* The bloc’s 27 member states have been in talks for months about how to reshape a law drafted by the European Commission, the EU’s executive body. Sweden, holder of the EU presidency, has been chairing the negotiations.
* The European Parliament has an equal say in finalising the law. Its position will be thrashed out by political parties’ representatives on its Economic and Monetary Affairs Committee.
* If parliament and EU states agree, the law could be passed next year and come into effect two years later for hedge funds, private equity groups and other niche investors across Europe.
* If parliament and member countries cannot settle their differences, a lengthy mediation will follow.
* The law is the subject of a tug-of-war between socialists and conservatives, with the socialists demanding harsher treatment of hedge funds.
Nonetheless, there are indications of support across all political groups for a tougher code for hedge funds, with a recent report from parliament recommending to broaden the scope of the law to include short-selling.
* EU countries are split, with Britain, home to Europe’s financial and hedge-fund capital, keen to dilute proposed rules, while others such as France and Germany want a stricter code.
Just as in parliament, however, the tendency is towards tighter rules, as proven by the unexpected late inclusion of pay curbs in the draft legislation.
* Among the most controversial rules under discussion are measures to limit the amount that hedge funds can borrow.
EU countries are reluctant to impose automatic caps on hedge funds, preferring to let the industry watchdog decide whether borrowing should be reined in.
* Parliament is taking a tougher line. Jean-Paul Gauzes, the French parliamentarian appointed to broker a deal on the shape of the new law, has called for fund managers to agree a borrowing limit with the industry supervisor.
* There is broad consensus in favour of pay curbs. The draft law outlines a code that discourages bumper payouts to keep high-fliers and demands more than 40 percent of bonuses be deferred for at least three years.
The pay code calls for a balance between the amount hedge funds or private equity managers are paid in salary and bonus.
* It is unlikely there will be an effective ban on foreign hedge funds wanting to sell to European investors, as was originally planned.
Lawmakers are moving towards a passport or made-in-Europe quality tag for funds that are based in Europe and comply with the bloc’s regime. European countries will, however, remain free to block a foreign fund from doing business on their territory.
* The proposed law may be extended to cover short-selling, although such a move has little support among member states.
In his report, Gauzes writes: “In exceptional circumstances and in order to ensure the stability … of the financial system … the European Securities and Markets Authority (a proposed new body) may take the decision to restrict short-selling activities.”
* Gauzes wants the authorities to be able to “impose a temporary prohibition of professional activity” or “request the freezing … of assets”.
The bloc’s countries have so far shied from spelling out what powers should be given to supervisors.
* Lawmakers want to establish depositaries where money that investors have committed to hedge funds, for example, can be warehoused safely.
Investments made by hedge funds — such as share certificates — can also be kept at the depositary, which should avert the repeat of frauds such as that of Wall Street conman Bernard Madoff.
* Alternative investment fund managers will likely be forced to publish accounts and appoint an independent valuator to assess what their investments are worth.
* Opinion is divided as to whether the new rules should apply to small funds — Gauzes recently said they should get no special treatment.