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Transnational Hedge Fund Regulation

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Abstract

After the global financial crisis, systemic risk regulation has taken centre stage. Many consider hedge funds a potential threat to financial stability. Regulating hedge funds, however, is necessarily a transnational challenge because no national government alone can effectively control the systemic risks affecting its economy. This article takes the example of hedge funds for a case study of emerging transnational regulation. After an introduction to hedge funds and the reasons for regulating them, it considers the possible elements of a transnational regulatory regime for hedge funds: transnational industry self-regulation, including such induced by the government, regulatory competition between government regulators, and harmonisation of government regulation. The main conclusions are: self-regulation cannot substitute fully for government regulation in controlling systemic risks caused by hedge funds. Equally, regulatory competition tends to undercut systemic risk regulation. Effective transnational regulation can only be accomplished through harmonisation of government regulation. Such harmonisation is likely to arise if regulation is needed to control systemic risk in global financial markets.

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References

  1. Coining the term ‘transnational law’ with this meaning is usually credited to P.C. Jessup, Transnational Law (New Haven, Yale University Press 1956) p. 2 (‘I shall use … the term “transnational law” to include all law which regulates actions or events that transcend national frontiers. Both public and private international law are included, as are other rules which do not wholly fit into such standard categories’ [emphasis added]). See, generally, G.-P. Calliess and P. Zumbansen, Rough Consensus and Running Code: A Theory of Transnational Private Law (Oxford, Hart 2010); C. Scott, ‘“Transnational Law” as Proto-Concept: Three Conceptions’, 10 German Law Journal (2009) p. 859; C. Tietje and K. Nowrot, ‘Laying Conceptual Ghosts of the Past to Rest: The Rise of Philip C. Jessup’s “Transnational Law” in the Regulatory Governance of the International Economic System’, in C. Tietje, et al., eds., Philip C. Jessup’s Transnational Law Revisited — On the Occasion of the 50th Anniversary of Its Publication (Halle, Beiträge zum Transnationalen Wirtschaftsrecht 2006) p. 17.

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  4. The estimates for 2000, 2005 and 2007–2009 have been taken from International Financial Services London, Hedge Funds (2010), Chart 1, available at: <http://www.ifsl.org.uk>. The more conservative estimates from Absolut Research, supra n. 3, are $491 bn (2000), $1,105 bn (2005), $1,868 bn (2007) and $1,407 bn (2008). See infra n. 129 on the limitations of the available data.

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  25. For 1992, individuals were reported to own four fifths of hedge fund assets, International Financial Services London, supra n. 3, at p. 1.

  26. International Financial Services London, supra n. 4, Chart 10 (relying on data from the Hennessee Group).

  27. See, e.g., T.A. Paredes, ‘On the Decision to Regulate Hedge Funds: The SEC’s Regulatory Philosophy, Style, and Mission’, University of Illinois Law Review (2006) p. 975, at pp. 990–998, particularly at pp. 992–994 (detailing the due diligence exercised by hedge fund investors); J. Danielson, et al., ‘Highwaymen or Heroes: Should Hedge Funds Be Regulated?’, 1 Journal of Financial Stability (2006) p. 522, at pp. 527–528. But see, e.g., R. Sklar, ‘Hedges or Thickets: Protecting Investors from Hedge Fund Managers’ Conflicts of Interest’, 77 Fordham Law Review (2009) p. 3251 (arguing for investor protection specifically against conflicts of interest).

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  30. Around 2000, hedge funds were able to extract money from mutual funds by purchasing and redeeming fund shares based on an information advantage (‘market timing’ and ‘late trading’ practices), see R.A. Booth, ‘Who Should Recover What for Late Trading and Market Timing?’, 1 Journal of Business and Technology Law (2006) p. 101; P.G. Mahoney, ‘Manager-Investor Conflicts in Mutual Funds’, 18 Journal of Economic Perspectives (2004) p. 161, at pp. 173–176; E. Zitzewitz, ‘Who Cares about Shareholders? Arbitrage-Proofing Mutual Funds’, 19 The Journal of Law, Economics and Organization (2003) p. 245.

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  31. Goldman Sachs has been accused of letting the hedge fund Paulson & Co. select a portfolio of mortgage-backed securities for a ‘synthetic collateralised debt obligation’ to be sold to investors in order to offer Paulson & Co. a short position in the securities, but without disclosing this arrangement to investors, see SEC v. Goldman Sachs (Complaint of 16 April 16 2010), available at: <http://www.sec.gov/litigation/litreleases/2010/lr21489.htm>.

  32. Hedge funds have been implicated in concealing their true shareholdings (‘hidden ownership’) and effectively buying voting rights (‘empty voting’), see H.T.C. Hu and B. Black, ‘The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership’, 79 Southern California Law Review (2006) p. 811. For a recent survey of the empirical evidence on hedge fund activism, see A. Brav, et al., ‘Hedge Fund Activism: A Review’, 4 Foundations and Trends in Finance (2010) p. 185.

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  38. European Central Bank (ECB), Large EU Banks’ Exposure to Hedge Funds (Frankfurt 2005), at pp. 18 and 31, available at: <http://www.ecb.int/pub/pdf/other/largeeubanksexposureshedgefunds200511en.pdf>; US Government Accountability Office (GAO), Hedge Funds, Regulators and Market Participants Are Taking Steps to Strengthen Market Discipline, But Continued Attention Is Needed (Washington 2008), at pp. 30–31, available at: <http://www.gao.gov/products/GAO-08-200>.

  39. For a succinct description, see ECB, supra n. 40, at p. 19.

  40. For details, see infra text accompanying nn. 101–103.

  41. As noted above in the text accompanying n. 16, the original idea of a hedge fund is to shield (‘hedge’) the fund’s position against those risks that the managers cannot assess any better than the market. Unfortunately, there is no perfect hedge. In addition, there is a risk that the mispricing continues longer than anticipated or even widens before it is ultimately resolved, which has come to be known as ‘noise trader risk’. For noise trader risk in the context of financing trades to exploit mispricings, see, e.g., A. Shleifer and R.W. Vishny, ‘The Limits of Arbitrage’, 52 Journal of Finance (1997) p. 35.

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  43. Most hedge funds permit monthly or quarterly redemptions, cf. the data in Baquero and Verbeek, supra n. 44, at pp. 19–20 and 62; Garbaravicius and Dierick, supra n. 17, at pp. 33–35.

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  46. Reliable data is scarce. According to industry sources in 2005, hedge funds accounted for 40–50% (!) of daily turnover at the New York and London Stock Exchanges. As to less liquid assets, their share in the volume of US distressed debt trading in 2004 has been estimated at 82%. See Credit Suisse First Boston, Hedge Funds and Investment Banks (2005), at pp. 4–5 (also providing additional estimates).

