Erhvervsudvalget 2008-09
KOM (2009) 0207 Bilag 1
Offentligt
José Manuel Barroso
President of the European Commission
[email protected]
20th April 2009
No to new loopholes in EU regulation on hedge funds and private equity!
Dear Commission President Barroso,
Thank you for your earlier correspondence and your letter of 12 February in which you
assured
us “The Commission has made a firm and clear commitment to bring forward
appropriate regulatory initiatives covering all financial actors…. These regulatory initiatives
will include hedge funds and private equity.” You assured us about that already before
Christmas in the European Parliaments plenary. You also have promised us that the
proposal would be made in due time to give the existing Parliament time to consider and
discuss it. Unfortunately, we have learned that your proposal has been further delayed.
You can imagine our dismay when we read the Commission’s draft “Proposal for a Directive
on Alternative Investment Fund Managers”. Unfortunately after six months and several
delays we now see a text proposal filled with loopholes, which make the real regulatory
effects highly ineffective.
Far from including hedge
funds
and private equity
funds
in new regulation, the Commission
apparently proposes to regulate only fund managers and actually exclude the funds
themselves from regulatory control!
The exclusion of the funds themselves
from the proposal for a Directive is just one of a
series of major loopholes which makes the proposed Directive almost worthless. Among the
other major defects
of the proposal are:
1)
The directive would cover managers of any type of funds provided that they are located in
the EU and require them to
be registered
in the EU in order to market their services to EU
investors. Although we appreciate the extent of coverage for all EU managers, we think this
scope would
create a major loophole: the funds themselves would neither be
registered, nor regulated and supervised.
Non-EU managers could still operate in the EU.
As it stands now, any funds, be it off shore or on shore would then be allowed to market their
products in the EU as well operate in European markets, in reality without effective regulation
or registration.
In the directive proposal the
registration is pure formalities
- in reality there are no specific
requirements to comply with for this authorisation. No requirements in terms of effective
transparency, information on leverage, portfolios, strategies, fees structures, and lists of
investors as we had suggested in our report.
2)
The directive as currently drafted provides for an
exemption for funds
below a threshold
of
EUR 250 Millions.
We believe this threshold is too high and would allow too many funds
to stay outside the directive, adding another loophole. Three funds with a size of each 80
millions Euros could go together and act like one without registrations. We think all funds, of
any size should be subject to the provisions of the directive as a matter of principle.
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3)
No
capital requirements
are expected from funds and this would be very detrimental to
financial stability in general. . We think liquidity requirements should be introduced as well,
since the current crisis has shown how liquidity shortage can become a tremendous problem.
This
liquidity requirement
should be coupled with a
leverage ratio
in accordance with risk-
profile, in order to prevent over leveraging without safety net. In addition, the level of
leverage should be limited.
In terms of
reducing short-termism and excessive risk-
taking,
we think it would be necessary to incentivise long term remuneration policy.
4)
The issue of
transparency
is not well enough addressed in the draft directive, neither
towards investors, nor to competent authorities (the regulators); the frequency and quality of
reporting in insufficient. We believe that on-going flows of information to
regulators and
supervisors
are very important to assess the stability of the financial system and that, at the
very minimum, quarterly reporting is necessary. The requirement for independent valuation,
critical for financial stability and investor protection, is also too weak as it currently stands.
This is critical because the structure of remuneration should not be based on accounting
profits but on real and independent valuation. In addition, and considering the recent
scandals related to high levels of remuneration, we believe it would be necessary to
introduce
disclosure of information related to fees.
5) The conditions of disclosure attached to funds acquiring control of companies are
simply insufficient:
Acquisitions of SMEs are out of the scope, and the definition of
controlling influence within non-listed companies is not adequate to reflect the reality of major
share ownership. The definition needs to be corrected. This must include "special incentives"
granted to the management of companies being acquired by private equity funds for
instance. In addition, the
consultation and information of employees
is not sufficiently
guaranteed. As currently drafted de facto this question is not dealt with at all in the
Commission's proposal. We have proposed to extend the well-known EU directive
2001/23/EC to cover also consultation and information in cases of PE-takeovers.
6)
It is imperative that the Commission address adequately the issue of
taxation
of investors,
funds and the managers. Unfortunately the commission does
not
deal with this issue at all in
this proposal. It is a priority for us to take action on this hot topic. We must provide measures
to tackle tax evasion, ensure adequate taxation of capital gains and fees of managers and
prevent the abuse of investment vehicles by investors for tax avoidance purpose. Therefore
we would expect the Commission to present proposals to that end.
7)
The Commission needs urgently to address the potential market
disruption
and
destabilizing behaviour by non-EU funds buying and selling European financial assets and
companies. The directive, as it currently stands makes no reference to this issue which is
critical from a financial and social stability perspective.
8)
It is important that the directive contains a provision making sure that
institutional
Investors
(Banks, Insurance Companies, Pension funds) can
only invest in Funds
complying with the directive.
This is key to protect European investors.
9)
Last but not the least, we recall that the regulation of naked
short selling
remains an item
of utmost important and needs to be addressed within the new regulatory framework. Within
this context, we ask for a prohibition to exercise voting rights based on
borrowed shares.
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***
Mr. Barroso.
On the basis of the draft which we have studied carefully, we must conclude that the
proposal for the directive goes in the wrong direction. Not only does it not properly respond to
the parliamentary report drafted and adopted last September with a very broad majority, nor
does it give an adequate political response to address the roots of the financial crisis. We
consider it would be a
major political mistake
were the Commission to adopt such a
proposal. It is not up to the challenge; it is not up expectations; it will only satisfy industry and
those (still) favourable to minimum regulation. It would constitute a huge competitive
advantage to the hedge fund industry at a time when, in the revision of the CRD, we are
being tough on banks and discussing retention requirements for securitisation.
We believe you are
failing to fulfill the commitments
you have made yourself and made by
President Sarkozy during the French Presidency in debates in the European Parliament.
We demand that you address the shortcomings of this proposal for a directive before it is
agreed by the Commission, and that you do so with sufficient speed to present the proposal
before the European elections. Therefore, we urge you to exercise leadership and
close the
loopholes as outlined in this letter and the enclosed annex.
We want you to be fully aware that the Party of European Socialists, and the Socialist Group
in the European Parliament, consider this proposal to be of the utmost importance and will
not stop in its efforts to obtain the regulation that Europe needs.
We outlined our concerns in a letter to you on December 16, well before the proposal was
drawn up.
We are watching, not for further assurances, but for implementation: appropriate regulation
that really does cover hedge funds and private equity as you promised. A real proposal from
the Commission must be comprehensive, efficient and forward-looking. It is high time and
urgent.
It is a matter of confidence
for the whole European Commission and for the
European Union.
Yours sincerely,
Poul Nyrup Rasmussen
President of the Party of
European Socialists
Martin Schulz
President of the
Socialist Group in the
European Parliament
Pervenche Berès
Chairwoman,
Committee on Economic
and Monetary Affairs