Money managers are jittery about a provision in the financial-reform law that gives the Securities and Exchange Commission and other federal regulators authority to decide whether their compensation is “excessive.”
Money managers are jittery about a provision in the financial-reform law that gives the Securities and Exchange Commission and other federal regulators authority to decide whether their compensation is “excessive.”
The SEC, the Federal Reserve, the Federal Deposit Insurance Corp. and other key federal agencies with financial industry oversight must jointly come up with compensation rules under Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
By April, the new law mandates that regulations be instituted to ban “incentive-based compensation arrangements” that encourage “inappropriate risks” — either because those arrangements result in payment of “excessive compensation, fees or benefits” or could lead to “material financial loss” to the firm.
Money managers and other financial firms also will be required to disclose incentive-based compensation arrangements to federal regulators.
Incentive- or performance-based bonuses are widely used by money managers, according to David Tittsworth, executive director of the Investment Adviser Association. “The bonus structure is in play,” he said.
“It's a big deal,” said Timothy Bartl, senior vice president and general counsel for the Center on Executive Compensation, a lobbying group that opposes mandatory say-on-pay proposals. “It has prohibitions and controls over private-sector compensation.”
The new regulation “could hurt the [money management] industry by increasing costs and uncertainty,” said Alan Johnson, managing director of the executive compensation firm Johnson & Associates Inc.
Some money managers declined to comment on the record, contending that they want to reserve judgment until they see what form the SEC's regulations take.
It is “dangerous” for the government to regulate financial firms that the government isn't insuring, said William F. Quinn, executive chairman of American Beacon Advisors, which manages $44 billion, including the $17 billion defined-benefit and defined-contribution plans of American Airlines Inc.
Although the federal government has a legitimate interest in restricting compensation arrangements at government-in-sured institutions or financial firms that are so big that their failure poses a risk to the financial system, “it is not clear why this rationale would apply to investment advisers,” Robert C. Pozen, chairman emeritus of MFS Investment Management, wrote in an e-mail.
In response, Lisa Lindsley, director of capital strategies at the American Federation of State, County and Municipal Employees, said: “No one knows where the next [financial system] collapse is going to come from. So the legislation attempts to put into place safeguards to prevent the accumulation of excess leverage in the financial system.”
A key question that needs clarification is how big a manager must be to come under the new pay restrictions, Mr. Tittsworth said. A provision in the law exempts financial institutions with assets of less than $1 billion, but doesn't specify what should be counted as a company's assets.
“If "assets' means assets under management, then a large number of money managers will be subject to these new regulations,” Mr. Tittsworth said.
The reform could spur some money managers and other financial firms to change compensation practices by raising base salaries or switching to “contingent bonuses based on longer-term results,” said David John, a senior research fellow for the Heritage Foundation.
“You don't want to destroy the value of your firm by driving away good managers,” he said.
Even without the regulation, some managers already are reviewing compensation arrangements, said Ben Phillips, a partner at Casey Quirk & Associates LLC, a management consultant to money managers.
“Their clients want to make sure that their interests are properly aligned,” he said.
“I think the SEC has a tough job,” Mr. Tittsworth said. “I mean, how do you determine whether a certain incentive-based arrangement results in excessive compensation?”
Some financial industry lobbyists said that new regulations aren't needed because the industry has taken steps on its own to reduce risky behavior.
“Market forces have already addressed the issue of excessive risk,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. The organization is a lobbying group for major financial firms and money managers.
Supporters of the new law don't buy Mr. Talbott's argument.
“The SEC is being instructed to review the compensation structures of executives at financial firms to ensure that the short-term incentives that fueled the financial crisis don't continue,” Ms. Lindsley.
Mr. Tittsworth said that money managers will have an opportunity to influence the SEC's regulations during the public comment period.
Doug Halonen is a reporter at sister publication Pensions & Investments.
