Herein in full is “annex II” - the last minute principles to heavily regulate European hedge fund managers’ pay appended to the European Union’s draft Alternative Investment Fund Manager directive in the past 48 hours by the Swedish presidency of the EU council.
The measures have been criticized as being even more severe than the bonus clampdown facing bankers.
The version below of the directive was accurate as at noon on Thursday 12th November, when a copy was circulated to a select group of fund managers. Emergency lobbying is underway, however, with the lately added principles on pay threatening to overshadow the broad swathe of compromises that have been achieved on other issues. The final draft of the directive may yet change.
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REMUNERATION POLICIES
1. (…) When establishing and applying the remuneration policies for those categories of staff, including senior management, whose professional activities have a material impact on their risk profile or the risk profiles of AIF they manage, (…) AIFM shall comply with the following principles in a way and to the extent that is appropriate to their size and the size of AIF they manage, their internal organisation and the nature, the scope and the complexity of their activities:
(a)
the remuneration policy is consistent with and promotes sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the AIFM or which is inconsistent with the risk profiles, fund rules or instruments of incorporation of the AIF it manages;
(b)
the remuneration policy is in line with the business strategy, objectives, values and (…) interests of the AIFM and the AIF it manages or the investors of the AIF, and includes measures to avoid conflicts of interest;
(c)
the management body in its supervisory function of the AIFM adopts and periodically reviews the general principles of the remuneration policy and is
responsible for its implementation;
(d)
the implementation of the remuneration policy is, at least annually, subject to central and independent internal review for compliance with policies and procedures for remuneration adopted by the management body in its supervisory function;
(e)
staff members engaged in risk management (…) are compensated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control;
(f)
where remuneration is performance related, the total amount of remuneration is based on a combination of the assessment of the performance of the individual and of the business unit or AIF concerned and of the overall results of the AIFM, and when assessing individual performance, financial as well as non-financial criteria are taken into account;
(g)
the assessment of performance is set in a multi-year framework appropriate to the life-cycle of the AIF managed by the AIFM in order to ensure that the assessment process is based on longer term performance and that the actual payment of performance-based components of remuneration is spread over a period which takes account of the underlying business cycle of (…) the AIF it manages and their business risks;
(h)
guaranteed variable remuneration is exceptional and occurs only in the context of hiring new staff and is limited to the first year;
(i)
fixed and variable components of total remuneration are appropriately balanced; the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component;
(j)
payments related to the early termination of a contract reflect performance achieved over time and are designed in a way that does not reward failure;
(k)
the measurement of performance used to calculate variable remuneration components or pools of variable remuneration components includes an adjustment for all types of current and future risks (…);
(l)
(…)
(m)
a substantial portion, which is at least 40 % of the variable remuneration component is deferred over a period which is not less than three years and is correctly aligned with the nature of the business, its risks and the activities of the member of staff in question; remuneration payable under deferral arrangements vests no faster than on a pro-rata basis; in the case of a variable remuneration component of a particularly high amount, at least 60 % of the amount is deferred;
(n)
the variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the AIFM as a whole, and justified according to the performance of the business unit, the AIF and the individual concerned; the total variable remuneration is generally considerably contracted where subdued or negative financial performance of the AIFM or of the AIF concerned occurs;
(o)
staff members are required to undertake not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.
2.
The principles set out in paragraph 1 shall apply both to the remuneration paid by the AIFM and to the remuneration paid by the AIF itself (carried interest). (…) Paragraph 1 shall not apply to returns to employees from their investments in AIF managed by the AIFM nor to remuneration paid in connection with the liquidation of an AIF. [Point (m) of paragraph 1 shall not apply in respect of variable remuneration linked directly to fees earned by the AIFM which cannot be clawed back.]
3.
AIFM that are significant in terms of their size or the size of the AIF the manage, their internal organisation and the nature, the scope and the complexity of their activities shall establish a remuneration committee. The remuneration committee shall be constituted in a way that enables it to exercise competent and independent judgment on remuneration policies and practices and the incentives created for managing risk.
The remuneration committee shall be responsible for the preparation of decisions regarding remuneration, including those which have implications for the risk and risk management of the AIFM or the AIF concerned and which are to be taken by the management body in its supervisory function. The remuneration committee shall be chaired by a member of the management body who does not perform any executive functions in the AIFM concerned. Related links:
Move to curb EU hedge fund managers pay - FT
Flaws in hedge fund rules detailed - FT