  47. See M.K. Brunnermeier and L.H. Pedersen, ‘Predatory Trading’, 60 Journal of Finance (2005) p. 1825, particularly at pp. 1841–1846 (presenting a model of forced liquidations being anticipated by other traders and discussing the systemic consequences).

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  57. Professor Stout develops a similar argument for procedural duties under the business judgment rule, see L.A. Stout, ‘In Praise of Procedure: An Economic and Behavioral Defense of Smith v. Van Gorkom and the Business Judgment Rule’, 96 Northwestern University Law Review (2002) p. 675, at pp. 688–691; see also A. Engert, Die Haftung für die drittschädigende Kreditgewährung [Liability for lending to the detriment of third parties] (Beck, Munich 2005), at pp. 186–187.

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  65. See also Paredes, supra n. 29, at pp. 1025–1034 (suggesting that the US Securities and Exchange Commission (SEC) regulate hedge funds by experimenting with default rules and ‘soft law’ best practices).

  66. The seminal contribution is I. Ayres and J. Braithwaite, Responsive Regulation, Transcending the Deregulation Debate (New York, Oxford University Press 1992); for an exposition of the broader notion of ‘new governance’, see O. Lobel, ‘The Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Legal Thought’, 89 Minnesota Law Review (2004) p. 262.

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  67. For the notion of relational contracting see, seminally, S. Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’, 28 American Sociological Review (1963) p. 55, particularly at pp. 62–65 (explaining the advantages of relational contracting over legal contract enforcement).

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  68. For an instructive analysis of ‘principles-based’ securities regulation, see C.L. Ford, ‘New Governance, Compliance, and Principles-Based Securities Regulation’, 45 American Business Law Journal (2008) p. 1. The Basel II framework for bank capital adequacy is an example of most ambitious reliance on individual firms’ governance. It allows banks to use their own risk models to determine the amount of required capital. See R.F. Weber, ‘New Governance, Financial Regulation, and Challenges to Legitimacy: The Example of the Internal Models Approach to Capital Adequacy Regulation’, forthcoming in 62 Administrative Law Review (2010). The UK’s FSA has explicitly endorsed a principles-based approach, FSA, Principles-Based Regulation: Focusing on the Outcomes That Matter (2007), available at: <http://www.fsa.gov.uk>. More recently, it has switched to the term ‘outcome-based’ to signal its more proactive and confrontational line, see FSA, Business Plan 2010/11 (2010), at pp. 9–10, available at: <http://www.fsa.gov.uk>; see also FSA, supra n. 55, at pp. 86–91 (summarising the FSA’s earlier and current approaches).

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  69. See Ayres and Braithwaite, supra n. 70, at pp. 21–35 (emphasising non-economic motives); Ford, supra n. 72, at pp. 28–30.

  70. See infra subsection 4.1.3 regarding the difficulty of enforcing self-regulatory standards.

  71. See Ayres and Braithwaite, supra n. 70, at pp. 35–47.

  72. Managed Funds Association, Sound Practices for Hedge Fund Managers (2009), available at: <http://www.managedfunds.org/mfas-sound-practices-for-hedge-fund-managers.asp>.

  73. See PWG, Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management (1999), at p. 37, available at: <http://www.ustreas.gov/press/releases/reports/hedgfund.pdf>. (‘A group of hedge funds should draft and publish a set of sound practices for their risk management and internal controls.’); Managed Funds Association, Sound Practices for Hedge Fund Managers (2000), at p. 1.

  74. A description is provided by J.H. Gatsik, ‘Hedge Funds: The Ultimate Game of Liar’s Poker’, 35 Suffolk University Law Review (2001) p. 591, at pp. 617–618. See also P. Robotti, Private Governance of Financial Markets: The US Regulatory Regime on Hedge Funds (Institut Barcelona d’Estudis Internacionals Working Paper 2009/20, 2009), at pp. 13–16, available at: <http://ssrn.com/abstract=1475210>. (also discussing a second contemporaneous bill).

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  75. See supra text before n. 4.

  76. PWG, Agreement among PWG and US Agency Principals on Principles and Guidelines Regarding Private Pools of Capital (Washington, D.C., 2007) Preamble, available at: <http://www.treas.gov/press/releases/hp272.htm>.

  77. Ibid., at paras. 1-2.

  78. Ibid., at paras. 8.2, 9., 9.2 and 9.3 (sound practices for managers) and 7.5 and 10.1 (sound practices for creditors and counterparties).

  79. See US Department of the Treasury, PWG Announces Private Sector Groups to Address Market Issues for Private Pools of Capital (Washington, D.C., Press Release, 2007), available at: <http://www.ustreas.gov/press/releases/hp575.htm>.

  80. Asset Managers’ Committee, Best Practices for the Hedge Fund Industry (2009), available at: <http://www.amaicmte.org/Asset.aspx>.

  81. AIMA, Guide to Sound Practices for European Hedge Fund Managers (2002). See also the 2007 update: AIMA, Guide to Sound Practices for European Hedge Fund Managers (2007), available at: <http://www.aima.org/en/knowledge_centre/sound-practices/guides-to-sound-practices. cfm>.

  82. Due reference is made, however, to the UK as the dominant jurisdiction, AIMA, supra n. 88 (2002), at p. 2; ibid., at p. 10. Another truly transnational piece of self-regulation for asset managers (but not confined to hedge funds) is Chartered Financial Analysts Institute Centre for Market Integrity, Asset Manager Code of Professional Conduct, 2nd edn. (2009), available at: <https://www.cfainstitute.org/ethics/codes/assetmanager/Pages/index.aspx>.

  83. AIMA credits Goldman Sachs, a major prime broker, with supporting the development of the Guide, see AIMA, supra n. 88 (2002), at p. 1; ibid., at p. 7.

  84. Hedge Fund Working Group, Hedge Fund Standards: Final Report (2008), at p. 29, available at: <http://www.hfsb.org>.

  85. See Hedge Fund Working Group, supra n. 91, at p. 28 (‘Given the FSA’s increasing scrutiny … for the industry simply to do nothing must give rise to a risk that the FSA (or any other regulator) might at some future date impose additional regulatory requirements that the industry considers unpalatable.’).

  86. FSA, Hedge Funds: A Discussion of Risk and Regulatory Engagement (Feedback Statement 06/2, 2006), available at: <http://www.fsa.gov.uk>, at p. 28.

