This is an author version of the contribution published on:
Journal of European Integration,
2011, 33(3), pp. 251-266. doi: 10.1080/07036337.2010.546844
The definitive version is available at:
http://www.tandfonline.com/doi/abs/10.1080/07036337.2010.546844? journalCode=geui20#.UxYhmaXnXG4
Getting Hedge Funds Regulation into the EU Agenda: The Constraints of Agenda Dynamics
Manuela Moschella
Abstract
Why did the issue of hedge fund regulation enter the formal EU agenda in response to the subprime crisis? Building on existing literature on agenda dynamics in the EU, this paper argues that framing and issue expansion were key in getting the issue into the formal agenda, and that issue expansion does not necessarily imply public mobilization. Going beyond existing scholarship, however, the paper also shows that framing processes are closely associated with the characteristics of the issue for debate and that issue expansion is intimately related to the arrangements governing the specific issue domain. In other words, whereas framing and issue expansion are traditionally conceived as a strategic choice or as the outcome of an exogenous event, this paper shows that framing may also be shaped by the nature of the issue at stake and that issue expansion may result from the unintended consequences of previous governance choices.
The financial crisis that started in the summer 2007 in the small segment of the US subprime market but quickly became global in scope has triggered a variety of reform proposals to improve the functioning of domestic and international financial markets, making them more resilient to shocks. The European Union has been one of the most active actors in the reform efforts that followed the crisis, repeatedly calling for a regulatory framework that covers ‘all financial markets, products and participants’ (Bryant 2009; EU Commission 2009b). Among other measures, the EU institutions have developed a number of proposals to centralize supervision of financial firms at the EU level (de Laroisiere 2009) and to tighten controls on derivative trading, tax havens and credit rating agencies (EU Commission 2009c; Quaglia 2009).
This paper focuses on one of the regulatory initiatives formulated in response to the crisis, that is to say, the proposal to regulate hedge funds managers’ activity within the EU. Specifically, the paper asks why such a regulation entered the EU policy agenda in response to the subprime crisis although the deep-seated roots of the crisis cannot be precisely traced back to hedge funds activities but lie in a long period of economic growth, low interest rates and lax financial regulation (Bank for International Settlements 2008; IMF 2009).
In answering this question, the paper draws attention to the impact of framing strategies and issue expansion processes. Specifically, the paper argues that the issue of hedge fund regulation catalyzed EU policy-making institutions’ attention because of the EU Commission’s reframing of the issue in light of the subprime crisis and because of issue expansion to the private sector. In other words, in line with the findings of existing literature (Baumgartner and Jones 1993; Schattschneider 1960), I argue that framing and issue expansion are key in getting an issue into a polity’s formal agenda, and that issue expansion does not necessarily imply public mobilization, the public being only one of many potential audiences to which conflict may be expanded to (Princen 2007). Going beyond existing explanations, however, the paper shows that the way an issue is framed is constrained by the specificities of the issue at stake, thereby escaping the full control of strategically-driven issue proponents that seek to get an issue on the agenda (Cobb, Ross, and Ross
1976). Furthermore, the paper argues and illustrates that issue expansion does not exclusively materialize as a reaction to exogenous shocks (Birkland 1998) but also results from the unintended developments of previous governance arrangements in the specific issue subsystem. In short, the paper brings to the surface two constraining factors to agenda-setting dynamics: the characteristics of the issue being debated, which constrain framing strategies, and the existing governance features in the specific issue subsystem, which constrain the process of issue-expansion.
On the one hand, the international dimension that the issue of hedge fund regulation took on in the aftermath of the subprime crisis influenced the Commission’s reframing strategy of its regulatory proposal. That is to say, the fact that regulating hedge funds became an issue of global cooperation rather than simply an issue of EU harmonization limited the range of solutions to the problem posed by the activities of hedge funds, leading the Commission to frame the proposal in terms of the G20 consensus on the topic. On the other hand, the existing institutional features of the EU financial services governance also influenced the trajectory of hedge fund regulation toward the EU formal agenda by providing the foundations for issue expansion. Indeed, issue expansion, that is to say, the activation of actors’ interest in a specific policy proposal that can lead to both support and opposition to the proposal, can take different forms. To start with, in line with most of existing literature, issue expansion can be the deliberate act of policy entrepreneurs that reach out to other groups of actors in order to build support around their preferred proposal or oppose rival proposals (for instance, Baumgartner and Jones 1993). Nevertheless, as this paper is going to show, issue expansion can also be inadvertent, that is to say, it can happen automatically without the mediation of strategic entrepreneurs. For instance, inadvertent issue expansion can take place as a result of an economic crisis or a natural disaster, when different groups of actors become aware of a specific problem (Birkland 1998). Still, as explained at greater length below, inadvertent expansion can take place as a result of the historical legacies deriving from the formal and informal governance mechanisms in a specific issue area. For instance, the paper shows that the institutionalization of private sector involvement in the issue area of financial services regulation, as a consequence of
past governance choices in 2005-6, ‘pushed’ the issue of hedge fund regulation to the private sector, although the Commission refrained from mobilizing the sector because of its likely opposition to the Commission-sponsored regulatory proposal.
