This document outlines an agenda for an AIFMD webinar on remuneration code, regulatory, and tax implications. The webinar covers an overview of the AIFMD remuneration code, remuneration and tax issues, the code in Malta, and concludes with a panel discussion on aspects not addressed in the code. Speakers from Cordium will discuss topics like the remuneration code requirements, proportionality principles, identifying staff, risk alignment, and disclosure obligations. They will also cover delegating functions and how the rules apply, as well as taxation of deferred remuneration for corporate and LLP structures.

1. May 21, 2014CORDIUM POWERPOINT MASTER 1

2. 2
AIFMD Surgery Webinars
- Remuneration Code; Regulatory and Tax
Implications
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4. 4
AIFMD Surgery Webinars
- Remuneration Code; Regulatory and Tax Implications
AGENDA
Introduction
Jonathan Wilson, Director of Project Consulting, Cordium
The AIFMD Remuneration code – an overview
Bobby Johal, Managing Consultant – Technical, Cordium
Remuneration and tax
Laurence Parry, Private Client Partner, Cordium
Malta and Remuneration
Adam de Domenico, CEO Cordium Malta
Panel discussion - What doesn't the Remuneration Code say? - moderated
by Jonathan Wilson, Director of Project Consulting, Cordium

5. THE AIFMD REMUNERATION CODE – AN
OVERVIEW
BOBBY JOHAL, MANAGING CONSULTANT
– TECHNICAL, CORDIUM
5

6. The AIFMD Remuneration code – an overview
o Remuneration (Art. 13) & (Annex II)
o Closely follows CRD and allude to MIFID and UCITS V
o Remuneration policies and practices must be “… consistent with
and promote sound and effective risk management and do not
encourage risk-taking…”
o Apply from July 2013 – but subject to transitional
o FCA rules feature in SYSC 19B – proportionality
o Not apply to sub-threshold AIFMs
o ESMA and FCA Guidelines add flesh to skeleton
6

7. Remuneration – In outline
o FCA Nine Principles
o Detailed Governance arrangements (sec. X / Principle 3)
o Management oversight - ‘Supervisory function’
o Remuneration committee (Part X.II)
o Independent review
o Risk alignment, general (Part XII / Principle 1)
o Remuneration policy
o In line with business strategy
o Not encourage risk taking
o Alignment of interests
o Cover: Pension; Severance; Personal Hedging
7

8. Remuneration – In outline
o Risk alignment, Specific (Part XII / Principle 5)
o Quantitative and qualitative over a multi year framework
o Structural provisions
o deferral of between 40% and 60% of variable remuneration for three to five
years;
o payment of at least 50% of variable remuneration must be units/shares in AIF
or equivalent;
o Clawback/malus
o Limits on guaranteed bonuses
o Provisions can be dis-applied for an individual where
o Bonus is no more than 33% of total remuneration; and
o Total remuneration is no more than £500k
8

9. Remuneration - instruments
o What Remuneration?
o All forms of payments and benefits paid by the AIFM
o Any amount paid by the AIF, including carried interest (but not return
on investment)
o Any transfer of units or shares in the AIF in exchange for professional
services
o Fixed or variable and both components may include
o Cash
o Shares
o Options
o Pension contributions
o Remuneration directly from AIF – (carried interest models; or non-cash – discounts,
allowances)
9

10. Remuneration - instruments
o What Remuneration?
o Excluded…
o Dividends or similar distributions received by owners of AIFM
o BUT – only if they do not circumvent the rules!
o Ancillary non-discretionary payments/benefits which are part of
AIFMD-wide policy
o Pro-rata returns on investment
o actual disbursement required
o Loans made to facilitate co-investment not covered within exemption if
loan has not been reimbursed before return is paid
10

11. Remuneration - Scope
o Apply to staff whose professional activities have a material impact on the
risk profiles of the AIFM or the AIFs
o ‘Identified Staff’ aka Remuneration Code staff
o Executive and Non-Executive Directors
o Senior Management
o Business unit heads – Portfolio Management, Marketing, HR
o Control functions
o Staff who exert a material influence on risk profile of AIF/AIFM
o Staff remunerated in same bracket
o Control functions variable remuneration based on function-specific
objectives not solely by AIFM-wide performance
11

