The financial crisis has revealed the origin of a fragile financial system to excessive too exposed to risk by investors and with an inadequate management of this risk. Further to Ecofin's mandate, the Parliament has now given its approval in plenary session to the Directive which seeks to regulate this situation and protect both investors and the financial system of this type of situation.

The European Parliament has adopted on 11 November the first EU directive to regulate investment funds at high risk, such as hedge funds or venture capital. The rule will still need the approval of the Council and Member States will then have two years to transpose it into their national law, by January 2013.

This new rules for hedge funds, for which the Ecofin gave a specific mandate for negotiations between Parliament and Council in May 2010, lays down obligations for depositaries, a European register and minimum capital and information requirements as well as introducing a "passport" which will allow to trade these funds throughout the Union without the need to adapt to 27 different national systems.

Thanks to Parliament, strong information and disclosure requirements are to be imposed on private equity investors, particularly regarding information for shareholders, employees and their representatives on the planned strategy for the company.

During negotiations, the two priorities of the Parliament have been strengthening economic stability and improve security for investors. The new rules will require investors to inform regulators of their activities and imposes a minimum capital to avoid bankruptcy of the funds and thus enhance investor protection. In addition, registration will be introduced as a requirement for big investors at EU level. This was a bone of contention between Parliament and some Member States, with Parliament pushing for a marketing passport to be granted to non-EU players.  Parliament allayed these Member States' fears by proposing the provisions now in the text whereby AIF and AIF managers will obtain passports only if the non-EU country they are located in meets minimum regulatory standards and has agreements in place with Member States to allow information sharing.

Furthermore, these rules will also limit the compensations of fund managers in order to avoid excessive risk, and introduces provisions to deter private equity investors from attempting to take control of a company solely in order to make a quick profit, a practice known as asset stripping. Neither of these two measures was included in the proposal from the Commission and have been introduced at Parliament's initiative.

Also, depositary liability has been increased in comparison to the initial positions of Council and the Commission to prevent further Madoff-style scandals.  The directive requires that if a depositary legally delegates its tasks to others, it must provide a contract which allows the fund or the fund manager to claim damages against the entity to which the tasks are delegated.