To advance my argument, in the following empirical sections, I am going to trace the process that led hedge fund regulation from its initiation to formal entrance into the EU policy agenda, passing through the stages of formulation and issue expansion (Cobb, Ross, and Ross 1976; Princen and Rhinard 2006). Specifically, the paper traces the Commission’s proposals on hedge funds regulation from 2005 to the directive proposal in the spring of 2009 – in contrast, the committee process and the inter-state negotiations initiated in the late 2009 that will amend the legislation, leading to its acceptance or rejection, are left out from the picture. Focusing solely on the agenda-setting time span, the paper will bring to the surface how the Commission framed the issue over time and how the mobilization of the private sector was one of the crucial factors that led the issue of hedge fund regulation into the EU policy agenda.
In sum, the paper argues that the dynamics that led hedge funds regulation into the EU policy agenda in 2009 was sustained by the Commission’s formulation of hedge funds regulation as part of the international regulatory reform efforts, in a reflection of the international dimension of the issue, and by issue expansion to the private sector, as a result of the unintended developments of the EU financial governance. Drawing attention to the characteristics of the issue that tries to get onto the agenda and to the governance arrangements of the policy subsystem in which the issue is debated, this paper thereby calls for a research agenda that links general theories of agenda-setting with issue types (Princen 2007). Still, the paper contributes to the comparative research on agenda-setting (Albæk, Green-Pedersen, and Nielsen 2007; Baumgartner, Green-Pedersen, and Jones 2006) by introducing a cross-time comparison of agenda dynamics, such as the one exemplified by the dynamics that preceded and followed the subprime crisis.
The paper is organized as follows. In the next section, I build on the literature on the agenda-setting in the EU to develop the analytical framework used in the empirical analysis. Section 2
illustrates the early stages of the agenda-setting process in 2005-06, when the Commission started advancing the regulatory proposal and brought the private sector into the regulatory debate. Section 3 illustrates the process through which hedge fund regulation became an issue in the EU policy agenda. In the conclusions, I reflect on the empirical findings connecting them with existing hypotheses and suggesting how the findings might spur future research.
1. The EU and Agenda-Setting Dynamics
While studies on agenda setting were originally developed for the analysis of domestic settings, they have also recently advanced a number of interesting propositions regarding agenda dynamics in the EU. Among others, scholars have cast light on several political and institutional factors (Pollak 2003; Princen 2007), and on the strategies used by a variety of actors and institutions that help explain why an issue enters into the EU policy agenda (Jabko 1999; Mazey and Richardson 2001; Tallberg 2003; Wendon 1998). At the risk of simplifying what it is a variegated and complex literature, it is possible to group existing studies according to whether they support or question the rationality assumption behind agenda-setting dynamics. This assumption is all the more evident in the treatment of the stages of formulation and issue expansion, which contribute to the process that leads an issue from its initiation to entrance in the formal policy agenda.
On the one hand, the stage of formulation and issue expansion are conceived as the result of strategic choices. Specifically, building on most of the studies on agenda dynamics at the domestic level, according to which shifts in framing and social mobilization are key elements in the process through which an issue compels attention by a governmental entity (Baumgartner and Jones 1991; Cobb, Ross, and Ross 1976), several scholars working on the EU have emphasized the strategic nature of the agenda-setting process. For instance, in their attempt to systematize EU agenda-setting dynamics, Sebastian Princen and Mark Rhinard have elaborated two models in which the drivers of issue formulation and issue expansion lie in the actions of strategically-oriented actors. Indeed, both
their inside-out model (i.e. where issues emerge ‘from below’ through officials and experts) and the outside-in model (i.e. where issues arrive on the agenda ‘from above’, through heads of state in the European Council) feature issue proponents that strategically frame issues and that either contain or expand issues to selected groups in order to win support around their pet solutions. Princen (2007, p. 34) has further specified this position by concluding that the EU agenda-setting process is a highly political process, that is to say, it is ‘a strategic choice by political actors to move issues to the EU level’.
On the other hand, the rationality that is assumed to guide agenda-setting processes in the EU has been questioned. Building on the work of John Kingdon (1995), who conceives of the policy process as made up of the three independent streams of problems, policy, and politics, Nikolaos Zahadiaris (2003) has suggested an understanding of framing and issue expansion that moves beyond rational-institutionalist accounts of EU policy. Specifically, although he analyses the entire process of policy formation and not properly the process of agenda-setting, Zahadiaris has drawn attention to the non-rational conditions under which policy-making takes place: the difficulty in distinguishing between relevant and irrelevant information, unclear actors’ preferences, and severe time constraints. Under these circumstances, problem definitions, that is, framing, is often more vague than is commonly assumed and mobilization is more the result of focusing events rather than of strategic choices (see also Birkland 1998).
Despite their differences, the two groups of studies analyzed thus far share the view that framing and issue expansion are crucial factors in catalyzing policy makers’ attention, facilitating issue entrance into the formal policy agenda. Furthermore, both groups suggest that issue expansion does not necessarily entail mass mobilization because of the fragmentation of the EU public sphere and because of the limited accountability of EU institutions as compared to their domestic counterparts. Still, the complexity of the EU institutional structure, where there is no institutional hierarchy but power is diffused (Fabbrini 2010; Moser, Schnider, and Kirchgassner 2000), provides for multiple access points in the EU policy-making process (Peters 1994; 2001; Richardson 2006),
with the consequence that getting an issue into the EU agenda involves the expansion of conflict to increasingly wider circles of participants.
