A leaked draft of the European Commission’s proposed hedge fund directive was harshly criticized on Monday by a number of members of the European Parliament. The draft indicates that the European Commission intends to focus regulation on the managers of such funds, not on the funds themselves.

The draft directive faces particularly strong opposition from the Party of European Socialists, one of the European Parliament’s largest voting blocs. The Party criticized the plan in a letter to European Commission President Jose Manuel Barroso, arguing that it is full of “loopholes” and questioning its effectiveness. Among the Party’s specific complaints were the following:

  • The funds themselves would not be regulated or supervised;
  • Funds with less than €250 million would be exempted from regulation under a de minimus exception;
  • There are no capital or liquidity requirements expected from funds;
  • Transparency, taxation and naked short selling are not addressed; and
  • There is no restriction providing that institutional investors may only invest in compliant funds.

The Party further complained that Barroso failed to meet the goals established at the G-20 summit in London, claiming that the leaked draft will only satisfy the financial industry and others interested in minimal regulation. Poul Nyrup Rasmussen, President of the Party of European Socialists, threatened to campaign on the issue in advance of the upcoming June parliamentary elections if the perceived shortcomings were not addressed by the Commission. A formal draft of the proposed directive is scheduled to be published next week.