12. Remuneration – Delegation
o Delegation
o requirements extended to those to whom functions of risk
or portfolio management have been delegated
o Delegates must be regulated under comparable rules; or
o requirements stipulated in contractual arrangements that cover
any payments made to the delegates’ identified staff as
compensation
o Obligations effective as soon as an AIFM is authorised
12

13. Remuneration – FCA Guidance
o FG 14/2 published in Jan 2014
o Pay-out process rules apply to remuneration in respect of first full year
following authorisation under AIFMD
o Principle 5(e): Retention
o Principle 5(f): Deferral
o Principle 5(g): Adjustment
o Will Comply in a way that is proportionate
o AuM threshold – a rebuttable presumption
o Final Threshold
o AuM of £5bn AIFMs managing AIFs that are unleveraged with a 5 year lock-in;
o AuM of £1bn for all other types of AIFMs.
13

14. Remuneration – FCA Guidance
14
Other proportionality factors…
o number of Code staff; organisation and ownership structure of the
firm, including whether the AIFM is listed and traded on a regulated
market;
o number of funds managed
o strategies deployed, including use of leverage and volatility;
o FCA prudential categorisation;
o the nature of any delegation arrangements between the AIFM and a
delegate performing portfolio or risk management;
o the nature of certain fee structures such as carried interest; and
o what peer firms are doing

15. Remuneration – FCA Guidance
o Supplemental guidance – seven worked examples
o AUM presumption rebutted – small but complex
o Example 3 – 3 Global Macro funds, AuM £800
o Fewer staff than competitors
o Internal organisation includes external stakeholders (as part of a group
that is listed)
o It is a CPMI
o Strategy deemed complex and AIFs volatile
o 10x levered
o Conclusion = Pay-out process rules to be applied as activities
and organisation deemed complex
15

16. Remuneration – FCA Guidance
o AUM presumption rebutted
o example 4 – AUM 2bn but large but simple
o Fewer staff than competitors
o Owner managed
o Limited leverage x1.5
o Strict investment restrictions with low volatility strategy
o Also manages UCITS
o No performance fees
o Conclusion = Pay-out process rules can be disapplied due
to simple organisation, non-complex activities and
conservative strategies.
16

17. Remuneration – FCA Guidance
17
o Delegation
o Code to be applied to delegated performing AIFM management
functions
o Either by contract or
o local regulatory obligation that is ‘equally effective’
o Rules do not require direct equivalence but equal effectiveness
o CRD and MIFID remuneration rules deemed equivalent
o Scenarios 5 and 6 show application to third country delegates
o Where AIFMD may prove onerous, apply CRD rules (scenario 5)
o Apply overall code but dis-apply Pay-out process (Scenario 6 - where delegated
mandate has strict investment guidelines)

18. Remuneration – FCA Guidance
o Drawings attribution ‘Approaches’
o ‘Approaches’ for the attribution of drawings between in scope, fixed
and variable remuneration and potentially out of scope, profit share
o Existing payments to partners approach
o Distributions to the owners may be excluded, to the extent that such are a return on an
investment
o Discretionary profit share “likely to be remuneration”
o additional profit share paid to founding or senior partners that is over and above what is
paid to other partners for services rendered, may be out of scope
o Benchmarking approach
o encourages, consideration of the remuneration structures of others performing similar
tasks amongst the peer group
18

19. Remuneration – FCA Guidance
o General considerations
o Amount of time spent on the AIFM
o Fixed and variable components must be appropriately balanced
o Payment in Units requirement subject to
o Structure of AIFs; Instruments constituting fund; and time spent
managing AIF(s)
o Optional consideration of
o Shares in AIFM or group company
o Shares in other AIFs managed or shadow vehicle
19

20. Remuneration – Disclosure
Disclosure
o Annual Report per relevant AIF;
o a general statement on remuneration policy;
o Information on rewards paid by the AIFM to its staff;
o Total remuneration; split between fixed and variable; number of beneficiaries; carry
o Amounts attributable to “risk takers” and Senior Management
o Overall proportionality principle applies
o Data protection laws, confidentiality
o There is no requirement for public disclosure (Art 22. 1) - regulators,
investors, staff
o FCA CP14/4 proposes to exclude delegates from Disclosure
20

