European Commission Proposes Broad Regulation of Hedge Fund and Private Equity Fund Managers

In a move that is the first of its kind in the world, and anticipates similar legislation in the US, the European Commission has proposed the broad regulation of managers of heddde funds and all private equity funds with 100 millon euros of assets under management. The Directive on Alternative Investment Fund Managers is designed to create a comprehensive and effective regulatory framework for hedge and orivate equity fund managers at the European level. The proposed Directive will provide robust and harmonised regulatory standards for all alternative investment funds within its scope and enhance the transparency of the activities of the funds towards investors and public authorities. This will enable Member States to improve the macro-prudential oversight of the sector and to take coordinated action as necessary to ensure the proper functioning of financial markets. The proposed regulations would require extensive disclosure of valuations, risk management, and other aspects of fund governance.

There had been some confusion over whether just hedge funds would be included in the proposed regulations. Members of the European Parliament reecently expressed concern to the Commission that earlier remarks by Commissioner McCreevy indicated that only hedge funds would be covered by new regulations. In the end, the Commission opted for the broad regulation of all alternartive investment funds over a certain minimum asset management level. The Commission said that it was loath to attempt to define hedge funds, fearing that many systemically relevant funds may fall through a regulartory gap.

The proposed Directive parallels a proposal presented by the Obama Administration to Congress, which would federally regulate both hedge funds and other private equity funds. Fully acknowledging the need for harmonized fund regulation, the Commission anticipates similar US legislation later this year.