Equity issues 17.02.14 Private Equity Funds and FCA guidance on the AIFMD remuneration code

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Equity issues 17.02.14 Private Equity Funds and FCA guidance on the AIFMD remuneration code

  1. 1. Welcome to EQUITY ISSUES, a short note on a relevant issue in the private equity and venture capital industry. If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers. Claire Cummings 020 7585 1406 claire.cummings@cummingslaw.com www.cummingslaw.com EQUITY ISSUES Private equity funds and FCA guidance on the AIFMD Remuneration Code The FCA has published its final guidance on the AIFM Remuneration Code for AIFMs, which is contained in SYSC 19B of the FCA Handbook. The guidance is of particular interest to those private equity and venture capital firms with carried interest arrangements in place, as it indicates that if those carried interest arrangements are sufficiently robust, the firm should not be required to comply with the pay-out process rules. The guidance sets out the FCA’s view of when a firm may reasonably conclude that it may disapply the pay-out process rules for the payment of carried interest to senior management on the grounds of proportionality. The guidance helpfully includes AUM threshold tables, indicating when it may be appropriate to disapply the rules and this will be the case where AUM amount to less than £5 billion. Further, the FCA sets out other additional elements which may be taken into account, such as the nature of certain fee structures, including carried interest. The FCA states that this factor may be considered in disapplying the pay-out process rules where fee structures satisfy the objectives of alignment of interest with investors and avoid incentives for inappropriate risk-taking (but perhaps not meeting the ESMA guidelines). This view would appear to be sensible, given that the nature of carried
  2. 2. interest, i.e. payment linked to the performance of the underlying fund and deferred over a long performance period, reflects the risk management objectives of the payout process rules. The Appendix to the guidance provides a useful example relating to a private equity firm as to how to apply proportionality in this respect. The FCA expects firms to implement the AIFMD remuneration regime for new awards of variable remuneration to relevant staff for performance periods following that in which the firm becomes authorised. The FCA has confirmed that the guidance will apply only to full performance periods and will therefore not apply to any remuneration periods prior to the first full performance period after authorisation. The FCA’s guidance is directed at firms authorised as full-scope UK AIFMs under the AIFMD. The Remuneration Code will not apply to those managers designated as small AIFMs, although firms may elect to implement some or all of these remuneration rules. The FCA guidance on the AIFMD Remuneration Code took effect from 31 January 2014 This document is for general guidance only. It does not contain definitive advice. Cummings Tel: + 44 20 7585 1406 Mob: + 44 7734 057 327 www.cummingslaw.com 17 February 2014

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