Co-authored by Tim Aron.
On February 11, the European Securities and Markets Authority (ESMA) published final guidelines (Guidelines) on remuneration of alternative investment fund managers (AIFMs). The Guidelines follow from, and add detail to, the remuneration provisions contained in Annex II of the EU Alternative Investment Fund Managers Directive (2011/61/EU). The Guidelines will apply to managers of alternative investment funds (AIFs). AIFs include hedge funds, private equity funds and real estate funds. Non-EU AIFMs which market AIFs to EU investors under the Alternative Investment Fund Managers Directive’s marketing passport will also be subject to the guidelines after a transitional period.
ESMA summarized the Guidelines as requiring AIFMs to introduce sound and prudent remuneration policies and organizational structures designed to avoid conflicts of interest that may lead to excessive risk taking.
The Guidelines apply to “identified staff whose professional activities might have material impact on the AIF’s risk profile.” Identified staff include executive and non-executive board members, senior management, control functions (including risk management, compliance internal audit and similar functions) and risk takers (any staff member who can “exert material influence” on the risk profile of an AIFM or the AIF it manages). Also included is any employee whose total remuneration is in the same bracket as the staff identified in the previous sentence.
For the purpose of the Guidelines, remuneration consists of:
i. all forms of payments or benefits paid by the AIFM,
ii. any amount paid by the AIF itself, including carried interest, and
iii. any transfer of units or shares in the AIF,
in each case paid or given in exchange for professional services rendered by the identified staff of the AIFM.
The board or other governing body of each AIFM is required to ensure that sound and prudent remuneration policies/structures are in place and are not circumvented.
The Guidelines will apply beginning July 22, 2013, subject to the AIFMD’s transitional provisions.