Fund Managers Face Bonus Curbs in EU Financial-Rule OverhaulJim Brunsden
Fund managers will face tougher European Union pay rules as part of a package of financial-services regulations approved by lawmakers today.
The European Parliament backed measures limiting guaranteed bonuses for managers of funds known as Undertakings for Collective Investment in Transferable Securities and requiring payment of at least 40 percent of variable pay to be deferred for a minimum of three years. The move is part of votes on topics ranging from high-frequency trading to bank account fees, as lawmakers clear the decks before adjourning for May elections.
The fund manager pay rules are a key part of a draft law targeted at boosting regulation of the UCITS industry and preventing fraud similar to that orchestrated by Bernard Madoff. Madoff pleaded guilty in 2009 to orchestrating what prosecutors called the biggest Ponzi scheme in history and is serving a 150-year sentence in U.S. federal prison. The fallout included the liquidation of four UCITS funds, a type of retail investment vehicle allowed to operate across the EU.
“Our goal with all these proposals has never been to attack the markets, but to ensure that they operate in a robust, transparent and healthy way,” Michel Barnier, the EU financial services chief, said in an e-mail. The EU is seeking to prevent “the excessive risk-taking that could cause another cataclysm.”
Under the draft law, banks and other institutions that act as so-called depositories for UCITS would face limits on their ability to delegate away responsibility for the safekeeping of assets. The measures also clarify the custodian bank’s liability in the event that assets are misused by fund managers, and firm up rules requiring banks to keep the fund’s asset pool segregated from their own investments.
Banks including HSBC Holdings Plc and UBS AG were sued by investors over their roles as custodians for funds that invested money with Madoff.
On pay, the amount of the bonus to be deferred should rise to at least 60 percent for awards “of a particularly high amount,” according to a draft of the law on the parliament’s website.
The draft law also includes a requirement for half of bonuses for UCITS managers to be paid in the fund’s own shares, or similar securities.
Guaranteed bonuses would be banned, with an exception for staff in their first year of employment with the company.
The European Securities and Markets Authority, an EU agency based in Paris, will draft guidelines on which staff at UCITS management companies should be covered by the pay rules.
The measures are among as many as eight financial services laws set to be voted on by the assembly today in Strasbourg, France, paving the way for their final adoption by national governments.
This week’s session is parliament’s last chance to vote on measures before elections next month. While the new assembly will start work in July, it will be initially focused on institutional decisions rather than legislation.
The rules today include a wide ranging overhaul of the EU’s financial market rulebook, known as Mifid.
Legislators have said that the updated Mifid rules will curb high-frequency trading, speculation in commodity derivatives, and push more trading onto regulated platforms.
Once the laws are given final sign-off by governments they’ll be published by the EU, beginning transition periods before they fully take effect.
While an 18-month transition period applies for the UCITS law, many of the Mifid measures won’t take effect until at least 2 1/2 years after the final legislation is published.