Frank Bill Purports to Regulate Incentive Compensation of Fund Sponsors

July 22, 2009

On July 17, 2009, Congressman Barney Frank introduced a discussion draft of his “Corporate and Financial Institution Compensation Fairness Act of 2009” to the House Financial Services Committee which contains a section entitled “Enhanced Compensation Structure Reporting to Reduce Perverse Incentives.” This section would apply to all “covered financial institutions” which includes a broad range of entities including investment advisors as defined in the Investment Advisers Act of 1940 (whether or not registered). Although not currently provided, it seems likely that the regulations would apply to any affiliates of such financial institutions as well.

If enacted, covered financial institutions will be required to disclose to the appropriate federal regulator (in the case of investment advisers, most likely the Securities and Exchange Commission) the structures of any incentive-based compensation arrangements for its officers and employees. The bill provides the regulator with the authority to prohibit compensation arrangements if the regulator determines that the arrangement “encourages inappropriate risks . . . that (1) could have serious adverse effects on economic conditions or financial stability; or (2) could threaten the safety and soundness of the covered financial institution.” It is unclear how incentive fees and carried interest would be interpreted by the regulator, but it is clear that the bill would provide the regulator with the authority to evaluate and potentially prohibit certain arrangements if it deems appropriate under the above-described standard.

We will continue to monitor this bill and provide updates of any material developments.

Please call any of your regular contacts at the firm or any of our partners and counsel listed under Private Equity or Executive Compensation and Employee Benefits in the Our Practice section of this website if you have any questions about these matters.