This paper takes stock of existing literature on EU agenda-setting processes suggesting that framing and mobilization are key in getting an issue into the agenda and that mobilization does not necessarily entail the expansion of conflict to the public. Nevertheless, the paper adds to such a literature by bringing to the surface some important constraints to framing strategies and issue expansion dynamics. Specifically, by distinguishing between the stage of framing and that of issue expansion, what this paper argues and illustrates is that room of manoeuvre that issue proponents have in framing an issue may be significantly limited by the characteristics of the issue that attempts to get into the agenda. Furthermore, issue expansion to actors and groups may be driven by the formal and informal arrangements that govern the specific issue domain rather than by the conscious strategy of issue proponents.
Indeed, not all issues are equal in agenda-setting processes (Peters 2006). Some issues appear almost automatically on the agenda – annual budget or programs that must be authorized on a frequent basis (Walker 1977). Other issues are likely to be placed quickly or slowly on the agenda depending on the social groups they affect. For instance, issues touching children are likely to be easily placed onto the agenda, while those affecting traditional pariah groups, such as drug abusers, will take much longer (Rochefort and Cobb 1994). Still, the propensity and the speed with which issues are likely to enter the agenda seem to depend on the losses they entail (Zahadiaris 2003, p. 88) and the visible harm they cause (Birkland 1998). Building on these insights, the paper draws attention to the characteristics of the issue as a variable affecting agenda-dynamics in the EU. In particular, the hypothesis is that the specificities of the issue may affect framing strategies by restricting the range of feasible options for solving a problem. In the case under investigation, the expectation is that the international dimension that the issue of hedge fund regulation acquired after the subprime crisis influenced the framing of the EU Commission. In particular, the fact that the G20 gave specific guidelines on international regulatory cooperation delimited the range of
potential solutions to the problem of hedge funds activities in the EU. In this connection, the EU Commission framed the EU regulatory proposal as a means to ensure international stability rather than simply EU harmonization. This does not mean that using the G20 consensus did not serve the strategic interest of the EU Commission to make the regulation of hedge funds acceptable among EU policy-makers. However, what the use of the G20 consensus also indicates is that the way in which the Commission framed its regulatory proposal was constrained by the international dimension that the issue had taken on over time.
Next to framing strategies, issue expansion is also constrained by the formal and informal governance arrangements that characterize the issue policy subsystem. Specifically, these arrangements may constrain the decision on issue expansion/containment and on the identity of the actors the issue should be expanded to. Following Paul Sabatier’s (1998, p. 99) definition, the policy subsystem ‘consists of actors from a variety of public and private organizations who are actively concerned with a policy problem, and who regularly seek to influence public policy in that domain’. In this connection, several policy studies have shown that the characteristics of the subsystem, including the cohesiveness of certain types of advocacy coalitions, help shape the extent of resistance to policy change and the response to external shocks (Birkland 1998; Howlett and Ramesh 2002; Williams 2009).
In the EU, for instance, policy subsystems and networks vary according to issue areas. The subsystem of environmental policy, for instance, is different from the subsystem of competition policy. They involve different actors and groups of actors as well as the dynamics of interaction among these groups vary from one subsystem to another. Furthermore, policy subsystems vary according to the institutional structure through which policy takes place. Although such differences are the most evident in the institutional features through which policy is decided, whether codecision or cooperation applies, differences also exist at the stage of agenda-setting where, for instance, consultations with relevant stakeholders are more or less institutionalized. As far as concerns the EU financial services, this policy subsystem has been increasingly characterized by the
active presence of industry representatives and by the extensive involvement of the private sector in policy-making (Mugge 2006; Quaglia and Christopoulos 2009). It also bears noting that private sector involvement in EU financial governance does not simply depend on the political willingness of EU institutions to reach out to private actors but is also prescribed in formal governance arrangements. For instance, the Lamfalussy Process is probably one of the most well-known initiatives that have institutionalized the involvement of the private sector through the use of commentaries and hearings (Lamfalussy 2001; Posner 2007; Quaglia 2008). The position that the private sector now has in the governance of EU financial services sector thereby represents a factor that has to be taken into consideration in the development of new policies and, consequently, in the introduction of new issues in the EU formal agenda.
The discussion led thus far raises a number of empirical expectations. To start with, we expect to find that the way in which an issue is (re)framed occurs within the limitations set by the characteristics of the issue itself, in this case, by the international dimension of hedge fund regulation. A second expectation is that the policy subsystem plays an important role in the stage of issue expansion. In particular, the expectation is that issue expansion takes place in the absence of strategic action by the proponents of new issues. Finally, and connected to the previous point, we expect to find that issue expansion catalyzes policy makers’ attention thereby leading an issue firmly in the EU policy agenda. In other words, there is link between issue expansion and formal agenda entrance. In what follows, I am going to test these empirical expectations reviewing the trajectory that led hedge fund regulation into the EU policy agenda, with the attendant consideration given to the issue by the European Council and Parliament.
