Tough rules for hedge funds and private equity funds were agreed in Brussels on Tuesday, ending almost two years of heavy industry lobbying and bruising political negotiations.
The package was hammered out by European parliamentarians, European Union member states and the European Commission over the past week, after France withdrew its objections to proposals.
The package must still be approved by the full European Parliament and EU member states, but these procedures are not expected to raise difficulties.
“Today, the European Parliament and the member states have found an accord,” said Michel Barnier, EU internal market commissioner. “This will introduce for the first time European regulation of managers of alternative investment funds.”
In the hedge fund and private equity sectors, there was relief that future rules are clear and that more extreme proposals – such as the introduction of leverage caps – have been either expunged or watered down.
But the industry will still face more proscriptive and detailed rules in Europe than in the US, and representatives warned that the compliance burden would mean higher costs for investors.
“We’re relieved to have reached some legal certainty ... [But] the directive ... is imperfect legislation. It will impose unnecessary cost for our investors,” said Uli Fricke, chair of the European Private Equity and Venture Capital Association.
Under the new rules, capital and disclosure requirements will be imposed on “alternative” fund managers across the EU, although those handling small portfolios will face much lighter treatment. Managers will also have to comply with other detailed rules – covering, for example, depositary arrangements and pay.
Provisions designed to protect against potential “asset-stripping” by private equity funds were one of the final areas dealt with on Tuesday, with limits on capital distributions for the first few years after a company is taken over by a private equity investor.
But from January 2013, when the directive must be adopted into national laws, approved fund managers will be allowed to market their funds across the EU, rather than continue to seek approval on a country-by-country basis.
These pan-EU marketing rights, also known as EU passports, will be extended to managers outside the 27-country bloc from 2015, provided they and their home countries meet certain conditions. These will include compliance with international tax and anti-money laundering agreements.
The existing system of country approvals will continue to operate until January 2018. Before that, however, there will be review of the directive and the passport system.
Non-EU managers – notably in the US – are unhappy about the lengthy transition timetable but relieved that pan-EU marketing rights will be available to funds outside the bloc.
“Everyone would have been happier if the passport regime could have been put in place earlier,” says Maria DeFalco, at New York law firm Lowenstein Sandler.
By contrast, jurisdictions outside the EU where many funds are based, often for tax reasons, seem content with the slow changeover. “It’s a good, sensible compromise,” said one senior official in the Jersey administration.
“We’re pleased with the outcome,” said Mark Lewis at the Walkers law firm in the Cayman Islands, suggesting the next five years could be used to work on exchange arrangements with European regulators.
