ESMA consults on remuneration policies impacting alternative investment fund managers
Posted on 6 Sep 2012
Consultation on proposed guidelines to run until 27 September 2012
On 28 June 2012, the European Securities and Markets Authority (“ESMA”) published a consultation paper on proposed guidelines on remuneration of alternative investment fund managers (“AIFMs”). ESMA’s future guidelines on the remuneration by AIFMs (the “ESMA Guidelines”) will apply to managers managing alternative investment funds (“AIF”) including hedge funds, private equity funds and real estate funds. These funds will be asked to introduce sound and prudent staff remuneration policies and structures, largely inspired by the provisions of the Capital Requirements Directive.
The key elements of the guidelines include the following:
The governing body of each AIFM will be required to ensure that sound and prudent remuneration policies and structures are in place and that such policies are not improperly circumvented. AIFMs should determine the type of staff for which a remuneration policy needs to be put in place and disclose the criteria used during the identification process.
The following staff categories are expected to be “identified staff”: directors, CEOs and partners; senior management; individuals responsible for control functions; staff responsible for portfolio management and all other staff whose professional activities would have a material influence on the AIFM’s risk profile.
Types of remuneration
For the purposes of the ESMA Guidelines, remuneration consists of all forms of payments or benefits paid by the AIFM, or any amount paid by the AIF itself including carried interest and any transfer of units or shares of the AIF in exchange for professional services rendered by AIFM staff.
Remuneration shall be divided into either fixed remuneration which is considered to be payments or benefits without consideration of any performance criteria, or variable remuneration which consists of additional payments or benefits that depend on performance or, in certain cases, other contractual criteria.
Both components of remuneration may include monetary payments or simply benefits, for example cash, shares, options and cancellation of loans to staff members at dismissal.
Bonuses and fees
In relation to retention bonuses, these should be considered as a form of variable remuneration and only be allowed to the extent that risk alignment requirements are properly applied. Fees and commissions received by intermediaries and external service providers in case of outsourced activities are not covered by the ESMA Guidelines.
AIFMs will have to disclose details of total remuneration paid by the AIFM, including the split between fixed and variable remuneration in the annual report of the AIF. The disclosure will have to include the aggregate amount of remuneration for senior management and other risk takers.
The consultation runs until 27 September and ESMA aims to publish a final report before the end of 2012 so that the guidelines will be in place in advance of the AIFM Directive transposition deadline of 22 July 2013.
It remains to be seen whether the proportionality under the existing FSA remuneration rules exempting some hedge fund managers of part of the remuneration policy will be lost as a result of the new AIFM Directive regime and hedge fund managers will apply a remuneration policy more akin to the one adopted by banks.