On the 3rd April, 2020, the European Securities and Markets Authority ("ESMA") published its final guidelines on performance fees in Undertakings for Collective Investments in Transferable Securities ("UCITS") and certain types of Alternative Investment Funds ("AIFs"). The guidelines provide comprehensive guidance to fund managers when designing performance fee models for the funds they manage, including the assessment of the consistency between the performance fee model and the fund's investment objective, policy and strategy, particularly when the fund is managed in reference to a benchmark.
Their purpose is to harmonise the way fund managers charge performance fees to retail investors, as well as the circumstances in which performance fees can be paid, in order to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision ("ESFS"), and to ensure the common, uniform and consistent application of Union law. Such harmonisation will allow convergence in how National Competent Authorities ("NCAs") supervise performance fee models and disclosure across the EU.
These guidelines apply to:
i. Competent authorities;
ii. UCITS management companies (as defined in Article 2(1)(b) of the UCITS Directive);
iii. Investment companies that have not designated a management company authorised pursuant to the UCITS Directive;
iv. Alternative Investment Fund Managers ("AIFMs") (as defined in Article 4(1) of the AIFM Directive) who market units or shares of AIFs they manage, in accordance with Article 43 of the AIFMD, to retail investors within their territory, except for:
a. Closed-ended AIFs; and
b. Open-ended AIFs that are European Venture Capital Funds ("EuVECAs") (or other types of venture capital AIFs), European Social Entrepreneurship Funds ("EuSEFs"), private equity AIFs or real estate AIFs.
(ii., iii. and iv. are hereinafter collectively referred to as "Managers").
The guidelines will now be translated into the official EU languages and subsequently published on ESMA's website and will become applicable two months after the publication of the translations.
Managers of any new funds created after the date of application of the guidelines with a performance fee, or any funds existing before the date of application that introduce a performance fee for the first time after that date, should comply with these guidelines immediately in respect of those funds. Moreover, Managers of funds with a performance fee existing before the date of application of these guidelines should apply these guidelines in respect of those funds by the beginning of the financial year following 6 months from the application date of the guidelines.
Supervisory convergence on this issue is crucial in order to ensure a level playing field and a consistent level of protection to retail investors in the European Union ("EU"), especially considering the importance of cross-border distribution of funds as well as the fact that this particular issue is not covered in great detail in EU regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.