Abstract
The recent crisis has demonstrated the potential destabilizing role of collective investments in economic and financial systems. This report considers rule relating to regulation of these funds which has differed markedly after the financial crisis. Regarding hedge funds, the rules regulating offerings, management, and taxation. Private equity funds have enjoyed relatively less regulation than hedge funds. In recent years, however, reform efforts in the U.S. and Europe have targeted both types of investment vehicles. Sovereign wealth funds play a considerable role in financial systems, holding a substantial portion of world wealth. The report surveys recent guidelines and code of conduct developed by the IMF in 2008.
III.A.1, La réglementation des fonds spéculatifs.
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Notes
- 1.
See § 31 of the Progress Report on the Actions to promote Financial Regulatory reform issued by the US Chair of the Pittsburgh G-20 Summit, 25 September 2009, stating “Hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on leverage, necessary for assessment of the systemic risks they pose individually or collectively. Where appropriate registration should be subject to a minimum size. They will be subject to oversight to ensure that they have adequate risk management.”
- 2.
See International Organization of Securities Commissions IOSCO, Hedge Fund Oversight, Final report, June 2009, § 5.
- 3.
This terminology is used in Italy.
- 4.
The EP report proposed to exempt credit institutions and insurance companies managing their internal AIF: see Committee on Economic and Monetary Affairs Draft report by Mr. Gauzès on the proposal for a directive of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC (COM(2009)0207 – C7-0040/2009 – 2009/0064(COD)).
- 5.
This overview is partly based on the IOSCO survey, Hedge Fund Oversight, Consultation Report, March 2009, annex 5. For more details, also on the country reports, see: P. Astleford and D. Frase (eds.), Hedge Funds and the Law, Sweet and Maxwell, 2010.
- 6.
ASIC is Australian Securities and Investments Commission.
- 7.
CVM or Comissao de Valores Mobiliarios, Brazil.
- 8.
E.g., investment for more than cdn $ 150 000.
- 9.
The regulation contains a detailed list of categories of “accredited investors”, inter alia persons with income in excess of $ 200.000 and $ 1 m net worth. But the limitation to 100 investors does not apply.
- 10.
Individuals with at least $ 5 m in investments, or companies and trusts with $ 5 m in investments.
- 11.
This refers to clients with $ 1.5 m invested.
- 12.
Kapitalanlagegesellschaft according to Investment Gesetz 2003 and Investmentaktiengesellschaftgesetz allowing entrepreneurs to associate investors to the common venture. See http://www.gesetze-im-internet.de/bundesrecht/invg/gesamt.pdf.
- 13.
On the basis of the three-pronged threshold: € 20 m balance sheet, € 40 m turnover and equity of € 20 m or more.
- 14.
See M. Seimetz, Luxembourg Hedge Funds, Astleford & Frase, nt. 6, 12–041 e.s.
- 15.
For further details, see: D. O’Sullivan, Hedge Funds in Ireland, in: Astleford & Frase, nt. 6 12–074.
- 16.
The thresholds are €1.250.000 assets and € 250.000 for an initial investment. For institutions, a minimum of assets under management of € 25 m is required.
- 17.
On the board of which at least two Irish, mostly non-executive directors have been appointed.
- 18.
Called the SME association and the Hedge Association, the latter being entitled to invest in a wider range of assets.
- 19.
Most regulations define the conditions according to which hedge funds would not be regulated. Even today, no jurisdictions address hedge funds as such.
- 20.
Reference is to be made to the provisions of the Investment Company Act in the US, and the Investment Advisers Act, and the UCITS legislation in the EU.
- 21.
See, e.g., Switzerland, Belgium.
- 22.
Another exception relates to the sale of hedge funds in private portfolios managed on a discretionary basis.
- 23.
The calculation basis excludes foreign and non-resident alien investors.
- 24.
In the US, different regimes apply under the Investment Company Act and the Securities Exchange Act. The former follows a cap on the number of investors involved (100 or less), the second uses the private placement exception, standing here for individuals with a minimum income of $200.000 or $1 million net worth; or $5 million assets for institutional investors. In these cases a prospectus must be published.
- 25.
See Machuca and Menendez, in: Astleford & Frase, nt. 6, 12–166.
- 26.
See French Report.
- 27.
And there may not be more than 200 investors per fund.
- 28.
See in Germany, at least for domestic FoHF; for foreign FoHF, a notification to Bafin and a cooperation agreement with the home supervisor is needed. A full prospectus is required.
- 29.
