PRINT THIS PAGE The threat of further regulation14/05/2008. Source: SJ Berwin. Simon Witney 
As was made clear last week at SJ Berwin's debate on transparency and disclosure in UK private equity, the British private equity industry has responded well to calls for greater openness - the reaction to Sir David Walker's proposals is as good as he could have hoped. Although clearly not the only reason that private equity has receded from the headlines (and the agenda of British politicians), Walker's pragmatic, 'principles based' recommendations have helped to stave off calls for more black letter law, and may now be emulated in several other European countries. Walker's early successes are good news for the industry, because a knee jerk reaction to last year's furore could have had damaging consequences for private equity, and for the European economy, according to Simon Witney of SJ Berwin. But there is no cause for complacency. There can be no doubt that the media and politicians will return to the subject in the UK, and in Brussels the debate not only continues, but is becoming more politicised.
Last month saw the publication of two draft reports by the European Parliament relating to private equity - which, once they reach their final form, will need to be responded to by the Commission, probably in the very late autumn. These draft reports include some alarming and dangerous proposals and also urge the Commission to provide a legislative response.
The first report, which was initially debated in March at a hearing at which the EVCA was invited to participate, is a draft issued by German MEP and member of Merkel's Christian Democrats, Klaus-Heiner Lehne. Whilst it acknowledges the need for a regulatory environment which is "sufficiently flexible to allow for the innovative strategies of the industry", it says that such flexibility is best maintained by directives from Brussels being transposed into the existing company law frameworks of member states. More concerning for those that favour a self-regulatory system are Lehne's assertions that such systems are not a substitute for legislation but simply "good models for regulators". Recommendations include the disclosure of firms' investment policies and associated risks, the notification of issuers when a certain percentage of share capital is acquired, and standardised contractual terms for alternative investments.
The other report comes from Poul Nyrup Rasmussen, a Danish MEP and former Prime Minister, and a well-known private equity sceptic. This report is more comprehensive and wide-ranging than Lehne's. It deals with a number of current economic topics - from financial stability, through transparency, to "excessive debt". In many ways the report's transparency recommendations echo those of the Walker Guidelines. However, recommendations as to capital adequacy requirements for firms, risk calculations and the establishment of an EU Public Credit Rating Agency go far further. Again a legislative response is sought, setting out the disclosure requirements for fund managers and their funds, and including the establishment of a European supervisory body to cover all financial sectors.
Despite the views of some European Parliamentarians, which are not universally shared, the current Commission is also known to be resistant to further regulation, given existing national legislative frameworks. For example, when Charlie McCreevy, European Commissioner for Internal Market and Services, spoke in February about the Commission's view of the industry he advocated a 'light touch' approach, and said that he had not yet seen any obvious sign of market failure at a European level. However one word of caution was sounded: to prevent legislative intervention, he said, self-regulation must be seen to be working. National regulators will be resistant too. The UK's Financial Services Authority, for instance, recently reviewed private equity and re-affirmed its own light touch approach to regulation of the sector.
Given that these proposals are still open to intense debate, they are not likely to see the full light of day in their current form. But those who think that political pressure has receded would be well advised to read the European Parliament reports, and it is important that the industry gives a clear and robust response to them.SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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