February 27, 2013

The Alternative Investment Fund Managers Directive – ESMA Remuneration Guidelines

On 11 February 2013, the European Securities and Markets Authority (“ESMA”) published its final Guidelines on the remuneration of managers under the Alternative Investment Fund Managers Directive (the “Directive”). The Guidelines set the parameters within which AIFMs must set their remuneration policies. Although the Guidelines are aimed specifically at European managers, they will affect non-European managers in two situations, viz disclosure and delegation, as noted below.

The Directive's Requirements

Article 13 of the Directive requires that managers have remuneration policies and practices in place for “those categories of staff, including senior management, risk takers, control functions and any employees receiving total remuneration that takes them into the same remuneration brackets as senior management and risk takers.” In Annex II to the Directive there are various specific requirements that these policies and procedures must meet.

Identified Staff

The first requirement is for each manager to determine who will be covered by the Article 13 requirement and the Guidelines. Managers should be able, if challenged, to demonstrate to local regulator how they assessed all their employees, and each case will need to be assessed on its own facts. It is worth noting, however, that managers should not be deceived by the text of Article 13 into considering the level of remuneration as being the major criterion for inclusion. Probably more important is the ability of that individual to affect the risk profile of the relevant fund.


For the purposes only of these Guidelines, remuneration includes all forms of payments or benefits paid by the manager, any amounts paid by the fund itself, including carried interest, and any transfer of units or shares in the fund in exchange for professional services rendered by the identified staff. The Guidelines usefully state, however, that remuneration does not include the payment of dividends or similar returns to owners of the manager and any returns made by identified staff on co-invest arrangements (provided that this co-invest is not financed by way of loan from the manager). This leaves open the issue of whether co-invest returns are remuneration if financed by way of commercial loan from an unconnected third party, such as a bank. Presumably, though, they would not be.

Remuneration Requirements


The headline requirements of each manager’s policy are as follows:

  • Fixed remuneration should be “sufficiently high to remunerate the professional services rendered, in line with the level of education, degree of seniority, the level of expertise and skills required,” but there is no maximum or minimum percentage figure. This, presumably, means that any manager’s arrangements of paying owners of the manager only through profit will no longer be permissible.
  • Assessment of variable remuneration must be based not only on the individual’s performance but also on the fund’s and the manager’s performance as a whole. Non-financial criteria must also be used. This assessment must be over a multi-year framework.
  • At least 50% of variable remuneration must be in the form of fund units, not cash.
  • At least 40% of the variable remuneration must be deferred over a period of time appropriate for the life of the fund, but at least 3 to 5 years. This amount allotted can be adjusted downwards for subsequent poor performance before vesting.

The Guidelines recognise that these requirements may be overly onerous for certain types of managers and/or certain types of staff. Small managers that manage funds that are non-complex may disapply the requirements above in their entirety if they believe it that it is proportionate to do so. If they wish to take advantage of the proportionality principle, they must disapply all of the requirements above and not merely some of the requirements.

Remuneration Committees

All managers should consider whether they ought to establish a remuneration committee with the presence of independent persons even where they are not strictly required to do so under the terms of Annex II of the Directive. The Guidelines suggest that managers may reasonably come to the conclusion that no remuneration committee is necessary where either they are members of a financial group that already has a group remuneration committee or where they manage no more than €1.25 billion of assets and have no more than 50 employees.


The Directive contains no requirements concerning the disclosure of a manager’s remuneration policy, but ESMA did propose in its earlier consultation paper on the Guidelines a provision on disclosure similar to that under the Capital Requirements Directive (“CRD”) and the Commission Recommendation on remuneration policies (2009/384/EC) (the “Recommendation”). This was heavily criticised by the industry, and ESMA now appears to have retreated slightly from this position, saying in its feedback statement that “the disclosure should not necessarily be made public” (ie, presumably, it may be to existing investors and potential investors only).

The Guidelines themselves now provide that “small or non-complex AIFMs/AIFs should only be expected to provide some qualitative information and very basic quantitative information where appropriate.” This does, however, suggest that all managers (including non-EU managers marketing their funds into the EU) will be expected to make at least some statement regarding their remuneration policies, although the difficult issue that has been left open is how much information needs to be disclosed and to whom.


The Directive contains no provisions directly applicable to persons carrying on portfolio or risk management as a delegate of the manager. This would ordinarily make little difference within the EU as such delegates will normally be subject to the remuneration requirements in the CRD and the Recommendation that are broadly similar. Notwithstanding strong criticism that ESMA did not have the legal position under the Directive to do so, it has decided to extend the Guidelines to delegates performing portfolio or risk management activities. An EU manager should not delegate either activity to a third party unless either that third party is subject to regulatory requirements on remuneration that are equally as effective as the EU requirements or where it enters into a contractual arrangement with the delegate to ensure that there is “no circumvention of the remuneration rules set out in the [Guidelines].”

This is unhelpful drafting. It leaves open whether this provision was merely intended to be a form of anti-avoidance provision to prevent delegations with the intention of avoiding the remuneration principles in the Guidelines or whether it is intended to impose, by contract, the Guidelines on non-European managers. The ESMA commentary in the Final Report recognises the aim of a level playing field between EU and non-EU managers regarding remuneration, so it seems reasonable to assume that the requirement is intended to be more than simply anti-avoidance.