McCreevy Urges Hedge and Private Equity Funds to Adhere to Codes of Conduct

The continued light regulation approach to hedge and private equity funds is conditioned on these funds complying with the recent codes of conduct adopted by the Hedge Fund Working Group and the Walker Working Group, in the view of EU Commissioner for the Internal Market Charlie McCreevy. While reiterating his preference for a self-regulatory approach, he said that a lot depends on whether industry codes work in practice. Compliance with high levels of professional codes is a precondition for continued regulatory confidence in the alternative investment sector, he noted, since regulators and policymakers require reassurance.

The Hedge Fund Working Group adopted voluntary standards for hedge fund managers on a comply or explain basis. The standards deal with valuation, disclosure and risk management; and have a global dimension. A UK working group headed by Sir David Walker issued final guidance to enhance disclosure by private equity firms and companies they acquire, called portfolio companies in the report. The guidance is also on a comply or explain basis.

Commissioner McCreevy continues to resist increasing pressure from policymakers for regulation of alternative investment vehicles. And, indeed, there are significant policy concerns regarding transparency, governance, and accountability. The European Parliament is conducting its own review of private equity and hedge fund investment in an effort to decide if action is needed at the EU level to monitor the opportunities and risks that this industry introduces.
Their response will be prepared over the coming months and is expected to be finalized by July.

For his part, the commissioner believes that the private equity industry in managing portfolio companies needs to have the freedom to act quickly and flexibly, and to be able to respond to rapidly changing global market conditions by restructuring the businesses in which they invest. Noting that private equity portfolios tend to be highly leveraged and therefore need to adapt faster than most to survive, he vowed to fight efforts at heavy-handed regulation of this sector.
He also assured that private equity is not central to the difficulties surrounding the structured credit and asset backed securities markets. But it is certain to be affected in a number of different ways, he said, such as by the tighter credit markets for raising capital to finance deals.