US fund groups caught out by European bonus rules
EU wins Nobel Peace Prize for advancement of democracy©EPA
A landmark European agreement designed to curb excessive pay in the fund industry has caught US groups offguard by the strict bonus rules.
The restrictions will create a legal and tax headache for fund companies and could deter US nationals in the US and Europe from managing European funds.
Declan O’Sullivan, a Dublin-based partner at Dechert, a law firm, said he had spoken to several US fund companies who are “very upset” about the pay curbs.
Large fund houses including BlackRock, Pimco and Aberdeen could be affected.
The new rules, which are set to enter European law in 2016, mean fund managers will be paid half of their bonuses in units of the funds they manage. They will also have to defer 40 per cent of bonuses for at least three years, or 60 per cent for very high bonuses.
Sean Tuffy, vice-president of investor services at Brown Brothers Harriman, the investment bank, in Dublin, said: “I don’t see how Asian or US managers will be able to escape these rules. This was lobbied pretty intently, but obviously to no avail.”
The requirement for managers to receive half of their bonuses in units of the fund they manage is particularly problematic as US nationals cannot own shares of Ucits funds.
The final rules, which are part of the Ucits V directive, were agreed last week between the European Council and European Parliament following months of political wrangling.
Last-minute amendments to the directive state that the rules should apply to “any third parties to whom functions have been delegated”, including non-EU-based investment advisers to Ucits funds.
Sean Donovan-Smith, a partner at K&L Gates, the law firm, said the rules could deter US fund staff from managing mainstream European funds. “This would mean a smaller pool of US managers willing to work with Ucits,” he said.
US fund groups had hoped that they would be able to pay bonuses in shares of the parent company, but last week’s agreement ruled that out.
Mr O’Sullivan said: “This will be troubling for US managers who are pretty much precluded from investing in Ucits. They could [receive bonuses via] a note or derivative linked to the performance of the fund, but this would be hugely complicated and an annoyance.”
Listed fund groups are also concerned that the rules incentivise staff to focus on fund performance alone rather than growth of the wider business, potentially damaging returns for shareholders, according to Tim Wright, a partner in the rewards practice of PwC, the professional services firm.
The European Securities and Markets Authority will publish guidelines on the scope of the directive in the next six months.
These guidelines could soften the blow for non-European fund managers, but Europe’s parliament and council have stated the guidelines should “prevent circumvention of the provisions on remuneration”.