Investors warn EU hedge fund rules could hit other funds

LONDON Thu Jul 12, 2012 9:28am EDT

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LONDON (Reuters) - Leading fund management firms have warned the European Commission's head of financial regulation that new rules aimed at tightening practice at hedge funds could damage the rest of the industry's ability to operate effectively.

Twenty investors, including Allianz, BlackRock, Fidelity and Schroders, have written to Michel Barnier, the Commissioner in charge of financial regulation, stating proposed reforms risk hampering Europe's single market in investment funds.

The letter, seen by Reuters, highlights proposals to ensure better governance of alternative investment funds by clamping down on so called "letter box entities" whereby a company is registered in one jurisdiction but operates elsewhere.

At stake, the fund managers say, is the ability of an asset manager based in one country to have people based in other countries making local investment decisions, overseen by locally based risk management teams.

The fund managers fear that by limiting their ability to delegate both risk and portfolio management to the markets in which they are investing, the new rules could cause huge disruption to their industry.

The letter highlights concerns that the impact of the rules, crafted to regulate hedge funds and private equity firms, could spill over into regulation of more conventional mutual funds sold across Europe known as UCITS.

"We are extremely concerned that the forthcoming 'Level 2' implementing measures for the Alternative Investment Fund Managers Directive will undermine the single market," the letter says.

(Reporting by Chris Vellacott; Editing by David Cowell)

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