Transparency of institutional investors European Parliament resolution of 23 September 2008 with recommendations to the Commission on transparency of institutional investors (2007/2239(INI))#ANNEX TO THE RESOLUTION: DETAILED RECOMMENDATIONS ON THE CONTENT OF THE PROPOSALS REQUESTED
Date: 2008-09-23
Institutions: Committee on Economic and Monetary Affairs, Committee on Legal Affairs, European Parliament
Subjects: drafting of EU law, financial legislation, financial market, financial services, national implementing measure








CE2010008EN.01003401.xml










14.1.2010   


EN


Official Journal of the European Union


CE 8/34





Tuesday 23 September 2008Transparency of institutional investors
P6_TA(2008)0426
European Parliament resolution of 23 September 2008 with recommendations to the Commission on transparency of institutional investors (2007/2239(INI))
2010/C 8 E/07

The European Parliament,
having regard to the Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (1),
having regard to the Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies (2),
having regard to the Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts (3),
having regard to Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (4),
having regard to Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (‘Directive on electronic commerce’) (5),
having regard to Directive 2001/65/EC of the European Parliament and of the Council of 27 September 2001 amending Directives 78/660/EEC, 83/349/EEC and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions (6),
having regard to Directive 2001/107/EC of the European Parliament and of the Council of 21 January 2002 amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) with a view to regulating management companies and simplified prospectuses (7),
having regard to Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), with regard to investments of UCITS (8),
having regard to Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services (9),
having regard to Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) (10),
having regard to Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments (11),
having regard to Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings (12),
having regard to Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (13),
having regard to Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (14),
having regard to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (15),
having regard to Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (16) (the ‘Transparency Directive’),
having regard to Directive 2005/1/EC of the European Parliament and of the Council of 9 March 2005 amending Council Directives 73/239/EEC, 85/611/EEC, 91/675/EEC, 92/49/EEC and 93/6/EEC and Directives 94/19/EC, 98/78/EC, 2000/12/EC, 2001/34/EC, 2002/83/EC and 2002/87/EC in order to establish a new organisational structure for financial services committees (17),
having regard to Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (18),
having regard to Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (19),
having regard to Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (20),
having regard to Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (21) (the MiFID Implementing Directive),
having regard to Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions (22),
having regard to Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies (23),
having regard to its position of 25 September 2003 on the proposal for a European Parliament and Council directive on investment services and regulated markets (24),
having regard to the Study on Hedge Funds: Transparency and Conflict of Interest commissioned by its Committee on Economic and Monetary Affairs (25),
having regard to Article 192, second paragraph, of the EC Treaty,
having regard to Rules 39 and 45 of its Rules of Procedure,
having regard to the report of the Committee on Legal Affairs and the opinion of the Committee on Economic and Monetary Affairs (A6-0296/2008),






A.


whereas it is recognised that alternative investment vehicles such as hedge funds and private equity can offer new diversification benefits for asset managers, increase market liquidity and the prospects of high returns for investors, contribute to the price discovery process, risk diversification and financial integration, and improve market efficiency,










B.


whereas hedge funds and private equity are distinct investment vehicles that differ as regards the nature of investment and investment strategy,










C.


whereas EU-based hedge funds and private equity require a regulatory environment which will respect their innovative strategies in order to enable them to remain internationally competitive while mitigating the effects of potential adverse market dynamics; whereas there is a risk that product-specific legislation could be inflexible and stifle innovation,










D.


whereas hedge funds and private equity which have their management company domiciled in the EU have to comply with existing and future Community legislation; whereas non-EU-based entities also have to comply with this legislation in the context of certain activity,










E.


whereas EU onshore hedge funds, hedge fund managers and private equity are subject to existing legislation, notably concerning market abuse, and whereas they are subject to regulation indirectly through counterparties and when related investments in regulated products are sold,










F.


