EU Hedge Fund Regulations Delayed

by Ulrika Lomas, for LawAndTax-News.com, Brussels

30 June 2010

The adoption of the proposed European Union (EU) directive establishing regulations for alternative investment funds, such as hedge or private equity funds, which was expected next month, has been delayed.

Last month, EU finance ministers reached agreement on a mandate for the Spanish Presidency of the EU to negotiate with the European Parliament (EP) on the directive. The aim of the directive would be to overcome gaps and inconsistencies in existing legislation.

If and when the directive enters into force, it is intended that a fund with a portfolio of more than EUR100m (USD124m) will be required to obtain a “passport”, or a permit, entitling them to offer services EU borders. Fund managers would also have to provide data on risk management, performance data and exposure to risks on a regular basis. They would also be required to deliver a clear description of their investment policies.

Negotiations over the directive have now floundered over the above-mentioned passport. There has been particular criticism of the stipulation that hedge fund managers in non-EU countries would have to obtain a passport to sell their funds within the EU, meaning that they would have to adhere to the same strict standards as EU-based funds, a proposal which could effectively extend the jurisdictional reach of EU regulators.

Earlier this year, the United States Treasury Secretary, Timothy Geithner, expressed the concern that the directive, as drafted, would discriminate against US funds.

On the other hand, countries, such as the United Kingdom, with significant hedge funds within their jurisdiction, have proposed that funds, if they fail to obtain an EU passport, should be given another opportunity to apply for permits to operate in individual EU countries.

During recent meetings, the EP has, however, refused to move on its insistence that there should only be an EU passport as originally proposed, and that, if the directive’s requirements are not met, a hedge fund will not be allowed to operate in any country within the EU.

European finance ministers, the European Commission and the EP would all have to agree on the new regulations before the directive can be adopted. Jean-Paul Gauzès, the member who is steering it through the EP, has suggested that an agreement won't be reached until September.

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