Negotiations between Belgium, on behalf of the Council of Ministers, and the European Parliament over legislation to regulate hedge funds have run into fresh difficulties.

The talks have been knocked off course by French attempts to tighten restrictions on hedge funds and other alternative investments. The French government is looking to revive clauses in the proposed legislation that would prevent investors within the EU from getting access to funds based in lightly regulated offshore jurisdictions.

France wants the EU to do this by banning so-called passive marketing by funds based in countries outside the Union that do not meet certain regulatory standards.

Third-country funds

Whereas, active marketing involves a fund contacting a potential investor and soliciting investment, the term passive marketing describes a fund doing business with an investor who has pro-actively sought it out. Active marketing from funds based in third countries that do not meet regulatory standards is already banned and the European Commission included a ban on passive marketing in its proposal for regulating alternative funds that was published in April last year. The idea was supported by many MEPs, but opposed by a large number of member states, which felt such a move would be unnecessarily heavy-handed and protectionist.

The French government is known to be unhappy with compromise texts on the alternative investment fund management directive that have been discussed between Belgium and MEPs. Sources said that it has prepared its own text, which it will circulate to other member states and the Commission. The text includes a ban on passive marketing, as well as a large role for the European Securities and Markets Authority in policing funds – an idea that is expected to run into strong opposition from the UK.

Sources said that France’s move has revived hopes in Parliament that passive marketing could be included in the directive, so complicating negotiations between MEPs and Belgium. Other outstanding issues in the negotiations include what restrictions to place on private equity and on fund managers based outside the EU.

Sources said that both sides in the negotiations had threatened, at a meeting on 27 September, to push discussions on the dossier to a second reading, though Belgium had been attempting to reach an agreement at first reading. The next meeting between negotiators has been pencilled in for 4 October. Parliament is scheduled to vote on the legislation at its session on 18-21 October.

The problems with the dossier have led Belgium to add it to the agenda of a finance ministers’ meeting taking place today (30 September).

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