whereas in some Member States hedge funds and private equity are subject to national regulatory regimes and differing implementation of existing EU directives; whereas such divergent national rules give rise to the risk of regulatory fragmentation in the internal market, which may have the effect of impeding the cross-border development of this business in Europe,










G.


whereas directives seem to be the appropriate legal instruments with which to address any issues needing to be tackled in relation to hedge funds and private equity; whereas an analysis and assessment of the impact on hedge funds and private equity of legislation already in force in the Member States and in the EU should precede any directive on the transparency thereof; whereas such legislation should be the starting-point for harmonisation; and whereas existing regulations may need to be adjusted but should avoid changes that would introduce unjustifiable divergences,










H.


whereas it is recognised that one of the main issues is the need for, and analysis of, transparency and instances in which it can be enhanced; whereas transparency has several facets, such as the transparency of hedge funds and — as the case may be — private equity vis-à-vis the companies whose shares they acquire or own, as well as vis-à-vis prime brokers, institutional investors such as pension funds or banks, retail investors, business partners, regulators and authorities; whereas one of the main transparency problems lies in the relationship between a hedge fund and — as the case may be — a private equity on one hand and the companies whose shares it acquires or owns on the other hand,










I.


whereas the experience of the United States, where freedom of information legislation has been used by competitors to obtain fund investment details at a level intended for investors, is that this has compromised both the investors and the fund,










J.


whereas inconsistent implementation of the Transparency Directive has led to divergent levels of transparency throughout the EU and to high costs for investors,










K.


whereas transparency is an essential condition for investor confidence and the understanding of complex financial products, and thus contributes to the optimum functioning and stability of the financial markets; whereas transparency is an aid to, not a replacement for, due diligence,










L.


whereas the current sub-prime crisis cannot primarily be attributed to one single sector — bearing in mind that it will take time to thoroughly understand the full causes and effects of that crisis, and whereas the manifold reasons for it include inter alia:






—


rating agencies, especially the conflicts of interest of credit rating agencies and the misconception of the meaning of ratings,










—


negligent lending practices in the US housing market,










—


rapid innovation in the area of complex structured products,










—


the originate-to-distribute model and the long intermediation chain,










—


investors’ greed in seeking ever-higher returns and a short-sighted incentive structure as regards remuneration,










—


failure to observe the due diligence process,










—


the securitisation and rating agency process in the context of complex structured products, which resulted in overpricing of those products with respect to the underlying assets,










—


conflicts of interests within, and the lack of regulation of, American investment banks,














M.


whereas Community legislation provides for mechanisms such as comitology or Lamfalussy procedures which allow for flexibility in reacting to the changing business environment via implementing measures; whereas this system will improve with the instrument of delegated acts under the Treaty of Lisbon,










N.


whereas numerous different hedge funds and private equity initiatives and organisations such as the International Organization of Securities Commissions, the International Monetary Fund, the Organisation for Economic Cooperation and Development and industry bodies, including those relating to hedge funds and private equity, have established principles and codes of best practice which may complement and serve as a model for EU legislation; whereas, in addition to complying with EU legislation, companies and business associations should be encouraged to sign up to these codes on a ‘comply or explain’ basis and details of such compliance and explanations should be publicly available and properly assessed,










O.


whereas some over-the-counter (OTC) products could use more open or visible trading systems in order to increase mark-to-market valuation where possible and to give an indication of potential ownership changes; whereas a more general OTC clearing system is attractive for the purposes of supervisory oversight and risk assessment, but, in order to ensure that there is a level playing field in the global context, any new system needs to be introduced on an international basis,










P.


whereas industry-wide monitoring and reporting has a role to play in addressing public concerns and in order to understand the economic impact of private equity, and whereas there is already an obligation incumbent on private and public companies to consult their employees about matters that affect their interests; whereas no imbalance should be created between commercial disclosure required of private equity portfolio companies and that required of other private companies,










Q.


whereas product-related legislation does not seem to be the appropriate type of regulation to deal with this innovative sector,










R.


