ESMA published a consultation paper on proposed guidelines on sound remuneration policy of Alterative Investment Fund Managers (AIFM) on 28 June 2012, as required under the AIFMD in order to ensure common, uniform and consistent application of the provisions on remuneration.
Article 13(1) of the AIFMD introduces the requirement for AIFM to introduce 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.
The consultation on the guidelines will run until 27 September 2012 and ESMA will publish its final report at the end of 2012. The guidelines will apply from 22 July 2013.
Who will this impact?
The guidelines apply to AIFM which are appointed to hedge funds, private equity funds and real estate funds, in relation to the remuneration policies and practices for identifiable staff.
ESMA proposes the following guidelines in relation to:
- Types of remuneration caught by the AIFMD
- How to identify the categories of staff covered
- Proportionality principle
- AIFMs being part of a group
- Financial situation of the AIFM
- Governance of remuneration
- General requirements on risk alignment
The guidelines are more intrusive than the current FSA Remuneration Code (the Code) under SYSC 19A.
One difference between the guidance and the Code is the broader category of staff caught under ESMA’s proposal. The non-exhaustive list provided by ESMA on the identifiable staff caught by the guidelines, which is similar but not identical to Code Staff under the current regime since it is likely to capture Investment Managers, include:
- Members of the governing body of the AIFM
- Senior management
- Control functions
- Staff responsible for heading the portfolio management, administration, marketing, human resources
- Other risk takers whose professional activities can exert material influence on the AIFM’s or AIF risk profile including persons capable of entering into contracts/positions and taking decisions that materially affect the risk positions of the AIFM/AIF
The guidance has also provided detail on how ESMA consider “exert material influence” should be assessed and the individuals that are considered to have “material impact on the risk profile” of the AIFM or AIF it manages. It should also be noted that AIFMs will be required to demonstrate to competent authorities how they have assessed and selected identified staff.
ESMA have set out the AIFMs that are within the scope of the guidelines which include:
- EU AIFMs which manage one or more AIFs irrespective of whether such AIFs are EU AIFs or non- EU AIFs
- Non-EU AIFMs which manage one or more EU AIFs
- Non-EU AIFMs which market one or more AIFs in the Union irrespective of whether such AIFs are EU AIFs or non-EU AIFs
Non-EU AIFMs which market units or shares of AIFs to professional investors in Member States without a passport will not be subject to the general AIFMD remuneration requirements and only the rules on remuneration disclosure will apply to them, until the private placement regime for non-EU AIFMs/AIFs is terminated (which may be never).
ESMA considers that there should be no exception to the application to any of the AIFMs which are subsidiaries of a credit institution of the sector-specific remuneration principles set out in the AIFMD and in the guidelines. The application of these remuneration principles by AIFMs which form part of a group, apply at group level, as is the case currently under CRD3.
It is also interesting to note that for private equity firms the guidelines provide detail on the treatment of carried interest.
The disclosure requirements, which are similar to those set out in the Code, include a specific disclosure required in the annual report of each AIF which should also detail information related to the link between pay and performance and the criteria used for performance measurements and risk adjustment.
Another point of interest is guidance in relation to deferral of remuneration, which is far more detailed than the rules provided under the Code. Elements covered by the guidance include the components covered by the deferral schedule, vesting point and retention policy. The guidelines also introduce an ex post incorporation of risk for variable remuneration which should imply that once an initial variable remuneration component has been awarded to the staff member, and an upfront part has already been paid, the AIFM is still able to adjust, by way of a reduction, the variable remuneration over time as the outcomes of the staff member’s actions materialise. This will require AIFMs to reconsider their structures to allow for deferral arrangements to be put in place.
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