Translations of ESMA’s Guidelines on Remuneration for Alternative Investment Fund Managers (AIFMs) were published on 3 July 2013.  The guidelines took effect on 22 July 2013, subject to the transitional provisions in AIFMD.

AIFMs must introduce sound and prudent remuneration policies and organisation structures which avoid conflicts of interest that may lead to excessive risk taking. Non-EU AIFMs who market funds using passporting arrangements to EU investors are also subject to the guidelines. 

Relevant Staff

The guidelines apply to “identified staff” whose professional activities might have a material impact on the AIF’s risk profile.  “Identified staff” includes:

• Senior management, risk management and compliance staff 
• Any employee receiving total remuneration that takes them into the same remuneration bracket as the aforementioned categories of staff

Remuneration & Proportionality

Remuneration of identified staff must be structured in a way that promotes sound and effective risk management by, amongst other things, deferring between 40% and 60% of variable remuneration for three to five years and allowing for an ex-post risk adjustment of a staff member’s remuneration by means of claw back clauses. 

The guidelines acknowledge that not all AIFMs should have to give substance to the remuneration requirements in the same way and to the same extent.  However, the only material requirements which may be dis-applied relate to: 

• Non-cash variable remuneration 
• The requirement to retain non-cash instruments for a period following acquisition
• The remuneration deferral period
• The incorporation of ex-post risk adjustments

Delegation

The guidelines provide that when delegating portfolio management or risk management activities, the AIFM should ensure that: (a) the entities to which portfolio management or risk management activities have been delegated are subject to regulatory requirements on remuneration that are equally as effective as those applicable under the guidelines; or (b) appropriate contractual arrangements are put in place with the delegate in order to ensure that there is no circumvention of the remuneration rules.

Non-EU AIFM

A non-EU AIFM who chooses to market to professional investors in the EU without a passport and relies instead on the national private placement regimes is only subject to Section XIII (guidelines on disclosure) of the guidelines. Such AIFMs should annually disclose information regarding their remuneration policies and practices for members of staff whose professional activities have a material impact on the risk profile of the AIFs the AIFM manages. Once such AIFMs switch from private placement to an EU passport (expected to be available from 2015), the full guidelines will apply.

Next steps

Regulatory authorities must notify ESMA whether they comply or intend to comply with the guidelines by 3 September 2013.

Contributed by Vincent Coyne