This document outlines an agenda for an AIFMD webinar on remuneration code, regulatory, and tax implications. The webinar covers an overview of the AIFMD remuneration code, remuneration and tax issues, the code in Malta, and concludes with a panel discussion on aspects not addressed in the code. Speakers from Cordium will discuss topics like the remuneration code requirements, proportionality principles, identifying staff, risk alignment, and disclosure obligations. They will also cover delegating functions and how the rules apply, as well as taxation of deferred remuneration for corporate and LLP structures.
2. 2
AIFMD Surgery Webinars
- Remuneration Code; Regulatory and Tax
Implications
The webinar will begin shortly…
You can join either by VoIP or dial in
by telephone
Follow call in details if you select
to use Telephone audio
4. 4
AIFMD Surgery Webinars
- Remuneration Code; Regulatory and Tax Implications
AGENDA
Introduction
Jonathan Wilson, Director of Project Consulting, Cordium
The AIFMD Remuneration code – an overview
Bobby Johal, Managing Consultant – Technical, Cordium
Remuneration and tax
Laurence Parry, Private Client Partner, Cordium
Malta and Remuneration
Adam de Domenico, CEO Cordium Malta
Panel discussion - What doesn't the Remuneration Code say? - moderated
by Jonathan Wilson, Director of Project Consulting, Cordium
5. THE AIFMD REMUNERATION CODE – AN
OVERVIEW
BOBBY JOHAL, MANAGING CONSULTANT
– TECHNICAL, CORDIUM
5
6. The AIFMD Remuneration code – an overview
o Remuneration (Art. 13) & (Annex II)
o Closely follows CRD and allude to MIFID and UCITS V
o Remuneration policies and practices must be “… consistent with
and promote sound and effective risk management and do not
encourage risk-taking…”
o Apply from July 2013 – but subject to transitional
o FCA rules feature in SYSC 19B – proportionality
o Not apply to sub-threshold AIFMs
o ESMA and FCA Guidelines add flesh to skeleton
6
7. Remuneration – In outline
o FCA Nine Principles
o Detailed Governance arrangements (sec. X / Principle 3)
o Management oversight - ‘Supervisory function’
o Remuneration committee (Part X.II)
o Independent review
o Risk alignment, general (Part XII / Principle 1)
o Remuneration policy
o In line with business strategy
o Not encourage risk taking
o Alignment of interests
o Cover: Pension; Severance; Personal Hedging
7
8. Remuneration – In outline
o Risk alignment, Specific (Part XII / Principle 5)
o Quantitative and qualitative over a multi year framework
o Structural provisions
o deferral of between 40% and 60% of variable remuneration for three to five
years;
o payment of at least 50% of variable remuneration must be units/shares in AIF
or equivalent;
o Clawback/malus
o Limits on guaranteed bonuses
o Provisions can be dis-applied for an individual where
o Bonus is no more than 33% of total remuneration; and
o Total remuneration is no more than £500k
8
9. Remuneration - instruments
o What Remuneration?
o All forms of payments and benefits paid by the AIFM
o Any amount paid by the AIF, including carried interest (but not return
on investment)
o Any transfer of units or shares in the AIF in exchange for professional
services
o Fixed or variable and both components may include
o Cash
o Shares
o Options
o Pension contributions
o Remuneration directly from AIF – (carried interest models; or non-cash – discounts,
allowances)
9
10. Remuneration - instruments
o What Remuneration?
o Excluded…
o Dividends or similar distributions received by owners of AIFM
o BUT – only if they do not circumvent the rules!
o Ancillary non-discretionary payments/benefits which are part of
AIFMD-wide policy
o Pro-rata returns on investment
o actual disbursement required
o Loans made to facilitate co-investment not covered within exemption if
loan has not been reimbursed before return is paid
10
11. Remuneration - Scope
o Apply to staff whose professional activities have a material impact on the
risk profiles of the AIFM or the AIFs
o ‘Identified Staff’ aka Remuneration Code staff
o Executive and Non-Executive Directors
o Senior Management
o Business unit heads – Portfolio Management, Marketing, HR
o Control functions
o Staff who exert a material influence on risk profile of AIF/AIFM
o Staff remunerated in same bracket
o Control functions variable remuneration based on function-specific
objectives not solely by AIFM-wide performance
11
12. Remuneration – Delegation
o Delegation
o requirements extended to those to whom functions of risk
or portfolio management have been delegated
o Delegates must be regulated under comparable rules; or
o requirements stipulated in contractual arrangements that cover
any payments made to the delegates’ identified staff as
compensation
o Obligations effective as soon as an AIFM is authorised
12
13. Remuneration – FCA Guidance
o FG 14/2 published in Jan 2014
o Pay-out process rules apply to remuneration in respect of first full year
following authorisation under AIFMD
o Principle 5(e): Retention
o Principle 5(f): Deferral
o Principle 5(g): Adjustment
o Will Comply in a way that is proportionate
o AuM threshold – a rebuttable presumption
o Final Threshold
o AuM of £5bn AIFMs managing AIFs that are unleveraged with a 5 year lock-in;
o AuM of £1bn for all other types of AIFMs.
