European Union plans to regulate
private equity and hedge funds moved forward this week when first the EU Parliament
and then the EU Council of finance ministers voted on and approved their separate
versions of the EU Alternative Investment Manager Directive.
Although there are substantial
differences between the Parliament’s and the council’s draft versions of the directive,
which must now be aligned in negotiations between the EU bodies, the new rules
will significantly increase the requirements for hedge funds that are
registered outside of the European Union.
Political leaders in Germany and
France have favoured a tightening of rules for hedge funds, partly blaming them
for exacerbating the effects of the financial crisis.
The proposals would impose
transparency standards and force fund managers to register and comply with
In addition the draft directives
set restrictions on the use of debt, investment managers’ bonuses and
Short selling, the selling borrowed
shares in the hope that the share price will decline, would be limited under
the Parliament’s legislation.
It would require hedge funds to
disclose large short positions to regulators, who would also have the power to
ban short-selling by some funds if financial stability is threatened. Naked
short selling, short selling without actually owning the shares, would be
prohibited under the proposal.
The most onerous rules for funds
registered in the Cayman Islands concern plans to restrict the marketing of
non-EU based funds to European investors.
The EU council draft directive
advocates that third-country funds would need to obtain individual approval in
each member state, in which they want to market their investment products.
In contrast, the EU parliament
suggested a passport system for the entire EU area under which external funds
would adhere to the terms of the directive and be forced to comply with a
number of regulatory oversight and anti-money laundering standards.
These standards would also require the
home jurisdiction of the fund to have regulatory and tax information exchange
agreements in place with relevant non-EU and EU authorities.
Premier McKeeva Bush said, ”we
believe that Cayman, on an objective assessment, meets these criteria.
“However, we are still seeking
clarification on the specifics (some of which the EU is still working out) and
on the process that they will put in place to assess whether the criteria are
Mr. Bush pointed out that since the
first draft rules were proposed in April 2009, the Cayman Islands Monetary
Authority had been studying them and engaged in a dialogue with regulators in
the UK and the Europe.
CIMA and recently retained law firm
Sidley Austin have set up meetings between EU representatives and a Cayman delegation
of government and CIMA officials, scheduled to take place in June.
A final version of the AIFM
directive will be negotiated between EU Commission, EU Parliament and EU
Council over the coming weeks before the EU Parliament will have a final vote
Current proposals have been firmly
opposed by the UK and the US, which feel that their hedge funds industry will
be negatively affected by the new EU rules.
Cayman Finance Chairman Anthony
Travers said in a press statement: “No one should be in any doubt that the EU
agenda here is motivated by French and German resentment of the success of the
City of London but in seeking to exclude non-EU funds and non-EU fund managers,
the EU may also be picking a fight with the United States, a point which Mr
Geithner, the Treasury Secretary, has made clear since US fund managers may
also be excluded.”
In Mr. Travers’ opinion “it is by
no means a foregone conclusion that protectionist legislation in Europe will be
a negative for the Cayman hedge fund industry because one consequence may be
that EU hedge fund managers seeking to maintain a competitive return will
choose to leave the EU.
“In that event, no doubt
Switzerland would become a favoured jurisdiction for an EU-based fund manager
to relocate within the proximity of Europe,” he said.
“But the relationship between the
Cayman hedge fund and a Swiss (or Dubai or Singapore or Hong Kong) based fund
manager would remain unimpaired as would the investment return of that hedge
fund untrammelled by the EU investment restrictions.”