Ministers to discuss tough new rules for fund managers

Commission wants to increase regulation but industry says legislation could kill off small funds.

Tighter regulation of hedge funds and private equity finance will be up for discussion by the EU’s finance ministers when they meet on 16 March.

The Spanish government, which holds the presidency of the Council of Ministers, is hoping to secure agreement on tougher rules to regulate those categorised as ‘alternative investment fund managers’ (AIFM).

The discussion has been scheduled for the same meeting at which finance ministers will discuss the public finances of Greece, whose problems have, according to Christine Lagarde, France’s finance minister, been made worse by speculators. The hedge funds are facing a possible regulatory backlash against the way they have bet against eurozone sovereign debt.

In the wake of the financial crisis, the European Commission proposed that managers of alternative investment funds be required to report to financial regulators on their activities, and to follow EU rules on risk management, on minimum capital and the safe-keeping of assets.

The proposal would require non-EU funds to adopt equivalent standards if they want to market themselves in Europe.

Lobbying campaign

The legislation has been the object of a fierce lobbying campaign by the financial services industry, which has warned that AIFM business might be driven out of Europe by the regulations.

The industry argued that the legislation would effectively kill off smaller venture funds and would reduce returns for pension funds.

“It is terrifying that a dossier of this complexity, involving many hundreds of amendments, is being pulled together at such lightning pace,” Javier Echarri, secretary-general of the European Venture Capital Association, said.

“If time and care isn’t taken to ensure these rules are appropriate to private equity, then access to finance for EU companies and innovation will suffer for generations to come,” Echarri said.

But finance ministers seem likely to close a deal. A progress report circulated to governments last week by the Spanish presidency says that member states are split on whether smaller funds should be granted an exemption from the legislation, on what regulatory requirements should be placed on funds outside the EU, and on rules about the banks in which the fund managers keep their money.

The presidency said that good progress had been made on all three fronts. It said that a “large number” of governments supported a voluntary exemption scheme for small funds (Germany and France are the main countries that are opposed), while its proposal to apply reporting obligations and other “certain minimum rules” to third-country funds was also supported by a strong majority (the UK, which sees regulation of non-EU funds as a national matter, is the main opponent on this point).

Agreed position

The European Parliament’s economic and monetary affairs committee is also looking to come to an agreed position on the proposals, not wanting to be presented with a fait accompli by the national governments.

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French centre-right MEP Jean-Paul Gauzès, who is drafting the Parliament’s report, wants the committee to adopt its opinion on 12 April, with a vote by the full Parliament to follow in June or July.

Yesterday (3 March), Gauzès and other MEPs held an informal meeting with the Spanish presidency and the Commission to discuss the subject. Gauzès told MEPs last week that he was “quite optimistic” that agreement on the legislation could be reached.

Gauzès has rallied political groups around a proposal to grant third-country funds a “transitional period” of between three and five years before they fall under the scope of the regulation, potentially resolving one of the thorniest issues in the proposal.