OECD Rejects Call For More Hedge Fund Regulation

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

07 June 2007

Member countries of the Organisation of Economic Cooperation and Development (OECD) have agreed that the corporate governance practices of private equity firms and hedge funds are best addressed within the framework of the existing OECD Principles of Corporate Governance.

They consequently rejected the idea of a separate OECD code on the role of hedge funds and private equity firms in corporate governance. The agreement came at a recent meeting of corporate governance experts and policy makers.

The OECD believes it is essential to take into account existing voluntary codes and industry guidelines when addressing issues that have attracted public concern, such as conflicts of interest, the efficiency of the market for takeovers, transparency around major shareholdings and the robustness of voting systems.

“A close dialogue with the hedge fund and private equity industry on corporate governance is essential,” said Marcello Bianchi who chairs the OECD Steering Group on Corporate Governance responsible for these issues. “We will therefore compare all the voluntary standards that are already out there and look for ways to develop a dialogue with representatives from the industry about key corporate governance issues.”

The Steering Group has based its conclusions on a new OECD report 'The Implications of “Activist” Hedge Funds and Private Equity Firms in Corporate Governance'. The report states that “activist” hedge funds and private equity firms can play a positive role in corporate governance of publicly held companies. They often act as informed owners and take a more active role in monitoring the performance of companies and their management than other institutional investors.

Despite the OECD's conclusions, opinion among governments and financial regulators in the major financial economies on hedge fund supervision remains divided. After failing to get G8 Finance Ministers to impose a Code of Conduct on hedge funds at Potsdam last month, Germany's Deputy Finance Minister Thomas Mirow told a conference last week that hedge funds should be more transparent. His views were echoed later in the same week by Bundesbank President Axel Weber.

Jean-Claude Trichet, president of the European Central Bank, told the Financial Times recently that a voluntary code could cover risk management within hedge funds and the exchange of information between funds and their bankers and between funds and their investors. And at last month's Ecofin meeting in Brussels, European finance ministers, while agreeing not to regulate hedge funds, spoke in favour of a code of conduct to guide their behaviour. Meanwhile, new French President Sarkozy has consistently spoken out against hedge funds.

The United States, Japan, Britain, and Canada however, remain opposed to any interference in the workings of the markets.

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