13
14. Remuneration – FCA Guidance
14
Other proportionality factors…
o number of Code staff; organisation and ownership structure of the
firm, including whether the AIFM is listed and traded on a regulated
market;
o number of funds managed
o strategies deployed, including use of leverage and volatility;
o FCA prudential categorisation;
o the nature of any delegation arrangements between the AIFM and a
delegate performing portfolio or risk management;
o the nature of certain fee structures such as carried interest; and
o what peer firms are doing
15. Remuneration – FCA Guidance
o Supplemental guidance – seven worked examples
o AUM presumption rebutted – small but complex
o Example 3 – 3 Global Macro funds, AuM £800
o Fewer staff than competitors
o Internal organisation includes external stakeholders (as part of a group
that is listed)
o It is a CPMI
o Strategy deemed complex and AIFs volatile
o 10x levered
o Conclusion = Pay-out process rules to be applied as activities
and organisation deemed complex
15
16. Remuneration – FCA Guidance
o AUM presumption rebutted
o example 4 – AUM 2bn but large but simple
o Fewer staff than competitors
o Owner managed
o Limited leverage x1.5
o Strict investment restrictions with low volatility strategy
o Also manages UCITS
o No performance fees
o Conclusion = Pay-out process rules can be disapplied due
to simple organisation, non-complex activities and
conservative strategies.
16
17. Remuneration – FCA Guidance
17
o Delegation
o Code to be applied to delegated performing AIFM management
functions
o Either by contract or
o local regulatory obligation that is ‘equally effective’
o Rules do not require direct equivalence but equal effectiveness
o CRD and MIFID remuneration rules deemed equivalent
o Scenarios 5 and 6 show application to third country delegates
o Where AIFMD may prove onerous, apply CRD rules (scenario 5)
o Apply overall code but dis-apply Pay-out process (Scenario 6 - where delegated
mandate has strict investment guidelines)
18. Remuneration – FCA Guidance
o Drawings attribution ‘Approaches’
o ‘Approaches’ for the attribution of drawings between in scope, fixed
and variable remuneration and potentially out of scope, profit share
o Existing payments to partners approach
o Distributions to the owners may be excluded, to the extent that such are a return on an
investment
o Discretionary profit share “likely to be remuneration”
o additional profit share paid to founding or senior partners that is over and above what is
paid to other partners for services rendered, may be out of scope
o Benchmarking approach
o encourages, consideration of the remuneration structures of others performing similar
tasks amongst the peer group
18
19. Remuneration – FCA Guidance
o General considerations
o Amount of time spent on the AIFM
o Fixed and variable components must be appropriately balanced
o Payment in Units requirement subject to
o Structure of AIFs; Instruments constituting fund; and time spent
managing AIF(s)
o Optional consideration of
o Shares in AIFM or group company
o Shares in other AIFs managed or shadow vehicle
19
20. Remuneration – Disclosure
Disclosure
o Annual Report per relevant AIF;
o a general statement on remuneration policy;
o Information on rewards paid by the AIFM to its staff;
o Total remuneration; split between fixed and variable; number of beneficiaries; carry
o Amounts attributable to “risk takers” and Senior Management
o Overall proportionality principle applies
o Data protection laws, confidentiality
o There is no requirement for public disclosure (Art 22. 1) - regulators,
investors, staff
o FCA CP14/4 proposes to exclude delegates from Disclosure
20
21. Remuneration – next steps
o Review existing remuneration policies
o Consider need for external review
o Scope - Identify
o affected staff
o Delegation agreements
o in and out of scope remuneration
o Governance
o Does the firm need to establish a remuneration committee?
o Are there confidentiality issues
o Composition of the management body
21
22. Remuneration – next steps
o Commercial issues
o Will investors come to expect implementation of pay-out process rules?
