Madoff Fraud Prompts EU to Review Fund Rules Enforcement - Madoff Fraud

Madoff Prompts EU to Review Fund Rules Enforcement
By John Rega

Jan. 14 (Bloomberg) -- The European Union is reviewing how mutual-fund rules are enforced around the 27-country bloc as losses from the alleged fraud of U.S. money manager Bernard Madoff triggered disputes in Europe.

The European Commission is evaluating how governments implement rules requiring EU-regulated funds to safeguard client assets, Oliver Drewes, a spokesman in Brussels, said today. A fund is “liable for losses due to failure to perform its duties or improper performance,” he said in an e-mail.

The Madoff case, which regulators say may have cost French investors more than 500 million euros ($662 million), has set off a clash between France and Luxembourg, Europe’s biggest market for EU-regulated funds. French fund manager Oddo & Cie. has also sued UBS AG, the custodian of a Luxembourg fund that invested with Madoff.

“If any weaknesses are identified they will be pursued,” said Drewes, a spokesman for EU Financial Services Commissioner Charlie McCreevy. “We will take any action necessary to protect investors.”

The commission, the EU’s executive arm, doesn’t directly enforce regulations and Drewes has said the Madoff fraud allegations are a matter for national authorities. The commission’s role is to hold governments to EU standards.

Countries that fail to implement and enforce EU rules can be taken to an EU court, which can order governments to change national laws and regulatory arrangements. The commission in November threatened to sue Italy, Greece, Portugal and the Czech Republic for failing to put in place updated rules on eligible assets for the EU-regulated funds.

Lagarde Comments

French Finance Minister Christine Lagarde complained to McCreevy this week that other countries haven’t enforced rules related to fund custodians. While she didn’t name Luxembourg, the country’s budget minister, Luc Frieden, told reporters yesterday that Luxembourg’s rules are identical to France and adequate to protect investors.

The funds at issue, called Undertakings for Collective Investment in Transferable Securities, are governed under an EU directive that dates to 1985 and was overhauled in 2001. UCITS registered in Luxembourg held 1.6 trillion euros as of the end of November, according to the country’s fund industry association.

The EU separately has agreed to another revision of the UCITS law that was proposed before the Madoff case became public. The European Parliament passed the initiative yesterday, in line with a tentative accord with EU finance ministers that Lagarde helped broker Dec. 2.

Ponzi Scheme

Nine days later, Madoff was arrested and charged in New York with securities fraud. Prosecutors and regulators said he told employees that he had lost about $50 billion in what he described as a Ponzi scheme, in which capital from new investors is funneled to previous investors, mischaracterized as investment gains.

The pending UCITS legislation, which is focused on helping funds expand and operate more efficiently, doesn’t revamp rules for custodians. If formally approved by governments, the measure would take effect in July 2011.

To contact the reporter on this story: John Rega in Brussels at jrega@bloomberg.net.

Last Updated: January 14, 2009 07:34 EST