Saturday, April 10, 2010

Industry Applauds US Treasury Secretary's Letter to EU Counterparts on Hedge Fund Directive

The U.S. hedge fund industry strongly praised Treasury Secretary Tim Geithner’s renewed call for the European Union to participate in a globally coordinated approach toward financial regulatory reform and resist protectionist-driven initiatives such as the proposed Alternative Investment Fund Manager Directive. The Managed Funds Association applauded the Secretary’s letter to U.K,. German and French Finance Ministers asking that EU legislation regulating hedge funds not discriminate against U.S. and other third country hedge funds not based in the EU. The MFA supports the Secretary's commitment to a level global playing field and encourages this important dialogue to be made part of the formal agenda during the upcoming G-20 finance ministers meeting.

In the
letter, primarily addressed to U.K. Chancellor of the Exchequer Alistair Darling, and copied to German Finance Minister Wolfgang Schauble, French Finance Minister Christine Lagarde and Spanish Finance Minister Elena Salgado Mendez, Secretary Geithner said that the current draft of the AIFM Directive would discriminate against U.S. and other foreign funds and fund managers by denying them the opportunity to access the EU single market through a passport approach, which would be an avenue open solely to EU funds and fund managers. Mr. Geithner urged that this provision be revised to provide US and other non-EU funds, fund managers and global fund custodians the same access as their EU counterparts.

He noted that the U.S. is actively implementing its G-20 commitment to enhance the regulation of hedge funds. The House has passed legislation requiring all advisers to hedge funds and private equity funds whose assets under management exceed a modest threshold to register with the SEC under the Investment Advisers Act. The registered advisers would then be required to report enough information on their managed funds so that the SEC and other regulators can assess whether a fund poses a threat to overall financial stability by virtue of its size, leverage or interconnectedness.

Some of the information that would be mandated to be disclosed includes assets under management, the use of leverage, and counterparty credit risk exposure. Firms deemed systemically important by regulators would be subject to heightened supervisory scrutiny and prudential standards, including higher capital, along with stricter liquidity and leverage rules. The Secretary told the Finance Ministers that the U.S. hedge fund regulatory regime will give equal treatment to all funds and advisers operating in the US regardless of their country of origin.

In an earlier letter to EU Commissioner for the Internal Market Michel Barnier, Secretary Geithner’s expressed concern over provisions in the proposed Alternative Investment Funds Management Directive that would discriminate against U.S. hedge funds and deny them the access to the EU market that they currently enjoy. He urged the Commission to adopt rules ensuring that non-EU fund managers and global custodian banks have the same access to their EU counterparts. More broadly, he said that it was essential to fulfill the G-20 commitment to avoid discrimination and maintain a level playing field in regulating the alternative investment fund management industry.

In recent remarks, Lord Myners, UK Financial Services Minister emphasized that hedge funds managed both inside and outside of the EU that meet the standards of the Directive should be entitled to an EU passport. In the absence of a passport, the justification for the EU determining the standards that funds would be required to meet in seeking to market into EU nations is unclear. In the absence of a passport, he said, the principle of subsidiarity would normally apply, leaving each country free to set its own national standards for hedge fund regulation. The Minister emphasized that the EU is not in the business of protecting its domestic fund management industries from the challenge of global competition.

At a recent seminar, Dan Waters, FSA Director of Asset Management, said that the proposed Alternative Investment Fund Managers Directive would restrict the access of EU institutional investors to valid investment opportunities in U.S. and other third-country hedge funds while delivering little real benefit to European market stability or investor protection. He said that the draft could be seen as an attempt to protect European funds from competition from legitimate U.S. and other third-country funds. In today’s fragile international economic environment, he noted, introducing damaging constraints on international investment flows is not a sensible policy.