European Parliament votes to reform hedge fund and private equity legislation

On 23 September 2008 the European Parliament called for strict new EU rules governing high-risk private equity and hedge fund activity, even though top regulators in the EU had said there were no plans to push forward extra legislation.

Currently, hedge funds and private equity funds in the EU are predominantly privately controlled, allowing them to take high risks and disclose relatively little information about their activities. However, the Parliament has endorsed a report by former Danish prime minister Poul Nyrup Rasmussen that called for action to:

  • prevent unreasonable asset stripping of companies taken over by private investors, on the basis that employees of target companies should have the same rights under EU law regardless of whether private equity investors or hedge funds are the acquirer
  • institute a regime that would require greater transparency by hedge funds and private equity funds, including disclosures of:
    • general investment strategy and fee policy
    • leverage/debt exposures, risk-management systems and portfolio valuation methods
    • source and amount of funds raised, including internally
    • high level executives' and senior managers' remuneration systems, including stock options and
    • the identities of shareholders beyond a certain proportion.
  • require executive reward packages to reflect losses as well as profits and
  • require all investment firms, funds and other financial institutions to follow capital requirement rules that oblige them to cover their risks, so that the interests of investors and loan originators are aligned, either by requiring originators to retain a portion of securitised loans on their own books or other measures with equivalent effect.

Under the EU legal structure, the Parliament can only ask the European Commission to draft new legislation and to date the Commission's Internal Market and Services chief has seen no need to add to existing rules governing hedge funds and private equity funds. Nevertheless, the Parliament has asked the Commission to review the existing rules governing these funds and to put forward any new legislation it considers necessary by the end of 2008.

Short-selling restrictions

These latest reforms follow announcements made last week that regulators throughout Europe have begun taking action to restrict short selling as an interim measure to protect the fundamental integrity and quality of markets, and to guard against further instability in the financial sector.

The Committee of European Securities Regulators (CESR) has been coordinating actions by EU members on short selling practices, particularly in relation to financial companies. A summary of the measures put in place by the various EU regulators as at 22 September 2008 can be found on the CESR website.

Regulators in Australia, the United States, Canada, the United Arab Emirates, India and Taiwan have also taken action in response to the crisis.

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