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UK Financial Services Secretary Wants Non-Protectionist EU Hedge Fund Legislation

By Jim Hamilton

The new Financial Services Secretary reaffirmed the UK position that the pending EU legislation on hedge funds and private equity funds must be proportionate, workable and non-discriminatory. In remarks at a London private equity event, Mark Hoban said that the final legislation must ensure that European and international measures support the government?s private equity initiatives and encourage capital to flow into the UK. He emphasized London?s pivotal role as the leading center for private equity in Europe.

The activities of hedge funds and other private equity funds are currently regulated by a combination of national regulations and general provisions of EU law, supplemented in some areas by industry standards. The global financial crisis showed that uncoordinated national responses to the risks to which the funds were exposed made the efficient management of these risks difficult.

Thus, there is now pending a proposed Directive on Alternative Investment Fund Managers in order to produce harmonized EU hedge fund legislation. The most controversial issues still to be resolved under the Directive center on the rules for non-EU hedge funds and hedge fund managers, the third country rules. The Minister said that it is important to attain a workable third country passport without closing the EU to managers who cannot attain this passport. It is also important that the legislation not limit investor choice and access, and maintain national regimes that operate in parallel alongside any passporting regime. Mr. Hoban said that EU private equity should not be at a competitive disadvantage to funds from other jurisdictions and that requirements should apply proportionately to the size of the business.

The UK has supported the concept of the marketing passport since it was originally proposed by the European Commission last year. UK officials have opposed an outright ban on non-EU funds and managers who can not obtain the passport, however, since this would restrict the access of European investors to valuable, open and successful markets.

The hedge fund legislation will be a priority in September, said the Minister, who noted that he has raised the UK?s concerns with EU Commissioner for the Internal Market Michel Barnier and Members of the European Parliament. Commissioner Barnier has acknowledged the G-20?s call to build a globally consistent regulatory framework for financial services. Commissioner Barnier has also reaffirmed in a letter to Treasury Secretary Tim Geithner that he would oppose any discriminatory outcome arising from the proposed Directive.

In an earlier letter to Commissioner Barnier, Secretary Geithner expressed concern over provisions in the proposed Alternative Investment Funds Management Directive that would discriminate against US hedge funds and deny them the access to the EU market that they currently enjoy. He urged the EU to ensure that non-EU fund managers have the same access to their EU counterparts. More broadly, he said that it was essential to fulfill the G-20?s commitment to avoid discrimination and maintain a level playing field in regulating the alternative investment fund management industry. The Secretary said that the US hedge fund regulatory regime embodied in the financial reform legislation signed by the President will give equal treatment to all funds and advisers operating in the US regardless of their country of origin. He thus urged that the AIFM Directive allow US and other third country funds and fund managers the opportunity to access the EU single market through a passport approach.

Full post as published by Jim Hamilton's World of Securities Regulation on July 28, 2010 (boomark / email).