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Friday, October 23, 2009

Warnings on Euro hedge fund regulation

Highlighted this Financial Times article on Twitter yesterday; certainly wanted to mention it here as well.

This story on proposed European regulations of the hedge fund and private equity industries and its likely effects may also reverberate here in the US. Here is an excerpt from, "ECB warns Brussels on hedge fund rules":

"Europe’s controversial
plans to regulate hedge and private equity funds were dealt a fresh blow on Thursday when the European Central Bank warned the proposals would put the industry at a significant competitive disadvantage.

The opposition voiced by the Frankfurt-based ECB, which feared a go-it-alone approach in Europe would backfire, is likely to be seized upon by the alternative investment fund sector – and influence the extensive re-writing of the proposals that is already under way.

Hedge funds have warned that business could be driven out of Europe as a result of the plans to regulate the sector for the first time on a pan-continent basis."

As we read on, the article seems to convey the notion that the problem lies not with this new layer of burdensome industry regulation, but the possibility that other regions may not move quickly enough to join Europe in adopting similar rules and restrictions.

You can see where this is going: the now commonly-cited fear of "regulatory arbitrage" rears its head once again. In other words, Europe doesn't want to be the only one to pass potentially restrictive industry legislation; they want to make sure the USA and other nations will institute similar rules ("harmonize") so that affected hedge funds and LBO firms have fewer places to relocate.

"In a legal opinion published on its website, the ECB warned that funds could simply shop around to find a country where the policing of the sector was less stringent. “An internationally co-ordinated response is necessary given the highly international nature of the industry and the consequent risks of regulatory arbitrage and evasion,” it said."

We also see this trend towards incremental global regulation unfolding in a number of areas outside of finance, but our focus today is the current and future regulatory environment for hedge funds and private equity.

What is likely to happen in this area in the year ahead? Your thoughts and insights on this issue are certainly welcome here, readers.