US Treasury Concerned about Protectionism of Proposed EU Hedge Fund Directive

In a letter to Michele Barnier, EU Internal Market Commissioner, Treasury Secretary Tim Geithner expressed concern over provisions in the proposed Alternative Investment Funds Management Directive that would discriminate against US 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. The Secretary pointed out that the US reform legislation will maintain full access to the US market for EU fund managers and custodians. 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.

Recently, Dan Waters, Director of Asset Management at the Financial Services Authority, said that the revised proposed Alternative Investment Fund Managers Directive would restrict the access of EU institutional investors to valid investment opportunities in US hedge funds while delivering little real benefit to European market stability or investor protection. In remarks at the recent Euromoney seminar, he said that the current draft can be seen as an attempt to protect European funds from competition from legitimate US and other third-country funds.

Meanwhile, in a meeting with London-based hedge fund and private equity fund managers, Commissioner Barnier said that the Commission needs to think carefully about the treatment of non-EU hedge funds and managers. While recognizing that the hedge fund industry is global and that access to overseas funds allows European investors to diversify their portfolios, the Commissioner also noted that EU regulators have a legitimate interest in the risks posed by third country funds and managers to EU markets and investors.

Requiring high standards of regulation and transparency from the EU hedge and private equity fund industry but not from third country funds and managers active in the EU would be short-sighted, he emphasized, and would impede the effective monitoring of risk in Europe. Further, it would create an unlevel playing field and opportunities for regulatory arbitrage, and could even fragment the internal market.

Regulators are working through different international forums to ensure a high level of co-ordination in global approaches, he noted, and the proposed Directive is consistent with these international benchmarks. The Commissioner believes that the equivalence approach in the proposed Directive is workable. He promised to carefully consider how these arrangements will work in practice so that the new regulations are neither discriminatory nor unduly restrictive to global investment flows.

More broadly, Commissioner Barnier explained that the Directive is designed to achieve three main objectives. The first objective is to ensure that regulators have the information they need to respond to systemic risks. The second is to put strong investor safeguards in place. The third is to build a real single market in alternative investments that ensures an efficient cross-border placement of hedge funds and private equity funds, while at the same time implementing regulations that recognize the differences between hedge and funds and other private equity funds in the areas of risk management, valuations, and depository functions.

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