Ireland: UCITS V And Proposals To Cap Remuneration For Fund Managers

The European Parliament has voted at a plenary session on the draft UCITS V directive.

On 3 July 2013, the European Parliament (the "Parliament") took a vote at a plenary session on the draft UCITS V directive ("UCITS V"). At that plenary session a number of amendments to the UCITS V text were adopted and some of the proposals previously put forward by the Parliament's Economic and Monetary Affairs Committee ("ECON") were rejected.

UCITS V proposes the introduction of remuneration policies and practices for those in senior management and those who are considered to have a material impact on the risk profile of a UCITS when making decisions. The purpose of this proposal is to ensure that such policies and practices are in line with the aim of sound risk management and that decision taking inconsistent with the UCITS's risk profile is avoided.

Proposals Rejected by Parliament

Some of the UCITS V proposals suggested by ECON that have not been adopted by Parliament include:

1. The imposition of a cap on fund manager bonuses at 100% of the fixed salary secured;

2. Performance fees only being permitted where UCITS market exclusively to MiFID investors;

3. Proposal that where an underperformance of a benchmark occurs, variable remuneration for fund managers should be reduced.

However, in rejecting ECON's amendments, Parliament has approved revised text stating that variable remuneration should be reduced where there is "subdued or negative financial performance of the management or of the UCITS concerned".

Key Amendments to UCITS V Text

In approving the UCITS V text, Parliament made a number of amendments as follows:

1. Scope of New Remuneration Rules

The draft UCITS V text regarding the categories of staff subject to the UCITS V remuneration provisions is now more detailed and includes "any employee and any other member of staff at fund or sub-fund level who are decision takers, fund managers and persons who take real investment decisions, persons who have the power to exercise influence on such employees or members of staff, including investment policy advisors and analysts, senior management and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and decision takers".

2. Guidelines to be Issued by European Securities and Markets Authority (ESMA) The revised UCITS V text now provides for guidelines to be issued by ESMA on remuneration policies and the different principles to be applied where employees or other categories of personnel perform services subject to different sectoral remuneration principles. ESMA is also required to issued guidelines to competent authorities concerning the provisions to be followed in the event of the insolvency of a third party appointed by a depositary.

3. Additional Information to be Included in the Key Investor Information Document (KIID) It is now proposed that UCITS will be required to detail in their KIIDs, the remuneration policies established as well as the basis on which such policies were formulated. 4. Establishment of a Remuneration Committee

UCITS V now provides for the establishment of a remuneration committee by those management companies that are significant in terms of their size or the size of the UCITS they manage or where their internal organisation and the nature or complexity of their activities warrant it. Such remuneration committees are required to include employee representatives and where decisions are to be made, the interests of longterm stakeholders, investors and the public interest are to be considered.

5. Guaranteed Variable Remuneration and Remuneration Payable by a Fund to a Management Company UCITS V now provides that guaranteed variable remuneration should be exceptional as it is not consistent with sound risk management or the pay-for-performance principle. This reflects similar general provisions in the Alternative Investment Fund Managers Directive (AIFMD). The revised text also states that guaranteed variable remuneration should not form part of prospective compensation plans.

Any remuneration paid from a fund to a management company should be consistent with sound and effective risk management and with the interests of investors.

Next Steps

Following Parliament's vote on UCITS V, negotiations will now commence on the final text of UCITS V with the European Council and the European Commission. We will continue to keep you updated on any developments.

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.