Senior hedge-fund and private-equity managers face longer waits for bonuses under proposals from the European Union’s top markets regulator.
Bonuses for risk-taking employees should be withheld for a certain length of time to align managers’ interests with the long-term performance of the fund, the European Securities and Markets Authority said today. Staff with the “most material impact on the risk profile” of the fund should be subject to longer retention periods, ESMA said without specifying how long.
“The proposed remuneration guidelines for alternative investment funds are an important step in creating a single EU rulebook by ensuring the consistent application” of bonus laws approved by ministers, Steven Maijoor, chairman of Paris-based ESMA, said in an e-mailed statement.
Payouts for managers at financial firms have been under scrutiny from regulators and lawmakers since the fall of Lehman Brothers Holdings Inc. in 2008. Robert Diamond, chief executive officer of Barclays Plc, said yesterday he would forgo his bonus after the bank was fined $451 million for submitting false London and euro interbank rates.
European finance ministers in 2010 approved a law, known as the Alternative Investment Fund Managers Directive, which gave ESMA power to set rules for hedge funds and private equity firms, regulating their pay and access to EU investors. Member states have until July 2013 to implement the directive.
National authorities should judge whether the bonus retention periods proposed by hedge funds and private equity firms are sufficient, ESMA said.
Hedge funds and private equity firms have until Sept. 27 to comment on ESMA’s proposals, which also include provisions for firms to set tougher frameworks determining severance pay for risk-takers to avoid a “heads I win, tails I still win approach to risk,” the agency said.
Firms should also avoid paying bonuses from a pool of capital if “its financial situation would no longer be sound,” the regulator said.
The U.K.’s Financial Services Authority began consulting with industry members earlier this year on its implementation of the European guidelines, considering the possibility of writing specific pay rules for fund managers rather than including them in those written for traders in large banks.