AIFMD Alert - ESMA issues final remuneration guidelines

On 11 February 2013 the European Securities and Markets Authority (ESMA) published its final report  setting out guidelines for the remuneration of alternative investment fund managers (AIFMs) under the Alternative Investment Fund Managers Directive (AIFMD).

ESMA’s remuneration guidelines will apply to managers of alternative investment funds (AIFs) including hedge funds, private equity funds and real estate funds, as well as managers of other non-UCITS funds. 

Non-EU AIFMs who market funds to EU investors will also be subject in full to the guidelines once they switch from private placement (available in some markets until 2018) to an EU passport (available from 2015).

The guidelines will apply from 22 July 2013 but existing AIFMs should be able to avail of a transitional period until 22 July 2014, unless they seek earlier authorisation. 

Firms with performance years commencing 1 January 2014 may need to assess their position over the coming months to ensure that appropriate policies and structures are in place in respect of the full performance year.

ESMA’s rules could require material changes to the way that fund managers remunerate their staff and the governance around remuneration.

We are actively discussing with firms the extent to which these requirements affect fund managers and which aspects of their existing remuneration policies and practices need to be considered to comply in time. Please feel free to contact us if you wish to discuss these requirements further.

Key points

ESMA’s final report follows an intense period of consultation after the release of the draft report on remuneration guidelines. 

Read our summary of the key principles set out in ESMA’s draft report.

Partners and shareholders
ESMA recognises that employee shareholders or partners in the AIFM may receive dividends or similar distributions as owners of an AIFM.

Such payments are excluded from the scope of ESMA’s guidelines, but only to the extent they do not circumvent them (whether intentionally or not).

ESMA offers little indication of what constitutes “circumvention”, other than general wording emphasising that structuring aimed at “artificially evading” the AIFMD remuneration guidelines will not be effective.

Delegated entities
All remuneration requirements have effectively been extended to entities to which portfolio or risk management have been delegated.

AIFMs must ensure that the delegated entity either has to be subject to regulatory requirements that are “equally as effective” as under the AIFMD, or should effectively be subject to the same requirements by way of contractual arrangements put in place between the AIFM and the delegated entity.

Proportionality
There is further guidance on proportionality within the guidelines and, in particular, ESMA has clarified that applying proportionality could lead to certain requirements being disapplied entirely. This is a positive development.

Requirements that can be disapplied entirely could include establishing a Remuneration Committee, delivering at least 50% of variable remuneration in the form of fund units and the deferral, retention and malus/clawback requirements.

ESMA has clarified that, whilst these features can be disapplied, they may only be disapplied in their entirety. It is not possible to apply lower thresholds based on proportionality (e.g. deferral of 20% of variable remuneration).

Disapplication cannot happen automatically and AIFMs should be able to provide regulatory authorities with a detailed explanation why such requirements have been disapplied. 

This will depend upon the size of the AIFM, the AIFs it manages, its internal organization and the nature, scope and complexity of its activities.

Remuneration committees
ESMA has confirmed that an owner-managed AIFM, partnership or LLP is not necessarily excluded from requiring a Remuneration Committee (RemCo) under the guidelines. They will be subject to the proportionality principle like all other firms.

ESMA has also updated the examples of AIFMs which may not need to establish a RemCo:

• AIFMs managing AIFs of EUR 1.25bn (in aggregate) or less and with 50 employees or less (including employees dedicated to other relevant activities, including management of UCITS funds)
• Firms with existing RemCos, provided the existing committee is governed by equivalent principles to those of ESMA and is responsible for monitoring the compliance of ESMA’s AIFMD remuneration principles. The types of firms this applies to has been extended from solely “credit institutions” to AIFMs which are part of banking groups, insurance groups, investment groups or financial conglomerates.

Identified Staff
ESMA has clarified that the general remuneration requirements should be applied only to “Identified Staff”, although voluntary application to all AIFM staff is strongly recommended.

ESMA has also explained that, although heads of business units (including administration) will be considered Identified Staff, administrative or logistical support staff will not necessarily be considered as such.

Co-investment
In spite of representations made arguing to the contrary, ESMA has confirmed its original position that certain co-investment arrangements, funded by loan arrangements, will still be considered “remuneration” for the purposes of their guidelines.

Control functions
The form in which variable remuneration is delivered to staff in control functions has been slightly relaxed, as ESMA now allows for some of their variable pay to be determined by reference to AIFM-wide (presumably also including fund) performance although it cannot be exclusively based on this element.

Multiple funds under management
For AIFMs managing multiple funds, staff were previously required to receive instruments related only to the AIFs in relation to which they perform activities. However, ESMA has now reworded the guidelines such that Identified Staff should receive instruments related mainly to the AIFs in relation to which they perform activities.

Disclosure
Given the feedback received, ESMA clarified that the disclosure of detailed information regarding remuneration policies and practices does not necessarily have to be public. Public disclosure may still be required under other EU and national rules.

Next steps
Now that ESMA has issued its final report on remuneration, affected firms should be considering their existing arrangements and the extent to which changes, if any, will need to be implemented. In particular, firms will want to consider the extent to which the proportionality principle applies to them.

For more information please contact us or your usual Deloitte relationship manger. You will also find a range of information on key AIFMD developments in our AIFMD web section.

Contact us

Mike Hartwell
Partner, Head of Investment Management
T: +353 1 417 2303
E: mhartwell@deloitte.ie

Deirdre Power
Partner, Investment Management Advisory  
T: +353 1 417 2448  
E: depower@deloitte.ie

Brian Jackson
Partner, Investment Management  Advisory
T: +353 1 417 2975
E: brijackson@deloitte.ie