Brussels, 26/10/2010 (Agence Europe) - Hedge funds and private equity funds operating in Europe will be covered by EU rules in 2013 following interinstitutional agreement on Tuesday 26 October 2010 between the European Parliament and the Council of Ministers on the draft directive on management of alternative investment funds (AIFM), one week after the unanimous compromise deal reached by the ECOFIN Council (see EUROPE 10239). Belgian finance minister Didier Reynders said that the politicians had managed to agree on fair rules for European and foreign hedge funds. EU Internal Market Commissioner Michel Barnier said that this was the first time that EU rules would govern hedge funds and private equity funds, which are systemically key to financial stability, covering around €2 billion of assets and sometimes accounting for half of all financial transactions. The new EU rules were useful but there was still room for improvement, commented Jean-Paul Gauzès (EPP, France), European Parliament rapporteur on the subject. On Thursday 11 November 2010, the European Parliament will endorse this agreement in principle, paving the way for adoption of the directive in first reading.
In 2013, European hedge funds will be able to apply for authorisation to sell their products to professional investors throughout the European Union. A 'European passport' will become available in 2015 to enable non-EU hedge funds to follow suit. The existing national schemes covering private investment may remain in place until 2018. This means that the Member States can continue to authorise non-EU hedge funds to operate in their own country without having to abide by EU rules, but after 2018, EU authorisation will be compulsory.
ESMA. The idea of a European passport for EU and non-EU hedge funds alike was defended by the United Kingdom. Some 80% of the hedge fund market is located in the City of London. This idea was backed by the EP and the European Commission. France opposed it initially but finally came round to the idea on the condition that the European Supervisory Authority for Securities Markets (ESMA), which will be set up in January 2011, plays an key role in awarding the passport. France was not able to make ESMA responsible for issuing the passport itself. National authorities will grant the passport but ESMA may establish guidelines on how this is done. ESMA will be informed about all passport applications and will centralise a blacklist of rejected hedge funds. Under the powers conferred in the EU's financial supervision legislative package, ESMA may ask the national authority of a host Member State for non-EU funds to restrict the fund's activities in the event of dangers to financial stability. In parallel, non-EU countries where funds are located should undertake to cooperate with Member States by exchanging tax information and other information to prevent money-laundering. Michel Barnier said the passport would have to be earned. Scheduled for the end of 2016, assessment of implementation of the directive would provide an opportunity to assess ESMA's ability to grant the European passport itself.
The European Parliament managed to get agreement that strict disclosure rules for capital investment funds would be included in the future directive. Gauzès (EPP, France) said that employees would be informed about the fate of their company if it is taken over by a private equity fund. The measures on employee participation have been included in the draft directive. By restricting the distribution of capital in the first years of a company takeover, the EU rules will limit asset stripping that enables private equity funds to rack in profit very quickly to the detriment of the long-term interests of the companies they buy up.
The Greens at the EP have published a press release saying that the draft directive does not go far enough, and saying that the position voted upon by the EP committee was 'more European and more regulatory'. Their main criticisms are that professional European investors can still buy shares in hedge funds that do not abide by the EU directive; there is nothing to prevent investors from directly investing in funds outside the EU ('passive marketing') without EU supervisory authorities being informed about it; and the directive does not provide ways of monitoring leverage used by fund managers although the managers will have to set maximum leverage levels. (M.B. trans fl)