  87. See FSA, Principles-Based Regulation, supra n. 72, at p. 11.

  88. Confirmation has the effect of creating a safe harbour against FSA enforcement (referred to as ‘sturdy breakwater’), see generally the explanation in FSA, FSA Confirmation of Industry Guidance (Policy Statement 07/16, 2007), at pp. 8–9, available at: <http://www.fsa.gov.uk>. (see also Annex 2 on the criteria for granting confirmation); FSA Handbook DEPP 6.2.1(4) (regarding penalties); FSA Enforcement Guide 2.28-2.30.

  89. H. Sants, The Regulator’s View of Hedge Funds and Hedge Fund Standards (speech at the Hedge 2008 Conference, 22 October 2008), available at: <http://www.fsa.gov.uk>.

  90. PWG, supra n. 80, at p. 36.

  91. Ibid., at p. 36.

  92. CRMPG, Improving Counterparty Risk Management Practices (1999), available at: <http://financialservices.house.gov/banking/62499crm.pdf>.

  93. CRMPG, Toward Greater Financial Stability: A Private Sector Perspective (2005), at p. 149, available at: <http://www.crmpolicygroup.org>. A third report appeared in 2008: CRMPG, Containing Systemic Risk: The Road to Reform (2008), available at: <http://www.crmpolicygroup.org>. In 2008, the Institute of International Finance (IIF) — a worldwide industry association of banks — likewise promulgated industry standards for risk management in response to the global financial crisis, IIF, Final Report of the IIF Committee on Market Best Practices: Principles of Conduct and Best Practice Recommendations (2008), available at: <http://www.iif.com>.

  94. See GAO, supra n. 40, at pp. 30–32.

  95. See International Financial Services, Hedge Funds (2007), Table 2, available at: <http://www.ifsl.org.uk>. (showing the ten largest prime brokers in 2006 with a combined market share of 84%).

  96. See GAO, supra n. 40, at p. 31; House of Lords, Directive on Alternative Investment Fund Managers, Volume II: Evidence (London, HL Paper 48-II, 2010), at p. 174 (testimony by Deutsche Bank representative A. Byrne on prime broker losses during the financial crisis of 2008/2009).

  97. See supra n. 86 and Investors’ Committee, Principles and Best Practices for Hedge Fund Investors (2009), available at: <http://www.amaicmte.org/Investor.aspx>. See also Asset Managers’ Committee, supra n. 87, at pp. iii and iv (‘The I[nvestors’] C[ommittee] recommends in its best practices that investors use the A[sset] M[anagers’] C[ommittee] best practices as a guideline in conducting due diligence reviews of hedge funds’, ‘What is critical is that managers are able to explain to investors how they have implemented and adopted the practices in this Report’).

  98. See Hedge Fund Working Group, supra n. 91, at pp. 11 and 26–27 (emphasising pressure from both investors and industry peers).

  99. Ibid., at p. 25.

  100. Ibid., at p. 26.

  101. See Kinetic Partners, UK Hedge Funds Uncommitted to Adopting Best Practice Standards (Press Release, 17 November 2008), available at: <http://www.kinetic-partners.com/public/downloads/KP%20HFSB%20press%20release.pdf>. (alleging that less than 10% of UK hedge fund managers were ready to endorse the Standards).

  102. Hedge Fund Standards Board, HFSB Expands International Investor Role and Signs Up Bluecrest and Winton (Press Release, 11 February 2010) (56 signatories managing $215 bn in assets as compared to European hedge fund assets of $350 bn).

  103. See Hedge Fund Working Group, supra n. 91, at pp. 100–102 (providing an opinion on the effect of the Standards on liability under UK and US law).

  104. On conflicts of interest in valuation see, e.g., UK Hedge Fund Standard 5, Hedge Fund Working Group, supra n. 91, at pp. 47–49.

  105. See generally S. Shavell, ‘Liability for Harm versus Regulation of Safety’, 13 Journal of Legal Studies (1984) p. 357, at pp. 360–361; S. Shavell, ‘The Judgment Proof Problem’, 6 International Review of Law and Economics (1986) p. 45.

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  106. More specifically, uncertainty with regard to the applicable negligence standard can easily lead to overdeterrence if the amount of liability is large, see generally R. Craswell and J.E. Calfee, ‘Deterrence and Uncertain Legal Standards’, 2 Journal of Law, Economics and Organization (1986) p. 279. Against this backdrop and given the rarity of litigation, it is exceedingly difficult for courts to set the standard of care so as to avoid over- or underdeterrence.

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  107. Professors Pistor and Xu observe that regulators, through their enforcement activity, specify legal requirements that would otherwise remain too vague (‘incomplete’) to guide the behaviour of firms, K. Pistor and C. Xu, ‘Incomplete Law’, 35 New York University Journal of International Law and Politics (2003) p. 931, particularly at pp. 949–951; see also the broader comparison of regulation and court adjudication in A. Shleifer, Efficient Regulation (NBER Working Paper No. 15651, 2010).

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  108. For the challenging task of enforcement under principles-based regulation, see only Ford, supra n. 72, at pp. 32–35.

  109. See Hedge Fund Working Group, supra n. 91, at pp. 5 and 29.

  110. See supra text accompanying nn. 61–63.

  111. For a model of underenforcement by a self-regulatory organisation, albeit in the different context of preventing opportunism in contractual relationships, see P.M. DeMarzo, et al., ‘Self-Regulation and Government Oversight’, 72 Review of Economic Studies (2005) p. 687.

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  112. See IOSCO, Hedge Funds Oversight, Final Report (2009), at paras. 50–51, available at: <http://www.iosco.org>. (emphasising the need for convergence); FSA, supra n. 93, at p. 28 (recognising international coordination as a ‘significant challenge’); Hedge Fund Working Group, supra n. 91, at pp. 32–34 (discussing the prospect of convergence and the relation to AIMA and its ‘Sound Practices’). As a first step towards coordination, the relevant organisations offer the Hedge Fund Matrix, a synopsis of industry standards, available at: <http://www.hedgefundmatrix.com>.

  113. ‘Arbitrage’ in this sense appears to have been used for the first time by M. de la Porte, La science des négocians et teneurs de livres, ou instruction générale pour tout ce qui se pratique dans les comptoirs des négocians, tant pour les affaires de banque, que pour les marchandises, & chez les financiers pour les comptes (Rouen, P. Machuel et J. Racine 1782), at p. 530.