o Staff retention
o Managers outside thresholds should be planning for the pay-out
process rules
o Seek tax advice
o Seek legal advice regarding employee/LLP member contracts
22
24. AIFMD remuneration
o Taxation of deferral depends on structure of manager
o Concept of ‘remuneration’ important
o Return on capital not ‘remuneration’
o Deferral in form of fund units
o Might be actual units or shares,
o If not in fund, may be options over shadow fund
o Different tax consequences
25. Corporate manager
o All individuals caught by employment related
securities (ERS) rules
o Taxation consequences well known (if complicated)
o Difference between actual units or options
26. Units v Options
o Units – tax consequences at issue
o But if reporting fund, or non-dom taxpayer, potential
longer term benefits
o Options – tax issues generally deferred until exercise
o No risk of wasted tax
o But all gain taxable in UK at marginal income rates
27. Units
o If pay market value at award then no tax issues
o ERS rules look at both ‘restricted’ MV and
‘unrestricted’ MV at issue
o Immediate tax issue – if less than RMV
o Tax issues longer term - if less than UMV
o Unlikely to be a problem for AIFMs as will be issued at
same value as external investors
o ‘Fee free’ class for managers – need some special rights
o Easily achieved
28. On vesting (and sale)
o No further tax on vesting
o Tax on gain
o Maybe income or capital depending on status of fund
(reporting fund)
o Losses
o Capital loss, irrespective of fund type
29. Corporate manager effect
o CT deduction for cost of shares issued (and cost of
options)
o E’ers NIC payable on remuneration and value of
options
30. LLP (or partnerships generally)
o LLPs transparent for tax
o Not a tax paying entity
o All profits must be allocated to partners
o Following anti-abuse rules cannot use corporate
member to facilitate deferral
31. Problem
o If profits allocated, then taxable
o May pay tax on more than receive
o Solution: can elect for LLP to be allocated members’
profit
o LLP will pay tax at 45% on this (no reliefs or allowances)
32. On vesting
o If vests at value, then tax paid by LLP is available as a
credit
o To the extent there is a loss on the units, then tax
paid is also lost
o Not available against other member’s tax bill
o If other member receives deferral (eg because
member left), no tax on recipient
34. Maltese Regulatory Regime on Remuneration
34
o Part BIII of the Investment Services Rules for
Investment Service Providers
o Appendix 13 to the Rules – Remuneration Policy
o MFSA Guidance on the proportionality principle in
relation to the ESMA Guidelines on sound
remuneration policies under AIFMD.
35. Malta vs UK - Similarities
35
o Remuneration policies and procedures
o Remuneration committee
o Identified Staff
o Type of Remuneration covered
o Fixed Remuneration and Variable Remuneration
o Not artificially evading the requirements (dividends)
o Excluded: Dividends and Pro-rata Return
o Proportionality Principle:
o Remuneration Committee and
o Pay-out process requirements
36. Malta vs UK : Dissimilarities
o Application of Proportionality principle – Size Criteria
o Automatic disapplication
o Disapplication considered on the grounds of
proportionality
o Full application of ESMA Guidelines
o Performance related remuneration - the
requirements to be satisfied by an employee for the
disapplication of the pay-out processes rules;
o Delegation – no look through
36
37. Scenario: UK Manager
o AIFM – Malta Man CO
o Risk Management
o Delegating Portfolio Management
o Delegate: UK Manager providing portfolio
management
o No look through from an AIFMD perspective
o MiFID service - MiFID Remuneration Code
o Profits through dividends
37
38. Scenario : US Manager
o AIFM – Malta Man CO
o Risk Management
o Delegating Portfolio Management
o Delegate: US Manager providing portfolio
management
o No look through (hence dissimilar to the UK regulatory
framework)
o Profits through dividend
38
39. Panel discussion
39
What doesn't the Remuneration Code say?
Moderated by Jonathan Wilson, Director of Project
Consulting, Cordium
40. Questions
40
You can submit your questions
using the Questions area in the
GoToWebinar console
For more information or sales enquiries please
contact sarah.donnelly@cordium.com for UK or
adam.dedomenico@cordium.com for Malta.
