EU Bonu$ Cap: Are Hedge Funds Next?

Last month, the European Parliament proposed legislation capping the annual bonuses of senior managers, risk-takers and other highly-compensated employees of EU banks, their overseas subsidiaries and the EU subsidiaries of non-EU banks. In London alone, there are reportedly about 5,000 such bankers whom the EU is apparently prepared to lose to New York, Hong Kong or other jurisdictions where bonuses are not so restricted. If the EU bonus cap passes in its present form (it is still subject to legislative revision), bonuses for affected bankers in 2014 will be limited to the levels of their salaries (which limit could be increased to as much as twice salary levels if approved by a supermajority of a bank’s shareholders).

Some EU lawmakers are reportedly now pressing to extend the bonus cap to managers of alternative investment funds (AIFMs), such as hedge funds and private equity funds (AIFs). If the cap were so extended, it would then intersect with the EU’s AIFMD, which goes into effect this July 22nd. Under the combined directives, the EU bonus cap would then apply to highly-compensated US and other non-EU employees of either EU-based AIFMs or EU-based affiliates of non-EU AIFMs who manage AIF assets in the EU or who market their AIFs in the EU with a passport. The bonus cap could also be incorporated by EU member states in their private placement regimes. Moreover, under the AIFMD, 40-60% of any bonus awarded to an employee of a covered AIFM must be deferred and no more than half of it can be paid in cash.

As matters currently stand, neither the AIFMD remuneration limits nor the EU bonus cap (if extended to AIFMs) will affect US and other non-EU staffers working in non-EU AIFM offices located outside the EU (even if their AIFs are partially managed or privately-placed in the EU). It remains to be seen whether the EU will next try to extend its bonus cap to the world-wide staff of any AIFM covered by the AIFMD.