  114. See also supra text accompanying n. 13 for the conventional meaning of ‘arbitrage’.

  115. Cf. F. Partnoy, ‘Financial Derivatives and the Costs of Regulatory Arbitrage’, 22 Journal of Corporation Law (1997) p. 211, at p. 227 (‘Regulatory arbitrage consists of those financial transactions designed specifically to reduce costs or capture profit opportunities created by differential regulations or laws.’). The term seems to have evolved before the 1990s. An early occurrence is M.G. Warren, ‘Global Harmonization of Securities Laws: The Achievements of the European Communities’, 31 Harvard International Law Journal (1990) p. 185, at pp. 189–190.

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  116. For a definition in this vein, see V. Fleischer, Regulatory Arbitrage (University of Colorado Law Legal Studies Research Paper No. 10-11, 2010), at p. 3 (‘Regulatory arbitrage exploits the gap between the economic substance of a transaction and its legal or regulatory treatment’).

  117. For a comprehensive analysis, see Fleischer, supra n. 125, at pp. 18–49.

  118. Such as custodians, fund administrators, accountants, and transfer agents, see, e.g., AIMA and Assirt Pty. Ltd., Hedge Fund Booklet (2002), at p. 7, available at: <http://www.aima.org/en/knowledge_centre/education/bibliography.cfm>.

  119. See, e.g., for the US: § 3(c)(1), (7) Investment Company Act 1940 (exempting issuers with no more than 100 investors or dedicated only to ‘qualified purchasers’); for the UK: §§ 14, 21–24 Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (exempting marketing to ‘investment professionals’ and certain high net worth or sophisticated investors); for the Cayman Islands: § 4(3) Mutual Funds Law (2009 Revision) (exempting funds with a minimum investment amount of CI$80,000 under condition of a registration and payment of a fee). For comparative overviews of hedge fund regulation generally, see E. Wymeersch, The Regulation of Private Equity, Hedge Funds and State Funds (Universiteit Gent Financial Law Institute Working Paper 2010–06, 2010), at pp. 4–13, available at: <http://www.law.ugent.be/fli/wps/>; PricewaterhouseCoopers, Changing Rules: The Regulation, Taxation and Distribution of Hedge Funds around the Globe (2009), available at: <http://www.pwc.com/hedgefunds>; IOSCO, Hedge Funds Oversight, Consultation Report (2009), Annex 5, available at:<http://www.iosco.org>; Schmies, supra n. 24, at pp. 201–369 (for the US, Luxembourg, Ireland and Germany); M. Lehmann, ‘Die Regulierung und Überwachung von Hedgefonds als internationales Zuständigkeitsproblem’ [The regulation and supervision of hedge funds as a problem of international jurisdiction], 27 Zeitschrift für Wirtschaftsrecht (2007) p. 1889, at pp. 1890–1895 (for the US, the UK and Germany); R. Wilhelmi, ‘Möglichkeiten und Grenzen der wirtschaftsrechtlichen Regulierung von Hedgefonds’ [Possibilities and limitations of hedge fund regulation under economic law], 62 Wertpapier-Mitteilungen (2008) p. 861, at pp. 863–867 (for the US, the UK and Germany).

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  120. International Financial Services London, supra n. 4, at p. 2. Other important offshore players include the British Virgin Islands (7%) and Bermuda (5%). Within the US, Delaware has captured 27% of all hedge funds. Europe is home to 5% of the world’s hedge funds with Luxembourg and Ireland being the leading domiciles. Numbers based on assets under management are essentially similar, see International Financial Services London, Hedge Funds (2005) (reporting 49% of assets under management in offshore jurisdictions for 2004), available at: <http://www.ifsl.org.uk>. See also Garbaravicius and Dierick, supra n. 17, at pp. 11–14 (reporting market shares over time). It should be noted that data is available only from private providers who rely on voluntary reporting by hedge funds, see ibid., at pp. 11–13; D. Cumming and N. Dai, A Law and Finance Analysis of Hedge Funds (2008), at pp. 15–16, available at: <http://ssrn.com/abstract=946298>; Fung and Hsieh, supra n. 18, at pp. 4–6.

  121. An essential tax feature is that the hedge fund can be formed as a corporation without being subject to corporate income tax. A flexible regulatory environment also seems to matter, cf. G.T. Lins, et al., Hedge Funds and Other Private Funds: Regulation and Compliance (St. Paul, West 2009), at § 9:2; specifically on the pertinent tax issues, see E. Cauble, Harvard, Hedge Funds, and Tax Havens: Reforming the Tax Treatment of Investment Income Earned by Tax-Exempt Entities (Illinois Program in Law and Economics Working Paper No. LE10-004, 2010), at pp. 9–10, available at: <http://ssrn.com/abstract=1571559>. (setting out the tax advantages for US tax-exempt investors); EU Commission, Report of the European Alternative Investment Group. Managing, Servicing and Marketing Hedge Funds in Europe (2006), at p. 15, available at: <http://ec.europa.eu/internal_market/investment/docs/other_docs/reports/equity_en.pdf>; AIMA, AIMA’s Offshore Alternative Fund Directors’ Guide (2008), at pp. 5 and 33–35, available at: <http://www.aima.org/en/knowledge_centre/sound-practices/guides-to-sound-practices.cfm>.

  122. For the UK: §§ 21, 22 Financial Services and Markets Act 2000 in conjunction with §§ 6, 7 Schedule 2 (managing investments and investment advice as regulated activities); FSA, Hedge Funds and the FSA (Discussion Paper 16, 2002), at para. 4.20, available at: <http://www.fsa.gov.uk>. Arguably, under Arts. 5(1) and 4(1) no. 2, Annex I Section A paras. (4) and (5) Markets in Financial Instruments Directive 2004/39/EC, Member States of the EU must already require hedge fund managers to register. On current EU proposals to regulate hedge fund managers, see text accompanying nn. 193–209 infra.

  123. For Switzerland, see Art. 13(2)(f), (4) Kollektivanlagengesetz [Collective Investment Act] (mandatory licensing only for managers of Swiss funds). For the US, see § 203(b)(3) Investment Advisers Act 1940 before the amendments of July 2010 discussed in nn. 191 and 192 infra (exempting ‘investment advisers’ with less than 15 clients and no registered investment company). The SEC’s attempt to restrict the ‘private adviser exemption’ and impose a registration requirement was struck down by the D.C. Circuit Court in Goldstein v. SEC, 451 F.3d 873, 884 (D.C. Cir. 2006); see A.S. Fraser, ‘The SEC’s Ineffective Move toward Greater Regulation of Offshore Hedge Funds: The Failure of the Hedge Fund Registration Requirement’, 92 Cornell Law Review (2007) p. 795, at pp. 807–811; Robotti, supra n. 81, at pp. 18–23. Hedge fund managers were, however, subject to SEC anti-fraud enforcement, see Rule 206(4)-8 Investment Advisers Act 1940.