Notes de l'éditeur
Jon
Jon
Remuneration (Art. 13) & (Annex II)Closely follow CRD and allude to MIFID and UCITS V - but with a some interesting differences…MIFID – align remuneration polices with conduct of business and conflicts of interest risks that may arise in the context of their business modelsUCITS IV – applicable from 2015 and appears directly akin to proposals under AIFMD including structural or specific risk components if deferral and payment in not cash instruments– apply to management companies (i.e. UCITS firm or UCITS investment firm). So how do the proposed MiFID related Guidelines differ from the CRD and proposed AIFMD regulatory interventions into remuneration? The CRD remuneration provisions were framed in a prudential prospective with effective risk management and ultimately preservation of the firm's balance sheet at the core. While CRD is seeking to underpin general financial stability, AIFMD pursues a slightly more intimate aim of targeting the alignment of interest between investors in the underlying funds and portfolio managers who make investment decisions on behalf of the funds.Remuneration policies and practices must be “… consistent with and promote sound and effective risk management and do not encourage risk-taking…”Capping of bonuses to 1 year’s salary “Bonus cap”! - Sven ‘Giegold’ proposal – last week snuck into discussions regarding UCITS VEuropean Parliament’s Economic and Monetary Affairs Committee (ECON) voted in favor 22 to 16. Intense lobbying expected implementation 2015…Increase in fixed costs, exodus from the EU – reduction in investor choiceApply from July 2013 – but subject to transitionalFCA rules to feature in SYSC 19B – proportionality guidelines?? IF we recall, proportionality framework was established many moons after the implementation of the REMCODE Not apply to sub-threshold AIFMs (CP13/09 – pt2.5)ESMA Guidelines add flesh to skeleton
Supervisory function – persons/bodies responsible for the supervision of the AIFM’s senior management Where disproportionate, Function can be the same as the Management bodyResponsible for establishment, oversight and Annual review of policyControl functions – should feed into processRemuneration Committee Should be considered as good practiceShould feature a non-executive director - practical issue for LLPs , owner managed structures Guidelines do allow and consider proportionality in Sec VII i.e whether and AIMF is significant – one should consider its size; amount of AUM; its internal organisation; nature, scope and complexity of activitiesIs AIFM listed; Legal structure; Number of staff; AUM; If AIFM is also UCITS company; Provides further services under Article 6(4) (portfolio management, ‘Supervisory function should ensure independent’ review of policy so that it Operates as intendedCompliant Large firms should have resources to ensure independent review. Smaller firms may ‘externally commission’ this review in line with proportionalityRemuneration policyBe in line with the business strategy, objectives, values and interests of the AIFMNot encourage risk taking as compared to the investment policy of AIFs managed – importance AIMFD plays upon the business planEnable the AIFM to align interests of the AIFs and their investors with identified staff, and to achieve and maintain a sound financial situation (as with CRD)Cover: Pension, Severance, Personal Hedging (no clever PA dealing or purchasing of insurance contracts that compensate downward adjustment in REM)
Risk alignment, Specific (Part X.II)Quantitative financial measures and qualitative (non-financial) measures over a multi year frameworkQUANTITATIVE – internal rate of return, earnings before interest, assets raised – long enough to capture risk of actions QUALITATIVE - strategic targets, leadership, motivation, contribution, most important - being nice to the compliance officerStructural provisionsdeferral of between 40% and 60% of variable remuneration for three to five years;payment of at least 50% of variable remuneration other than in cash;Clawback/malusClawback retention of non-cash instruments for a period following ex post risk adjustmentsMalus – (non-vesting compensation)Limits on guaranteed bonuses - exceptional, limited to hiring new staff, and to the first year – as with CRDRisk Governance – implementation challenge where proportionality is not granted…Difficulties in awarding equity linked instruments or unitsPayment in share of units in AIF cannot be assumed to be appropriate in all cases3-5 year deferral period may not bear any resemblance to the life cycle of a fundRisk alignment compromised where the assumption of many existing models is the direct alignment between performance and a performance feeFCArules required the setting of a ratio between variable and fixed remuneration but CP 14/4 proposes to remove this as such a thing is not stipulated in the AIFMD-
What Remuneration?All forms of payments and benefits paid by the AIFMAny amount paid by the AIF, including carried interest (but not return on investment) Any transfer of units or shares in the AIFIn exchange for professional services rendered by identified staffFixed or variable and both components may include CashSharesOptionsPension contributionsRemuneration directly from AIF – carried interest models; or non-cash – discounts, allowances for car, phones etc)
What Remuneration?Excluded…Dividends or similar distributions received by owners of AIFM E.g. LLP BUT – only if they do not circumvent the rules!FSA approach to CRD rules may set precedentAncillary non-discretionary payments/benefits which are part of AIFMD-wide policyPro-rata returns on investment actual disbursement required Loans made to facilitate co-investment not covered within exemption if loan has not been reimbursed before return is paid
Scopeapply to staff whose professional activities have a material impact on the risk profiles of the AIFM or the AIFs ‘Identified Staff’ aka Code staff Executive and Non-Executive DirectorsSenior Management Business unit heads – Portfolio Management, Marketing, HR Control functionsStaff who exert a material influence on risk profile of AIF/AIFMStaff remunerated in same bracket Control functions variable remuneration based on function-specific objectives not solely by AIFM-wide performanceControl functions variable remuneration: This latter condition is nuanced but important change from the draft guidance which suggested that such remuneration was to be based only on function specific objectives.
