ESMA hearing on proposed remuneration guidelines (AIFMD)
On 25 September 2012, the European Securities and Markets Authority (ESMA) held an open hearing on the consultation paper on the proposed remuneration guidelines for Alternative Investment Fund Managers (AIFMs) released on 28 June 2012.
The proposed guidelines (AIFMD Guidelines) set out how AIFMs will be required to implement remuneration policies to comply with the EU Alternative Investment Fund Managers Directive (AIFMD), which has to be implemented into the national law of EU states by 22 July 2013.
The final ESMA guidelines will be released as soon as possible in Q4 2012. Thereafter the FSA (and other local EU regulatory bodies) will produce their own final rules consistent with the final ESMA guidelines.
At the open hearing, clarity was sought and representations were made on a number of aspects of the AIFMD Guidelines. A summary of the key issues raised is set out below. The extent to which these concerns will be addressed in the final guidelines, if at all, remains unclear.
Concerns were raised about:
- the lack of clarity on proportionality; and
- the issue that, although proportionality could lead to ‘tailoring’ of different principles to the AIFMs’ specific circumstances, the ‘neutralisation’ of specific principles would not be permitted.
Significant concerns were raised in relation to:
- the potential requirement to publicly disclose the details of aggregate Identified Staff pay, particularly given many AIFMs have a very small number of staff such that it may be possible to extrapolate the remuneration paid to particular individuals; and
- the difficulty that an AIFM may have in requiring AIFs to make disclosures if the AIF in question is not internally managed by the AIFM.
Representations were made that:
- the de minimis value of assets under management of €250m that would exclude an AIFM from requiring a Remuneration Committee is too low;
- many AIFMs would not have Non-Executive Directors and it would not necessarily be appropriate for them to be appointed solely for this purpose, particularly where the AIFM is an owner-managed business; and
- Identified Staff in a control function may have a dual role as a member of the governing body and/or senior management, particularly in smaller AIFMs. Therefore they should still be able to be incentivised based on the performance of the business area in which they work.
It was noted that:
- management fees are not subject to performance or clawback and therefore it is difficult to understand why an AIFM should be constrained in the payment of bonuses from that source;
- performance fees are commonly agreed with investors and are typically not subject to clawback;
- deferral can, depending on the structure and jurisdiction, trigger upfront tax charges which can potentially be higher than the amount subsequently received;
- further clarity is needed on the types of instruments that could be used to satisfy the deferral requirements; and
- the focus on annual award cycles could create a shift away from long term equity plans and those aligned with fund lifecycles (whether short or long) which could be to the detriment of investors.
In particular, the Private Equity industry would welcome confirmation that, if carried interest plans are in operation, the requirements on risk alignment of variable remuneration (e.g. deferral, time horizons etc) would automatically be met, and there would be no further need for deferral of short-term variable pay.
Issues in relation to AIFMs as part of groups
The interaction of the proposed remuneration rules/guidelines based on CRD, AIFMD, UCITS and other EU directives remains unclear, particularly in a group context.
Key issues raised in this context were:
- a group may have different parts of the business subject to different regulations which could materially impact the group’s ability to have a consistent reward strategy across the organisation;
- there could also be certain individuals with roles in the different parts of the business whose remuneration is theoretically subject to different guidelines and how this should be addressed is not currently clear; and
- it is not uncommon in certain AIFMs for an individual based outside the EU (e.g. in the US) to be responsible for certain functions in the EU AIFM and clarity was requested as to whether that individual’s remuneration, or a part of it, would be subject to the AIFMD remuneration requirements.