(May 18, 2010) — A panel of European Union lawmakers approved tighter standards on hedge funds and private equity firms on Monday, rejecting complaints that the legislation would impose excessive restrictions on European investors using offshore funds.

The legislation, which was passed with 33 votes in favor, 11 against and three abstentions, will require funds to register with European authorities and will black-list some nations, which lack adequate financial regulation, from European investment — a measure that has sparked the most controversy and opposition from European hedge funds. Hedge fund managers outside the EU will be forced to abide by transparency standards in exchange for a so-called passport to market to investors in the 27-nation bloc, reflecting heightened pressure to exert tighter controls on hedge funds and private equity firms accusing of contributing to the global financial crisis and aggravating Greece’s borrowing difficulties by betting against its debt.

The regulations would impose restrictions on investment managers in regards to bonuses and their amounts of debt. Fund managers that use borrowed money, or leverage, will need to coordinate with authorities setting limits on the amount of leverage they can use. Additionally, a new EU regulator will be able to place caps on leverage at funds that pose excessive risk and will have the power to ban short selling, the act of selling borrowed shares to bet in hopes that the stock’s price will decline.

The European Parliament’s economic and monetary affairs committee approved the measure Monday, while the full Parliament is due to give its verdict on the draft legislation in July. The new rules are likely to take effect around 2012. The U.S. has opposed the legislation, warning that the rules discriminate against non-EU funds, along with Britain, home to eight out of 10 European hedge funds. While Britain has called for softer rules for the industry based on fears that stricter measures would incite funds to flock to Switzerland or elsewhere, Germany and France have resolutely demanded tougher rules.