Reports from Brussels suggest that discussions on a key part of the European Union’s proposed pan-European rules for hedge and private equity funds may now include a passport that would give funds from outside the EU pan-EU marketing rights.
 
The passport issue has moved into view following concessions from the French government which has strongly opposed draft legislation allowing it. The introduction of a passport remains contingent on other conditions being met and is only likely to come into effect after a transition period lasting several years. During this period a new European Securities and Markets Authority (ESMA) is to be set up and could be entrusted with administering the passport.
 

“The French Government may deny that its proposals were protectionist but viewed from London or Washington they certainly looked both protectionist and contrary to G20 commitments,” said Ronald Paterson, a partner advising on hedge funds at international law firm Eversheds. “The alternative justification that these proposals were about ensuring maximum protection for investors is unconvincing as it fails to take account of the costs to investors of achieving maximum protection.”
 

Paterson and others have welcomed the more pragmatic approach from the French but also warn about difficulties in formulating the role for ESMA in approving fund passports. Owing to this and the need for continuity, the existing private placement regimes used by hedge funds outside of the EU is expected to continue for the foreseeable future. 
 
Diplomats characterised the French move as important but short of a breakthrough. It followed a letter earlier this week from Tim Geithner, US Treasury secretary, to Christine Lagarde, French finance minister, protesting at France’s hostility to a passport for third-country fund managers. Geithner charged that excluding non-EU funds was discriminatory and contrary to commitments undertaken by the G20 group of leading economies.