Europe's Draft Directive

On April 29, 2009, the European Commission issued its "Directive on Alternative Investment Fund Managers," in essence a set of rules for the regulation of a broad range of alternative asset managers, the firms that manage hedge funds and similar vehicles.

At the time, the general expectation was that the rules would be enacted in some form similar to that of the draft, though with some tinkering. Pursuant to my employment, at that time I contacted some HF managers and some of the attorneys who work for them in Europe, They explained how the process works -- the draft rules would have to move through two parallel tracks toward implementation. This has the amusing name of the Lamfalussy Process, never mind now why.

One track is an executive one, so to speak -- the Council of the European Union. The other track of Lamfalussy is legislative -- approval of the Parliament.

Everyone I spoke to on this subject told me that tightening hedge fund regulations, through this draft or something more severe than this draft, would be a pretty straightforward matter in on the legislative track, because they all expected socialist victories in these elections. (These conversations were taking place in middle of May.) These were people involved in the hedge fund industry, so they weren't happy about that expectation, but it WAS their settled expectation. But they also thought the regulatory draft might run into trouble in the executive Council.

They were wrong about the legislative end. There might be any number of reasons why. Personally, I suspect they were probably right about sentiment when we spoke, but there was likely a quick shift in sentiment in late May.

The election took place over four days in early June, and they resulted in a rightward-shift of the balance of power in the EU. The situation, in terms of which parties are associated with which, is very confused and confusing, so I'll say very little about it, seeking the safety of this simplicity: the "right" may be roughly defined as consisting of those parties that are suspicious about the role of the Parliament they are joining: the "left" as those that see a need for a more activist EU, as against both separate national agendas on the one hand and global business interests on the other.

In the Czech Republic, the election saw the victory of the Civic Democrats, a group zealous of Czech sovereignty vis-a-vis the EU.

In Austria, where five years ago the EU election was a virtual dead heat, this time the People's Party -- the more rightward of the two major parties there -- won the clear victory though against a background of low turnout, and voter dissatisfaction with both major parties. The People's Party had gotten 33% of the vote in 2004, but were down to 30% this year. That wasn't as far a distance to fall though as the Socialists, who had gotten just over 33% in 2004, but just 23.5% this time.

In Portugal, the Social Democrats (PSD) defeated the Socialists. That country's Socialists, who had polled 44.5% in the 2004 EU elections, polled only 26.58% this time around. The PSD ended up first past the post with 31.68%.

And so it went. The bottom line? Anyone in Brussels looking forward to reguatory authority over hedge funds may have to settle for something less than only quite recently seemed inevitable.