Comment Letter on Incentive-Based Compensation Arrangements

MFA submitted a comment letter to the SEC in response to the joint agency proposed rules that would prohibit incentive-based compensation arrangements at covered financial institutions, including investment advisers with at least $1 billion in assets, that would encourage inappropriate risks by providing excessive compensation or that could lead to material financial loss to the institution. In our letter, we expressed our view that the structure of the hedge fund industry and the compensation structure of the industry are well designed to achieve the underlying goals of the proposed rules and that hedge fund advisers do not pose the types of risks that Congress sought to address through agency guidelines or rules to prohibit excessive incentive based compensation. We encouraged the SEC to implement guidelines or rules that address Congresss underlying concerns but avoided unintended consequences, including: (1) the SEC should clarify that assets under management will not be counted toward the $1 billion asset threshold, regardless of the accounting treatment of those assets under management; (2) the SEC should exclude assets set aside for deferred compensation of adviser employees and assets invested in funds managed by the adviser as these mechanisms act to promote sound risk management and alignment of interests with investors; (3) clarify that payments in connection with an ownership stake are not incentive-based compensation for purposes of the rules; (4) exclude adviser employees with significant ownership in funds managed by the adviser as these employees face risk of loss and do not raise the concerns underlying the statute; and (5) the SEC should take a principles-based approach to implementation and enforcement of the rules.