A European Parliament paper on regulation of the alternative investment industry, which had included controversial measures such as the forced disclosure of directors' remuneration, corporate earnings and bonuses as well as relationships with prime brokers, has now been watered down.
The new proposals will go to a full vote by the European Parliament later this month, and the assembly has called on the European Commission, which is responsible for initiating European Union legislation, to submit draft proposals by the end of November. However, any legislation will have to be approved by a weighted majority of EU member governments before it can come into force.
The amended report by the parliament's economic and monetary affairs committee, authored by MEP and former Danish prime minister Poul Nyrup Rasmussen, has softened its proposals enough to be welcomed by the European Venture Capital Association, but controversial points still remain. Notably, it calls for private equity and hedge funds to disclose their investment strategies, risk management and portfolio valuation methods.
At a time of industry introspection about risk management and valuation methodologies, the latter requirements can probably be accommodated by the industry without too much grief. But disclosure of investment strategies? Success for many funds depends on the manager being able to keep his positions and strategy confidential. Not to be able to do so would allow other funds to copy winning strategies and perhaps trade against short positions.
There is no certainty, of course, that any of these proposals will become European law. However, if the European Parliament wants to enjoy credibility in the alternative investment sector, it should consider further changes to bring its proposals into line with industry reality.