On 28 June 2012 the European Securities and Markets Authority published a consultation paper on its proposed guidelines on the remuneration of alternative investment fund managers. The consultation paper is here and the accompanying press release is here.
The guidelines, once adopted, will apply to hedge fund, private equity fund and real estate fund managers where those alternative investment funds are within the ambit of the Alternative Investment Fund Managers Directive (AIFMD). For background on the AIFMD, see these posts.
The aim of the guidelines is to ensure that alternative investment funds have “sound and prudent remuneration policies and structures with the aim of increasing investor protection and avoiding conflicts of interest that may lead to excessive risk taking”. From the ESMA press release:
“[The AIFMD] establishes a set of rules that AIFMs have to comply with when establishing and applying a remuneration policy for certain categories of their staff. The AIFMD also requires ESMA to develop guidelines on sound remuneration policies to further clarify the Directive’s provisions. Overall, the guidelines are aligned with remuneration policies in other financial sectors and deliver against the G20 commitments on sound remuneration as set out in the Financial Stability Forum’s Principles for Sound Compensation Practices.
Steven Maijoor, ESMA Chair, stated:
“The proposed remuneration guidelines for alternative investment funds are an important step in creating a single EU rulebook by ensuring the consistent application of the AIFMD remuneration requirements across member states.
“Given our co-operation with the European Banking Authority on remuneration principles, we expect that the future guidelines will ensure consistency of the rules for remuneration across financial sectors. This consistency will help strengthen the protection of investors and avoid the creation of adverse incentives for those managing alternative investment funds.”
The key elements of the guidelines include:
AIFs’ internal governance
• The governing body of each AIFM has to ensure sound and prudent remuneration policies and structures exist and are not improperly circumvented;
• AIFMs should select the type of staff for which a remuneration policy is put in place and disclose according to which criteria the staff was selected;
Types of remuneration
• For the purposes of the guidelines, remuneration consists of all forms of payments or benefits paid by the AIFM, of any amount paid by the AIF itself, including carried interest, and of any transfer of units or shares of the AIF, in exchange for professional services rendered by the AIFM staff;
• All remuneration shall be divided into either fixed remuneration (payments or benefits without consideration of any performance criteria) or variable remuneration (additional payments or benefits depending on performance or, in certain cases, other contractual criteria). Both components of remuneration (fixed and variable) may include:
o monetary payments; or
o benefits (such as cash, shares, options, cancellation of loans to staff members at dismissal, pension contributions, remuneration by AIFs e.g. through carried interest models) or non-monetary benefits (such as, discounts, fringe benefits or special allowances for car, mobile phone, etc);
Other payments
• Ancillary payments or benefits that are part of a general, non-discretionary, AIFM-wide policy and pose no incentive effects in terms of risk assumption can be excluded from this definition of remuneration for the purposes of the AIFMD-specific risk alignment remuneration requirements;
• Any payment made directly by the AIF to the benefit of the selected staff which consists of a pro-rata return on any investment made by those staff members into the AIF should not be subject to any of the remuneration requirements;
Bonuses and fees
• A “retention bonus” should be considered as a form of variable remuneration and only be allowed to the extent that risk alignment requirements are properly applied; and
• Fees and commissions received by intermediaries and external service providers in case of outsourced activities are not covered by the guidelines.”
The consultation runs until 27 September 2012, with ESMA aiming to publish a final report by the end of 2012. The AIFMD has to be implemented into the national law of member states by 22 July 2013.
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