For whether wealthy investors or investors with experience in the financial sector.
- 30.
According to a specific regulatory regime, see Machuca and Menendez, in: Astleford & Frase, nt. 6, 12–166.
- 31.
See for example Switzerland, where managers are subject to licensing and qualification conditions, and have to present a prospectus to the supervisor.
- 32.
See the UK where the asset manager regime applies with a close follow-up of about 40 major hedge fund managers. Most of the funds managed from the UK are located in tax friendly jurisdictions.
- 33.
See www.hfsb.org/?page=10915; compare the rules of the Swiss Funds Association: https://www.sfa.ch/self-regulation/selbstregulierungmusterdok. Danish funds may also subscribe to the Danish Venture Capital Association.
- 34.
- 35.
To be mentioned however is the Swiss proposal according to which the new provisions on remuneration in financial institutions would have been applicable: the scope of the final regulation was considerably reduced, thereby excluding hedge fund managers: see Finam Circular 2010/1: Minimum standards for remuneration schemes of financial institutions http://www.finma.ch/f/regulierung/Documents/finma-rs-2010-01-f.pdf.
- 36.
E.g., in the US where rule 10B-5 would apply.
- 37.
See D. Frase, Hedge funds in the UK, nt. 5, at 12–004.
- 38.
See in the UK, the Hedge Funds Standards Board Code, with 57 signatory funds. See HFSB, www.hfsb.org/?section=11400. The IOSCO report, nt.2 raised the question of effectiveness: § 17.
- 39.
See Taiwan report.
- 40.
In Belgium, Germany, Denmark, e.g., see the EU Commission’s statement on the Packaged Retail Investment Products, or “prips”: for the latest update, see: ec.europa.eu/internal_market/finservices-retail/docs/investment_products/20091215_prips_en.pdf.
- 41.
Especially on suitability and conflicts of interest, including fee disclosure.
- 42.
Communication from the Commission on Packaged Retail Investment Products, COM(2009) 204 final, 30.4.2009, ec.europa.eu/internal_market/finservices-retail/docs/investment_products/29042009_communication_en.pdf.
- 43.
This position was repeatedly voiced by several representatives of the Wharton School. This was still the case in February 2007, in a report of President’s Working Group on Financial Markets, chaired by Treasury Secretary Henry M. Paulson, urged vigilance but concluded that new regulations are not needed (www.nytimes.com/2007/02/23/business/23hedge.html?_r=1&pagewanted=2). The Securities and Exchange Commission in 2004 tried to require them to register with the agency and make limited disclosures about their activities. But a federal appeals court ruled that the Commission did not have that authority: Ph. Goldstein v. SEC, 23 June 2006.
- 44.
See on this case: the US report.
- 45.
See e.g. statement by Lord Myners,.UK. Must Fix Hedge-Fund Oversight, Nov 10, 2009, online.wsj.com/article/SB125778995639339045.html. In the US, initiatives came mainly from Congress (Paul Kanjorski, Barney Frank).
- 46.
This subject is mentioned in several reports, and is sometimes referred to as relating to “substitute products”, or “prips”, (prepackaged retain investment products). See nt. 38.
- 47.
This is the case in the UK, but not in France.
- 48.
See the Galleon case in the US, involving an insider ring. In Oct 2011, the fund’s CEO has been sentence to 11 years in jail. See for other cases: E. Allen, Hedge funds and related entities as defendants, in Astleford & D. Frase (eds) nt. 6, 7–041 e.s.
- 49.
Among these one can mention the dismantling of ABNAmro Bank and the attempts to urge Deutsche Börse to adapt its business plan. The opposition has been virulent in Germany – see the speech by Müntefering, referring to “the swarms of locusts”: see Gumpel, P., The day of the Locust, Time, May 15, 2005, www.time.com/time/magazine/article/0,9171,1061439,00.html, and the French report.
- 50.
Held to unlimited liability, although this partner is often a limited liability entity.
- 51.
Where the Kommanditgesellschaft would constitute an adequate vehicle for a fund with only a few members.
- 52.
The minimum initial contribution to a contractual fund would be € 250.000, indicating that this type of fund is only addressed to professional or institutional investors.
- 53.
Spain is stricter in regulating these relations, dealing inter alia with organization and risk control measures, the relations with prime brokers, and the collateralization rules.
- 54.
This is the case in France, and in support of the regulatory obligations in Spain as well.
- 55.
This is the case in Spain, France, Denmark and Taiwan.
- 56.
