Resolution Recommendation by qfi14777


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									 Follow-up to the European Parliament Resolution with Recommendation to the
Commission on transparency of institutional investors, adopted by the Commission
                            on 18 November 2008

1.     Rapporteur: Klaus-Heiner LEHNE (EPP-ED/DE)

2.     EP reference number: A6-0296/2008 / P6-TA-PROV(2008)0426

3.     Date of adoption of the resolution: 23 September 2008

4.     Subject:

The resolution, presented pursuant to Article 192 TEC, requests the Commission to
submit to the Parliament a legislative proposal or proposals on the transparency of hedge
funds and private equity, based on specific recommendations detailed in an Annex to the
motion. Contrary to the resolution on the Rasmussen report on hedge funds and private
equity that was put forward in parallel, the resolution on the Lehne report does not set
any deadline for the Commission to take action.

5.      Competent Parliamentary Committee: Committee on Economic and Monetary
Affairs (ECON)

6.     Brief analysis/assessment of the resolution and its requests:

While recognising the benefits which hedge funds (HF) and private equity (PE) can bring
to the market, the resolution concludes that diverging national regimes and differing
national transposition of EU rules by Member States lead to the risk of regulatory
fragmentation with a view to HF/PE and asks the Commission to propose legislative
measures to guarantee a common standard of transparency. A comprehensive analysis of
the existing national rules is therefore considered necessary, in particular in the area of
transparency, which should serve as a starting point for further harmonisation measures
at European level.

Furthermore, the resolution lists a number of areas that such harmonisation measures
should be addressed in order to improve transparency in the HF/PE sector.

For a detailed list of the requests as set out in the resolution, please see Annex I to this

7.     Reply to the requests and overview of the actions taken by the Commission
       or outlook of those actions which the Commission intends to take:

Many of the requests contained in the resolution have been discussed previously with the
European Parliament in a broader context – not specifically in relation to hedge funds
and private equity. In the light of these discussions and the experience of the financial
crisis, the Commission agrees with Parliament on the need to take a pro-active approach
by continuing the in-depth analysis and by proposing legislation wherever that may prove

Therefore, the forthcoming review of the Transparency Directive as well as the work on
its follow-up will be an occasion to review the situation concerning many of the requests
highlighted in the resolution and, as announced in the context of the Third public
consultation on shareholders' rights in the summer 2007.

Constant vigilance is needed to ensure that there are no remaining gaps or weaknesses in
our regulatory arrangements. This is particularly the case as concerns new financial
market players and instruments that are regulated in a different manner than traditional
financial institutions. The issue that must now be looked at is whether the development
of this non banking sector has evolved in such a way as to create a threat to financial

The Commission has therefore already begun an in depth review of the supervisory and
regulatory framework that is applied to all significant financial market actors, including
hedge funds and private equity, with a particular focus on capital requirements, risk
management and transparency. The aim of this work will be to assess the adequacy of
such measures in the context of ensuring financial stability in the EU and to take
initiatives as soon as possible. The Commission will ensure that Parliament is kept duly
informed of this work as it proceeds.

For a detailed response on the Parliament's requirements set out in the resolution please
see Annex I.

                                        Annex I


One stop shop website for codes of conduct

A one-stop-shop website for codes of conduct        Industry-developed codes of conduct have an
would be helpful and should be established for      important role to play in increasing the
the     European     Union     and      promoted    transparency of the hedge fund and private
internationally; that website should include a      equity sectors. The Commission is encouraged
register of those market players who comply         that the industry has demonstrated a willingness
with the codes of conduct, their disclosures, and   to engage collectively with some of the issues
explanations of non-compliance.                     raised by the Financial Stability Forum, in
                                                    particular with regard to transparency, asset
                                                    valuation and risk management practices. The
                                                    initiatives of the Walker Working Group and the
                                                    Hedge Fund Working Group in the UK are
                                                    notable examples.

                                                    In order for these initiatives to achieve their
                                                    objectives, it will be vital for the industry to
                                                    ensure that relevant stakeholders are able to
                                                    access the text of the standards, to identify the
                                                    signatories and - if necessary - to scrutinise the
                                                    reasons for non-compliance.

                                                    The idea of a 'one stop-shop' for monitoring
                                                    compliance with various self-regulatory codes is
                                                    a novel one. Further detail and reflection is
                                                    needed before the Commission could pronounce
                                                    on the usefulness of a 'one stop-shop' for codes
                                                    of conduct.

