EU officials hit back at criticism from Geithner over rules on hedge funds

11th March 2010 – Top EU officials hit back at criticism from Tim Geithner, US Treasury secretary, who accused Brussels of pushing ahead with protectionist rules to regulate the hedge fund and private equity industries.

EU commissioner responsible for financial services regulation, said the proposed actions against hedge funds were in line with a decision by the Group of 20 to reinforce transparency in the financial system.

Diplomats from the EU’s 27 member states failed to agree a compromise package of rules that would regulate for the first time hedge funds and private equity funds on a pan-EU basis. Britain is leading opposition to aspects of the directive, which it fears could impede the operations of funds based in London, arguing that hedge funds authorised by regulators to operate in one EU country should be allowed to operate under a “passport” in all other countries. Malta is one of the countries unhappy with the aspects of the proposed text.

Disagreement is due to the so-called “third country” issue – that is, the access, and the terms on which this would be given, for alternative investment fund managers from outside the EU to market themselves within the bloc.

Spain, which holds the rotating EU presidency, proposes allowing access, provided there are “appropriate co-operation arrangements for the purpose of systemic risk oversight and in line with international standards . . . in place between the competent authorities of the member state where the fund is marketed and the competent authorities of the AIFM. However, without more detail on how these “equivalence” arrangements would work, there is concern that the directive would become protectionist.

The hedge fund rules will need approval from the European parliament as well as member states. There are signs that MEPs may take a more conciliatory approach to the third-country issue, allowing current national arrangements to remain in place while equivalence standards are drawn up.
Managers from third countries that met the equivalence standard might also enjoy a so-called “EU passport” allowing EU-wide marketing rights.