whereas a one-stop-shop website for codes of conduct would be helpful and should be established for the European Union and promoted internationally; whereas that website should include a register of those market players who comply with the codes of conduct, their disclosures, and explanations of non-compliance; whereas reasons for non-compliance can also be a learning tool,










S.


whereas attention is drawn to the need to overcome the obstacles to cross-border distribution of alternative investments by establishing a European private placement regime for institutional investors,










T.


whereas, in the context of private equity, the costs of any additional reporting requirements, in particular where these are frequent, should be justified and proportionate to the benefits flowing from them; whereas, in all contexts, better linkage is needed between remuneration packages and long-term performance,










U.


whereas no proposal in this field is in preparation,










1.


Requests the Commission to submit to Parliament, on the basis of Articles 44, 47(2) or 95 of the EC Treaty, depending on the subject matter, a legislative proposal or proposals on the transparency of hedge funds and private equity; calls for such proposal(s) to be drawn up in the light of interinstitutional discussions and following the detailed recommendations below;










2.


Confirms that the recommendations respect the principle of subsidiarity and the fundamental rights of citizens;










3.


Considers that the requested proposals have no financial implications;










4.


Instructs its President to forward this resolution and the accompanying detailed recommendations to the Commission and the Council, and to the parliaments and governments of the Member States.






(1)  OJ L 26, 31.1.1977, p. 1.

(2)  OJ L 222, 14.8.1978, p. 11.

(3)  OJ L 193, 18.7.1983, p. 1.

(4)  OJ L 372, 31.12.1986, p. 1.

(5)  OJ L 178, 17.7.2000, p. 1.

(6)  OJ L 283, 27.10.2001, p. 28.

(7)  OJ L 41, 13.2.2002, p. 20.

(8)  OJ L 41, 13.2.2002, p. 35.

(9)  OJ L 271, 9.10.2002, p. 16.

(10)  OJ L 96, 12.4.2003, p. 16.

(11)  OJ L 157, 26.6.2003, p. 38.

(12)  OJ L 178, 17.7.2003, p. 16.

(13)  OJ L 345, 31.12.2003, p. 64.

(14)  OJ L 142, 30.4.2004, p. 12.

(15)  OJ L 145, 30.4.2004, p. 1.

(16)  OJ L 390, 31.12.2004, p. 38.

(17)  OJ L 79, 24.3.2005, p. 9.

(18)  OJ L 309, 25.11.2005, p. 15.

(19)  OJ L 177, 30.6.2006, p. 1.

(20)  OJ L 177, 30.6.2006, p. 201.

(21)  OJ L 241, 2.9.2006, p. 26.

(22)  OJ L 79, 20.3.2007, p. 11.

(23)  OJ L 184, 14.7.2007, p. 17.

(24)  OJ C 77 E, 26.3.2004, p. 329.

(25)  IP/A/ECON/IC/2007-24.


Tuesday 23 September 2008ANNEX TO THE RESOLUTION:
DETAILED RECOMMENDATIONS ON THE CONTENT OF THE PROPOSALS REQUESTED
The European Parliament asks the Commission to propose a directive or directives guaranteeing a common standard of transparency and to tackle the issues mentioned below covering hedge funds and private equity, on the basis that the directive(s) should give Member States, where necessary, enough flexibility to transpose EU rules into their existing company-law systems; in parallel, it asks the Commission to encourage improvements in transparency by supporting and monitoring the evolution of self-regulation already introduced by managers of hedge funds and private equity and their counterparties, and to encourage Member States to support these efforts through dialogue and exchange of best practice.
Taking into account the fact that there is no uniform public disclosure of sovereign wealth funds (SWFs), the European Parliament welcomes the initiative of the International Monetary Fund to establish a working group to draft an international code of conduct for SWFs, and believes that such a code of conduct would go some way to demystifying SWF activities; it calls on the Commission to take part in that process.


