At a European Parliament meeting held yesterday in Brussels, the European Union moved a step closer to new rules on hedge funds and private-equity firms, with most member states backing the controversial Alternative Investment Fund Manager Directive that would regulate managers of hedge funds, private equity funds and venture capital funds in Europe.

Germany and France led the push for new rules, but the debate put much of the EU at odds with the U.K., home to almost 80% of the EU’s hedge-fund managers.

The EU explained yesterday’s decision by saying it is keeping the promise made after the financial crisis to regulate all players in the market that might pose a risk to financial stability. Most of the member states want more visibility and tighter controls over an industry they view as being instrumental in exacerbating Greece’s debt collapse.

Yesterday’s meeting was a continuation of an EU meeting that had stalled in March amid fierce UK opposition.  The UK and the U.S. continue to be strongly opposed the draft directive, arguing that the requirements would be onerous and discriminate against non-European funds. The directive, which will put hedge funds under a super-regulator for the first time, requires EU funds to comply with restrictions on bonuses, leverage and investment strategies and a number of other regulations. The directive also places conditions on investments in funds from non-EU jurisdictions, only allowing non EU funds to be marketed there if they meet strict new criteria relating to regulatory oversight, anti-money laundering and countering terrorist financing and compliance standards.

The directive has now been agreed in draft form by the European Parliament’s Economic and Monetary Affairs Committee and Economic and Financial Affairs Council. The European Parliament, Commission and Council will now finalize the details in three-way negotiations before agreeing a draft to be voted on in July.  Britain continues to be strongly opposed to the proposal.  An official statement made after the talks yesterday said that the negotiation process that will now start between the Council, Parliament and the Commission will take into account the concerns expressed by the opposing member states.

For related Compliance Avenue posts on this topic, see:

EU Hedge Fund Rules Stalled Amid UK Opposition (posted March 17, 2010)