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  124. An exception often obtains in jurisdictions with regulated hedge funds, which commonly require oversight of the manager. An example is Switzerland, see supra n. 132.

  125. House of Lords, supra n. 103, at p. 173 (testimony of A. Byrne, Deutsche Bank); International Financial Services London, supra n. 4, at pp. 3–4. London, by far the largest European hedge fund manager location, is estimated to also host 90% of European prime brokerage activity, EU Commission, supra n. 130, at p. 14.

  126. See International Financial Services London, supra n. 4, at pp. 2–3; see also Garbaravicius and Dierick, supra n. 17, at pp. 14–15. On data limitations, see supra n. 129.

  127. For London’s market share in European prime brokerage services, see supra n. 134. Ireland and Luxembourg have become important locations for fund administrators, see EU Commission, supra n. 130, at p. 14. Many jurisdictions prescribe the use of local service providers for regulated hedge funds, see the overview in PricewaterhouseCoopers, supra n. 128, at pp. 78–85.

  128. Competition in the market for prime brokerage is fierce, see, e.g., ECB, supra n. 40, at pp. 33–34; Brandon, supra n. 39, at pp. 22–23.

  129. See the overview in PricewaterhouseCoopers, supra 128, at pp. 78–85. But see text accompanying n. 20 for the trend towards ‘UCITS hedge funds’.

  130. See n. 128 and accompanying text.

  131. 29 C.F.R. § 2510.3–101(a)(2), (f).

  132. ERISA § 3(21) = 29 USC. § 1002(21). For a sketch of ERISA fiduciary duties, see Lins, et al., supra n. 130, at § 4:52.

  133. ERISA §§ 405(d), 402(c)(3), 3(38) = 29 USC. §§ 1105(d), 1102(c)(3), 1002(38).

  134. For strategies to accomplish this, including the use of feeder funds, see Lins, et al., supra n. 130, at § 4:52. But see SEC, Implications of the Growth of Hedge Funds, Staff Report to the Securities and Exchange Commission (Washington, 2003) (alleging that some hedge funds willingly assume ERISA duties), at p. 28.

  135. § 3(2) lit. b Anlageverordnung (AnlV) [Investment Regulation] restricts hedge fund investment to 5% of tied assets. However, §§ 3(2) lit. c and 2(2) AnlV provide for an additional quota of 5% (to be raised to 10% with permission) for unspecified investments. See generally, M. Weitzel and S. Zeller, ‘Hedgefonds-Investitionen von Versicherungsunternehmen nach der neuen Anlageverordnung’ [Hedge fund investments by insurance companies under the new Investment Regulation], 60 Wertpapier-Mitteilungen (2006) p. 358.

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  136. _§ 2(1) no. 15–17 AnlV.

  137. See, e.g., SEC, supra n. 143, at p. 22 (noting voluntary registration of hedge fund advisers in order to attract investors); Paredes, supra n. 29, at pp. 993–994 (explaining voluntary registration as ‘marketing tool’ and citing evidence from a 2004 survey that 15% of institutional investors invest only with registered managers); Shadab, supra n. 25, at p. 303; Hennessee Group, Hennessee Group LLC Releases 13th Annual Hedge Fund Manager Survey (Press Release, 1 May 2007), available at: <http://www.hennesseegroup.com/releases/release20070501.html>. (reporting that 87% of US managers in survey were registered with at least one regulator); PricewaterhouseCoopers, Luxembourg Hedge Funds (2008), at pp. 6 and 14, available at: <http://www.pwc.com/lu/en/hedge-funds/publications.jhtml>. (noting the attractiveness of regulated hedge funds).

  138. See generally, e.g., M.E. Levine and J.L. Forrence, ‘Regulatory Capture, Public Interest, and the Public Agenda: Toward a Synthesis’, 6 Journal of Law, Economics and Organization (1990) p. 167; J.J. Laffont and J. Tirole, ‘The Politics of Government Decision Making. A Theory of Regulatory Capture’, 106 Quarterly Journal of Economics (1991) p. 1089.

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  139. See, e.g., the Luxembourg taxe d’abonnement of 0.1% of assets under management on ‘specialised investment funds’, Art. 68(1) Loi du 13 février 2007 relative aux fonds d’investissement spécialisés [Law of 13 February 2007 regarding specialised investment funds]. Revenues from the tax (including that on mutual funds) amounted to around €594 mn or about 5% of total tax revenues, see Comité pour le Développement de la Place Financière, Etude d’impact de l’industrie financière sur l’économie luxembourgeoise [Study on the impact of the financial industry on the Luxembourg economy] (2009), at p. 52, available at: <http://www.cssf.lu/uploads/media/Etude_impact_2008.pdf>.

  140. For the influence of small interest groups on regulation, see seminally G.J. Stigler, ‘The Theory of Economic Regulation’, 2 Bell Journal of Economics and Management Science (1971) p. 3, at pp. 13–14.

  141. Cayman Islands Government Ministry of Finance, The Cayman Islands ‘At-A-Glance’ (2010), available at: <http://www.caymanfinance.gov.ky>.

  142. See Comité pour le Développement de la Place Financière, supra n. 148, at pp. 20 and 30. If one includes estimated indirect effects, the percentages rise to 32% (2008) and 43% (2007), ibid., at p. 45.

  143. For the financial industry in general, Switzerland would be another example with a financial services share of 12.0% in the country’s gross domestic product, Eidgenössisches Finanzdepartement [Federal Department of Finance], Finanzstandort Schweiz Kennzahlen [Financial Centre Switzerland Key Figures] (2009), available at: <http://www.efd.admin.ch>. However, Switzerland’s market share in hedge fund management is a paltry 4% of the European market, International Financial Services London, supra n. 4, Chart 7.

  144. International Financial Services London, Economic Contribution of UK Financial Services 2009 (2009), available at: <http://www.ifsl.org.uk>, Chart 2.

  145. See A.C. Pritchard, London As Delaware? (Michigan Law School John M. Olin Law and Economics Working Paper No. 09-008, 2009), at pp. 29–30, available at: <http://ssrn.com/abstract=1407610>.