So-called ARIA; see also the FCIMT, which trades positions in the marché à terme.
- 57.
See above on the objectives of regulation.
- 58.
See IOSCO report, nt. 2: “However, the activities of hedge funds may have amplified the consequences of the crisis. This occurred, for instance, because of the need for hedge funds (along with many other market participants) to quickly unwind positions because of liquidity restrictions in meeting margin calls or significant requests for redemption by investors.”
- 59.
See art. 2(a) of the proposed regulation on the ESRB defining “financial institution” as “any undertaking whose main business is to take deposits, grant credits, provide insurance services or other financial services to its clients or members or engage in financial investment or trading activities on its own account.”
- 60.
The Central banks, and in Europe the European Systemic Risk Board. See Regulation 1092/ 2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board, OJEC 15 12 2010, L 331/1.
- 61.
See Hedge Funds and Their Implications for Financial Stability by T. Garbaravicius and F. Dierick, ECB, Occasional paper Series, nr. 34, August 2005.
- 62.
―“hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on their leverage, necessary for assessment of the systemic risks that they pose individually or collectively. Where appropriate, registration should be subject to a minimum size. They will be subject to oversight to ensure that they have adequate risk management. We ask the FSB [Financial Stability Board] to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure that effective oversight is maintained where a fund is located in a different jurisdiction from the manager.”
- 63.
The G-20 Action Plan states: “Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies.” See Declaration Summit on Financial Markets and the World Economy, Action Plan to Implement Principles of Reform, G-20, 15 November 2008, available at http://www.g20.org/Documents/g20_summit_declaration.pdf.
- 64.
ESRB, see nt. 60.
- 65.
The latter would allow aggregation of data relating to all funds managed by the same firm; however, it excludes self managed funds.
- 66.
See IOSCO Regulatory and Investor Protection Issues Arising from the Participation by Retail Investors in (Funds-of) Hedge Funds – Final Report, Report of the Technical Committee of IOSCO, February 2003, p. 4, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD142.pdf, and The Regulatory Environment For Hedge Funds, A Survey And Comparison – Final Report, Report of the Technical Committee of IOSCO, November 2006, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD226.pdf.
- 67.
See IOSCO Principles for the valuation of hedge fund portfolios, November 2007.
- 68.
See PWC, Future Newcits Regulation? www.pwc.com/gx/en/asset-management/assets/newcits-regulation-0310.pdf.
- 69.
Leverage. See art. 83 of Directive 2009/65 of 13 July 2009, OJEC 17 November 2009, L 302/32.
- 70.
Directive art. 50(1)(9) of the Ucits directive, 17 July 2009, 2009/65 OJ. L. 302/66 of 17 November 2009 allows UCITS to invest in derivatives but the amount should be less than the total net value of the portfolio.
- 71.
See nt. 67.
- 72.
Report of the Working Group on Highly Leveraged Institutions, see for the text Annex II of the IOSCO Documents PD288.pdf.
- 73.
See IOSCO Principles for the valuation of hedge fund portfolios, November 2007.
- 74.
IOSCO September 2009.
- 75.
Directive 2011/61 of 8 June 2011, OJEC, L.174/1 of 1 July 2011.
- 76.
Art 63 (1) 3rd para.
- 77.
The definition of “accredited investor” with $ 100 m in assets has been strengthened by excluding his primary residence from the calculation.
- 78.
Thereby putting an end to the disclosure obligations: see the Danish report for the case of a failed 100% takeover whereby the disclosure duties to the market were maintained.
- 79.
See, by way of example, the Rasmussen and Lehne reports in the European parliament: Rasmussen Report, European Parliament 2007/2238(INI) of 18.4.2008 and Parliaments’ motion: (http://www.europarl.europa.eu/sides/getDoc.do?pubRef=−//EP//NONSGML+REPORT+A6-2008-0338+0+DOC+PDF+V0//EN) and Lehne report (www.europarl.europa.eu/sides/getDoc.do?pubRef=−//EP//NONSGML+REPORT+A6-2008-0296+0+DOC+PDF+V0//EN) and the motion adopted.
- 80.
Large banks and private equity sponsored leveraged buyouts in the EU, April 2007 www.ecb.eu/pub/pdf/other/largebanksandprivateequity200704en.pdf.
- 81.
Art. 23 of the 2nd Company Law directive forbade any form of financial assistance. It has been changed in 2006, allowing financial assistance under certain conditions. See Wymeersch, Article 23 of the second company law directive: the prohibition on financial assistance to acquire shares of the company, Festschrift für U. Drobnig, Mohr Siebeck, Tübingen, 1998, 725–48.
