Bloomberg News

Hedge Fund, Private Equity Bonus Rules Considered by FSA

January 24, 2012

(Updates with lawyer’s comment in third paragraph.)

Jan. 24 (Bloomberg) -- The U.K. Financial Services Authority may set bonus rules specifically for hedge fund and private equity managers as it works to implement European Union regulations.

The FSA may write “a remuneration code to apply specifically to Alternative Investment Fund Managers, but modeled closely on the existing code” that applies to banks and other financial firms, the regulator said in a statement on its website. While the FSA is obliged to comply with EU standards set by the European Securities and Markets Authority, that agency hasn’t yet completed them.

“There’s a degree of nervousness out there in the market about the possibility of this outcome,” Darren Fox, a financial regulation lawyer at Simmons & Simmons LLP, said in a telephone interview today. “There’s a feeling the apple cart may be upset again.”

European finance ministers in 2010 approved a law, known as the Alternative Investment Fund Managers Directive, which gave Paris-based ESMA power to set rules for hedge funds and private equity firms, regulating their pay and access to EU investors.

The aim of the rules would be to ensure managers “control risk-taking behavior by reducing the potential adverse impact of poorly-defined remuneration schemes,” the FSA said in a discussion paper. It is seeking input on the plans from the industry and the public.

‘Regulatory Arbitrage’

“It will depend on the state of the markets when the rules come in and what kind of regulatory arbitrage you can run between here and, say, Switzerland, where hedge funds like to base themselves,” said Arun Melmane, a finance analyst at Investec Plc in London. “It needs to be a wider initiative, rather than just the U.K.”

The FSA said its existing bonus code, which it expanded to include more than 2,700 firms at the end of 2010, may already be compliant with the EU rules.

“It would seem to me to be better to bring it into the scope of the existing code,” Andrew Shrimpton, a former head of hedge fund regulation at the FSA, who now advises hedge funds at London-based Kinetic Partners LLP. “It treats everyone equally and doesn’t single out alternative managers.”

Some U.K. funds are required to disclose the size of their bonus pools for the previous year in regulatory filings.

Managers at Odey Holdings AG, the company led by Crispin Odey, shared pay of 34.7 million pounds ($54 million) for the financial year ended April 5, according to a regulatory filing. Lansdowne Partners made a total of 18.85 million pounds, and Threadneedle Asset Management 15.7 million pounds, available to employees at the end of 2010, according to similar filings.

--With assistance from Howard Mustoe in London. Editors: Christopher Scinta, Peter Chapman

To contact the reporter on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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