EU Hedge Fund Rules Inch Closer To Reality

May 5 2010 | 2:25pm ET

The shape of Europe’s alternative investments regulatory regime should come into clearer focus this week, with both lawmakers and the bloc’s 27 members striving to reach accord this week.

The European Parliament may finalize a compromise bill this week in advance of a Monday vote by its economics committee. Lawmakers are nearing a deal on the hedge fund and private equity rules that would seem to assuage many of the fears expressed by the British and the U.S., which have blasted earlier iterations that might have blocked U.S. alternative investments firms from the EU.

Representatives of the EU countries are also due to meet tomorrow to try to break the logjam that has blocked the rules’ approval, Reuters reports. If the legislation wins the acquiesce of both the European Parliament and the EU countries, it would take effect in 2012. The differences between the two sides also need to be worked out.

In March, British Prime Minister Gordon Brown blocked approval of the EU rules by the bloc’s finance ministers.

The legislation in Parliament would require foreign regulatory regimes to meet four or five criteria or else be placed on a blacklist, barring Europeans from investing with funds domiciled in those jurisdictions, The Wall Street Journal reports. Under the proposal, non-EU fund managers would have to pledge to follow the EU rules, which would likely include strict reporting and custody requirements, as well as strict leverage limits.

The bill would not only cover funds: Foreign regulators would have to strike deals with the EU to ensure that hedge funds and private equity funds under their jurisdiction were up to snuff. The criteria for avoiding the blacklist would include rules against money launders and terrorism financing, information-sharing with the EU, tax agreements with individual EU countries and laws assuring EU depositaries access.

A fifth criterion, pushed by the minority socialists in Parliament, would require adherence to a 1958 convention requiring enforcement of arbitration awards internationally, is unlikely to survive Monday’s vote, Jean-Paul Gauzès, the French lawmaker steering the bill through Parliament, said.

Gauzès told the Journal that it was unclear if the Cayman Islands—domicile to much of the British hedge fund industry—would pass the test.

“If the Cayman Islands doesn’t satisfy these conditions, then this is really a country that deserves to be on the black list,” Gauzès said.

An earlier plan, pushed by Gauzès for a third category for countries—the U.S., for instance—that didn’t fully meet EU standards was dropped. But individual EU countries could still decide to bar their own nationals from investing in funds based in those countries under the proposal.


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