Hedge, Private Equity Managers Must Wait on Bonuses: ESMA

Senior hedge-fund and private-equity managers may face long waits for bonus payouts in a push by the European Union to impose bank-style pay rules on the industry.

Bonuses for risk-taking employees should be withheld for a period of time to align managers’ interests with the long-term performance of the fund, the European Securities and Markets Authority said today.

Deferred parts of bonus awards should be paid out at least over a three-year to five-year period, ESMA said. Companies “should consider longer” waiting times for “members of the management body,” according to guidelines published by the authority.

Payouts in the financial industry have been under scrutiny since the 2008 collapse of Lehman Brothers Holdings Inc. and the government rescue of American International Group Inc., which were blamed in part on traders and executives making risky bets to boost results and subsequent bonuses. EU lawmakers called last year for banks to ban bonuses that exceed fixed pay and are drafting similar rules for retail fund managers.

The measures ESMA offered in part echo EU rules for banker bonuses, which took effect in 2011 and include minimum three-year deferral periods. Robert Jenkins, a member of a Bank of England committee charged with ensuring financial stability, has said that bankers’ bonuses should be deferred for as long as 10 years to hold executives accountable for risks.

Libor Rigging

Royal Bank of Scotland Group Plc and Barclays Plc have both said they would limit bonuses over criticism about their involvement in the rigging of interbank lending rates.

“Making sure that these provisions on pay are applied in a common and consistent way is key to increasing investor protection and ensuring a level playing field in the alternative fund sector across the EU,” Steven Maijoor, chairman of Paris-based ESMA, said in an e-mailed statement.

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.

Firms should also have the power to revisit, or claw back, bonuses in situations where employees are found guilty of “fraud” or supplying misleading performance information, according to the ESMA guidance. National regulators will police fund managers’ compliance with the ESMA pay guidance.

Risk Taking

Between 40 percent and 60 percent of an employee’s variable pay should be subject to deferral, with the exact amount depending on the size of the pay award and how involved the person is in risk taking, according to the agency’s guidance.

In addition to hedge fund managers and private-equity firms, the rules also apply to other so-called alternative investment vehicles, such as real estate funds.

The measures should apply to senior management and other staff that have a “material impact” on risk taking, according to the agency.

Exemptions to the three-to-five-year deferral rule may be made for managers of funds with a short life cycle, ESMA said.

Spokesmen for the Alternative Investment Management Association, a group representing hedge funds, and the European Private Equity and Venture Capital Association, didn’t have an immediate comment.

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