On hedge funds and private equity


The European Parliament asks the Commission to submit the appropriate legislative proposals by way of review of the existing acquis communautaire affecting the various types of investors and counterparties, together with an impact assessment and with the involvement of the industries concerned, to explore the possibility of differentiating between hedge funds, private equity and other investors and to adapt or establish rules providing for the clear disclosure and timely communication of relevant and material information so as to facilitate high-quality decision-making and transparent communication between investors and the company management as well as between investors and other counterparties; where proposals already exist they should be implemented accordingly; it invites the Commission to explore ways of enhancing the visibility and understanding of risk, as distinct from creditworthiness; attention should be paid to the question whether existing and future directives and transparency measures are not undermined by excessive disclaimers in contracts.
The new legislation should require shareholders to notify issuers of the proportion of their voting rights resulting from an acquisition or disposal of shares where that proportion reaches, exceeds or falls below the specific thresholds starting with 3 % instead of 5 %, as mentioned in Directive 2004/109/EC; it should also oblige hedge funds and private equity, as far as those categories of investors can be differentiated from others, to disclose and explain — vis-à-vis the companies whose shares they acquire or own, retail and institutional investors, prime brokers and supervisors — their investment policy and associated risks.
These proposals should be based on an examination of the existing Community legislation, carried out with a view to ascertaining the extent to which the existing rules on transparency can be applied to the specific situation of hedge funds and private equity.
With a view to the abovementioned legislative proposals, the Commission should in particular:






—


explore the possibility of contract terms, to 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;










—


investigate the issue of money laundering in the context of hedge funds and private equity;










—


explore possibilities of harmonising rules and recommendations for hedge funds and — as the case may be — private equity to register and identify shareholders beyond a certain proportion, as well as to disclose their strategies and intentions — bearing in mind that an overflow of information should be avoided;










—


explore the need for, and ways of, obliging intermediaries to enable the original shareholders to participate actively in voting at general meetings of shareholders and to make sure that their voting instructions are respected by proxy-holders, as well as to ensure that voting policies of identified shareholders are disclosed;










—


establish, together with the industry, a code of best practice on how to rebalance the current structure of corporate governance with a view to reinforcing long-term orientation and discouraging financial and other incentives for short-term excessive risk-taking and irresponsible behaviour;










—


establish rules providing for full transparency of managers’ remuneration systems, including stock options, through formal approval by the general meeting of the company's shareholders.






On hedge funds specifically


The European Parliament asks the Commission to establish rules that enhance the transparency of voting policies of hedge funds, on the basis that the addressees of Community rules should be the managers of such funds; such rules could also include a system of EU-wide shareholder identification; where proposals already exist they should be implemented accordingly.
With a view to the abovementioned legislative proposal(s), the Commission should in particular:






—


investigate the effects of securities lending and voting on borrowed shares, having regard to better regulation principles;










—


examine whether reporting requirements should also apply to cooperation agreements between several shareholders and to indirect acquisitions of voting rights via option arrangements.






On private equity specifically


The European Parliament asks the Commission to propose rules that forbid investors to ‘plunder’ companies (so called ‘asset stripping’) and thus misuse their 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; moreover, the Commission should explore common rules to guarantee the capital maintenance of companies; in parallel, the European Parliament also asks the Commission to examine whether the Member States have put in place measures to counteract asset stripping.
With a view to the abovementioned legislative proposal(s), the Commission should examine ways of addressing the issues arising when banks lend huge amounts of money to acquirers, including private equity, and then disclaim any responsibility whatsoever as to the purpose for which that money is used or the provenance of the money used to repay the loan, bearing in mind that these points ultimately remain the responsibility of the debtor and that capital requirements for comparable risks must be the same across the entire financial system.
The European Parliament also asks the Commission to examine whether the Transfers of Undertakings Directive (1) needs to be adjusted to the specific situation of leveraged buy-outs.


(1)  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 (OJ L 82, 22.3.2001, p. 16).