In These New Times

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May 18 (Bloomberg) — European Union finance ministers approved draft rules to tighten hedge-fund regulations as new U.K. Chancellor of the Exchequer George Osborne raised concerns about the law’s impact on the industry.

The proposal, which would impose transparency standards on hedge-fund managers based outside of the EU, was endorsed by a majority of ministers over U.K. objections at a meeting in Brussels today. Osborne told reporters he was “very pleased” that his counterparts had listened to his concerns that the provisions could harm U.K. interests.

Britain is home to 80 percent of European hedge-fund and 60 percent of private-equity managers, according to a report last year from the Financial Services Authority. It’s also a hub for non-EU funds looking to market in Europe. The U.K. didn’t have enough support among ministers to stop the law from taking another step toward being implemented.

“It could be disastrous,” Philip Keevil, senior partner at investment bank Compass Advisers LLP in New York, said in an interview. “There are elements that will drive hedge funds offshore that will have a terrible effect on London. It’s not going to put hedge funds out of business, they will move somewhere else.”

Hedge funds and private-equity firms are under the scrutiny of lawmakers worldwide, who say they are partly to blame for the financial crisis. Then-U.K. Prime Minister Gordon Brown warned in March that the Alternative Investment Fund Managers Directive may threaten the country’s pre-eminence in the financial- services industry. The U.S. has also opposed the draft law.

U.K. Stance

“We’re a community and that means that there can be decisions against an individual member state,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels, referring to the U.K. stance on the proposals.

The draft from the finance ministers requires managers to register in each EU country they want to market their funds. It also would set restrictions on investment managers’ bonuses and on the use of debt.

“Ultimately it’s really bad for investors,” Ana Haurie, managing director of London-based Dexion Capital Plc, which manages a $1.7 billion fund of hedge funds, said in an interview. “If you’re limiting where you can invest there will be a consequence. Just because a fund is operated through the Cayman’s doesn’t mean these funds are cowboys.”

Final EU approval of any measures requires an accord between the Parliament and EU national governments in a process that could take another year or more.

‘Explicit Recognition’

The finance ministers “gave explicit recognition” of the U.K.’s criticism about the way fund managers from outside the EU are treated in the law, Osborne said in an interview with Bloomberg TV.

“The U.K. hasn’t given up on its concerns,” Luxembourg Finance Minister Luc Frieden said. “Osborne told us in bilateral talks they have a number of questions on this, but we’ll take these questions with us into the discussions we’ll have with the European Parliament.”

Today’s agreement among ministers may set up a clash with the European Parliament’s economic and monetary affairs committee. The Parliament panel yesterday approved a measure to force hedge-fund managers outside the EU to agree to transparency standards in exchange for a so-called passport to market to investors in the bloc.

‘Difficult’

The Parliament’s negotiations with finance ministers “will be difficult,” said Jean-Paul Gauzes, the French lawmaker who sponsored the bill in the assembly. “The devil is in the detail.”

Gauzes said today that the goal of the Parliament is to fast-track negotiations with national governments, overcoming “strong divergences” between the texts. “But that doesn’t mean an accord at any price.”

Michel Barnier, the EU’s financial services commissioner, said today that he preferred the Parliament’s version and said the rules should make sure there is a “level playing field for market participants.”

The overall Parliament bill, which would see investment managers subject to restrictions on bonuses and debt leverage, was passed with 33 votes in favor, 11 against and three abstentions. It was opposed by U.K. conservative members of the committee.

‘Fortress Europe’

“We’ve adopted protectionist, fortress Europe policy,” Syed Kamall, a U.K. conservative lawmaker, said after yesterday’s Parliament vote.

The rules will “reduce the return of pension funds” and could “lead to retaliation” from lawmakers in countries outside the EU, Kamall said.

Finance ministers in March put off a vote on the directive under earlier pressure from the U.K., which had sought to modify the proposed rules. Spain, which holds the EU’s rotating presidency, said last week it would push ahead with the legislation without U.K. support.

Private-equity and venture capital managers will be subject to leverage limits and transparency rules, which industry groups said would limit investment in small to medium-sized companies.

The law “still poses a grave threat to innovative companies backed by venture capital,” Javier Echarri, secretary general of the European Venture Capital Association, said yesterday in an e-mailed statement. “Unwarranted disclosure requirements would leave these ideas-fuelled companies at the mercy of unfair and damaging competition.”

–With assistance from Rainer Buergin, Stephanie Bodoni and Francine Lacqua in Brussels, Tom Cahill in London and Jonathan Stearns in Strasbourg. Editors: Peter Chapman, Jones Hayden

To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net