Geithner warns of rift on EU regulation

Tim Geithner, US Treasury secretary, has delivered a blunt warning to the European Commission that its plans to regulate the hedge fund and private equity industries could cause a transatlantic rift by discriminating against US groups.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

A letter sent by Mr Geithner this month to Michel Barnier, Europe's internal market commissioner, makes clear that the European Union is heading for a clash with Washington if it pushes ahead with what the US – and Britain – fear could be a protectionist law.

The debate over the shape of financial regulation has reached a critical point in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Brussels. Diplomats were last night moving closer to a compromise on an overhaul that has angered the industry and worried big investors. The draft EU directive would impose tighter restrictions on hedge funds, private equity and other alternative investment funds.

If European diplomats reach agreement today, the directive will be put to EU finance ministers on Tuesday. The proposed rules will require approval by EU lawmakers.

Mr Geithner's one-page letter, sent on March 1, stresses the need for the US and Europe to work together on regulation.

Mr Geithner warns that US hedge funds, private equity groups and banks could be discriminated against if proposals to restrict the access of EU investors to funds based outside the bloc are approved.

So-called “third country” elements of the directive would force non-EU funds to comply with the new rules if they wish to market themselves in the EU.

Contentious areas also include rules on remuneration, limits on borrowing, the disclosure of sensitive information and the regime for depositaries.