28 March 2008

JURI working paper on ECON report on hedge funds and private equity

In a working paper prepared for the JURI Committee, Piia-Noora Kauppi (EPP/FIN) concentrates on the positive role hedge funds play in the European economy and proposes several non-legislative measures to meet enhanced transparency requirements.

Instead of further regulation, member states ought to coordinate their regulatory requirements and simplify the legal environment, Mrs. Kauppi notes. Also, the Commission should come forward with a uniform definition of private placement in the EU as the definitions currently vary between member states. Additionally, CESR should study the possibility of introducing a regulated class of FoHF available to retail investors within the EU.

In contrast to the Rasmussen working document issued in ECON Committee, the working paper does not find evidence that alternative investment has been the source of the recent financial turmoil.

The document also notes that hedge funds cannot be considered unregulated, but are subject to a body of EU legislation directly and through their dealings with counterparties, prime brokers, lenders and investors. In respect of Private Equity, funds themselves and/or their fund managers are regulated at national level, and their underlying activities are conducted within the framework of the relevant national regulation.

The document also finds that a soft law approach is the appropriate way forward. Codes of conduct and best practice standards should be looked at to improve the regulatory framework for alternative investment industry.

To satisfy the need to monitor market activity, transparency of hedge fund holding and lending could be gained by competent authorities via aggregating information from prime brokers, the report states. However, it may be desirable to have full transparency on the part of the fund available to regulators upon their request.

Setting a legal maximum level to leverage is not an appropriate regulatory approach in a free market economy, the document notes.

The working paper sets the base of the JURI opinion that will be presented on 8 April in JURI Committee.

© Graham Bishop