On July 3, 2013, the European Parliament approved an amended text of the proposed fifth directive on Undertakings for Collective Investments in Transferable Securities (“UCITS V”). The proposal to cap the variable component of a UCITS manager’s identified staff’s remuneration at 100% of the fixed component was rejected (a similar cap was adopted with respect to certain employees of banks and investment firms under the capital requirements directive (“CRD IV”)). As a result, it is now unlikely that a bonus cap along the lines of the one introduced under CRD IV will be adopted in the foreseeable future in relation to alternative investment fund managers.

The European Parliament has, however, introduced a number of new provisions as part of UCITS V that, if adopted in the final text, would provide that:

  • competent authorities in Member States may require a UCITS manager to explain how its variable remuneration policy is consistent with the relevant UCITS V requirements; 
  • the European Securities Markets Authority (“ESMA”) is empowered to monitor remuneration policies together with the competent authorities in Member States and, where a UCITS manager is in breach of the requirements in relation to remuneration, ESMA can make a recommendation to the relevant competent authority to prohibit temporarily or restrict the application of that manager’s remuneration policy; and 
  • UCITS managers are obliged to have malus or clawback arrangements in place to allow them to reduce the variable remuneration component where the UCITS manager or the UCITS fund it manages suffers “subdued or negative financial performance”.

The current text of UCITS V provides that the variable component of a UCITS manager’s identified staff’s remuneration must be based on both the individual’s and the fund’s performance with at least 50% of such variable component paid in units of the UCITS that they manage or similar instruments that create an equivalent ownership interest. At least 25% of the variable component must be deferred for at least 3 to 5 years (or less where the lifecycle of the relevant UCITS fund is shorter) to encourage managers to take a long term view. The salary restrictions apply to identified staff at UCITS managers, including, fund managers, persons who take investment decisions that affect the risk position of the fund, persons who exercise influence on staff, such as investment policy advisors and analysts, and senior management, risk takers and personnel in control functions.

The European Parliament, the European Council and the European Commission will now work together to produce a final text of UCITS V, which is expected in the third quarter of 2013. The restrictions on remuneration would likely be applicable from mid-2015.