Hedge Funds Attack EU Draft

Date: Friday, April 24, 2009
Author: Reuters

The hedge fund and private equity industries attacked a draft European Commission directive designed to regulate their activities and due to be published next week.

Trade associations representing both sectors on Thursday characterised the draft as a rush job heavily influenced by politicians seeking to score short-term electoral points.

"A process which should usually take many months has been reduced to mere weeks," said Tim Hames, head of communications and public affairs at the British Private Equity and Venture Capital Association (BVCA).

Publication of the draft directive, which comes amid growing political pressure for increased regulation of institutions seen by many politicians and regulators as posing systemic risks, has been postponed from this week to Wednesday, April 29.

"Consultation with the private equity industry has been non-existent and the political motivations for the proposal seem to far outweigh any economic motives," said Hames.

The Alternative Investment Management Association, which represents more than 1,100 hedge fund firms in more than 40 countries and which has recently proposed concessions over information sharing and transparency, said it is frustrated by the "baffling" volume of political rhetoric.

"We are... concerned that the process of drafting the directive has been subjected to undue political pressure," AIMA Executive Director Florence Lombard said.

"There has been much rhetoric from various political organisations on the directive, most of which appears designed to satisfy domestic audiences ahead of the forthcoming European elections rather than to secure an effective and sensible solution to identified problems."

"UNACCEPTABLY WEAK"

European leaders such as France's Nicolas Sarkozy and Germany's Angela Merkel have called for regulation of hedge funds, which have come in for criticism from some politicians and commentators over the practice of short-selling.

"This proposal has already been delayed too long," said Poul Nyrup Rasmussen, president of the Party of European Socialists (PES) and long-standing hedge fund critic. "There has been a consultation in which industry had every opportunity to give their views," he said in an e-mailed statement.

Rasmussen added he believes the draft proposal gives huge concessions to the industry and is "unacceptably weak."

Lawmakers have been concerned about potential systemic risks posed by hedge funds since the 1998 collapse of U.S.-based Long Term Capital Management, while safeguards on client money have been in the spotlight in the wake of the Madoff fraud.

In a letter to the European Commission president Jose Manuel Barroso, PES said the draft directive was filled with loopholes and was ineffective.

It argued the proposed directive only covers fund managers and not the funds themselves and exempts those with less than 250 million euros (170.8 million pounds) in assets from increased disclosure. The private equity industry, meanwhile, would like to see that threshold set at about 1 billion euros.

While AIMA did not detail its objections to the proposals, a recent draft from the EU seen by Reuters said managers of hedge funds will need to be registered, hold a minimum level of capital and disclose information on borrowing.

AIMA said a rush to publish draft measures could lead to a flawed directive with major negative consequences for several key European financial industries and a direct impact on jobs.

Once the Commission has formally proposed the draft law, it will need joint approval from EU states and the European Parliament, a process expected to make changes to EU Internal Market Commissioner Charlie McCreevy's text.

AIMA also said it looked as if the drafting had not been co-ordinated with the Financial Stability Board and the International Organisation of Securities Commissions and said it was unclear how the EC's directive would fit with G20 plans.