- 82.
See the French report.
- 83.
Art. 5, Takeover Directive, of 21 April 2004, OJ L 142, 30.4.2004, 12–23.
- 84.
Comp. the German Holzmüller case BGH – Federal Court of Justice February 25, 1982, (BGH – Federal Court of Justice, BGHZ 83, 122 (“Holzmüller”)) and the decisions of the Dutch Hoge Raad of 13 July 2007 (“La Salle”) whereby the first decided that it was legally required to submit significant disposals of assets to the decision of the general meeting, and the second decided this to be in the remit of the board.
- 85.
See the French system of the “titres au porteur identifiables”.
- 86.
See about these the Control enhancing mechanisms, see Report on “Proportionality between ownership and control in EU listed companies”, ec.europa.eu/internal_market/company/docs/shareholders/study/final_report_en.pdf. See the French system whereby shareholders can form an association to protect their interest.
- 87.
Expression used inter alia by Frans Timmermans, Dutch junior minister.
- 88.
See also in the Spanish and Italian Reports.
- 89.
See the Danish report referring to “The Danish discussion” and the Rasmussen report Hedge Fund and private Equity, nt. 93. This report also refers to voluntary codes such as a Guide for responsible ownership and good corporate governance.
- 90.
However, there may be confusion as to whether they were due to the activity of hedge funds, rather than of private equity investors.
- 91.
The latter point is especially mentioned in the French report, although the obligation exists in similar terms in the takeover regulation of other jurisdictions. See also the Spanish report referring to the regulation. (p. 16).
- 92.
See about these points the Swiss report.
- 93.
Indirectly, art.26–30 focus more clearly on PEF, by addressing AIFM acquiring control of non-listed companies and assets.
- 94.
Including the retention by the originator of at least 5%: art 17. The rule will apply to all AIFM. The rules have to be further detailed in Commission secondary legislation.
- 95.
See for criticism: European venture capital association, or Alternative Investment Management Association.
- 96.
Art 26, also excluding SPVs for holding real estate.
- 97.
At the 50% + level: art 26(5).
- 98.
- 99.
- 100.
- 101.
See Gauzès Report, nt. 4.
- 102.
The main SWF are the funds from the UAE (Abu Dhabi), Norway, Saudi Arabia, China (2 investment funds) Singapore, Kuwait, Russia, China (social security funds), and Hong Kong: D. Oakley and Gillian Tett, Sovereign Wealth Funds, courted in debt sales, FT, 25 March 2010.
- 103.
The members of which are: Australia, Azerbaijan, Bahrain, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, South Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad & Tobago, the United Arab Emirates, and the United States.
- 104.
See the Greek report, the Taiwan report.
- 105.
Speech 4 December 2007, europa.eu/rapid/pressReleasesAction.do?reference = SPEECH/07/787&format = HTML&aged = 0&language = EN&guiLanguage = en
- 106.
A common European approach to Sovereign Wealth Funds, 27.2.2008 COM(2008) 115 final.
- 107.
Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation).
- 108.
In the golden shares ECJ cases of 4 June 2002, the court took a restrictive attitude as to the compatibility of “golden shares” with the freedom of capital movement that can only be allowed for “overriding reasons of general interest”, see ECJ, 4 June 2002, C.367/98 (Portugal: general financial interest is not an adequate justification); C 483/99 (France: general right of refusal for direct and indirect investment is not compatible) but C. 503/99 (golden shares acceptable for safeguarding energy supply); more recent cases (e.g. Netherlands, 28 Sept. 06 C 282/04 and C 283/04 restrictions extending beyond the needs of maintaining postal service) (C 463/04 Federconsumatori) have maintained this line. See also the Volkswagen case (C 112–05 Germany no showing of protection of minority shareholders as a legitimate interest).
- 109.
See for a detailed overview, Government Accountability Office (GAO), Sovereign Wealth Fund Laws Limiting Foreign Investment Affect Certain U.S. Assets, May 2009/www.gao.gov/new.items/d09608.pdf.
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Wymeersch, E. (2012). The Regulation of Private Equity, Hedge Funds and State Funds. In: Brown, K., Snyder, D. (eds) General Reports of the XVIIIth Congress of the International Academy of Comparative Law/Rapports Généraux du XVIIIème Congrès de l’Académie Internationale de Droit Comparé. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-2354-2_12
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