EUROPE - European Union finance ministers have backed proposals to regulate hedge funds and private equity funds just hours after the European Parliament's Economic and Monetary Affairs Committee (ECON) adopted a revised position on the Alternative Investment Fund Managers (AIFM) Directive on Monday.
EU finance ministers on Tuesday agreed to introduce tougher regulations for alternative investment fund managers in the EU - despite the UK's new Chancellor George Osborne restating the country's objections to the proposals - and will now negotiate with the European Parliament to draft legislation.
On Monday, the ECON committee voted for an amended version of the Directive, which would allow 'third country' fund managers to market alternative funds in the EU if they signed up to the new rules and faced tough oversight at home.
The European Commission had originally proposed that foreign managers should only be able to market funds in the EU if an EU member state gave its approval to the third country's rules. According to the European Parliament, ECON's amended legislation would require a non-EU manager to "voluntarily subject itself to the directive's requirements", and the financial regulators of its third country domicile would have to act as agents to the European Securities and Markets Authority (ESMA) "in the supervision of that manager".
The proposed legislation would also require the third country to have "high enough standards to combat money laundering and terrorist financing", grant "reciprocal access to marketing of EU funds on its territory" and "recognise and enforce judgements given in the EU on issues connected to the directive".
Non-hedge fund vehicles, such as private equity funds, would be subject to lighter regulation and some forms of alternative investment funds would be completely exempt under the amended directive.
Parliamentary Rapporteur Jean-Paul Gauzes said the changes would "ensure better transparency and better investor protection while at the same time being on the side of the financial industry when it is working for the real economy".
Javer Echarri, secretary general of the European Private Equity & Venture Capital Association (EVCA), gave a guarded welcome to the amendments regarding non-hedge fund regulation and changes to third country rules.
He said: "The vote recognises the importance of protecting Europe's private equity and venture capital firms from rules designed for financial market traders. We have fresh hope of constructive debate on the flow of funds between the EU and third countries. A solution that balances cross-border transparency and co-operation with the need for investor-choice and finance for European business, is an absolute priority."
But he warned the legislation still posed "a grave threat to innovative companies backed by venture capital".
Andrew Bradshaw, partner at Sacker & Partners complained that, despite the EU's intentions to protect investors, pension funds would inevitably suffer from the increased compliance costs passed on to them.
"Whilst I recognise the EU's good intentions, large sophisticated institutional investors are big boys and don't really need Brussels holding their hands when it comes to making investment decisions," he said.
"Pension funds take specialist advice on which alternative funds to invest in, and subsequently understand the inherent risks. Many feel their investment allocation does not need to be governed by the EU."