(Updates with parliament action on private-equity firms)
Of DOW JONES NEWSWIRES
BRUSSELS -(Dow Jones)- Lawmakers at the European Parliament Monday night approved new rules for hedge funds and private-equity firms, rejecting complaints that the legislation could unduly restrict European investors from using offshore funds.
The legislation passed 33-11 at the parliament's key Economic and Monetary Affairs committee. European Union finance ministers at the European Council are expected to approve their version of the legislation Tuesday night, kicking off what will likely be months of talks between the council, the parliament and the European Commission, the EU's executive arm, over a final version that will become law.
The parliament's legislation will require funds to register with European authorities. Fund managers that use borrowed money, or leverage, will have to file plans with the authorities setting limits on how much leverage they can use, and a new EU regulator would have the power to cap leverage at funds that pose "systemic" risks.
Most controversially, the legislation would create a "black list" of countries that lack adequate financial regulation. European investors would be forbidden from sending their money to funds based in these countries.
The prospect of a black list has sparked strong opposition from European hedge funds, which are mostly managed from London but rely heavily on funds based in the Cayman Islands. Jean-Paul Gauzes, the center-right French politician who led debate on the legislation at the parliament, has said it's unclear whether the Cayman Islands would be placed on the list, though the Cayman Island financial industry says it can satisfy the conditions laid out in the legislation for avoiding the list.
Fund managers based outside the EU would be able to get a "passport" to raise money from investors across the EU if they pledged to follow the new rules.
The final legislation will likely differ significantly from the legislation approved by the parliament. The version that finance ministers are expected to pass Tuesday allows national governments to opt out from some of the rules. The council's version contains no black list, a provision that EU diplomats say is strongly opposed by national governments at the council.
The council's legislation, however, has drawn criticism from U.S. Treasury Secretary Timothy Geithner, because it would prevent funds and fund managers based outside the EU from obtaining a passport to raise money and market themselves across the 27-nation bloc.
The parliament committee spared private-equity firms from tough limits on their ability to sell assets of a company they acquire or increase leverage on that company to the point where EU authorities determine the company's viability is threatened. Gauzes and socialists in the parliament sought those provisions, but parliamentary rules gave precedence to weaker language written by the parliament's legal affairs committee.
Copyright 2009 Dow Jones Newswires
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