Originally published September 25, 2008
Keywords: European Parliament, legislation, EU Financial regulation, hedge funds, private equity houses, obligations, investment policy, risks, asset stripping, money laundering, securities lending, voting, borrowed shares, shareholders, indirect acquisitions, voting rights
On 23 September, the European
Parliament voted in support of two reports calling for legislation
to be proposed which would, if made into a directive, radically
extend the scope of EU financial regulation to include hedge funds
(HF) and private equity houses (PE).
The new legislation requested by MEPs would potentially consist of
a directive to impose a "common standard of transparency and
to tackle the issues" in relation to HF and PE. This directive
would include measures such as:
- obligations on HFs and PEs to disclose and explain their investment policy and associated risks;
- rules to prevent "asset stripping" of companies and "misuse [of ] financial power" by PE investors; and
- greater transparency on the voting by HFs in shareholder meetings.
The European Parliament also calls
for the Commission to (i) investigate matters such as money
laundering in the context of HFs and PEs; (ii) investigate the
effects of securities lending and voting on borrowed shares, having
regard to better principles of regulation; (iii) examine whether
reporting requirements should also apply to cooperation agreements
between several shareholders and to indirect acquisitions of voting
rights via option arrangements; and (iv) generally review all
existing financial market legislation with a view to identifying
any gaps regarding HF and PE investors.
Various other requests of the Commission are also made by the
European Parliament which may lead to a far-reaching review of EU
financial regulation. Areas targeted by the European Parliament
include:
- a general review of market concentration in the financial services industry;
- a review of the protections given to employees when businesses are transferred; and
- an examination of the issues of responsibility of banks when lending money to PE funds.
By voting to back the reports drawn
up by two MEPs (Mr. Paul Rasmussen and Mr Klaus-Heiner Lehne), the
European Parliament has formally requested the Commission to
propose the new legislation by the end of 2008. Although the
Commission has previously rejected proposals to regulate HFs and
PEs, the current market and economic environment will incline the
Commission to being more receptive to these motions from the
Euopean Parliament. The precise extent of any action the Commission
will take cannot be ascertained at this stage.
It should be noted that the Commission has already consulted on
some of the new proposals for regulation made by the European
Parliament, such as on regulation and oversight of Credit Ratings
Agencies and on aligning the interests of investors and loan
originators, for example through imposing a mandatory retention. We
are awaiting the Commission's next steps in that regard.
Relevant links:
Rasmussen Report: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A6-2008-0338+0+DOC+PDF+V0//EN
Lehne Report: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A6-2008-0296+0+DOC+PDF+V0//EN
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