Financial Regulatory Forum

By Svea Herbst-Bayliss and Matthew Goldstein

BOSTON/NEW YORK, June 25 (Reuters) – It appears Wall Street investment banks can stay in the highly-profitable hedge fund business after all.

An overhaul of financial regulations hammered-out by U.S. lawmakers after weeks of negotiation would permit Wall Street banks to continue to manage and sponsor hedge funds along with private equity funds, according to lawyers and Wall Street officials familiar with the massive bill.

For months Wall Street bankers and hedge fund managers have worried that the legislation, which could be signed into law by President Obama within two weeks, would prohibit investment banks from running hedge funds and possibly force them to sell these often very profitable businesses.

But the version of the bill agreed to by lawmakers on Friday morning would not force the draconian changes sought by some critics of the financial industry, said sources familiar with the bill.

Still, Wall Street is not quite ready to celebrate.

That’s because a final language of the financial regulatory reform bill in not yet public and must still be voted on by Senate and the House of Representatives before going to Obama.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Greensboro, Alabama, May 31 (Reuters) – As an investment strategy, making private equity and hedge fund managers rich is a probable loser. As a tax policy, it is a guaranteed one.

The U.S. House of Representatives passed a bill last week that would raise the taxes that private equity and other investment managers pay on “carried interest,” their share of the takings when a holding such as a startup or turnaround is sold at a profit.

Carried interest is currently taxed at the lower capital gains rate, meaning that many private equity barons can pay less in tax than the people who clean their swimming pools or mind their children. This is patently unjust. Carried interest is compensation for labor, earned income in other words, rather than gains on capital that might be lost.

By Huw Jones and John O’Donnell

LONDON/BRUSSELS, May 19 (Reuters) – The European Union, struggling to calm volatile financial markets, intends to curb speculation in government debt but remains very unlikely to imitate harsh steps announced by Germany.

The difficulty of enforcing any prohibition on speculative trade, and concern that any ban might backfire by depriving investors of ways to hedge their risks, mean many governments are reluctant to try to introduce regional or global bans.

Instead, the EU is likely to focus on increasing transparency in the markets — forcing traders to disclose more information about their activities, so that regulators can see risks emerging — and on introducing limits to the size of derivatives positions which traders can hold.

May 19 (Reuters) – The European Union’s 27 countries and the bloc’s parliament agreed to tighten controls of hedge funds and private equity this week.

Negotiations will now begin between the two to hammer out a final version of the law to regulate the secretive industries by 2012.

Although some issues remain contentious, such as how the new law will treat foreign funds, both parliament and European countries have committed to set up broad controls on a sector many suspect exacerbated the financial crisis.

In the aftermath of the Goldman Sachs fraud charges, Propel Capital said it was delaying the Canadian IPO of its Propel Multi-Strategy Fund – until recently called the Propel Paulson Diversified Fund. Propel says it’s just a delay, but there is no indication when the offering might be resurrected.  Westlaw Business Currents, a Thomson Reuters product, looks at the issues. 

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    FRANKFURT, April 12 (Reuters) – U.S. banking supervisors could get indirect powers to ban proprietary trading by banks even if the “Volcker rule” is not in the financial reform bill, a banking consultant with close contact to decision-makers said. (more…)

BRUSSELS, April 7 (Reuters) – The European Union (EU) is embarking on an overhaul of financial services that politicians hope will send bankers back to their roots of no-frills lending to households and business.

Michel Barnier is the EU commissioner in charge of the shake up on regulations ranging from curbs on banker pay to a clampdown on speculators betting on government debt.

Here is a guide to the overhaul:

* One of Barnier’s priorities is writing a rule book for trading derivatives, a financial instrument whose value is linked to an asset such as a government bond or currency.

BRUSSELS, March 5 (Reuters) – The European Union’s executive body said a meeting on Friday with supervisors and investment industry officials has helped shape a planned law on derivatives due later in the year.

The meeting was held amid pressure from France, Germany and Luxembourg to crack down on what they see as hedge funds using credit default swaps to push Greek government bonds and the euro lower.

“It was a useful meeting and it will feed into preparation for rules on derivatives that we will propose in the Summer,” a spokeswoman for EU Internal Market Commissioner, Michel Barnier, said.

By Huw Jones

LONDON, March 5 (Reuters) – European governments are exploring ways to curb trade in credit default swaps but may have to settle for requiring greater disclosure rather than banning certain forms of speculation.

France, Germany and Luxembourg say “speculators” — typically code for hedge funds — used CDS contracts to bet on Greece defaulting and send the euro lower.

Faced with such political pressure, the European Commission has called national supervisors, credit rating agencies, hedge funds and investors to meetings in Brussels on Friday to help it decide if European Union action is needed in the CDS market.

By Laurence Fletcher

LONDON, March 2 (Reuters) – Hedge fund investors could be left out of pocket as managers conjure up shortcuts to earn once again the lucrative bonuses based on performance fees that were a feature of the industry before the credit crisis.

Despite 20 percent returns last year, big losses in 2008 mean that between a half and two-thirds of hedge funds are below high-water marks — performance levels they must hit before claiming a 20-percent fee on a fund’s profits.

This could persuade more managers to move to new firms where they can start earning these bumper fees straight away, forcing clients to decide whether the quality of the managers justifies the additional cost and disruption needed to follow them.