The European Union will impose new controls on private equity and hedge funds from 2013 after the European Parliament gave its final vote in favour of tighter regulation of the industry on Thursday.
The vote follows the resolution of a disagreement between France and Britain over measures to rein in hedge funds, which some lawmakers have blamed for aggravating the euro-zone crisis by speculating on sovereign debt, driving up borrowing costs.
Following are the main points of the new legislation.
* The rules are meant to add transparency, chiefly by putting hedge funds, private equity groups and other alternative investment vehicles under the eye of a pan-European watchdog. France hopes the watchdog, to begin work from January, will gather more powers and expand its 100-strong staff over time.
* France backed down on demands to give the new watchdog responsibility for issuing EU licences for foreign funds to work across the bloc's 27 countries. In return, Britain agreed to delay the start of the new licensing scheme for foreign-based funds until around 2015.
* In essence, the legislation extends the range of information private equity and hedge funds must hand over. They will have to tell the authorities how and why they have borrowed money to invest as well as on which markets they are trading. They will also be obliged to outline key exposures, which will help supervisors decide if they pose a risk. For example, a fund could be told to reveal its short-selling positions, something most would be reluctant to do in case the information were to fall into the hands of rivals. The law also subjects them to summary bans on short-selling, a power slated for the new EU markets agency.
* The authorities will be allowed to demand documents from hedge funds, quiz managers, and probe telephone or data records as well as launch surprise on-site checks. The information would be shared among watchdogs around Europe as well as a new market-risks supervisor, to be based in Frankfurt under the wing of the European Central Bank.
* The law would also impose a loose pay code on hedge-fund managers, asking that they stagger earnings over a number of years. Forty percent of bonuses should be staggered over a number of years, for example, to reduce the incentive for managers to take big risks for bumper one-off windfalls.
* While strict, the industry is pleased with the legislation, which has been watered down from its original. It does not lay down a rigid code of rules, such as a cap on hedge-fund borrowing or pay, but sets up a framework for watchdogs to police hedge funds and private equity firms.
* Think tanks and finance experts, however, are sceptical about whether the regulator, with only as many staff as the financial supervisor on the small island of Jersey, will have the clout to make powerful hedge funds obey the rules.