  146. See text accompanying n. 135.

  147. International Financial Services London, supra n. 4, at p. 2.

  148. For the UK, see FSA, supra n. 93, at para 1.1 (‘We are committed to playing our part to ensure the UK remains an attractive location for hedge fund managers to be based’); FSA, Hedge Funds: A Discussion of Risk and Regulatory Engagement (Discussion Paper 05/4, 2005), at para. 8.2, available at: <http://www.fsa.gov.uk>. (recognising the ‘highly mobile … nature of the hedge fund industry’ and the potential for regulatory arbitrage); HM Revenue & Customs, Statement of Practice 1/01 as revised on 20 July 2007, Treatment of Investment Managers and Their Overseas Clients (2007), at para. 2, available at: <http://www.hmrc.gov.uk>. (noting the importance of the ‘Investment Manager Exemption’ for the UK’s attractiveness). For the US, see J.R. Oppold, ‘The Changing Landscape of Hedge Fund Regulation: Current Concerns and a Principle-Based Approach’, 10 University of Pennsylvania Journal of Business & Employment Law (2008) p. 833, at p. 874 (arguing that the US’ reliance on self-regulation reflects a concern for US competitiveness).

  149. See generally the conclusions of the G-20 summits on the financial crisis, which were held in the US (Washington, D.C., November 2008; Pittsburgh, September 2009) and in the UK (London, April 2009), available at: <http://www.g20.org/pub_communiques.aspx>; Pritchard, supra n. 154, at pp. 24–33 (describing the UK and US reactions to the financial crisis as ‘populist retribution’).

  150. Because the hedge fund industry has little or no power in ‘non-captured’ states, their politics will pay little attention to the interests of managers and investors. This need not distort incentives for regulation: management fees and investment returns from hedge funds reflect losses by other traders, which implies that they cannot be equated with social gains. The social benefits created by hedge funds consist of enhanced price efficiency and liquidity in financial markets. For a concise explanation of this point see I. Ayres and S. Choi, ‘Internalizing Outsider Trading’, 101 Michigan Law Review (2002) p. 313, at pp. 328–336.

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  151. G8 Summit Heiligendamm, Growth and Responsibility in the World Economy (2007), at p. 3, available at: <http://www.g-8.de/Webs/G8/EN/G8Summit/SummitDocuments/summit-documents.html>. (‘we reaffirm the need to be vigilant’).

  152. See Tett, supra n. 54, at pp. 188–192 (describing a meeting convened by the German finance ministry on hedge fund regulation in Washington, D.C.).

  153. With regard to financial regulation, the debate centres around the law governing stock and bond issuers, see, e.g., R. Romano, ‘Empowering Investors: A Market Approach to Securities Regulation’, 107 Yale Law Review (1998) p. 2359; C. Brummer, ‘Stock Exchanges and the New Markets for Securities Laws’, 75 University of Chicago Law Review (2008) p. 1435; L. Enriques and T. Tröger, ‘Issuer Choice in Europe’, 67 Cambridge Law Journal (2008) p. 521 (offering a European perspective). For a broader overview touching also on the regulation of financial institutions, see H. Jackson, ‘Centralization, Competition, and Privatization in Financial Regulation’, 2 Theoretical Inquiries in Law (2001) article 4.

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  154. See, e.g., PricewaterhouseCoopers, supra n. 146, at p. 6 (praising the Luxembourg regulator for being ‘very proactive in the development of regulated investment products’).

  155. See supra n. 146 and accompanying text. Regulation can be valuable even for sophisticated investors for the reasons mentioned above in the text around n. 116.

  156. See A.P. Morriss, Changing the Rules of the Game: Offshore Financial Centers, Regulatory Competition, & Financial Crises (Illinois Law and Economics Research Papers Series Research Paper No. LE09-031, 2009), available at: <http://ssrn.com/abstract=1501402>. (arguing that offshore financial centres offer not less regulation than onshore jurisdictions but regulation attuned to the needs of sophisticated investors); PricewaterhouseCoopers, supra n. 146, at p. 6 (praising Luxembourg’s ‘[s]trong culture of investor protection’); S. Gray, ‘Bidding to Capitalise on EU Alternatives Regulation’, Hedgeweek Special Report Luxembourg (2009) p. 3 (‘solid yet pragmatic approach adopted by the [Luxembourg] industry regulator’).

  157. B. Liang and H. Park, Share Restrictions, Liquidity Premium, and Offshore Hedge Funds (2008), available at: <http://ssrn.com/abstract=967788>.

  158. Another study attempts to identify regulatory arbitrage by examining the relation between different hedge fund strategies and certain regulatory features, such as minimum capitalisation rules for hedge fund managers. This rather rough empirical approach does not yield a discernible pattern, see D. Cumming and S. Johan, ‘Hedge Fund Forum Shopping’, 10 University of Pennsylvania Journal of Business and Employment Law (2008) p. 783, at pp. 807–829.

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  159. See supra n. 116 and accompanying text.

  160. More precisely, because regulatory arbitrage offers a way to opt out of rules that were meant to be mandatory, regulators can no longer prevent an adverse selection of ‘bad’ contractual terms or arrangements to the detriment of less knowledgeable (or less rational) parties.

  161. See generally H.-W. Sinn, ‘The Selection Principle and Market Failure in Systems Competition’, 66 Journal of Public Economics (1997) p. 247 (arguing that regulatory competition reintroduces the market failure that regulation was intended to cure). For a general analysis of regulatory jurisdiction as a property rights problem, see J.P. Trachtman, ‘Regulatory Competition and Regulatory Jurisdiction’, 2000 Journal of International Economic Law, p. 331.

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  162. See C. Brummer, Post-American Securities Regulation (2010), at pp. 43–45, available at: <http://ssrn.com/abstract=1441508>. (arguing that the cross-border effects of systemic events make systemic risk regulation a widely shared concern).

  163. See J.R. Macey, ‘Regulatory Globalization As a Response to Regulatory Competition’, 52 Emory Law Journal (2003) p. 1353, particularly at pp. 1358–1361 (examining regulators’ willingness to give up independence in exchange for cooperation); E. Colombatto and J.R. Macey, ‘A Public Choice Model of International Economic Cooperation and the Decline of the Nation State’, 18 Cardozo Law Review (1996) p. 925, at pp. 933–935, 943–944 and 951–954 (analysing the Basel Accord and insider trading laws).

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  164. See Macey, supra n. 172, at p. 1358–1367 (‘regulatory cartellisation’). Proponents of regulatory competition must thus be critical of regulatory harmonisation, see, e.g., R. Romano, ‘The Need for Competition in International Securities Regulation’, 2 Theoretical Inquiries in Law (2001), at pp. 10–11.

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  165. See Brummer, supra n. 171, at pp. 45–65 (providing an in-depth analysis of regulatory ‘clubs’ with exclusive membership); see also K. Raustiala, ‘The Architecture of International Cooperation: Transgovernmental Networks and the Future of International Law’, 43 Virginia Journal of International Law (2002) p. 1, at pp. 62–70 (using the economic concept of network effects to explain why regulators adopt a prevailing regulatory model).

