As reported by CNBC, during a European Parliament meeting held yesterday in Brussels, EU finance ministers decided to postpone talks on a controversial proposed directive that would regulate managers of hedge funds, private equity funds and venture capital funds in Europe. Talks stalled after finance ministers were unable to resolve a dispute between Britain, the leading opponent of the proposal, and Germany and France, which favor the proposal’s increased regulation.
The proposed directive was drafted by the EU’s council on Alternative Investment Fund Managers (“AIFM”).
According to the Wall Street Journal, the draft AIFM directive is meant to have three objectives: (1) investor protection; (2) control of risks to the financial system; and (3) increased transparency over the operations of fund managers. Hedge funds would be required to disclose their overall trading strategies, their risk management system, their valuation guidelines and their custody policies. They would also be required to hold a minimum level of capital to cover potential losses.
The draft law has received considerable support from Germany and France, whose economies are still recovering from the Madoff fraud and whose politicians fault hedge funds for exacerbating Greece’s problems by betting on its debt.
The UK, however, is bitterly opposed to the proposal, which is not surprising given that more than 70 percent of alternative investment funds — which also include private equity funds and venture capital funds — are based in Britain. During yesterday’s talks British finance minister Alistair Darling argued that the proposal would put Britain (particularly London, which is home to 80 percent of the EU’s hedge fund industry) at a major competitive disadvantage.
Chief among the EU proposal’s disputed provisions is the so-called “third-country” clause, which would govern the activities (including fund raising) of non-EU alternative investment funds run outside the EU, and would impose limits on the ability of EU investors to invest in such non-EU funds.
According to Financial News and the Financial Times, U.S. Treasury Secretary Timothy Geithner also has serious concerns about the third-country clause, and reportedly sent a letter last week to France’s Michel Barnier, EU’s financial markets chief, warning that the draft rules could potentially block American funds from selling to European investors.
European diplomats and ministers are planning to resume talks in May or June. Spanish Finance Minister Elena Salgado said her country, which currently leads EU talks, would try to broker a deal with “as many concessions as possible” to get the full agreement of all 27 finance ministers.
The proposed rules would need the backing of the European Parliament to become law. Given how far apart and how firmly entrenched the two sides are on this issue, it remains to be seen whether the stalemate can be resolved.