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Hedge Funds

European lawmakers to unveil hedge fund clampdown

BRUSSELS (Reuters) - European lawmakers will approve measures on Monday to control how hedge funds and private equity firms borrow, invest and pay themselves, a key step in putting the secretive sector under the watch of supervisors for the first time.

The measures, which are due to become law in 2012, also need the blessing of individual EU countries and remain mired in a dispute between Britain and France. The European Parliament’s approval, however, would accelerate the process to impose new controls on hedge funds and likely speed up a wider regulatory overhaul of European financial services.

“We want to have clear rules that these managers have to stick to,” said Udo Bullmann, a German Socialist member of the European Parliament who plays a central role in deciding the law. “The hedge funds played a role in the Greek crisis.”

Bullmann said the rules would include curbs on pay such as an end to “golden handshakes”, as well as strict limits on private equity investors trying to extract dividends from companies within the first four years of ownership.

“There are good private equity companies,” he said. “But there are others that do no more than buy companies, bulk up their debts and then asset strip. We want to restrict that.”

Most importantly for the highly leveraged sector, parliamentarians want to place both private equity and hedge funds under closer scrutiny by supervisors and give those watchdogs the power to impose limits on the firms borrowing or other curbs.

CLOSE EYE

To keep tabs on what they are doing, supervisors will demand hedge funds tell them how they are investing, breaking an industry taboo. This information, which can give hedge funds an edge over rivals betting on the markets, is closely guarded.

Although hedge funds have been blamed for exacerbating Greece’s borrowing difficulties by betting against its debt, there are few records to show who is active in these markets.

The new regime would change that, proponents say, making it easier for supervisors to see what is happening as well as intervene with bans on short selling, for example.

Britain, home to eight out of 10 European hedge funds and most of the region’s private equity, has fought hard to water down the rules, concerned that tough new measures could prompt funds to move to Switzerland, Dubai, Asia or elsewhere.

Many British parliamentarians had hoped to derail the new regime altogether, while Germany and France sought a heavier clampdown.

The proposed law also led to disagreement between Washington and Brussels, with U.S. Treasury Secretary Timothy Geithner complaining that the controls could discriminate against American firms.

Washington, mulling lighter regulation for the sector, is worried the new EU rules would make it harder for a New York hedge fund, for example, to find investors in Europe.

Lawmakers in Brussels will address these concerns by giving foreign funds a passport or license to let them do business across all 27 EU countries if they meet European standards.

It is unclear whether France, which does not want to give a pan-EU license to foreign funds, would back down.

Ending the tug-of-war between Brussels and Washington would accelerate international efforts by the globe’s biggest powers to regulate banking.

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