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  166. An influential literature analyses organisations of regulators as ‘transnational’ or ‘transgovernmental’ ‘regulatory networks’. These networks are believed to foster coordinated responses to global challenges as specialised regulators develop formal and informal links. One key assumption seems to be that professional ties lead regulators to pursue the transnational public interest rather than (exclusively) the national interest of their respective jurisdictions, see, e.g., A.M. Slaughter, A New World Order (Princeton, Princeton University Press 2004) particularly at pp. 12–14 (describing the activity of regulators as a ‘disaggregation’ of the state); D. Zaring, ‘Informal Procedure, Hard and Soft, in International Administration’, 5 Chicago Journal of International Law (2005) p. 547; Raustiala, supra n. 175; for more sceptical assessments, see P.-H. Verdier, ‘Transnational Regulatory Networks and Their Limits’, 34 Yale Journal of International Law (2009) p. 113 (highlighting the conflicting national interests); Brummer, supra n. 171, at pp. 23–35 (citing empirical evidence on lack of effective coordination); for a normative critique, see K. Anderson, ‘Squaring the Circle? Reconciling Sovereignty and Global Governance through Global Government Networks’, 118 Harvard Law Review (2005) p. 1255, at pp. 1283–1310.

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  167. The Basel Committee consists of central banks and bank regulators (if different from central banks) of 27 major jurisdictions, see <http://www.bis.org/bcbs/index.htm>. (last visited 1 May 2010).

  168. The London G20 summit in April 2009 announced to re-establish the Financial Stability Forum as ‘Financial Stability Board’ with a broader membership base and an extended mandate, see <http://www.financialstabilityboard.org>. (last visited 1 May 2010).

  169. See PWG, supra n. 80, at p. 26 (invoking the principle ‘market discipline of risk taking is the rule and government regulation is the exception’) and p. 42 (dismissing direct regulation of hedge funds ‘at this time’ because of concerns for regulatory arbitrage, cost and effectiveness); see also text accompanying nn. 78–87 on the self-regulation approach adopted in the US.

  170. See Garbaravicius and Dierick, supra n. 17, at p. 15 (reporting a decline in the global share of US-managed hedge fund assets from about 65% in 1999 to around 53% in 2004).

  171. See Financial Stability Forum, Report of the Working Group on Highly Leveraged Institutions (2000), at paras. 116–119, available at: <http://www.financialstabilityboard.org/list/fsb_publications/tid_75/index.htm>. (discussing but dismissing direct regulation ‘at this stage’); IOSCO, Hedge Funds and Other Highly Leveraged Institutions, Report of the Technical Committee (1999), at para. 124, available at: <http://www.iosco.org>. (‘At the present time, IOSCO is not recommending that HLIs be subject to direct regulation’). The Basel Committee did not take a position at all and confined itself to the regulation of banks as counterparties, see Basel Committee on Banking Supervision, Sound Practices for Banks’ Interactions with Highly Leveraged Institutions (1999), available at: <http://www.bis.org/publ/bcbs45.htm>.

  172. IOSCO, supra n. 181, at paras. 101–102; see also the discussion ibid. in the preceding paragraphs.

  173. The difference in emphasis may reflect pressure from non-US regulators or divergent views among US regulators, of which only the SEC and the CFTC were represented. In 2002, not long after IOSCO’s report, the SEC undertook a study to explore the need for more hedge fund oversight, see SEC, supra n. 143.

  174. See ECB, supra n. 40, at p. 7; Garbaravicius and Dierick, supra n. 17, at p. 5. Germany moved hedge fund regulation to the top of the G8 agenda, see text accompanying n. 160 and Financial Stability Forum, Update of the FSF Report on Highly Leveraged Institutions (2007), available at: <http://www.financialstabilityboard.org/publications/r_0705.htm>. (report commissioned by the G8 finance ministers); see also IOSCO, supra n. 9, at p. 11 (but with a focus on investor protection).

  175. Cf. the recommendations given by the Financial Stability Forum, supra n. 184, at pp. 5–7.

  176. What Is the G-20, available at: <http://www.g20.org/about_what_is_g20.aspx>. (last visited 1 May 2010).

  177. G-20, Declaration: Summit on Financial Markets and the World Economy (Washington, D.C., 15 November 2008), at para. 9, available at: <http://www.g20.org/pub_communiques.aspx>.

  178. See G-20, The Global Plan for Recovery and Reform (Communiqué, London, 2 April 2009), at para. 15, available at: <http://www.g20.org/pub_communiques.aspx>; more specifically, G-20, Declaration on Strengthening the Financial System (Annex 1 to Communiqué, London, 2 April 2009), at p. 3, available at: <http://www.g20.org/pub_communiques.aspx>.

  179. Interestingly, IOSCO seems not to have anticipated the G-20 interest in hedge funds. Hedge fund regulation did not appear among the issues discussed in an open letter three days before the first crisis summit on 15 November 2008, available at: <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD282.pdf>. (last visited 1 May 2010).

  180. IOSCO, supra n. 121, at paras. 23–27.

  181. See § 403(2) Dodd-Frank Wall Street Reform and Consumer Protection Act (hereafter WSRCPA), H.R. 4173 (eliminating the ‘private adviser exemption’ in the Investment Advisers Act of 1940, cf. supra n. 132); § 404 WSRCPA (authorising the SEC to require advisers of ‘private funds’ to collect and provide systemic-risk relevant information). The term ‘private fund’ includes asset pools other than hedge funds, such as private equity funds; but see the exemptions in §§ 407–409 WSRCPA.

  182. More specifically, see § 402(a) WSRCPA. See also the general exemption for private fund advisers with less than $150 mn in § 408 WSRCPA. Before the amendment, the ‘private adviser exemption’ (see supra n. 132) also served to limit the extraterritorial reach of the Investment Advisers Act, cf. P.M. Rosenblum, ‘Extraterritorial Application of the Advisers Act’, in C.E. Kirsch, ed., Investment Adviser Regulation, 2nd edn. (New York, Practising Law Institute 2009) § 35.

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  183. See the final report by the Committee on Economic and Monetary Affairs (Rasmussen Report) adopted by the European Parliament on 23 September 2008, 2007/2238(INI), available at: <http://www.europarl.europa.eu/oeil/FindByProcnum.do?lang=en&procnum=INI/2007/2238>.

  184. As late as in September 2008, the competent European Commissioner McCreevy opposed additional regulation, see Speech/08/451, available at: <http://europa.eu/rapid/>.

