May.09, 2010, 19:09

Hedge funds from outside the European Union will have to meet standards on tax, money laundering and regulatory information to access the bloc’s investors, under proposals likely to be agreed in the European Parliament on Monday.

A draft package of rules for “alternative investment fund managers” is due to be passed by the parliament’s economic and monetary affairs committee.

If a deal between the main political parties holds, this will alter some of proposals put forward by Brussels last year. It will then form the parliament’s negotiating position as EU lawmakers try to hammer out a single text with member states, which must approve the new rules.

The full parliament will then vote on that jointly agreed text.

Monday’s package seeks to ensure that smaller funds can be exempted from burdensome rules.

Provisions on private equity funds will not apply to companies employing fewer than 50 people, for example. And the principle of “proportionality” is introduced, allowing national authorities to decide which funds may qualify for lighter treatment based on the directive’s rules.

But the proposal continues to face criticism from the alternative investment industry. The Confederation of British Industry will urge MEPs to vote against parts of the draft on Monday, claiming that it could harm companies owned by private equity firms and discourage investment.

“We are particularly concerned about the impact it would have on small and medium-sized companies,” said John Cridland, deputy director-general.

Mr Cridland’s comments echo those of the private equity industry itself. It claims that companies backed by private equity and venture capital funds are still disadvantaged compared with those backed by a private investor, say, because there will be added costs of complying with the new rules and a requirement to information to investors and regulators.

It also maintains that the 50-employee exemption is insufficient and that the proportionality clauses run counter to other detailed measures contained in the draft compromise.

“There is a contradiction in the text,” said Javier Echarri, secretary-general of the European Private Equity and Venture Capital Association.

Meanwhile, the so-called “third country” issue – the terms on which managers and funds outside the EU can access professional investors within the bloc – also remains controversial.

Drafts of the parliamentary compromise text suggest that four or five conditions would have to be fulfilled before it would be possible to sell a non-EU fund to investors within the bloc.

These include an information exchange agreement between EU authorities and the supervisor where the fund is based, compliance with anti-money laundering rules, fiscal standards, and reciprocal market access.

In addition, a non EU-based fund manager would have to pledge compliance with the new EU rules, and a local supervisor would have to agree with EU authorities to oversee that compliance.

Professional fund managers in the City of London warn that these constraints could impinge dramatically on their ability to invest internationally and seek the best returns for the underlying beneficiaries of their funds.

Michel Barnier, EU internal market commissioner, looks set to discuss the new parliamentary position with Tim Geithner, the US treasury secretary – who has warned of a possible transatlantic rift if the EU rules discriminate against US fund managers – when they meet in Washington this week.

“I will tell him it’s not the end of the story,” Mr Barnier said last week, when asked how he would explain the parliamentary text.