Funds Face ‘Honesty’ Rule in Expanded EU Law, Group Says

The European Commission has added rules on honesty, client-asset segregation and conflicts of interest to measures to regulate hedge funds, an industry group said.

The commission, the European Union’s executive arm, has added a provision saying fund managers must act with “honesty, integrity and independence of mind to effectively assess and challenge” senior management decisions, according to the Alternative Investment Management Association.

Fund managers also face tougher rules on protecting client assets, use of debt and conflicts of interest in rules that differ from advice from the European Securities and Markets Authority to the commission, AIMA said.

The draft rules are part of the commission’s work to implement a hedge-fund law from 2011. The legislation, known as the Alternative Investment Fund Managers directive, sets rules on management and information disclosure for funds across the 27-nation region.

While “nobody is disputing the need and the obligation to act honestly,” the underlying hedge-fund law already contains measures that impose that obligation, Andrew Baker, AIMA’s chief executive officer, said in an e-mailed statement today.

“The concept of independence of mind and other similar provisions appear to be copied from” other commission proposals for regulating markets, Baker said. “This is a good illustration of the types of changes which have been introduced above and beyond ESMA advice without making the text any clearer.”

The group warned earlier this month that the rules could harm asset managers. Michel Barnier, the EU’s financial services chief, responded by saying he won’t be “intimidated” by what he described as “rearguard lobbying.”

Chantal Hughes, Barnier’s spokeswoman, declined to comment further today.

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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