2. Hedge Fund Regulation and EU Agenda: The Early Attempt
Hedge funds, which are also known as alternative investment funds, can be considered as a special category of investment funds. Indeed, investments funds are those entities in which
individual and institutional investors pool their capital for collective investment. The assets are then managed by one of more managers who, in exchange of a fee, decide how to invest the fund pool. Similarly to any investment fund, hedge funds are private collective investment schemes managed by one of more investment manager that decides about the fund’s investment strategy. In contrast to more traditional investment funds, however, hedge funds are particularly oriented to make high returns for their investors using aggressive investment techniques and instruments – for instance, an hedge fund may go both long and short on securities using complex derivative trading for this purpose. Because of their speculative investment strategies, hedge funds are more risky investments than traditional collective investment funds are. Hence, they are generally regarded as more suitable for institutional and professional investors than for retail investors, the latter being more vulnerable to adverse investment outcome.
The activities of investment funds in the EU are regulated by a set of directives known as UCITS (Undertakings for Collective Investment in Transferable Securities). In particular, the original UCITS directive, adopted in 1985 and amended in 2002, enables a fund authorised in one member state to be sold across the EU while assuring a high level of investor protection.i This is achieved through strict investment limits, capital and disclosure requirements, and oversight provided by an independent depositary. Still, the most recent legislation has introduced the concept of a simplified prospectus in order to provide more accessible and comprehensive information in the cross-border marketing of retail funds.
In contrast to the legislative framework governing the investment funds that have been established in accordance with UCITS Directive, the activities of alternative investment funds, including the activities of their managers, are not regulated at the EU level. Rather, alternative investment fund managers (AIFM) are regulated by a combination of member states’ financial and company law regulation, which are also supplemented in some sectors by industry-developed standards. Starting in 2005, however, the Commission initiated the debate on hedge fund regulation with the publication of a Green Paper titled ‘on the enhancement of the EU framework for
investment funds’ (EU Commission 2005b). While the Green Paper devoted the most of attention to the traditional type of investment funds, it also extended the debate to the issue of the regulation of the alternative investment funds industry. Specifically, although it did not argue for creating new EU legislation, the Commission Paper suggested looking beyond existing rules in order to formulate guidelines for future action. In this connection, the Commission started specifying the proposal for the regulation of the hedge funds industry at the EU-level, in order to face the long-term developments of the internal market, which was projected to be increasingly characterized by the activities of the asset management industry.
Interestingly, however, at this stage, the regulatory proposal was formulated as an instrument that could help the expansion of the internal market. That is to say, EU regulation of alternative investment funds was framed as a way to facilitate the development of the industry on a EU scale. For instance, establishing a working group on the topic, the Commission specified its mandate by inviting it to study ‘the types of action that could be most helpful in overcoming barriers to [hedge funds] cross-border development’ (EU Commission 2005b, p. 9). In other words, the issue of hedge fund regulation was presented as the most cost-effective response to some of the main obstacles to the creation of a competitive single market for investment funds. As the White Paper (EU Commission 2006c, p. 13-4) further put it, the Commission would have worked to remove marketing and sales restrictions of hedge funds’ products and to remove national barriers to ‘private placement’ of financial instruments with institutional investors and eligible counterparties.
In spite of the Commission efforts, it is not possible to claim that the issue of hedge fund regulation completed the cycle of the agenda-setting process in 2006. Specifically, the issue had been initiated and formulated but it fell short of formal entrance into the EU policy agenda. Indeed, there is no evidence that the issue was set for debate in the calendar of the Council or of the European Parliament. True, there had been growing concerns about the effects of the activities of highly leveraged investment vehicles such as hedge funds well before the subprime crisis burst, in
particular in continental Europe (Rasmussen 2009; Smith 2006). Nevertheless, such concerns did not translate into a formal consideration of the issue by the EU decision-making institutions.
Although the issue was not yet in the EU formal agenda, these early stages of the agenda-setting process were nonetheless crucial to its development. In particular, the fact that the early Commission proposal was staked on the recognition of the importance to reach out to the private sector proved crucial to the dynamics of agenda-setting in the aftermath of the subprime crisis. Indeed, since the issuance of the Green Paper, the Commission expanded the issue to selected groups of actors that were the target of the reform proposal. For instance, the Commission sponsored the creation of the working group on alternative funds, which was made up of private sector representatives. In particular, the Commission invited representatives from the retail investor community, institutional and public/semi-public investors and the corporate world as observers to the work of the group.ii The Expert Group was charged with the task of analyzing the organisation of the alternative investments industry and to evaluate whether operators in these asset classes were confronted with specific difficulties in organising their activities on a pan-European level. To carry out their task, the representatives of the private sector were also given a primary role in the agenda-setting process in that they would have signalled the issues warranting attention from EU policy-makers.
The participation of the hedge fund industry to the agenda-setting process was further reaffirmed with the opening hearing held in October 2005. That is to say, following the notice-and-comments procedure typical of domestic legal systems, the Commission invited notice-and-comments from interested parties on its Green Paper. In an effort to emphasize the role of the private sector in setting the agenda on its own regulation, the Internal Market Commissioner Charlie McCreevy noted that the Commission would have ‘look[ed] carefully at the recommendations’ coming from the public consultations, ‘so that we can respond in a way that will keep the fund industry growing. Now we need to hear other stakeholders’ views’ (EU Commission 2006b). Furthermore, the
Commission made clear that the White Paper was the result of the consultations held with the private sector and of the report prepared by the expert group (EU Commission 2006a).
