Cicero Policy Briefer

Issue 23, April 2008

Private Equity and Hedge Funds:
European Parliament making the case for action on transparency

By Michael Cooper

As 2007 was the year when scrutiny of private investors came under the UK parliamentary and regulatory spotlight, so 2008 is seeing the is sue beginning to take centre stage across the Channel. This is not to say that transparency around these actors has been a dead is sue in Brussels up to this point, but the continuing fragility of global financial markets has led to increasing calls for EU action, challenging the view held by Internal Market Commissioner Charlie McCreevy that a hands-off approach is the best way forward.

With the Commission has been seen to be disinterested in taking up the agenda the European Parliament has been only too happy to flex its powers of being able to initiate legislation. In two separate reports from MEPs looking to kick-start the Commission into action, greater transparency and disclosure in the private equity and hedge fund industries—albeit to varying extents—is a common theme at the top of the wish list.

The first, and more extreme of the two reports, comes from Poul Nyrup Rasmussen MEP, a Socialist from Denmark who sits on the Economic and Monetary Affairs Committee. He and Pervenche Berès, the French MEP who chairs the committee, have been spearheading the Socialist group’s efforts to raise private equity up the political agenda, calling for full regulation of the industries in an open letter to the Commission and even going so far as to push for a common stance on the is sue in the groups’ manifesto ahead of next year’s parliamentary elections.

While Rasmussen has stressed that he is not trying to blame any one player for the recent financial turmoil in his working document, he sees the situation at present to be one of “hedge funds operating in shadows” and is pressing for increased levels of transparency, supervisory disclosure as necessities in the current financial climate. He believes that the very contribution that private equity and hedge funds make to economic growth and their compliance with the Lisbon Strategy needs to be called into question.

The draft report has not been warmly received in the Committee, with the centre-right grouping and Liberals expressing concerns that Rasmussen is bundling together hedge fund and private equity industries and demonising them ahead of the credit crunch.

Rasmussen has been backed into a corner somewhat by remaining unwilling to adapt his report to the thoughts of opposition groupings, and consequently the report does not appear to carry much favour in the Committee.

The second report comes from Klaus-Heiner Lehne MEP, a Christian Democrat from Germany who is a member of the Legal Affairs Committee. His report has been viewed much more favourably within most corners of his Committee. His main is sue s are centred around the principle that European-based hedge funds need a flexible environment in which to remain competitive and that the interests of investors need to be maintained.

While it is thought that he has doubts about the need for full regulation, his draft report champions flexible mechanisms to look at the degree of regulation required for each member state. With willingness to allow for industry input and with greater cross-party consensus, Lehne appears to be drafting the report that will carry most favour with the Commission.

In terms of timetable, it is thought that both reports will be put to the Parliament in a plenary in the same week (either in July or September). The rapporteurs are being pressed to hold to this timetable so that the Barrosso Commission has ample time to consider a response before all attention is turned to the new Commission next autumn.

While it may not be his favoured topic of discussion at present, it looks as though McCreevy cannot yet shelve the is sue of transparency of the private equity and hedge fund industries before his tenure in the Berlaymont is up. As for the chances of the Commission accepting a report in full, the chances remain slim; but if the Parliament can come forward with a strongly-backed and industry-supported package the Commission may yet be persuaded to back a voluntary code of conduct, following its latest proposal on Sovereign Wealth Funds.

Michael Cooper can be contacted on +44 (0)20 7665 9530 or click here to email.

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