EU Hedge Fund Rules Pass First Hurdle

May 18 2010 | 2:10pm ET

The European Union’s finance ministers today give their assent to controversial new rules for hedge funds and private equity firms, despite the opposition of both the U.S. and the U.K.

The rules, which will come into force in 2012 pending their approval by the European Parliament, will impose strict new reporting and custody requirements on alternative investment managers, as well as possible leverage and borrowing restrictions. As adopted by the finance ministers, the directive would also bar foreign hedge fund managers that fail to adhere to the EU’s stricter standards.

The draft approved by the finance ministers does not, however, include the so-called “passport” that would allow any foreign hedge fund access to all 27 national markets. Instead, foreign hedge funds would have to register with each EU country. The draft being considered by the European Parliament is likely to include a provision for such a passport. The finance ministers did promise to take “into account the concerns expressed” by the British over barring foreign hedge funds.

“We’re a community and that means that there can be decisions against an individual member state,” Wolfgang Schaeuble, Germany’s finance minister, said after the vote in Brussels. Still, the vote was a rare rebuke for a member state; the EU does not often impose laws strenuously opposed by a major member state.

“We are determined to accelerate the pace of regulation,” Schaeuble said.

Austria’s Josef Pröll was more conciliatory.

“Today, with goodwill and agreement from Britain and after a very hard struggle in recent weeks, we have succeeded,” he said.

The British contingent put the bravest face on the defeat, with one British official telling Reuters the vote was “the best possible outcome.” Still, the new British chancellor of the Exchequer was quick to lay blame on the country’s late government, despite the steadfast opposition to the measure from former British Prime Minister Gordon Brown. Brown blocked the rules’ adoption in March.

“Obviously, I arrived with a challenging position that was bequeathed to me by the previous government,” Chancellor George Osborne said. “There were close to no allies around the table.” Indeed, the only country to join Britain in opposition to the rules was the Czech Republic.


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