The European Parliament’s Economic and Monetary Affairs Committee has adopted its position on the draft EU law regulating managers of alternative investment funds, including hedge funds.
MEPs voted for new ways to deal with managers and funds located outside the EU, a proportionality system to regulate less risky funds more lightly, and rules on remuneration policies and short selling.
They also made changes to the directive’s transparency and risk reduction rules.
"This position will ensure better transparency and better investor protection while at the same time being on the side of the financial industry when it is working for the real economy," rapporteur Jean-Paul Gauzès said minutes after the vote.
Under the legislation as amended by the committee, alternative investment fund managers in third countries would have to comply with the directive in order to market funds around the EU. Funds such as private equity and investment trusts would be more lightly regulated than hedge funds and some other types of alternative investment funds would be completely exempted.
The main changes put forward by MEPs to the commission’s initial draft are intended to increase investor protection and transparency while at the same time reducing the potentially protectionist dimension of the rules on access to the EU market from the outside.
Negotiations are now expected to take place between MEPs and the Council of Ministers ahead of the first-reading vote by the full Parliament, scheduled for July.
The adopted text increases the disclosure requirements to investors by alternative investment fund managers in some fields and also proposes some new reporting requirements for to the competent authorities.
Most notably, new rules would require alternative investment fund managers to inform investors about maximum levels of leverage (borrowing) and the total amount of leverage used by an alternative investment fund, and to provide information on the domicile of underlying funds in case of fund of funds and the domicile of any master fund. Managers would also be required to provide a description of the past performance of the fund, changes in liability if there is a contractual agreement between the alternative investment fund manager and the depositary, and information about the role of sub-depositaries if these are being used.
The authorities would need to be informed about the overall leverage used for each fund, the ways fees are paid and the amounts paid to the alternative investment fund manager, and performance data of the fund including the valuation of assets. The authorities may ask for additional information from managers which they consider may pose important risks. The European Securities and Markets Authority may also require additional reporting in exceptional circumstances or in order to protect the stability of the financial system.
The committee suggests new features designed to reduce risk in the financial system. These include new rules on remuneration, selling of borrowed securities (short-selling) and marketing to retail investors.
The text bans "naked short-selling", a process of selling a security which is neither owned nor borrowed. It also requires managers regularly to disclose information on important short positions to national authorities. It also provides that ESMA may decide to restrict short-selling activities in exceptional circumstances or to protect the financial system’s stability.