US-based broker-dealers and investment advisers managing at least $1 billion in assets will have to prove to regulators their executives aren’t being compensated in a way which would encourage “inappropriate risks”, the Securities and Exchange Commission proposed on Wednesday.
Private equity firms managing at least $150 million in assets are considered investment advisors that must register with the SEC.
The SEC was mandated by the Dodd-Frank bill to craft rules to supervise incentive-based compensation schemes used by large financial institutions which are deemed to encourage excessive risk-taking.
Under the proposal, large private equity firms will have to include in their annual reports a section detailing any incentive-based compensation arrangements for their executives. The SEC would then have the right to prohibit any arrangement which they see as encouraging “inappropriate risk-taking” or which could result in heavy losses for the firm.
Moreover, firms themselves will be expected to put in place policies and procedures to ensure employee contracts don’t encourage excessive risk-taking.
GPs with more than $1 billion under management are already subject to proposed SEC regulation. Earlier this year the agency proposed GPs falling into this category be subject to additional reporting requirements.
The SEC will open a 45-day public consultation period once other US watchdog agencies, such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), have finalised the language of their respective Dodd Frank proposals.
SEC chairwoman Mary Schapiro said in a speech earlier this week she was interested in how the proposals might affect private fund advisors, “given how they often structure their compensation”, presumably referring to a fund manager’s carried interest.