U.S., EU clash over "protectionist" hedge fund law

Published: 17 Sep 2009 21:03:25 PST

LONDON, Sept 17 - Draft European Union plans to regulate hedge fund and private equity managers would shut out American competitors from the bloc's markets, a U.S. official told a conference on Thursday.

EU governments and the European Parliament have the final say on a law that will require a wide range of alternative investment fund managers to register and disclose information to supervisors if they want to operate in the 27-nation club.

Unless non-EU managers comply with the rules within three years of the law coming into force, probably around 2015, they will be barred from offering their products in the bloc.

"U.S. managers would effectively be excluded from the EU market," David Vaughan, a senior fellow for the U.S. Securities and Exchange Commission, told a conference on the draft EU law.

"There is much that can go wrong if we as regulators don't respect our differences. We should not impose our standards on one another," Vaughan said.

Britain, the EU's main hedge fund and private equity centre, has mounted a strong campaign to water down several aspects of the draft law but faces stiff opposition from France. Spain and Germany also back strong regulation of the sector.

"We believe there are very real benefits for investors in the UK having access to the world's most talented managers... It's a retrograde step if they're denied access," Britain's financial services minister, Paul Myners, told the conference.

"By playing in the Champions League you achieve the highest possible standards, (higher) than playing in a provincial league," Myners added.

Jean-Pierre Jouyet, chairman of French market supervisor AMF, replied: "We want also to play in the Champions League... We want to be clear on the rules of the game, we want a referee as a real ruler of the game."

"We are not seeking to undermine London to the preference of Paris," Jouyet said.

The EU's executive European Commission, which proposed the draft law and has the right to withdraw it, said it would support "sensible and balanced" changes.

"Passions are running very high. Some of the comments have been hysterical and inaccurate and some tinged by blatant anti-Europeanism," said David Wright, deputy head of the Commission's internal market unit.

"As regards third country regime, this has attracted a great deal of criticism. We have been accused of protectionism by some and being passive and weak by others," Wright said.

"We are not trying to arbitrarily discriminate against third country management... We want funds from third countries to have a similar level of standards," Wright added.

The alternative to U.S. managers complying with EU rules was general mutual recognition of securities rules but reaching a transatlantic deal on this "been put, more on the U.S. side than on our side, into the refrigerator if not the deep freeze," Wright said.

Myners said the process of improving the draft law would address the protectionist elements.

PASSPORT PROBLEM

Consensus is emerging that a "one-size-fits-all" approach to all the different funds that falls within the law's cope needed refining.

"The regulation needs to take into account that we are talking about a very heterogenous group of funds," said Mats Odell, a minister for EU president Sweden.

"We must be careful not to put up barriers that would unduly affect investment opportunities while at the same time ensuring investment protection," Odell said.

Wright said "getting the right level of differentiation between the different sectors will be the key task."

Britain and France are getting closer to a consensus over leverage and valuation issues in private equity and custody of assets but there is deep division over hedge funds marketing.

"The area where we are going to have to work hardest to reach common ground is around the passport. We want a UK market and European market... The French are yet to be persuaded," Myners said.

The draft law would allow third country fund managers to offer their funds in all EU markets, even if the actual funds are based outside the EU, as many are.

"We firmly and strongly oppose the passport for offshore alternative funds. This is the French public authorities' number one priority," Jouyet said.

Jouyet said the product passport should be limited to funds domiciled in the EU but that this would not stop individual EU states from allowing third country funds to be marketed only within their national boundaries.

Myners criticised the private equity sector for not spelling out in public the changes it wants to see. "Smell the coffee! There is going to be a directive," Myners said.