Transparency of hedge fund and private equity

Disclosure of information on HF and PE

The Commission should submit appropriate            The Commission has already begun an in depth
legislative proposals by way of review of the       examination and review of the supervisory and
existing acquis communautaire affecting the         regulatory framework that is applied to all
various types of investors and counterparties,      significant financial market actors, including
together with an impact assessment and with the     hedge funds and private equity, with a
involvement of the industries concerned. Where      particular focus on capital requirements, risk
proposals already exist they should be              management and transparency. The aim of this
implemented accordingly.                            work will be to assess the adequacy of such
                                                    measures in the context of ensuring financial
                                                    stability in the EU and to make

                                                recommendations as appropriate.            The
                                                Commission will ensure that Parliament is kept
                                                duly informed of this work as it proceeds.

                                                As concerns existing legislation, it should be
                                                recalled that hedge funds are already subject to
                                                European rules applicable to financial
                                                instruments. E.g. the exposure of the banking
                                                sector to hedge funds and private equity is
                                                subject to the Capital Requirements Directive.
                                                Also rules on information and consultation of
                                                workers apply. Hedge funds are also subject to
                                                national authorisation regimes in those Member
                                                States where the majority of EU hedge funds are

Risk management

The Commission should explore ways of This is being addressed in the context of the
enhancing the visibility and understanding of ongoing in-depth examination and review
risk, as distinct from creditworthiness.      referred to above.

                                                - Risk management is an aspect of corporate
                                                governance along with other related issues such
                                                as transparency, disclosure, and the role of
                                                shareholders, non-executive directors and also

                                                - The Commission adopted a report in 2007 on
                                                its 2004 Commission recommendation on the
                                                appropriate regime for the remuneration of
                                                directors' of listed companies and continues to
                                                urge MS to properly implement this
                                                recommendation.       In   this   context   the
                                                Commission has indicated an openness to look
                                                at perverse incentives and its relationship to
                                                performance and packages and bring forward
                                                appropriate proposals.

                                                - Another recommendation adopted by the
                                                Commission in 2005 concerned the role of non-
                                                executive or supervisory directors of listed
                                                companies and on the committees of the
                                                (supervisory) board.

                                                - The Shareholders' Rights Directive (Directive
                                                2007/36) which is due to be transposed in
                                                August 2009.

Contractual disclaimers

Attention should be paid to the question whether This is being addressed in the context of the

existing and future directives and transparency ongoing in-depth examination and review
measures are not undermined by excessive referred to above.
disclaimers in contracts.

Review threshold Transparency Directive

New legislation should require shareholders to     The evaluation of the Transparency Directive
notify issuers of the proportion of their voting   will take place in 2009 once the results of a
rights resulting from an acquisition or disposal   tendered out study have been received. The
of shares where that proportion reaches, exceeds   results of that study should be available in 2009.
or falls below the specific thresholds starting
with 3% instead of 5%, as mentioned in
Directive 2004/109/EC.

Disclosure of investment policies

The new legislations should also oblige hedge      Such an option could lead to more negative than
funds and private equity, as far as those          positive effects. In particular, disclosure of
categories of investors can be differentiated      investment policy could create more barriers for
from others, to disclose and explain – vis-à-vis   takeover bids, thus rendering the market for
the companies whose shares they acquire or         corporate control less efficient. The threat of
own, retail and institutional investors, prime     takeover bids is currently one of the major tools
brokers and supervisors – their investment         to ensure the protection of minority investors in
policy and associated risks.                       listed companies.

                                                   A public consultation on future priorities in
                                                   company law and corporate governance carried
                                                   out in 2006 dealt, inter alia, with the idea of a
                                                   general rule, not addressed to any specific
                                                   sector, on disclosure of voting policies of
                                                   institutional investors. No strong case has
                                                   emerged for further action at EU level.

                                                   In any event, this issue will be taken up during
                                                   the forthcoming review of the Transparency

Issues that in particular should be taken into account when making such proposals

Contract terms

The Commission should:                          This is being addressed in the context of the
                                                ongoing in-depth examination and review
 explore the possibility of contract terms, to referred to above.
  be applied to alternative investments, that
  provide for an unambiguous disclosure and
  management of risk,

 for measures to be taken in the event of

   thresholds being exceeded,

 for a clear description of lock-up periods and

- for explicit conditions governing cancellation
  and termination of the contract.

