Brussels, 29/04/2009 (Agence Europe) - On Wednesday 29 April, Commissioner Charlie McCreevy, in charge of the internal market, declared, “the Commission has adopted today a proposal on hedge funds, private equity and other alternative investment fund managers. This is the first attempt in any jurisdiction to create a comprehensive framework for the direct regulation and supervision in the alternative fund industry”. This covers all non-harmonised funds in the “UCITS” directive 85/611/EEC and a market estimated to be worth €2000bn at the end of 2008. The draft directive demands that fund managers be: authorised by the competent authority where they are established by proving they can apply robust internal procedures linked to their businesses (e.g. management of risk/liquidity, investor protection); communicate their investment policy to professional investors and national regulators. It will authorise managers to distribute their funds throughout the EU. The same thing applies afterwards for funds based outside the EU, particularly off-shore financial centres, on the condition that these funds respect the strictest conditions. At the source of the campaign calling for European regulation of hedge funds and private equity, European socialists demanded that these funds to be covered and no their managers. In the event of adoption of the directive before the end of 2009 in codecision, the new rules will be in application in 2011.
The Commission is convinced that they are not the cause of the current financial crisis but it does recognise that alternative funds have an economic model that could have helped increase the scale of the crisis and helped undermine financial stability. For example, the demands for repayment addressed to hedge funds provoked serious liquidity problems for these entities and which sometimes led them to suspend repayments. In response to the G20 appeal for each financial to be subject to appropriate surveillance, the Commission concluded that there was a need to launch a specific legislative initiative.
The future directive will apply to all managers of funds not regulated by the UCITs directive, whether these are hedge funds, capital investment, real estate, raw materials or infrastructure. Why target managers and not the alternative funds themselves? According to the Commission, managers make the key decisions involved in fund activities and financial stability essentially stems from the way in which these managers carry out their activities. The field of application for the proposal will include all alternative fund manages whose portfolios are above: €100 million or; €500 million for funds (certain venture capital) which do not use the debt leverage technique or which do not keep investors captive for more than five years. A provisional version of the text put the first ceiling at € 250 million (EUROPE 9886). 30% of hedge fund managers will be covered by the proposal and 90% of hedge fund assets based in the EU, as well as almost half of all managers of non-UCIT funds. Alternative fund managers will be obliged to have a minimum capital of €125,000, other demands for own funds are required if the assets managed are above €250 million. This obligation will enable investors to obtain damages in the event of fraud or mistakes proved to be caused by managers.
To be authorised in the EU, a managers will have to communicate to the supervisor of the establishment: the identity and description of the funds, the internal provisions in place for governance, auditing, risk management (particularly liquidity risks and those linked to short selling techniques) and the arrangement for deposit safety.
Once authorised, a manager will have a European passport that will allow him to distribute alternative funds under his management throughout the EU but only for professional investors (banks, pension funds etc). Mr McCreevy stated that, “Our proposal provides also "carrots" to accompany these "sticks". Provided that they operate subject to these strict controls, the proposal will grant rights to managers to manage and market funds not only in their own jurisdictions, but throughout the European Union”. The proposal also paves the way to the distribution of alternative funds based off-shore in the EU and not only in member states (United Kingdom and Netherlands) that authorise this practice. The Commissioner explained that, “the proposal will provide an "EU passport" for the marketing of those third country funds which comply with stringent requirements on regulation, supervision and cooperation, including on tax matters”.
He said that these measures were in line with the guidelines set by the G20 Summit and sent an important political signal to offshore financial centres in that they will provide strong inducement to them to improve their practices and to cooperate more with European supervisors. Distribution of alternative funds will be authorised in the EU three years after the directive comes into force. This will allow the Commission time to check equivalence between European rules and those of the country of domiciliation of the non-European alternative funds, and also for the non-EU jurisdictions in question to comply with the OECD fiscal code. What response can be given to Germany, France and Luxembourg which are against delivery of a European passport to offshore alternative funds? The aim of the proposal is not to allow a badly regulated alternative financial industry, like a Trojan horse, into the EU but, on the contrary, to export European rules beyond the borders of the EU, McCreevy said. (M.B./transl.rh/rt)