Delegation - newrequirements extended to those to whom functions of risk or portfolio management have been delegatedDelegates must be regulated under comparable rules; orrequirements stipulated in contractual arrangements that cover any payments made to the delegates’ identified staff as compensationExtends scope and territoriality MIFID firms providing services of portfolio managementMulti-jurisdictional groupsObligations effective as soon as an AIFM is authorised
Disclosure similar to CRD but more prescriptive than existing level 3 disclosure An Annual Report or independent standalone document per relevant must be produced for every AIF marketed in Europe within 6 months of ARD and will need to contain;a general statement on remuneration policy;Information on rewards paid by the AIFM to its staff, including;Total remuneration; (a) the split between fixed and variable; (b) number of recipients; and (c) carried interest paid by the AIF;of the above, the aggregate amount of remuneration attributable to "risk takers“ (those who have an impact upon the risk profile of the AIF) and senior management respectively and the number of recipients in each category by AIFOverall proportionality principle applies Data may be withheld if disclosure would otherwise breach applicable data protection laws confidentiality (XIII.I.I)Annual reports must be made available to relevant regulators and investors. There is no requirement for public disclosure of remuneration (L1 Art22. 1) –Made to regulators, to investors on request, Some information must be shared with staff – Policy should be available to staff – with some quantatative data also provided on a proportionate basis . Size, scale, complexity of the AIFMThere is no requirement for public disclosure of remuneration (L1 Art22. 1)Disclosure similar to CRD requirements but more prescriptive than existing level 3 disclosure under FSA rules.
Internal documents / data to gatherIn addition to the regulatory materials noted above, asset managers should consider compiling and reviewing the following internal documents and materials to assist in the development/refinement of the remuneration policy and practices:Any existing remuneration policy / practice;Organisation chart and job descriptions;LLP Agreement, if any;LLP Member side letters, if any;Employment contracts;Terms of reference for committees/boards;Fee/incentive/carry provisions from fund management agreements;FCA conduct and prudential risk categorisation;Risk management policy/risk limits for funds/identities of AIF PMs;Details of any delegation arrangements; andAny past correspondence with the FCA (likely relevant only to larger firms). Asset managers should also consider compiling data on: The interests of relevant staff in the equity of the firm; The interests of relevant staff in shares or units of the various funds; The subscription eligibility terms for each fund; and The percentage split of time divided between AIF and non-AIF activities of relevant members of staff. Key considerations for asset managersKey points for asset managers to consider in relation to their remuneration policies and practices include the following:ScopeWhich of the firm’s staff will be affected by the application of regulatory requirements regarding remuneration? Which payments will be considered to be remuneration?GovernanceDoes the firm need to establish a remuneration committee? Are there confidentiality issues about decision making and awards? What is the composition of the management body and the supervisory body?Commercial issuesWhat are the firm’s recruiting objectives? Does the firm wish to defer/pay in units to some degree even if the firm is otherwise able to dis-apply the pay out process rules? What is the firm’s current policy on use of golden hellos/retention bonuses?If the remuneration policy and practices need to change, when must this be done by and how will this affect awards? How will staff be notified of the changes to their remuneration?Regulatory capitalThe impact of remuneration decisions on fixed overheads may drive regulatory capital – is this an issue for the firm?Periodic reviewWhen will the remuneration policy and practices be reviewed and by whom?
All remuneration can be divided into two categories:Fixed remuneration such as payments or benefits without consideration of any performance criteria eg: cash, shares, options, cancellation of loans to staff members at dismissal, pension contributions, remuneration by AIFs; orVariable remuneration such as additional payments or benefits depending on performance, or in certain cases other contractual criteria e.g non (directly) monetary benefits such as discounts such as dscounts, fringe benefits or special allowances for car and mobile phone among others.