In sum, during 2005-06, the issue of hedge fund regulation was still at the beginning of the agenda-setting process. Using the issue career stages identified by Cobb, Cobb and Ross (1976), it is possible to say that the Commission had initiated the issue and had started specifying it but, absent any serious consideration of the issue from policy makers, the stage of issue entrance into the formal agenda had not been reached yet. Nevertheless, the early debate is relevant to the development of the agenda-setting process because it set the stage for the issue expansion that followed the subprime crisis. Specifically, by opening up consultation with the private sector, the Commission had somehow institutionalized their participation in the governance of the issue.
3. Hedge Fund Regulation and EU Agenda: A Successful Attempt
Although the subprime crisis certainly catalyzed the EU decision-making institutions on the issue of hedge funds regulation, the proposal was still driven by the Commission, as clearly emerges from the analysis of the documents released in the aftermath of the crisis. Indeed, the EU Council statement issued in October 2008 emphasized the need to strengthen the supervision of the European financial sector. In this connection, the Council declared its support for strengthening the rules on banks’ capital requirements, and called for speedy examination of legislative proposals on credit rating agencies (CRA), on the security of deposits and on accountings standards. Interestingly, however, the Council statement did not mention hedge funds regulation in spite of its focus on expanding the perimeter of regulation in the EU. Instead, the issue made its first appearance in a EU Commission document.
In the Communication released on 29 October 2008, the Commission listed a number of reform proposals deemed necessary to allow the EU to minimize the likelihood of future crises. Next to the proposals to regulate CRA and executive pay, the Commission also listed its ongoing
work on hedge funds, inviting the Council and the Parliament ‘to give priority to dealing with its proposals’ (EU Commission 2008, 4). In a similar vein, in a Communication issued in early 2009, the Commission pledged to ensure that all relevant market actors are subject to appropriate regulation and to introduce a harmonised regulatory and supervisory framework for the alternative investment sector. In this connection, the regulation of hedge funds was presented as one of those issues that the Commission would have ‘brought forward as a matter of priority in the coming months’ (EU Commission 2009b, p. 5).
The Commission specified its proposal on AIFM regulation in early April 2009, when the draft directive was officially circulated. As the EU website put it, the draft directive is meant to pursue ‘the objective to create a comprehensive and effective regulatory and supervisory framework for AIFMs at the European level’.iii According to the proposed text, alternative fund managers are required to register and seek authorization to carry out their activity. Fund managers will also have to meet reporting, governance and risk management standards, including minimum capital requirements, and will strengthen the legal responsibilities of depositories, that is, of prime brokers. Finally, the rules, as currently drafted, prescribe that only AIFM established in Europe can provide their services in the Community. Likewise, only funds domiciled in Europe can be marketed by the EU authorized AIFM on the European territory.
It is interesting to note the distance that separates this directive from the proposals advanced just a couple of years before. While in 2005-06 the proposal for regulation was framed in terms of removing the barriers to the development of a pan-European hedge fund industry, after the subprime crisis, the Commission couched the proposal in significantly different terms. Specifically, the need for developing a EU-wide regulation was derived from the global G20 consensus on how to mitigate the risks to financial instability through prudential regulation. Indeed, the G20 leaders agreed to ‘extend regulation and oversight to all systemically important financial institutions, instruments and markets’ (G20 2009a, also G20 2008). This proposal derived from the recognition that ‘reckless and irresponsible risk taking by banks and other financial institutions’, including
hedge funds, ‘created dangerous financial fragilities that contributed significantly to the current crisis’(G20 2009b). In sum, after the subprime crisis, the issue of hedge fund regulation had acquired a global rather than a regional dimension, that is to say, regulation had become an issue of international cooperation.
Recognizing the global dimension that the issue had acquired, the Internal Market and Services Commissioner Charlie McCreevy thereby justified the Commission regulatory proposal affirming that ‘[the Commission] ha[s] followed the G20 request to the letter’.iv In particular, regulating hedge funds responded to the global strategy to reduce systemic instability, in that ‘hedge funds could impact financial stability in ways that had not previously been expected’ (McCreevy 2009). The Directorate General (DG) Internal Market also clearly made the connection between the proposed directive and the global nature of hedge fund regulation. Indeed, explaining the proposal in its online section dedicated to the frequently asked questions, the DG justifies the regulatory proposal saying that it ‘complies with the political commitments made by the G20 to ensure that “all relevant actors … are subject to appropriate regulation and oversight”’. The DG thereby concluded that ‘with this proposal the Commission will give effect to principles set out by G20 in April [2009] and which reflect a global consensus for a tighter regulation of the alternative investment fund sector’ (EU Commission 2009a).
Framed in these terms, the proposal, which indirectly attributed a portion of the blame of the crisis to hedge funds, attracted the fierce opposition of the private sector. The expansion of conflict to this group, which had been previously involved in the governance of the sector, helped catalyze policy-makers’ attention on the Commission’s regulatory proposal.
Indeed, the draft directive drew fire from a broad range of fund managers, and in particular from the UK where the bulk of the industry is domiciled. For instance, during the annual gathering in Monaco, the industry spoke out against the ‘disastrous’ new regulatory proposal from the European Union (Jones 2009d). Among others, three main criticisms have been raised at the proposed regulation. The first is that the new requirements on borrowing, marketing and capital, as
well as on the custodians, would reduce flexibility in the industry and increase costs. In short, the directive entails high compliance costs that can undermine the competitiveness of the industry.v A second criticism is that the EU Commission proposal is protectionist. Indeed, by making it difficult and costly for non-EU funds and managers to access the EU market, the directive entails the risk of creating incentives for alternative asset managers to relocate their business outside the EU.vi Finally, the private sector criticized the EU proposal because of its alleged ‘one size fits all’ approach. Indeed, similar requirements would be imposed on most alternative investment funds – be they big hedge funds or relatively small commodity or real estate funds that follow different business models.