Anti-Money Laundering

The Commission should investigate the issue of The Financial Action Task Force (FATF) will
money laundering in the context of hedge funds be looking into the question of money
and private equity.                            laundering risks in the securities industry over
                                               the next few months. A report should be
                                               available in spring 2009.

Registration      and       identification       of

The Commission should explore possibilities of
harmonising rules and recommendations for             The forthcoming review of the Transparency
hedge funds and – as the case may be – private        Directive would be an occasion to review the
equity to register and identify shareholders          situation concerning the identification of
beyond a certain proportion, as well as to            shareholders, as announced in the context of the
disclose their strategies and intentions – bearing    Third public consultation on shareholders' rights
in mind that an overflow of information should        in the summer 2007.
be avoided.

Role of intermediaries

The Commission should explore the need for,           The      Shareholders'     rights     Directive
and ways of, obliging intermediaries to enable        (Directive 2007/36) is due to be transposed by
the original shareholders to participate actively     August 2009.
in voting at general meetings of shareholders
and to make sure that their voting instructions       The European Corporate Governance Forum has
are respected by proxy-holders, as well as to         established contacts with CESAME and the
ensure that voting policies of identified             Legal Certainty Group in order to establish what
shareholders are disclosed.                           progress in the area of shareholder voting has
                                                      been made following the work of these two
                                                      expert groups and to identify issues that still
                                                      need to be resolved.

Code of best practices to reinforce long-term
                                                      By virtue of Directive 2006/46, which
The Commission should establish, together with        introduced amendments to the Fourth and
the industry, a code of best practice on how to       Seventh Company law Directives, all companies
rebalance the current structure of corporate          whose shares are admitted to trading on a
governance with a view to reinforcing long-term       regulated market will be required to disclose a
orientation and discouraging financial and other      corporate governance statement. Directive
incentives for short-term excessive risk-taking       2006/46 was due to be transposed into MS law

and irresponsible behaviour.                     by September 2008.

                                                 See also reference at risk management and in
                                                 particular concerning the 2005 Commission
                                                 recommendation on non-executive directors and
                                                 entry below under managers' remuneration.

Managers' remuneration

The Commission should establish rules            The 2004 Commission Recommendation on
providing for full transparency of managers'     directors’ remuneration already foresees
remuneration systems, including stock options,   disclosure of directors' remuneration and of
through formal approval by the general meeting   remuneration policy of companies. To increase
of the company's shareholders.                   accountability, the Recommendation already
                                                 foresees that directors' remuneration policy
                                                 should be on the agenda of the shareholders’
                                                 general meeting. Furthermore, it should be
                                                 submitted to a vote which may be either binding
                                                 or advisory.

                                                 The Commission adopted a report in 2007 on its
                                                 2004 Commission recommendation on directors'
                                                 remuneration and continues to urge MS to
                                                 properly implement the recommendation. The
                                                 European Council meeting in October 2008
                                                 urged Member States to take the necessary
                                                 actions, with a Council report by the end of

                                                 The Commission will continue to review the
                                                 practical effect of the Recommendation in the
                                                 light of these issues and will bring forward any
                                                 appropriate proposals.

On Hedge Funds specifically

Transparency of HF voting policies

The Commission should establish rules that This is being addressed in the context of the
enhance the transparency of voting policies of ongoing in-depth examination and review
hedge funds, on the basis that the addressees of referred to above.
Community rules should be the managers of
such funds.

Securities lending and voting agreements

The Commission should in particular:            The Commission looked at the issue of the
                                                impact of securities lending on voting in the
 investigate the effects of securities lending general meeting in the context of the discussion
  and voting on borrowed shares, having on a possible Recommendation on shareholders'

   regard to better regulation principles;        rights last year but the conclusion was that no
                                                  action should be taken in that field as it was not
 examine whether reporting requirements          obvious where to draw the line for a possible
  should also apply to cooperation agreements     action. If the action to be taken was to be
  between several shareholders and to indirect    effective in terms of reducing the effects of
  acquisitions of voting rights via option        stock lending on voting in the general meeting
  arrangements.                                   (i.e. to avoid/reduce empty voting and reduce
                                                  the number of "lost votes", i.e. lent stock that is
                                                  not voted as the borrower is not interested in
                                                  voting) it would have risked to hamper the stock
                                                  lending activities that - at least at the time - were
                                                  considered as very useful for the market (in
                                                  particular because they increased liquidity).

