UCITS and AIFMD remuneration rules for fund managers

A pro-rata return on an actual staff investment is outside the AIFMD guidelines; not if an AIFM loan for it is still unrepaid. On carried interest: an investment funded by an AIFM loan still unrepaid does not qualify for the co-investment exclusion.

Others in the same pay bracket count where their work has material impact. The AIFMD guidelines apply from 22 July 2013, subject to AIFMD transitional provisions. They were amended from 1 January 2017, when the UCITS guidelines also began.

The guidelines list the staff presumed to be identified staff. A manager can rebut this by showing no material impact on the risk profile (UCITS guidelines, para 19; AIFMD guidelines, para 20). They include executive and non-executive members of the management body, senior management, control functions, and heads of investment management, administration, marketing and human resources. Administrative or logistical support staff with no connection to the risk profile are not risk takers (AIFMD guidelines, para 20).

While Article 42 national regimes remain, a non-EU AIFM marketing AIFs to professional investors without a passport is subject only to the disclosure section (AIFMD guidelines, para 1).

Where the delegate is under equally effective remuneration rules, the manager should still ensure the condition is met. Under UCITS, the contractual route applies where the rules would otherwise be circumvented.

In Luxembourg, delegate due diligence should cover pay-rule compliance, among other things (CSSF Circular 18/698, para 495).

The three numerical criteria may only be disapplied in full (para 27). A 20% deferral is not allowed. Be able to explain each disapplication.

Disapplication is never triggered automatically by the guidelines alone (AIFMD guidelines, para 25). A manager that applies deferral at all applies at least 40%, or 60% for a particularly high amount (para 27). The UCITS guidelines describe proportionality in general terms only (UCITS guidelines, para 22).

In Luxembourg, a manager taking a proportionate approach to a remuneration principle informs the CSSF and explains why. It still implements a remuneration policy (CSSF Circular 18/698, para 391).

A manager significant on only one or two factors should not be required to set one up (UCITS para 55; AIFMD guidelines, para 53). Members are non-executive members of the management body. In the example of UCITS or AIF portfolios of up to EUR 1.25 billion, the count includes staff dedicated to the other fund regime and to specified ancillary services. Above those thresholds, the manager should be considered significant for its size or its funds' size. It still assesses its internal organisation and the nature, scope and complexity of its activities. The committee should comprise non-executive supervisory members, at least a majority independent. The chair should be independent and non-executive. Employee representatives are required for UCITS where national law provides for employee representation on the management body.

A second example that may not need a committee is an AIFM in a group whose committee serves the whole group. That committee should have equivalent make-up, role and powers, and take responsibility for checking the AIFM's compliance (AIFMD guidelines, para 55). For an AIFM required to have a committee, the committee should directly oversee the pay of senior staff heading control functions (para 73). Under the AIFMD guidelines, the committee requirement is one of the five that may be disapplied (para 26).

The 50% minimum lapses if UCITS, or AIFs, are under 50% of the total portfolio managed. Fixed pay must be high enough to allow paying no variable pay at all (AIFMD Annex II(1); UCITS Art 14b(1)). Deferred pay vests no faster than pro rata. The 50% instrument rule applies to deferred and upfront parts alike. The UCITS deferral period is set by the recommended holding period and the fund's risks. The AIF deferral period is set by its life cycle, redemption policy and risks. Vesting should not be more often than yearly. The first amount should not vest sooner than 12 months after accrual. The period also reflects fund risks and the staff member's role.

The same ratio of instruments to cash applies to the upfront and deferred parts (AIFMD para 145; UCITS guidelines, para 147). For UCITS, the 50% test uses the total net asset value of all UCITS managed, against all portfolios managed under the UCITS and any AIFMD authorisation (para 149). Neither dividends nor interest should be paid on instruments before vesting (AIFMD para 136; para 138). A retention period does not count towards the minimum deferral period (para 140).

On retirement, discretionary pension benefits are paid in instruments with a five-year retention. If an employee leaves before retirement, the benefits are held for five years in the form of instruments (AIFMD Annex II(1); UCITS Art 14b(1)). Under both regimes, staff undertake not to undermine risk alignment. That bars personal hedging and pay- or liability-related insurance (AIFMD Annex II(1); AIFMD guidelines, para 92; Art 14b(1); UCITS guidelines, para 94).

Early termination payments reflect performance over time and do not reward failure (AIFMD Annex II(1); UCITS Art 14b(1)). Malus acts at vesting and cannot operate after the deferral period ends. Case by case, the AIFMD pay-out rules may be met where investors first get back their capital and any agreed hurdle. Staff pay must also stay subject to clawback until the AIF is wound up.

Criteria under which malus and clawback apply should, for example, include misconduct or serious error and a significant downturn in financial performance. They also include a significant risk management failure and a significant change in the manager's overall financial situation (AIFMD para 151; UCITS guidelines, para 153). Termination payments may still be made on early termination due to a change of strategy, or a merger or takeover (AIFMD para 87; para 89).

The key investor information points to that website (UCITS Art 78(4)).

Managers should publish a disclosure at least yearly, scaled to size (AIFMD paras 162-163; UCITS paras 163-164; AIFMD guidelines, para 160). They may choose its form (UCITS para 161). Small or non-complex managers should only be expected to give some qualitative information and, where appropriate, very basic quantitative information. Managers should disclose how they have applied proportionality (AIFMD para 162; UCITS guidelines, para 163).

The UCITS guidelines then set how the regimes combine. Pay should be split pro rata by activity where possible, or should follow the regime more effective at discouraging inappropriate risk. Staff providing ancillary services under UCITS Article 6(3) or AIFMD Article 6(4) should also be subject to the MiFID remuneration rules. Where a CRD instrument rule conflicts, the UCITS or AIFMD instrument rule applies with its percentage and exceptions.

ESMA/2016/579 amended paragraph 33 in Section VIII of the AIFMD guidelines from 1 January 2017. It restated paragraph 32 without change (ESMA/2016/579, paras 2 and 3). The 2013 paragraph 33, which treated an AIFM's compliance with the AIFMD principles as ensuring group compliance for that AIFM, is no longer current. In Luxembourg, UCITS management companies follow ESMA/2016/575 and AIFMs follow ESMA/2016/579 (CSSF Circular 18/698, paras 389 and 390).