The SEC and other federal regulators will determine whether money managers' compensation is considered “excessive,” and that has managers on tenterhooks.
The Securities and Exchange Commission, Federal Reserve System, 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, the major regulatory reform measure signed into law by President Barack Obama on July 21.
By April 2011, regulations are supposed to ban “incentive-based compensation arrangements” judged to 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, the new law states.
Also, money managers and other financial firms will be required to disclose incentive-based compensation arrangements to federal regulators.
Incentive- or performance-based bonuses are widely used by money managers, David Tittsworth, executive director of the Investment Adviser Association, Washington, said in a telephone interview.
“The bonus structure is in play,” Mr. Tittsworth said.
“It's (the compensation changes) a big deal,” added Timothy Bartl, senior vice president and general counsel, Center on Executive Compensation, Washington. “It's prohibitions and controls over private-sector compensation.”
Alan Johnson, managing director of the executive compensation firm Johnson & Associates Inc., New York, said the new regulation “could hurt the (money management) industry by increasing costs and uncertainty.”
“We're telling our money manager clients we have to pay attention to this, and nobody knows where this is going to go.”
Some money managers reached by Pensions & Investments declined to comment on the record, contending they want to reserve judgment until they see what form the SEC's proposed regulations take.
“It makes a lot of sense for them to be regulating banks, which they are insuring,” Mr. Quinn said. “But it doesn't make any sense to me on why they would want to regulate asset management compensation as there is no financial risk there to the financial system or the government.”
American Beacon manages $44 billion, including the $17 billion defined benefit and defined contribution plans of American Airlines Inc., Fort Worth, Texas.