In a Wall Street Journal op-ed Wednesday, Christine Lagarde and Wolfgang Schauble, foreign ministers of France and Germany, respectively, made their case against the controversial third-country rules in the EU’s proposed Alternative Investment Fund Managers directive.
The current version of the directive would prohibit foreign fund managers from marketing within the EU unless they can demonstrate that they are subject to a regulatory regime of equivalent rigor in their home country.
“France and Germany believe in open financial markets,” the ministers wrote. “All hedge funds marketed in Europe should certainly provide information to European authorities so that they can monitor systemic risk. But besides such rules agreed by the G-20, qualified investors should be free to invest in funds from all around the globe irrespective of quality standards set for state-of-the-art European hedge funds.”
Currently, many major EU trading partners, including the US, Russia, China, India and Brazil, do not meet this standard, and therefore would be denied a “passport” to market within the EU.
“The directive would create a passport that would enable them to be actively marketed to qualified investors throughout the EU. It may seem paradoxical for a directive that aims at regulating hedge funds to ease their marketing conditions. We believe such a passport would be in the European general interest, provided we ensure that funds that benefit from the newly created passport align with the highest standards in terms of investor protection,” the ministers wrote.
Lagarde and Schauble have concerns about limiting the choice of European investors.
“At a time when our fellow citizens call for more safety and security, including on financial markets, they would not understand if we eased marketing conditions for hedge funds. It is therefore up to each member state to decide whether to allow the active marketing of off-shore funds to their national investors.”
The Alternative Investment Management Association (AIMA), an industry group that is a staunch supporter of the AIFM directive, responded to the letter.
“We very much welcome the comments by Mrs. Lagarde and Mr. Schäuble that ‘France and Germany believe in open financial markets…’” said Andrew Baker, CEO of AIMA in a statement. “… While Mrs. Lagarde and Mr. Schäuble say that EU investors should be free to invest in non-EU funds as long as non-EU investment funds and their supervisors provide for adequate information exchange to mitigate systemic risk, the current text being discussed at Council level imposes additional requirements on non-EU funds beyond this,” said Baker.
Lagarde and Schauble’s letter is the latest in a string of officials to weigh in on the Directive.
Earlier this month, a member of the European Parliament proposed a compromise on the third-country rules. Jean-Paul Gauzes, the appointed “rapporteur” for the directive, reportedly told journalists Tuesday that he is considering a tiered-system of access to the EU market, rather than the all-or-nothing passport process that had been under consideration.
US Treasury Secretary Timothy Geithner wrote a letter to four EU finance ministers on 5 April reiterating his concerns about the controversial Directive on Alternative Investment Fund Managers. Geithner sent the letter soon after an intervention from UK Prime Minister Gordon Brown reportedly delayed a vote on the directive at a mid-March meeting of EU ministers.