Following the expansion of the debate on hedge fund regulation to the industry vociferous representatives, the EU Council and Parliament increasingly devoted attention to the issue. Indeed, as compared to the 2005-06 Commission failed attempt to bring the issue of hedge fund regulation into the EU agenda, what made the 2009 agenda dynamics distinctive was the inadvertent expansion to the private sector and its influence on policy-makers. For instance, the financial press has repeatedly reported the pledges made by members of the European Parliament to devote considerable attention to the issue in an attempt to respond to the private sector concerns on the new rules (Tait 2009a). In this environment, even one of the advocates of the regulation such as Poul Nyrup Rasmussen has conceded that ‘it would be “foolish” to push ahead without more consultation’ with the private sector (Jones 2009b). Still, in an interview with the Financial Time, Sharon Bowles, chair of the EP’s economic and monetary affairs committee, emphasized how policy makers were forced to concentrate on the issue because of the private sector resistance. In her words, ‘the UK hedge fund mood music just puts people’s backs up’.vii The mobilization of the private sector against the draft directive also bore on EU Council members. This is particularly the case for the UK government, primarily because the UK is where the bulk of the industry resides. Indeed, after having being repeatedly criticized by major hedge funds managers for inaction, in the summer of 2009, members of the UK government made clear that the proposed regulation would
have received the highest attention in Brussels (as reported in Jones 2009e, and Masters and Tait 2009).
In sum, the reframing of the issue and its expansion to the private sector combined to create significant political momentum in Brussels around the issue of hedge fund regulation. The result is that the issue of hedge fund regulation is now firmly on the EU formal agenda. That is to say, hedge funds regulation is scheduled for debate in the parliamentary committees and working groups. A first report from Jean-Paul Gauzès, the French MEP charged with steering the legislation through the European parliament, suggests that there could be a vote in parliament by July 2010 whereas the Council is expected to agree the text on the new rules in May (as reported in Tait 2009b).
Conclusions
Tracing the trajectory that led the hedge fund regulation directive into the EU decision-making institutions’ agenda, this paper has attempted expanding our understanding of agenda-setting dynamics in the EU. In line with existing scholarship, the paper showed that framing and issue expansion are crucial factors of EU agenda-setting processes. Nevertheless, the paper also showed that framing processes are closely associated with the characteristics of the issue for debate and that issue expansion is intimately related to the arrangements governing the specific issue domain. In other words, this paper showed that framing may be shaped by the nature of the issue at stake and that issue expansion may result from the unintended consequences of previous governance choices. In the case under investigation, for instance, the way in which the EU Commission presented the proposal to regulate hedge funds in 2009 was influenced by the international dimension that the issue had taken on as a result of the crisis. Issue expansion, in turn, occurred because of the characteristics of EU financial governance – i.e. that had become increasingly based on private sector participation and consultation – rather than because of the EU Commission deliberate efforts to mobilize the private sector.
These findings have important implications for policy studies focusing on agendas because they unveil the necessity of linking general theories of agenda-setting with issue types. If agenda dynamics are influenced by the specificities of the issue and by the formal and informal governance mechanisms through which an issue is debated, it appears necessary to deepen our knowledge among different issue domains. This, of course, speaks to the comparative research agenda that has long been introduced in the studies on domestic agendas (Baumgartner, Green-Pedersen, and Jones 2006; 2008; Green-Pedersen and Krogstrup 2008). Specifically, a comparative dimension appears the most important within studies on the EU agenda. Given the complex and fragmented nature of the EU polity, it is plausible to hypothesize that agenda dynamics not only depend on the EU institution that drives the process (Princen and Rhinard 2006) but also on issue characteristics and issue governance arrangements.
The paper also adds to our understanding on the role of the Commission as an agenda-setter (Burns 2004; Mazey 1998; Smyrl 1998). Indeed, what this paper illustrates is that the Commission agenda-setting capacity should not exclusively be judged in terms of the consensus it is able to nurture among member states (Jabko 1999), Rather, the Commission’s agenda setting capacity is also evident in having ‘forced’ policy-makers to devote attention to the issue. As a result of re-framing strategies, which linked the proposed regulation with the G20 regulatory consensus causing private sector’s opposition, policy-makers found themselves in a position where they could no longer ignore the issue.
Although the findings of this paper bear innovative implications for the studies on agenda-setting in the EU, this research also confirms several of the hypotheses that have already been developed and tested in the literature. For instance, the paper lends support to existing propositions on the importance of group politics in setting the agenda and advancing policy solutions. Indeed, both the EU Commission and the private sector played a crucial role in the process that led hedge fund regulation into the EU policy agenda. The paper also confirms the importance of the ‘EU dimension’ to get an issue into the agenda. As Princen (2007, 32) has put it, ‘actors have to argue
not only that certain substantive aspects of an issue are more important than others but also that European action is needed to address it’. The fact that the EU Commission framed the issue of hedge fund regulation as part of EU response to the international crisis thereby reinforces Princen’s insight. Finally, although this study emphasizes the role played by issue expansion to the success of the agenda-setting process, it also confirms the hypothesis according to which issue expansion is key to agenda-setting processes but is not a guarantee of a favourable policy outcome. Rather, the elevated number of actors now involved in the policy-making, including the Council and the EP, is more likely to block rather than advance the Commission proposal, echoing Princen and Rhinard’s (2006) expectation according to whom the shift of an issue from a low to a high-politics dynamics can lead to blockages.
