Hedge Fund Managers, Buyout Firms Face First EU Law

Hedge Fund Managers, Buyout Firms Face First EU Law

April 29 (Bloomberg) -- The European Union proposed its first law on hedge funds and buyout firms, stepping up oversight as part of a global revamp of rules responding to the financial crisis.

Hedge-fund managers and private-equity firms who handle at least 500 million euros ($662 million), or 100 million euros if they use debt to boost returns, would report to regulators under the proposal from the European Commission in Brussels today. The commission also called for caps issued on so-called golden parachutes in new recommendations on executive-pay practices.

The rules on hedge funds and buyout firms answer demands from lawmakers to clamp down on Europe’s 2 trillion-euro alternative-investment industry, adding to pressure on money managers in a stock-market slump that knocked 47 percent off global market value last year.

“It is essential that regulators have the information and tools necessary to conduct effective macro-prudential oversight,” Charlie McCreevy, EU commissioner for financial services, said in a statement. “The crisis has also underscored the importance of robust risk and liquidity management systems and the need for reliable investor information as the basis for effective due diligence.”

The alternative-investment proposals also meet demands from the Group of 20 nations to oversee all corners of the market.

For now, the measure only covers managers, rather than funds, because many funds are based offshore. EU-regulated managers would be able to attract investors from anywhere in the 27-nation area.

Get Tougher

After three years, the rules will get tougher for funds based outside the EU. Those in countries with lower regulatory standards or that don’t cooperate in fighting tax evasion couldn’t be marketed in the region, even by EU-regulated managers.

“Politicians need to ensure that the political agenda doesn’t end up destroying the European hedge fund industry by imposing sweeping changes that are unworkable or unnecessary,” said Tom Brown, investment management partner at KPMG in London.

The EU is also ramping up bank-capital requirements and imposing other curbs, such as today’s recommendations on banker bonuses.

While not binding, the statement calls on EU governments to cap “golden parachutes” and bar them for managers fired for failure. Companies should defer bonuses and stock options to link incentives to long-term performance, and be able to claim back bonuses paid on the basis of faulty results, the commission said in updating 2004 recommendations to reflect lessons learned from the financial crisis.

The EU also may seek to expand investor-protection rules to insurance policies and bank-savings vehicles that compete with mutual funds under different regulations, the commission said in a separate policy paper issued today. Such an initiative may take more than a year to become a formal proposal.

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