Some CDO collateral managers have restructured their existing management fees to remove any performance-based compensation, so that they can avoid consolidation under Financial Interpretation No. 46-R.
Last week, Lincoln National Corp. disclosed with the Securities and Exchange Commission that it had removed performance-based incentives from five of its seven outstanding CDOs. By eliminating the performance-based component, these fees are no longer considered variable, allowing the company to avoid being deemed the primary beneficiary.
The remaining two CDOs retain their incentive fees, and are considered variable interests. However, Lincoln has found that it is not the primary beneficiary in these two deals.
Last year, Lincoln had indicated it was planning to consolidate approximately $1.2 billion, as the gross value of their management fees would have been considered variable interests for calculating the expected loss and expected residual return (see ASR 3/24/03).
In December, the Financial Accounting Standards Board released the second rendition of FIN 46, FIN 46-R, which allowed for management fees to be excluded from the ERR/EL analysis if they meet certain criteria that make them more akin to service provider fees.
In May 2003, T. Rowe Price restructured the management fees in its two existing CDOs, such that the fees were no longer performance-based.