In conclusion, the paper has built on existing scholarship on EU agenda-setting processes but has also raised a number of questions for future research to address. For instance, further empirical analysis is required to validate the hypotheses on the constraining effects of the nature and institutional characteristics of the issue. Specifically, an important question relates to the specification of the issues that influence the type of mobilization, be it strategically-induced, event-triggered or institutionally constrained. That is to say, it will be appropriate to find a way to cluster issues according to their impact on issue expansion.
i The modifying Directives 2001/108/EC (on the product) and 2001/107/EC (on the management company and the
simplified prospectus) extended the range of assets in which a UCITS can invest, reinforced capital and organizational requirements for management companies, and introduced a new disclosure document, the simplified prospectus. Still, the amended legislation gave a UCITS management company a passport that will enable the company to carry on within another Member State’s territory the activity for which it has been authorised.
ii Experts have been selected on the basis of nominations received from 13 European-level associations. The list of
nominating associations and experts can be found in the EU Commission website, available at
http://ec.europa.eu/internal_market/securities/ucits/index_en.htm#experts
iii European Commission, DG Internal Market, Proposal for a Directive on Alternative Investment Fund Managers,
Available at http://ec.europa.eu/internal_market/investment/alternative_investments_en.htm
iv As reported by Masters, B. and Tait, N. (2009).
v For instance, the industry estimates that custodians would likely charge one-quarter of one per cent of assets for the
service, up from one-fiftieth now. As reported by Masters, B. and Tait, N. (2009).
vi The survey conducted by the think tank Open Europe, for instance, showed that over 42 per cent of UK managers said
the new rules would be likely to force them abroad. As reported in Jones, S. (2009c).
vii As reported by Jones. S. (2009a).
References
Albæk, E., Green-Pedersen, C., and Nielsen, L. B. (2007) Making Tobacco consumption a political issue in the United States and Denmark: The dynamics of issue expansion in comparative perspective, Journal of Comparative Policy Analysis: Research and Practice 9(1), pp. 1-20.
Bank for International Settlements (2008) Annual Report. Bank for International Settlements, Basel.
Baumgartner, F. R., Green-Pedersen, C., and Jones, B. D. (2006) Comparative studies of policy agendas, Journal of European Public Policy 13(7), pp. 959–74.
Baumgartner, F. R. and Jones, B. D. (1991) Agenda Dynamics and Policy Subsystems, Journal of
Politics 53(4), pp. 1044-75.
— (1993) Agendas and Instability in American Politics (Chicago: University of Chicago Press).
Birkland, T. A. (1998) Focusing Events, Mobilization, and Agenda Setting, Journal of Public
Policy 18(1), pp. 53-74.
Bryant, C. (2009) ‘EU leaders push sweeping regulations’, Financial Time, February 22.
Burns, C. (2004) Codecision and the European Commission: a study of declining influence?
Journal of European Public Policy, 11(1), pp. 1-18.
Cobb, R., Ross, J.-K., and Ross, M. H. (1976) Agenda Building as a Comparative Political Process,
American Political Science Review, 70(1), pp. 126-138.
de Laroisiere, J. (2009) ‘The High Level Group on Financial Supervision in the EU’, Brussels, February 25.
EU Commission (2005a) Financial services: Commission proposes improvements to the European
market for investment funds. Press Release, IP/05/927. Brussels, 14 July.
— (2005b) Green Paper on the enhancement of the EU framework for investment funds. Brussels: COM(2005) 314 final, 12 July.
— (2006a) Financial services: Commission sets out vision for modernising EU investment fund
market. Press Release, IP/06/1569, Brussels, 16 November.
— (2006b) Financial services: industry reports recommend improvements to EU investment fund
framework. IP/06/915. Brussels, 4 July.
— (2006c) White Paper on Enhancing the Single Market Framework for Investment Funds. Brussels: COM(2006) 686 final, 15 November.
— (2008) From financial crisis to recovery: a European framework for action Communication from the Commission, Brussels, COM(2008) 706 final, 29 October.
— (2009a) Directive on Alternative Investment Fund Managers (AIFMs): Frequently Asked
Questions. MEMO/09/211, Brussels, 29 April
— (2009b) Driving European recovery. Communication for the Spring European Council, Brussels, COM(2009) 114 final, 4 March.
— (2009c) Ensuring efficient, safe and sound derivatives markets: Future policy actions. Communication from the Commission: COM(2009) 563 final, 20 October.
Fabbrini, S. (2010) Compound Democracies. Why the United States and Europe Are Becoming
Similar (Oxford: Oxford University Press).
— (2009a) Communiqué from the London Summit. 2 April.
— (2009b) Communiqué from the Pittsburg Summit. 24-5 September.
Green-Pedersen, C. and Krogstrup, J. (2008) Immigration as a political issue in Denmark, and Sweden, European Journal of Political Research, 47(5), pp. 610-635.
