Regulatory Framework Overhaul- Hedge Funds and Tax Havens; but what about supervision?

There have been strong voices calling for revising the financial sector’s regulation including that for hedge funds throughout the financial crisis and leading up to the G20 meeting.  In this context the European Commission unveiled its much awaited draft proposal of a Directive on Alternative Investment Fund Managers.  The draft Directive will introduce licensing and reporting requirements for EU-domiciled managers of alternative investment funds. Once considered and approved by the European Council and the European Parliament, the Directive will enter into force, but likely not before 2011. The topic came up at a recent NYSSA panel that I co-chaired and a useful reference to that is provided by March MacHarg of Debevoise & Plimpton.

Outside Europe the G20 has decided to strengthen regulation globally with the introduction of the Financial Stability Board (FSB).  Actions in this front are yet to be clarified but probably are going to move slowly.  The US has outlined in the meantime a reform of regulatory framework that will probably steer much discussion and has already attracted much opposition but it seems that this is central to Obama’s administration agenda.  What I really find interesting in the discussion regarding averting financial crises are two points:

The notion of “Too big to fail” is under increased skepticism.  For years there was a theorem that when a company was too big somehow it wouldn’t fail. Probably there was the assumption that there was too much wisdom possessed within in, too many repercussions from a possible fallout.  At least the second was proved to be right with the Lehman bankruptcy but what people come to focus upon now is the connection between country GDP and financial assets at risk.  That along with the notion that as a recent NY Times article put it ”banks that, in life, are global in scope, but national in death when they become wards of the taxpayers” and that had at least brought to the knees whole nations like Iceland (UK, Switzerland, Belgium where also affected).  US is much safer when it comes to this ratio but still was affected.  Hence it will be interesting to see who will be footing the bill in the future and who will be regulating and supervising.  And that gets me to the second point: supervision.  There’s a saying that I’m familiar with saying that “there’re already a lot of laws what we lack is implementation (or supervision)” I wouldn’t like to draw examples from recent fallouts but clearly supervision is key otherwise people are just window dressing.  In this respect I’ve read with interest Britain’s hesitation towards a pan-European supervisory body although it accepts common regulation.  Some cite reservation over EU bureaucrats, probably different systems but this is one very interesting story unfolding.

On a different front the tax haven status of certain countries has come under increased scrutiny creating tensions even within European Union members and leading to review of bank secrecy laws in Switzerland and Luxembourg. 

Related Articles:  European Commission unveils tough hedge fund directive, The Telegraph 29 Apr 2009, Reuters Summit-Regulatory heat turned up on hedge funds, Reuters, Tue Apr 28, 2009, UPDATE 1-Eurogroup’s Juncker: no clear way out of crisis, Reuters, Wed Apr 15, 2009, Austria, Luxembourg, Belgium escape tax blacklist, euobserver 3, April 2009, U.S. financial regulation reforms outlined, Reuters, June 15, 2009, In Britain, an Aversion to Rules From Europe, NY Times, June 17, 2009, Brown agrees to common EU rules for financial oversight, . The Times (London) (19 June, 2009), Global coordination of regulatory overhaul falls apart, . Financial Times (free content) (17 June ,2009)


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