By Brett Philbin and Annie Gasparro
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)–If Congress has its way, brokers may not get much of a taste of their coveted retention bonuses.
Aimed initially at big bonuses received by executives and traders at American International Group Inc. (AIG), legislation passed by the U.S. House of Representatives also appears to encompass retention bonuses received by brokers at Morgan Stanley (MS), Citigroup Inc.’s (C) Smith Barney, Bank of America Corp. (BAC), and Merrill Lynch Global Wealth Management.
The special tax, as passed Thursday in the House, would claim 90% of bonuses paid after Dec. 31, 2008, to employees with a household income of $250,000 or more by companies that received at least $5 billion from the government’s Troubled Asset Relief Program. The Senate is considering its own version, which differs.
“This legislation would apply to brokers,” said Kenneth Raskin, head of White & Case LLP’s global executive compensation, benefits and employment law practice group.
Raskin believes, however, that big banks who received taxpayer funds can prevent their brokers from losing retention awards by paying back the TARP money. The chief executives of Bank of America and Morgan Stanley both have said their companies plan to begin repaying bailout funds by the end of this year.
A Morgan Stanley spokeswoman declined to comment, and a Bank of America spokesman didn’t immediately return calls.
Brokers aren’t so reticent. Said one at Merrill Lynch: “90% tax on bonuses! Haven’t they heard of The Boston Tea Party?”
Merrill Lynch and Bank of America brokers signed retention contracts on Nov. 14, 2008, but didn’t receive the money until January.
Morgan Stanley and Smith Barney brokers have until March 31 to sign their retention agreements, and will get their checks in January 2010. The delay isn’t typical for retention packages, but the companies want to try to ensure that the money comes from future earnings from the planned Morgan Stanley Smith Barney joint venture and not from TARP.
The companies might find loopholes in the language of the bill. For example, Morgan Stanley and Bank of America say the retention packages aren’t a bonus, but rather a forgivable loan since the brokers must pay the money back if they leave before a set period of time. Morgan Stanley’s package is a nine-year contract while the term for Bank of America’s is seven years.
Congress “forgets that the company has liberty to pay me 100 ways,” said a Smith Barney broker in the Midwest U.S.
Mike Shah, a partner in the executive compensation group at law firm Jones Day New York, said regulators, in their response to a public outcry, are rushing through populist legislation “without examining the long-term implications.”
The measure could drive brokers out of jobs with companies receiving government bailout money to others that aren’t. “There seems to be an ‘I just want out’ attitude coming our way,” said Carri Degenhardt-Burke, a job recruiter with Degenhardt Consulting.
A Merrill Lynch broker in the Midwest expects foreign institutions such as UBS AG (UBS) or regional companies including Raymond James Financial Inc. (RJF) to be huge beneficiaries of such legislation. However, the Swiss government could pursue a similar action to curtail signing bonuses that could affect UBS’ ability to recruit brokers.
(Brett Philbin writes Street Moves, a column which tracks the migration of executives on Wall Street, with a particular emphasis on financial advisers with more than $1 million in annual production and who manage more than $100 million in client assets. He can be reached at 201-938-5393 or by email at email@example.com.)
(Annie Gasparro writes about financial advisers and their jobs, with a particular focus on the transformation of the brokerage business from a transaction-oriented model to fee-based financial advising. She can be reached at 201-938-5174 or by email at firstname.lastname@example.org.)