US Hedge Fund Industry Supports Proposed EC Directive on Hedge Fund Regulation

The US hedge fund industry has expressed qualified support for the European Commission’s proposed Directive regulating hedge fund managers and private equity fund managers. The Managed Funds Association particularly praised the Commission’s rejection of direct regulation of the hedge funds themselves in favor of regulating hedge fund managers.

The proposed Directive on Alternative Investment Fund Managers, centered on enhanced disclosure and effective risk management, is designed to create a comprehensive and effective regulatory framework for hedge and private equity fund managers at the European level. The proposed Directive will provide robust and harmonized 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.

While praising the focus on fund managers as opposed to the funds themselves, the MFA did have some concerns with the proposed Directive. In particular, the MFA was concerned about the possible imposition of minimum capital requirements on hedge fund managers, as well as confidentiality issues. The MFA urged the any mandate on the reporting of information include appropriate confidentiality of certain information for fund managers.

The MFA also said it appreciated the Commission’s recognition that market-wide issues such as short selling should be considered in the broader context of all market participants.

Recently, the Obama Administration asked Congress to pass legislation requiring SEC registration of all advisers to hedge funds and private equity funds with assets under management over a certain threshold. All such funds advised by an SEC-registered investment adviser would be subject to investor and counterparty disclosure requirements and regulatory reporting requirements. The reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability.