EU Hedge Fund Vote Delayed Again

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

14 September 2010

The vote by the European Parliament (EP) on the European Union (EU) directive for the regulation of hedge funds, the details of which were agreed by the European Council in May this year, has been further delayed.

The aim of the Alternative Investment Fund Manager (AIFM) directive is to overcome gaps and inconsistencies in existing EU legislation with regard to alternative investment funds. According to the Council, the recent financial crisis underlined how the activities of large hedge funds may "serve to spread or amplify risks through the financial system."

When the directive enters into force, a European hedge fund with a portfolio of more than EUR100m (USD127m) will be required to obtain an authorization from national authorities to operate. This permit will also entitle them to work across 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 under the directive, which also establishes a number of requirements in other areas, such as leverage, governance standards and transparency.

Currently, the most controversial proposal in the directive is that hedge fund managers from 'third countries' would have to obtain an EU permit to sell their funds within the EU, a planned regulation that is widely awaited, for instance, by US funds wanting to continue to operate in Europe.

The possible allowance of non-EU hedge funds to obtain EU-wide permission has, however, forced long-standing divisions on hedge funds between various EU countries to resurface. Those divisions range, for example, from the United Kingdom, in which most European hedge funds reside and which is against too-stringent regulation, to France, which has expressed a wish for the strongest rules and is against allowing non-EU funds into the European market at all.

That divergence of views has meant that the planned vote in the EP on the AIFM directive, planned for September 20, has had to be delayed. It is hoped, but not certain, that continued negotiations will allow it to be held during the next parliamentary session in October; either early in the month in Brussels or later in Strasbourg.

It is reported that the negotiations are now concentrating on allowing the EU passport for hedge funds to be granted by national financial regulators, but giving a greater overall role to the newly-agreed European financial supervisory bodies in the directive’s overall implementation.

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