                                                  The question of reporting requirements will
                                                  have to be looked at in the context of the review
                                                  of the Transparency Directive.

On private equity specifically

Asset stripping

The Commission should propose rules that In the light of the current financial crisis, the
forbid investors to "plunder" companies (so Commission will examine existing practices and
called "asset stripping") and thus misuse their report accordingly as a separate issue.
financial power in a way that merely
disadvantages the company acquired in the long
term, without having any positive impact on the
company's future and the interest of its
employees, creditors and business partners; the
Commission should explore common rules to
guarantee the capital maintenance of companies.

Responsibilities of banks as creditors

The Commission should examine ways of             The Commission is working closely together
addressing the issues arising when banks lend     with the Basel Committee on improvements of
huge amounts of money to acquirers, including     the way models measure the risk of banks
private equity, and then disclaim any             trading activities (in the banking book, internal
responsibility whatsoever as to the purpose for   models cannot receive supervisory recognition).
which that money is used or the provenance of
the money used to repay the loan, bearing in      Furthermore, this is being addressed in the
mind that these points ultimately remain the      context of the ongoing in-depth examination and
responsibility of the debtor and that capital     review referred to above.
requirements for comparable risks must be the
same across the entire financial system.

Review of the Transfer of Undertakings
                                                  The purpose of the Transfer of Undertakings

The European Parliament also asks the               Directive is to ensure, so far as possible, that the
Commission to examine whether the Transfers         rights of employees are safeguarded in the event
of Undertakings Directive (Council Directive        of a change of employer by allowing them to
2001/23/EC of 12 March 2001 on the                  remain in employment with the new employer
approximation of the laws of the Member States      on the terms and conditions agreed with the
relating to the safeguarding of employees' rights   transferor (an old employer).
in the event of transfers of undertakings,
businesses or parts of undertakings or businesses   Moreover, the Directive safeguards the right to
(OJ L 82, 22.3.2001, p. 16) needs to be adjusted    the information and consultation in case of the
to the specific situation of leveraged buy-outs.    transfer.

                                                    The recent report of the Commission
                                                    (Commission report on Council Directive
                                                    2001/23/EC of 12 March 2001 on the
                                                    approximation of the laws of the Member States
                                                    relating to the safeguarding of employees' rights
                                                    in the event of transfers of undertakings,
                                                    businesses or parts of undertakings or
                                                    businesses COM(2007)334 - section 2.2.1)
                                                    indicates that there must be a change, in terms of
                                                    contractual relations, in the legal or natural
                                                    person who is responsible for the performance
                                                    of the activity and who assumes the obligations
                                                    of an employer with respect to the employees of
                                                    the entity.

                                                    According to the report the transfer of
                                                    ownership of the majority of the shares in an
                                                    undertaking or a change in the majority of
                                                    shareholders does not constitute a transfer
                                                    because the legal personality of the employer is
                                                    unchanged.        Therefore the Commission
                                                    considers that a revision of the Directive,
                                                    extending the definition of "transfer" to include
                                                    a change of control is not justified at this stage.
                                                    Although a change of control can lead to
                                                    changes in the undertaking, the employees' legal
                                                    position vis-à-vis the employer is unchanged. In
                                                    any case, Directive 2002/14/EC makes such
                                                    changes subject to appropriate information and
                                                    consultation procedures.

Sovereign Wealth Funds

Work of the IMF

The Commission should take part in the              The Commission has actively taken part in the
initiative of the International Monetary Fund to    work of the IWG (International Working Group
establish a working group to draft an               of Sovereign Wealth Funds that was launched
international code of conduct for SWFs.             with the support of the IMF as technical support
                                                    and facilitator) alongside with recipient

               countries of SWFs investments (USA, Japan,
               UK, Germany, France, Italy and Spain) and its
               contributions have been publicly acknowledged
               by the Group.

               The initiative has succeeded in reaching a
               preliminary agreement on a set of good practices
               and principles to be followed by SWFs. 26
               countries sponsoring SWFs including Abu
               Dhabi, Kuwait, China, Russia and Norway
               among others have produced a set of 24
               generally accepted practices and principles that
               they have committed themselves to enforce on a
               voluntary basis. These countries are considering
               now the creation of a standing committee to give
               continuity to the International Working Group
               that drafted the Principles. The new Committee
               would see to the enforcement and future
               development of these principles. Recipient
               countries could be invited to take part in the
               work of that Committee.



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