EU Nears Vote On Foreign Fund Managers

The European Union is scheduled to vote Oct. 19 on new regulations that could make it difficult for U.S.-based buyout shops and hedge funds to market their funds there.

Heated negotiations were ongoing at deadline though, and because the EU parliament will vote only if it comes to agreement on the new law it is possible it will delay the final vote. It has been delayed in the past; in the spring, officials said they hoped to wrap up work on the plan by July.

At stake is the ability of U.S.-based firms to raise money from European investors, but the central struggle is over the power center of Europe, with Britain, the nexus of Europe’s hedge fund community, arguing for more lax regulations and France arguing for strict oversight of non-EU firms. U.S. Treasury Secretary Timothy Geithner has gotten into the mix too, recently penning a letter of protest to France’s economy minister.

The latest version of the Alternative Investment Fund Managers Directive proposes that non-EU fund managers be able to market their funds across the EU as long as they register with an EU regulator. But France objects to this and wants more power to restrict non-EU fund managers from soliciting French investors, said Lisa Cawley, a London-based attorney at the law firm Kirkland & Ellis LLP who specializes in regulation and has been closely following the situation.

Instead, France argues, only EU-based firms should have the right to market their funds across the continent. Further, France believes each member country should have the power to accept or reject non-EU fund managers, so long as the latter abide by certain fundamentals of the directive with regard to transparency and disclosure.

“It now seems possible that non-EU firms may be required to comply with large parts of the directive without, at least initially, getting the benefit of pan-European marketing rights,” Cawley said. “And whatever compromise is reached, it is likely to be more difficult for such firms to fundraise in Europe in the future.”

European legislators are reportedly weighing several compromises. One, for example, would reportedly call for previous rules, which generally allow sophisticated European investors to invest wherever they choose, to be phased out over five years as a new “passport system” for non-EU fund managers is introduced. Another proposal would reportedly introduce the passport for non-EU fund managers and keep the current rules in place for five years, after which there would be a review of the new regime and perhaps a phase-out of the old rules.

The directive is enormously important for U.S.-based firms like the Carlyle Group and Kohlberg Kravis Roberts & Co. that raise millions from European investors, as well as the placement agents that facilitate contacts with European investors. In 2008, for example, placement agents that collectively raised $24.1 billion for private equity funds reported in a Buyouts survey that 42.4 percent of their capital came from Europe.

The Obama administration also opposes the more restrictive version of the law, arguing that it discriminates against American firms. “A proposal that limits or delays the access of third-country firms to a passport—while granting EU domiciled managers and funds access to the European market—would be discriminatory and contrary to G20 commitments,” Geithner wrote to Christine Lagarde, France’s economy minister, according to Reuters, publisher of Buyouts. “We would consider adoption of such a proposal as unfair and damaging to our shared interest in maintaining an open, global financial system.”

The Private Equity Growth Capital Council is closely following the situation but has not been directly involved in lobbying the EU, a source at the U.S. trade group said.