The European Securities and Markets Authority (ESMA) has published a consultation paper (ESMA34-39-881) that contains draft guidelines on the regulation of certain elements of performance fees applied in the realm of undertakings for collective investment in transferable securities (UCITS). With the draft guidelines, ESMA pursues the objective of aligning the interests of UCITS management companies (ManCos) and UCITS investors through establishing common criteria in the following areas:

  1. general principles on performance fee calculation methods;
  2. consistency between the performance fee model and the fund's investment objectives, strategy and policy;
  3. frequency for the crystallization of the performance fee;
  4. circumstances in which a performance fee should be payable;
  5. disclosure of the fee model.

The draft guidelines also contain definitions of various terms, such as "excess performance" and "fulcrum fee". UCITS ManCos would always have to be in the position to demonstrate how the performance fee model represents a reasonable incentive and is aligned with investors' interests.


In early 2018, ESMA carried out a mapping exercise among national competent authorities (NCAs) with respect to the current practices regarding performance-based fee models and payments. The exercise showed divergent approaches across EU member states as to performance fee models and circumstances in which performance fees are



According to ESMA, such discrepancies can result in undesired regulatory arbitrage and inconsistent levels of investor protection in the EU's most prominent investment fund segment, which calls for a push towards greater supervisory convergence in the relevant fields. ESMA estimates that guidelines are the most appropriate instrument to tackle the problem and is now seeking the views of concerned parties via the consultation paper.

ESMA found inspiration for the guidelines in IOSCO's Good Practice for Fees and Expenses of Collective Investment Schemes (FR09/16 August 2016). The guidelines come on the heels of EU efforts to facilitate the cross-border distribution of investment funds (see the texts of the recently adopted Directive and Regulation), as well as financial watchdogs' and investors' increased scrutiny of fee calculation and transparency (see for example Institutional Limited Partner Association's (ILPA) Principles 3.0).


Although some member states already prescribe computation mechanisms for performance fees, EU legislation has so far mainly focused on disclosure rules. This would be the first time that one of the EU bodies directly tampers with how performance fees are determined, e.g. through introducing a general crystallization period of one year.

Moreover, whereas the draft guidelines only target UCITS, question 13 of the consultation paper surveys the interested parties on whether the principles should also apply to alternative investment funds (AIFs) marketed to retail investors. ESMA is thus examining the possibility to expand the tenets to effectively all EU funds open to retail investors.

Since the consultation paper directly touches upon fund economics, we expect a passionate industry-wide reaction from both UCITS ManCos and AIF ManCos, as well as from fund investors.

Next steps

The deadline for submitting comments to the consultation paper is 31 October 2019. After processing the responses, ESMA usually makes tweaks to the guidelines and then adopts final guidelines, together with a report containing a summary of the feedback to the consultation paper. This will most likely not occur before Q1/2020.

Next, the final guidelines have to be translated into all official languages. They normally enter into force two months after publishing all translations. If the draft guidelines were adopted in their current form, existing UCITS would have one year to adapt their remuneration procedures to the rules laid down in the guidelines. Under the above timeline, this should not occur before Q2/2021.

How can we help?

We will carefully follow developments related to the consultation paper to anticipate the guidelines' final wording and repercussions. We would be glad to assist you, should you decide to reply to the consultation paper.

Dentons Luxembourg's investment fund team has deep knowledge in not only investment fund regulation but also in the market standards concerning fund remuneration regimes, such as management fees, performance fees and carried interest.

If you are an investment fund manager, we can help you prepare for potential regulatory changes influencing your compensation systems and ensure that they line up with investors' expectations.

If you are a fund investor, you can count on us to further your best interests in negotiating your fund investment so that you maximize your outcome.

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