EU cracks down on fund managers’ pay policies

The European Union’s original draft directive on alternative investment fund managers (AIFM) did not tackle fund managers’ pay. But the latest version, due to come into effect in 2012, includes measures that would heavily regulate the way fund managers are remunerated. It says that:

  • Pay policy must promote “sound and effective risk management and not encourage risk-taking that exceeds the level of tolerated risk of the fund”.

  • Performance-related pay must be assessed over a “multi-year framework” that is appropriate to the lifecycle of the fund and spread over a period “which takes account of the underlying business cycle” of the fund, and the business risks.

  • At least 40% of performance-related pay or bonuses must be deferred for at least three years, and if it is a “particularly high amount”, at least 60% must be deferred.

  • The fund’s annual report should disclose the pay of highly paid individuals.

  • Large fund management houses, or those managing large or complex funds, must have an independent remuneration committee for pay policies and incentives.

    Only funds that market to investors across EU borders will be subject to these rules. So some fund managers won’t be affected and will still be covered by national laws, which are not expected to change in Northern Europe. But more protectionist countries like Spain and Italy may prohibit managers from marketing there unless they operate under the new EU directive. “Only one or two people have said they won’t operate under these regulations,” says Nabarro’s Deborah Lloyd. “Some clients think it will be good for them because they only want to market in one jurisdiction so won’t have to comply with the directive.” As well as tackling pay, the EU directive says a regulated fund has to have its main decision-maker authorised. As most limited partnerships’ general partners aren’t authorised, decision-making in these funds may have to shift to the investment partner. The directive also requires regulated funds to have a depository: a custodian that ensures the assets, e.g. share certificates or title documentation, are secured. APUTs already have trustees, but LLPs don’t.