US Fund Bonus to Follow European Bonus Rule

Europe flexed its regulatory muscles and approved rules that would cut back on compensation packages paid to managers of equity funds. These new and strict bonus rules caused consternation among U.S. fund managers because they would create long-term legal and tax complications for those managing European clients. 

The reaction by fund companies was swift and negative. Several exasperated U.S. fund managers told lawyer Declan O’Sullivan that they were very upset about the pay restrictions. O’Sullivan is a partner at the Scottish Dechert law firm. The new rules would clamp down hard on compensation packages, requiring that fund managers be compensated in units of funds they manage for half the bonuses earned. In addition, the rules require that 40 percent of bonuses paid would be deferred for a minimum of three years. If the bonuses are large, 60 percent could be subject to the deferment rule.“I don’t see how Asian or U.S. managers will be able to escape these rules,” said Sean Tuffy, a Brown Brothers Harriman investment bank vice-president. “This was lobbied pretty intently, but obviously to no avail,” he added. The European Council and European Parliament finalized the rules last week which fall under the Ucits V directive. This situation is extremely problematic because U. S. citizens can’t own Ucits fund shares. The key part of the law states that the rules must apply to “any third parties to whom functions have been delegated.” That will include advisors to Ucits funds who are not based in the EU.

Most likely, this rule will probably discourage experienced U.S. fund managers from performing management tasks with European funds. That management task will probably fall to a small number of U.S. managers who are willing to live with the bureaucratic headaches that accompany this rule.  O’Sullivan noted that the entire matter will prove troubling for U.S. managers who are pretty much forbidden from investing in Ucits. Although managers could secure bonuses as a note or derivative attached to performance, the situation will prove to be complex and annoying, O’Sullivan added.

This rule change comes on the heels of a blockbuster report by Deutsche Bank that hedge fund investors are itching to plow money back into Europe. Western Europe, in particular, is cited by Deutsche Bank in its report “Twelfth Annual Alternative Investment Survey” as the area where investors want to shovel mountains of hedge fund money.  The investors surveyed by the bank represented 400 investment parties with $1.8 trillion in hedge fund assets. If the new rule holds, U.S. hedge fund managers will be looking in the window while their European counterparts feast at the hedge fund table.

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