New York – Yesterday, the European Parliament voted 513-92 to adopt new regulations for hedge funds and private equity firms.
The rules, which will go into effect in 2013, set up a system of “passports” which determine the areas that different funds are allowed to market their services. The passports will give fund managers access to investors all over the EU so long as the funds comply with certain transparency rules. Firms outside the EU, such as those based in America or the Cayman Islands, will begin to be eligible for the passports starting in 2015, however the rules do not explicitly state that non-EU based funds can not have EU investors.
The transparency rules will force additional disclosures on leverage from hedge funds and information on which markets they are trading. Key exposures will also have to be highlighted, and it is even possible that firms would be forced to reveal information such as their current short-selling positions. The power behind these new regulations is a pan-European watchdog slated to begin working in January which will start out with approximately 100 staff.
The ruling also extends to “alternative” investment funds such as capital-risk and private equity firms. One particular aspect of the new legislation deals with asset stripping by private equity funds. To do this, limits have been placed on the selling of assets immediately after corporate takeover. Investors will also have to disclose their strategic plans to employees of companies they control.
The talks were held up initially due to a debate between Britain and France, who were fighting over who would control the issuance of passports. Reportedly, 80% of the hedge fund industry calls London its home, which was the main reason Britain was so adamant about the issue. Eventually a compromise was reached where France backed down from demanding the new watchdog agency have responsibility for issuing EU licenses for foreign funds to work in the EU and Britain agreed to delay the foreign licensing scheme until 2015. Each of the Ministers at the 27 EU member states will have to formally approve the rules later this month.
The legislation also addresses compensation for hedge fund managers, imposing a loose pay code on them.
The U.S. government will be watching this legislation closely, and Timothy Geithner, the US Treasury Secretary has already expressed fears of protectionist overtones in some of the developments stemming from the legislation.
While strict, the industry in general seems relieved that the legislation has been somewhat watered down from its original version. The fact that the new legislation simply sets up a watchdog agency rather than placing strict caps on hedge funds seems to suggest that the industry will not be too severely limited. Overall, that is good news for the independent research industry, as hedge funds are a large user of their services.