The European Securities and Markets Authority (ESMA) today published its final guidelines on remuneration of alternative investment fund managers.
The rules will apply to managers of alternative investment funds, including hedge funds, private equity funds and real estate funds. Non-EU alternative investment fund managers who market funds to EU investors will also be subject in full to the guidelines after a transitional period.
The organization believes that stronger governance of how fund managers are paid will lead to improved investor protection.
“These guidelines will help promote prudent risk-taking by fund managers and help align the interests of both fund managers and investors,” said Steven Maijoor, ESMA chair. “Making sure that these provisions on pay are applied in a common and consistent way is key to increasing investor protection and ensuring a level-playing-field in the alternative fund sector across the EU.”
Key elements of directive—referred to as AIFMD—include:
Alt. Investment Funds’ Internal Governance
• The governing body of each AIFM has to ensure sound and prudent remuneration policies/ structures exist and are not circumvented;
• AIFMs should select the type of staff for which a remuneration policy is put in place and be able to demonstrate according to which criteria this selection occurred;
Categories Of Staff Covered
ESMA’s remuneration guidelines apply to identified staff whose professional activities might have a material impact on the AIF’s risk profile. This includes:
• senior management, risk takers, control functions; and
• any employee receiving a total remuneration that takes them into the same remuneration bracket as the aforementioned categories of staff.
Types Of Remuneration Covered
• For the purposes of the guidelines, remuneration consists of all forms of payments or benefits paid by the AIFM, of any amount paid by the AIF itself, including carried interest, and of any transfer of units or shares of the AIF, in exchange for professional services rendered by the identified staff;
• All remuneration should 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, remuneration by AIFs e.g. through carried interest models) or non-monetary benefits (such as discounts, special car allowances etc).
The rules are slated to come into effect on July 22 this year.