  185. See Arts. 1, 2 and 3(1)(a), (b) AIFM Directive Compromise Proposal by the Council Presidency of 11 March 2010 (hereafter AIFM Directive Council Proposal), 2009/0064 (COD), which the Council adopted on 18 May 2010. The following text only concerns the provisions relating to hedge funds. For the UCITS Directive, see supra n. 19.

  186. As to the right to manage funds established in other Member States and third countries, see Arts. 34 and 34a ibid.

  187. See Art. 34b ibid. As a condition for admission by Member States, Art. 34(1)(b) ibid. requires cooperation arrangements with the third country’s regulator.

  188. See Art. 33(1), (8) and Art. 35 as contained in the AIFM Directive Commission Proposal and the AIFM Directive Report of the European Parliament Committee on Economic and Monetary Affairs of 17 May 2010 (hereafter AIFM Directive Parliament Proposal), A7-0171/2010.

  189. See Art. 39 AIFM Directive Commission Proposal and Article 39a AIFM Directive Parliament Proposal (the latter proposal leaving the decision to the new European Securities and Market Authority, to be established as of 1 January 2011).

  190. See Art. 35 AIFM Directive Council Proposal (requiring compliance with European disclosure rules and certain rules aimed at private equity funds as a condition for admission to a Member State’s market).

  191. Art. 39(2) and (3) AIFM Directive Commission Proposal would effectively authorise the Commission to bargain on behalf of the EU by stipulating general criteria for equivalence and reciprocity as well as determining whether they are met by a third country.

  192. See ‘Hedge Funds Face Tighter Controls’, WSJ Europe (19 May 2010) p. 5. Expectedly, the UK also takes issue with restrictions for third-country funds run by European managers, which directly affects the UK hedge fund industry.

  193. For the British concern, see, generally, House of Lords, Directive on Alternative Investment Fund Managers, Volume I: Report (London, HL Paper 48-I, 2010), at paras. 142–162, particularly para. 142 (citing a member of the European Parliament saying that the AIFM Directive ‘ends up being both fortress Europe and prison Europe in that funds cannot get in and money cannot get out’). The US has already expressed criticism, see ‘EU Rejects US Claims of Hedge Funds Regulation Rift’, EurActiv (15 March 2010), available at: <http://www.euractiv.com/en/financial-services/eu-rejects-geithner-s-claims-regulation-rift-news-330649> (reporting a letter by US Secretary of Treasury T. Geithner). For a response by the French and German finance ministers, see C. Lagarde and W. Schäuble, ‘Europe’s Financial Reform Road Map’, WSJ Europe (28 April 2010) p. 14.

  194. See ‘Hedge Funds Face Uncertain Future after EU Votes’, EurActiv (18 May 2010), available at: <http://www.euractiv.com/en/financial-services/hedge-funds-face-uncertain-future-after-EU-votesnews-494251>. (citing an unnamed British source: ‘[O]thers just don’t have a dog in the fight’).

  195. The International Financial Reporting Standards (IFRS) promulgated by the International Accounting Standards Board (IASB) have become a highly successful competitor to US Generally Accepted Accounting Principles, so much so that the US is considering their adoption, see SEC, ‘Commission Statement in Support of Convergence and Global Accounting Standards, Release Nos. 33-9109; 34-61578’, 75 Federal Register (2010) p. 9494, at pp. 9496–9497; see also L.M. Smith, ‘Are International Financial Reporting Standards (IFRS) an Unstoppable Juggernaut for US and Global Financial Reporting?’, 10 Cambridge Business Review (2008) p. 25 (summarising the dissemination of IFRS); A. Fleckner, ‘FASB and IASB: Dependence Despite Independence’, 3 Virginia Law & Business Review (2008) p. 275, at pp. 287–290 (describing the political influence of the EU on the IASB).

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  196. See L.E. Ribstein, ‘Bubble Laws’, 40 Houston Law Review (2003) p. 77; for a (brief) historical account regarding securities regulation, see S. Banner, ‘What Causes New Securities Regulation? 300 Years of Evidence’, 75 Washington University Law Quarterly (1997) p. 849; see also R. Higgs, Crisis and Leviathan, Critical Episodes in the Growth of American Government (Oxford, Oxford University Press 1987).

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  197. See High-Level Group on Financial Supervision in the EU, Report (2009), at para. 86, available at: <http://ec.europa.eu/internal_market/finances/committees/index_en.htm>. (‘did not play a major role’); IOSCO, supra n. 128, at para. 86, and IOSCO, supra n. 121, at para. 14 (‘recent financial crisis is not actually a “hedge fund crisis”’). See also the pointed opening statement by the former EU Commissioner McCreevy, Opening Speech (EU Commission, 26 February 2009), Speech/09/80 (‘[E]asy scapegoats for more deep-rooted problems’).

  198. See supra subsection 4.1.1.

  199. The argument is familiar from the debate on charter competition in the US where many attribute the leading role of Delaware to its expert judiciary and bar, see, e.g., R. Romano, ‘Law As a Product’, 1 Journal of Law, Economics and Organization (1985) p. 225, at p. 280; M. Klausner, ‘Corporations, Corporate Law, and Networks of Contracts’, 81 Virginia Law Review (1995) p. 757, at pp. 842–847; L.A. Bebchuk and A. Hamdani, ‘Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters’, 112 Yale Law Journal (2002) p. 553, at pp. 586–589.

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  200. See supra subsection 4.1.1.

  201. A fear that other Member States may be too generous in applying common standards seems to be motivating the resistance to including an EU passport for third-country managers in the AIFM Directive, see ‘Hedge Funds Face Tighter Controls’, WSJ Europe (19 May 2010) p. 5 (reporting venue shopping concerns of the governments of France and Germany). Many expect Luxembourg to benefit from the AIFM Directive because of its experience in adapting EU financial regulation to industry needs, see M. Baranowski, ‘A Potential Winner from the Crisis’, Hedgeweek Special Report Luxembourg (2009) p. 5, at p. 8. On the enforcement problem in regulatory harmonisation, see generally Jackson, supra n. 162, at p. 17; Verdier, supra n. 176, at pp. 125 and 137–138 (discussing the example of the ‘Basel’ international standards for bank capital adequacy).

  202. This may be an important role for ‘transnational regulatory networks’, see supra n. 176. The Committee of European Securities Regulators (CESR) in the EU has an explicit responsibility for reviewing regulatory practices in the Member States, see Art. 4(3), sentence 3, CESR Charter.

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    Andreas Engert LL.M. (Professor)

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Engert, A. Transnational Hedge Fund Regulation. Eur Bus Org Law Rev 11, 329–378 (2010). https://doi.org/10.1017/S1566752910300036

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