(BRUSSELS) - Members of the European Parliament demanded on Tuesday tougher EU regulation of the crisis-struck financial sector, targetting hedge funds in particular for restrictions.

EU lawmakers adopted a report by a broad majority calling on the European Commission to draft proposals by year-end covering "all relevant actors and financial market participants, including hedge funds and private equity."

Among its main recommendations, the report urges mandatory capital requirements for all financial institutions, full transparency about executive compensation, disclosure of leverage and identification of major shareholders.

"We need new and better regulation and we need it now," said Danish Socialist lawmaker Poul Nyrup Rasmussen who steered the text through the parliament.

"The proposals agreed today by the European Parliament would be a first step towards making future crises less likely," he added.

EU Internal Markets Commissioner Charlie McCreevy has warned against tightening regulation of hedge funds and private equity, arguing before the parliament on Monday that they "were not the cause of the current turmoil."

McCreevy, who is the European Commission's pointman for financial services, stressed that "it was the regulated sector that had been allowed to run amok," referring to the banking industry.

The parliamentary report originally targetted hedge funds and private equity funds but was broadened out to include the sector as a whole in light of the recent turmoil and under pressure from conservative lawmakers.

"To target hedge funds and private equity specifically for regulation is not the right approach," said British Liberal lawmaker Sharon Bowles.

"Regulation must be non-discriminatory and must be part of a broader overall package of monitoring risk," she added.

Nevertheless, the proposals would hit hedge funds and private equity firms particularly hard because they are currently much more loosely regulated than high street banks or insurance companies.

With most hedge funds and private equity firms privately held, they currently have to disclose little information about their activities and are not subject to the same international capital requirements as banks.

"The ongoing crisis of the banking sector shows that we can no longer rely on US standards, particularly since the American control systems partly failed," said conservative German lawmaker Kurt Joachim Lauk.

Even without the vote, the European Commission is due to roll out proposals next month tightening rules on capital requirements and on regulating credit rating agencies, which have come under fire for underestimating risks in recent years.

While the vote requires McCreevy to come up with legislative proposals before the end of the year, he could choose not to -- although in that case he would have to justify his decision.

Even if the commission does draft proposals, they would still have to be approved by member states and European financial centres such as Britain, Ireland and Luxembourg would very likely resist tough new regulations.

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