EU reaches deal on hedge-fund regulation

The European Parliament today reached agreement with the Council of Ministers and the European Commission on new EU rules to regulate hedge funds and other alternative investment funds.

The agreement is to ensure effective supervision over how alternative investment funds are marketed and run within the EU. The Parliament is expected to endorse the accord in a plenary vote on 11 November.

“It is a first step to real European supervision,” said Didier Reynders, the Belgian finance minister who led negotiations on behalf of the Council. He said only “minor changes” involving wording were made to a draft agreed by member states on 19 October.

The draft deal, 18 months in the making, would require managers of alternative funds – which includes hedge funds, private-equity funds and commodity funds – to inform regulators and investors about their activities, to retain capital to protect themselves from default, and to use depository banks to safeguard their investors’ money.

The deal will also allow fund managers to market to investors across the EU without having to seek permission from each member state. The fund managers will have to obtain ‘passports’ that will give them the right to sell funds across the EU. The passport scheme, to be introduced in 2013, will be extended to managers from outside the EU from 2015.

Jean-Paul Gauzès, the lead MEP on draft legislation to regulate the sector, said although the deal was “not perfect”, the agreed text “represents a considerable step forward”. Gauzès said that changes could be made to the regulation through a review of the law by the Commission in the coming years.

The new regulation, once approved, is expected to come into force in January 2011, but member states will have two years to implement it into national law.

Michel Barnier, the European commissioner for the internal market, said he would travel to the United States this week to ensure US legislation on alternative funds was equivalent to that in the EU, to ensure equal treatment for fund managers. “We are certainly hoping we will have intelligent regulation and effective supervision,” Barnier said.

The European Securities and Markets Authority (ESMA), which starts its work in January, is expected to play an important role in regulating fund managers and will be responsible for maintaining a central register of managers allowed to operate across the EU. ESMA was one of three supervisory bodies set up as part of new EU financial supervision architecture.

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