The European Securities and Markets Authority (ESMA) has published a consultation on proposed implementation measures for the Alternative Investment Fund Managers Directive (the Directive) that must be implemented by 22 July 2013. The Directive will include detailed provisions on compensation arrangements.
The Directive will require significant changes to the compensation policies of many fund management organisations. Whilst many such organisations are already subject to the Financial Services Authority (FSA) Remuneration Code (the Code), many others are not – e.g certain hedge funds and private equity businesses. The UK is likely to take a similar approach to implementing the Directive as it did with the Capital Requirements Directive III that gave life to the Code in the UK; it is probable that the FSA will amend the Code to implement the Directive for fund managers. However, the Code will not simply be extended to apply to these new organisations. The Directive’s obligations will apply quite specifically to fund managers, and the obligations on those that are subject to the Code will increase as a result of implementation of the Directive – complying with the current Code will not be sufficient.
By way of example, the Code really only has a material impact on workers classified as Code Staff. The Directive, on the other hand, does not exempt Code Staff in the same way and will apply to risk takers who have a material impact on the risk profile of either the asset management business or of the fund itself. Also, it is unlikely that the proportionate tiered approach that applies under the Code and which relaxes the strict rules in relation to many organisations, particularly those that do not pose a large risk to the economy, will apply.
Therefore, even though the implementation date of the Directive is in 2013, organisations should start considering what this means for them now.
At the heart of the Directive requirements on compensation is the requirement that the organisation should have compensation policies and practices that promote sound and effective risk management in the context of and aligned with the risk profiles of the particular funds that it manages.
As one would expect, there are a number of specific obligations in relation to variable compensation that follow the Code to a large extent, for instance:
- A significant proportion should be deferred (40 percent to 60 percent as with the Code) and subject to retention periods aligned with the funds managed
- At least 50 percent should be paid in equitylinked instruments
- All variable compensation should be aligned with the wider strategy of the business
Performance assessment should be based on a multi-year framework appropriate to the life cycle of the funds managed by the organisation.
There are de minimis exemptions based on the value of assets under management for the particular manager.
It should be noted in particular that variable compensation in this context includes carried interest arrangements. Furthermore, partnerships generally are likely to be treated in the same way as corporate bodies – how this can be achieved in view of the transparent way partnerships tend to work will need to be determined.
ESMA is consulting on the level of disclosure required but proposes that disclosure as to compensation is made in relation to each fund on an aggregate basis, including more detail on compensation for senior management and those members of staff whose professional activities have a material impact on the risk profile of the relevant fund.