Howlett, M. and Ramesh, M. (2002) The Policy Effects of Internationalization: A Subsystem Adjustment Analysis of Policy Change, Journal of Comparative Policy Analysis, 4(1), pp. 31-50.
IMF (2009) Initial Lessons of the Crisis. International Monetary Fund: Washington, D.C.
Jabko, N. (1999) In the name of the Market: how the European Commission paved the way for monetary union, Journal of European Public Policy, 6(3), pp. 475-95.
Jones, S. (2009a) ‘Draft EU hedge fund rules to be revised’, Financial Time, 28 July.
— (2009b) ‘EU plans for hedge funds’ rules ‘flawed’, Financial Time, 11 September.
— (2009c) ‘EU rules would see hedge funds go overseas’, Financial Time, 21 September.
— (2009d) ‘Hedge funds attack proposed EU regulations’, Financial Time, 17 June.
Kingdon, J. W. (1995) Agendas, Alternatives, and Public Policies (New York: HarperCollins College Publishers).
Lamfalussy, A. (2001) Final Report of the Committee of Wise Men on the Regulation of European
Securities Markets. Brussels, February.
Masters, B. and Tait, N. (2009) ‘Dodging the draft’, Financial Time, 13 July.
Mazey, S. (1998) The European Union and women’s rights: from the Europeanization of national agendas to the nationalization of a European agenda?, Journal of European Public Policy, 5(1), pp. 131-152.
Mazey, S. and Richardson, J. (2001) Interest groups and EU policy-making: organizational logic and venue shopping, in: J. Richardson (ed) European Union. Power and Policy-making, pp. 217-37 (London and New York: Routledge).
McCreevy, C. (2009) Remarks at the EU Commission Open Hearing on Hedge Funds and Private
Equity. 26-7 February.
Moser, P., Schnider, G., and Kirchgassner, G. (eds) (2000) Decision Rules in the European Union (New York: St. Martin’s Press).
Mugge, D. (2006) Reordering the Marketplace: Competition Politics in European Finance,, Journal
Peters, G. B. (1994) Agenda-setting in the European Community, Journal of European Public
Policy, 1(1), pp. 9-26.
— (2006) Agenda-setting in the European Union, in: J Richardson (ed), European Union. Power
and Policy-making (London and New York: Routledge).
Pollak, M. (2003) Engines of European Integration: Delegation, Agency, and Agenda Setting in the
EU (New York: Oxford University Press).
Posner, E. (2007) Financial Transformation in the European Union, in: K. McNamara and S. Meunier (eds), Making History: European Integration and Institutional Change at Fifty, pp. 139-156 (Oxford: Oxford University Press).
Princen, S. (2007) Agenda-setting in the European Union: a theoretical exploration and agenda for research, Journal of European Public Policy, 14(1), pp. 21–38.
Princen, S. and Rhinard, M. (2006) Crashing and creeping: agenda-setting dynamics in the European Union, Journal of European Public Policy, 13(7), pp. 1119–32.
Quaglia, L. (2008) Financial Sector Committee Governance in the European Union, Journal of
European Integration, 30(4), pp. 563-578.
— (2009) The Politics of Regulating Credit Rating Agencies in the European Union, Working
Quaglia, L. and Christopoulos, D. (2009) Network constraints in EU banking regulation: The case of the Capital Requirements directive, Journal of Public Policy, 29(2), pp. 1-22.
Rasmussen, P. N. (2009) Remarks at the EU Commission Open Hearing on Hedge Funds and
Private Equity. 26-7 February.
Richardson, J. (eds) (2006) European Union: Power and Policy-making (London and New York: Routledge).
Rochefort, D. A. and Cobb, R. W. (1994) Instrumental versus Expressive Definitions of AIDS Policy-Making, in: D.A. Rocheford and R.W. Cobb (eds), The Politics of Problem
Definition (Lawrence, KS: University Press of Kansas).
Sabatier, P. (1998) The Advocacy Coalition Framework: Revisions and Relevance for Europe,
Journal of European Public Policy, 5(1), pp. 98-130.
Schattschneider, E. E. (1960) The Semi-Sovereign People. A Realist’s Guide to Democracy in
America (New York: Holt).
Smith, P. (2006) ‘‘Locusts’ swarm to Germany in effort to improve image’, Financial Time, 19 February.
Smyrl, M. E. (1998) When (and how) do the Commission’s preferences matter? Journal of
Common Market Studies 36(1), pp. 79-99.
Tait, N. (2009b) ‘Tough EU timetable for fund regulation’, Financial Time, 6 October.
Tallberg, J. (2003) The agenda-shaping powers of the EU Council Presidency, Journal of European
Public Policy 10(1), pp. 1-19.
Walker, J. L. (1977) Setting the Agenda in the Us Senate, British Journal of Political Science 7, pp. 423-35
Wendon, B. (1998) The Commission as Image-Venue Entrepreneur in EU Social Policy, Journal of
European Public Policy, 5(2), pp. 339-53.
Williams, R. A. (2009) Exogenous Shocks in Subsystem Adjustment and Policy Change: The Credit Crunch and Canadian Banking Regulation, Journal of Public Policy, 29(1), pp. 29-53.
Zahadiaris, N. (2003) Ambiguity and Choice in Public Policy (Washington D.C.: Georgetown University Press).
