EU Recommends a Tightening of Hedge Fund Transparency Laws

The EU Parliament has come up with new guidelines regarding hedge fund transparency,
'asset stripping' and proposed some investigative measures and rules so that companies are not left in the dark on the investment policies of hedge funds or private equity investors who buy up their shares.

They also want much more light to be shed on pay and bonus packaged for fund managers. The commission also asked that the EU address the issue of money laundering, specifically in the context of hedge and private equity funds.

MEPs in committee unanimously approved the report by Klaus-Heiner Lehne (EPP–ED, DE) which would - if approved by the plenary - become a formal request to the Commission to put forward EU legislation.

The EP committee proposes to oblige hedge funds and private equity funds to disclose and explain the companies whose shares they acquire or own, retail and institutional investors, prime brokers and supervisors - their investment policy and the associated risks.

The committee also asks the Commission to investigate the possibility to apply, to alternative investments, contract terms allowing for a clear limitation of risk, for measures to be taken if thresholds are exceeded, for a clear description of lock-up periods and for explicit conditions concerning cancellation and termination of investment contracts.

MEPs want the Commission to propose rules forbidding "asset stripping" by investors who misuse their financial power in a way that merely disadvantages the company acquired in the long term, without having any positive impact on its future - or the interests of employees, creditors and business partners. They therefore propose common EU rules to guarantee capital maintenance of companies.

Regarding private equity funds, Members in committee suggested, among several proposals, that the Commission should address the issue of irresponsible lending to private equity funds, where banks disclaim any responsibility for what the loan is used for and where the money that repays the loan comes from.