The “unstoppable” rise of hedge funds is behind Dutch proposals on 1% disclosure. But regulators are missing the point.

The world of shareholder disclosures hit a new level this week with proposals from regulators in Holland calling for disclosure of share ownership at the 1% level – down from the current 5%. If passed – and it seems that many are in favour – it would be the world’s lowest level for triggering disclosure.

The motivation seems to be the desire for greater insight into the activities of activist investors, and potentially into private equity buyouts. Whilst the concept has been floated for a while in Holland, it has sat on the back burner till now. However there seems to be a real chance of this happening. Regulators presented their proposals at a recent meeting of private equity and hedge fund executives, regulators, worker and employer representatives and board members from companies targeted by hedge funds or buy-out funds. As can imagined, the proposals got a mixed reception.

One organisation representing shareholders called instead for a 3% threshold, mirroring the position in the UK and Germany.

The timing may be a coincidence, but there appears to be open season on leveraged buyout deals at the moment, in the banking and industrial sectors.

My own view is that whilst this is an important development, there are 2 elements missing that would limit the effectiveness of a 1% - or indeed 3% - regime. First, the exclusion of derivatives. With equity swaps, CFD’s and their equivalents being non material for the purposes of disclosure, and given the (ever increasing) role they play in the strategies of hedge funds, the AFM should look at including these instruments as part of the change to the disclosure levels.

Second, the absence of a pre-emptive right to demand the identity of the beneficial owner – getting behind the nominee names. Regulation like this exists in so many countries now – the UK, France, South Africa, Australia, that it is becoming best “regulatory” practice.

The AFM and the Dutch central bank would do well to consider these whilst they are enhancing the Dutch disclosure regime.