial reform, flagging 72 powers of intervention to be given to a new EU supervisory agency.
"There is going to be supervision now [...] European supervision. Lots is going to change."
Joerg Asmussen, Germany's deputy finance minister, applauded the deal, saying it meant Europe could hold its head high at a meeting later this week between finance ministers of the Group of 20 of the world's top economies.
"We wanted to have this guideline ready so we could travel to the G20 summit and say 'yes, we have rules in Europe for hedge fund managers and private equity managers'."
Many compromises
France backed down on its previous demands to give the new markets watchdog the responsibility for issuing EU licences for foreign funds to work across the bloc's 27 countries. In return, Britain agreed to delay the start of this new licensing scheme for foreign-based funds until around 2015.
"It is indeed a compromise," said French Economy Minister Christine Lagarde. "We could probably have come up with something better."
"We have had innumerable compromises," said Didier Reynders, the Belgian finance minister who helped broker a deal. "We have now got a final text fully supported by all."
The law will extend the range of information private equity and hedge funds must hand over, such as what products and on which markets they are trading.
It also subjects them to summary bans on short-selling, a power slated for the new EU markets agency.
The EU law, which is set to be waved through by the European Parliament next month, represents the end of a campaign by French President Nicolas Sarkozy to clamp down on a group of investors derided as "locusts" by a German politician.
But as popular interest waned in France and as Paris became increasingly isolated among Europe's big powers on the issue, his position looked increasingly hopeless.
Germany's Asmussen, whose growing frustration with France forced Lagarde to compromise, flagged a new system of guardians to monitor what is happening to investor money at a hedge fund as well as safeguarding the investments it has made.
This is intended to prevent sham investment schemes like that run by Bernard Madoff, who paid dividends to investors using their own money.
"They have the duty to disclose to investors and regulators," said Asmussen. "They also have to inform investors what their investment strategy is [...] and which leverage they plan to use."
The industry gave the new law a guarded welcome.
"There is still much in the directive that will be difficult to implement and there will be a heavy compliance burden that the industry will have to bear," said Andrew Baker, head of hedge-fund industry group AIMA.
"But the impact will be far less severe than if something close to the original proposal had been agreed."
(EurActiv with Reuters.)
Positions
Commenting on the political agreement reached at yesterday's meeting of finance ministers on the Alternative Investment Fund Managers Directive, the UK's Financial Secretary to the Treasury, Mark Hoban, said:"The UK is committed to robust, proportionate and transparent regulation of hedge funds and private equity managers as agreed at the G20 summit in London. Investors will now be able to choose from a global range of funds meeting the highest regulatory standards."
"Today's agreement represents a significant advance from the situation in May, when member states were on the verge of voting through an agreement that would have closed the EU market to funds from third countries, undermining competition and closing off a source of investment to the EU economy. We believe this represents a good outcome for investors and the businesses they finance," Hoban continued.
"Today member states passed a fundamental stage towards an agreement on this important directive, an agreement which would not have been possible without the commitment and determination of the Belgian Presidency," said the EU commissioner for the Internal Market, Michel Barnier, welcoming the agreement.
"The text takes into account the numerous and legitimate requests of the European Parliament with whom we must now finalise this agreement. I wish to thank Jean-Paul Gauzès for the key role he played in these negotiations," Barnier continued.
"We are glad that European finance ministers have reached agreement on AIFMD. There is still much in the Directive that will be difficult to implement for the industry and there will be a heavy compliance burden that the industry will have to bear. But the impact will be far less severe than if something close to the original proposal had been agreed," read a statement from the Alternative Investment Managers Association (AIMA) in London.
"The European Parliament rapporteur for the AIFM Directive, Jean-Paul Gauzès (EPP, FR) welcomes the progress made between member states today, notably on the system to be applied to managers from non-EU countries and looks forward to convening another negotiation meeting next week," according to a statement from theEuropean Parliament yesterday.
Next Steps
- Nov 2010: European Parliament to vote on AIFMD
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