ESMA has opened a consultation (closing Sept 30) on proposed guidelines on remuneration of alternative investment fund managers (AIFMs). ESMA will hold a hearing on the guidelines on sound remuneration policies under the AIFMD at ESMA offices on 25 September.
ESMA’s guidelines will apply to managers managing alternative investment funds (AIFs) including hedge funds, private equity funds and real estate funds. These funds will be obliged 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 guidelines are generally aligned with remuneration policies in other financial sectors and the Financial Stability Forum’s Principles for Sound Compensation Practices.
The guidelines include:
- AIFs’ internal governance. The governing body of each AIFM has to ensure sound and prudent remuneration policies and structures exist and operate. 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, 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 the AIFM staff. All remuneration is to 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:
- monetary payments; or
- 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. Fees and commissions received by intermediaries and external service providers in case of outsourced activities are not covered by the guidelines.