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EU Hedge Fund Directive Approved

by Ulrika Lomas, LawAndNews-Tax.com, Brussels

15 November 2010


The European Parliament (EP) has adopted the directive which will introduce, for the first time, European regulation on the marketing of alternative investment funds (AIF), including hedge funds and private equity.

This is the final hurdle for the directive, whose rules are to take effect by 2013. The European Securities and Markets Authority (ESMA) and the European Commission will now have the considerable task of fleshing out the details of how the directive works, through guidelines and implementing legislation.

The directive will impose registration, reporting and initial capital requirements on a financial industry sector which until now has been subject only to "light touch" regulation. It is hoped that, following its introduction, the enhanced regulatory oversight over AIF managers will enhance investor protection and financial stability.

Under the directive, a European AIF manager with a portfolio of more than EUR100m (USD136m) will be required to obtain authorization from national authorities to operate. This permit, or ‘passport’ will entitle them to market funds throughout the EU single market, without first having to seek permission from each member state and comply with different national laws.

The most controversial proposal in the directive has been that AIF managers from 'third countries' would be able to obtain that EU passport to sell their funds within the EU. This, the EP says, was a bone of contention between the EP and some member states, with the EP pushing for a marketing passport to be granted to non-EU players.

The EP has allayed those member states' fears by proposing the provisions now in the text whereby AIF managers will obtain passports only if the non-EU country they are located in meets minimum regulatory standards and has agreements in place with member states to allow information sharing.

The EP has also insisted on the insertion into the directive of rules to deal with asset stripping, and the agreement now includes a number of provisions to this end, relating primarily to limits on distributions and capital reductions within the first two years that a company is taken over by a private equity investor. This is intended to deter private equity investors from attempting to take control of a company solely in order to make a quick profit.

The EP has also introduced information and disclosure requirements to be imposed on private equity investors, particularly regarding the information to be provided to employees and their representatives on the planned strategy for the company. The intention is to oblige investors to develop longer-term strategies for the companies that they take over.

TAGS: investment | private equity | European Commission | law | investment funds | hedge funds | offshore | legislation | standards | regulation | alternative investment | European Union (EU) | Europe

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