21. Remuneration – next steps
o Review existing remuneration policies
o Consider need for external review
o Scope - Identify
o affected staff
o Delegation agreements
o in and out of scope remuneration
o Governance
o Does the firm need to establish a remuneration committee?
o Are there confidentiality issues
o Composition of the management body
21

22. Remuneration – next steps
o Commercial issues
o Will investors come to expect implementation of pay-out process rules?
o Staff retention
o Managers outside thresholds should be planning for the pay-out
process rules
o Seek tax advice
o Seek legal advice regarding employee/LLP member contracts
22

23. REMUNERATION AND TAX
LAURENCE PARRY, PRIVATE CLIENT
PARTNER, CORDIUM
23

24. AIFMD remuneration
o Taxation of deferral depends on structure of manager
o Concept of ‘remuneration’ important
o Return on capital not ‘remuneration’
o Deferral in form of fund units
o Might be actual units or shares,
o If not in fund, may be options over shadow fund
o Different tax consequences

25. Corporate manager
o All individuals caught by employment related
securities (ERS) rules
o Taxation consequences well known (if complicated)
o Difference between actual units or options

26. Units v Options
o Units – tax consequences at issue
o But if reporting fund, or non-dom taxpayer, potential
longer term benefits
o Options – tax issues generally deferred until exercise
o No risk of wasted tax
o But all gain taxable in UK at marginal income rates

27. Units
o If pay market value at award then no tax issues
o ERS rules look at both ‘restricted’ MV and
‘unrestricted’ MV at issue
o Immediate tax issue – if less than RMV
o Tax issues longer term - if less than UMV
o Unlikely to be a problem for AIFMs as will be issued at
same value as external investors
o ‘Fee free’ class for managers – need some special rights
o Easily achieved

28. On vesting (and sale)
o No further tax on vesting
o Tax on gain
o Maybe income or capital depending on status of fund
(reporting fund)
o Losses
o Capital loss, irrespective of fund type

29. Corporate manager effect
o CT deduction for cost of shares issued (and cost of
options)
o E’ers NIC payable on remuneration and value of
options

30. LLP (or partnerships generally)
o LLPs transparent for tax
o Not a tax paying entity
o All profits must be allocated to partners
o Following anti-abuse rules cannot use corporate
member to facilitate deferral

31. Problem
o If profits allocated, then taxable
o May pay tax on more than receive
o Solution: can elect for LLP to be allocated members’
profit
o LLP will pay tax at 45% on this (no reliefs or allowances)

32. On vesting
o If vests at value, then tax paid by LLP is available as a
credit
o To the extent there is a loss on the units, then tax
paid is also lost
o Not available against other member’s tax bill
o If other member receives deferral (eg because
member left), no tax on recipient

33. MALTA AND REMUNERATION
ADAM DE DOMENICO,
CEO, CORDIUM MALTA
33

34. Maltese Regulatory Regime on Remuneration
34
o Part BIII of the Investment Services Rules for
Investment Service Providers
o Appendix 13 to the Rules – Remuneration Policy
o MFSA Guidance on the proportionality principle in
relation to the ESMA Guidelines on sound
remuneration policies under AIFMD.

35. Malta vs UK - Similarities
35
o Remuneration policies and procedures
o Remuneration committee
o Identified Staff
o Type of Remuneration covered
o Fixed Remuneration and Variable Remuneration
o Not artificially evading the requirements (dividends)
o Excluded: Dividends and Pro-rata Return
o Proportionality Principle:
o Remuneration Committee and
o Pay-out process requirements

36. Malta vs UK : Dissimilarities
o Application of Proportionality principle – Size Criteria
o Automatic disapplication
o Disapplication considered on the grounds of
proportionality
o Full application of ESMA Guidelines
o Performance related remuneration - the
requirements to be satisfied by an employee for the
disapplication of the pay-out processes rules;
o Delegation – no look through
36

37. Scenario: UK Manager
o AIFM – Malta Man CO
o Risk Management
o Delegating Portfolio Management
o Delegate: UK Manager providing portfolio
management
o No look through from an AIFMD perspective
o MiFID service - MiFID Remuneration Code
o Profits through dividends
37

38. Scenario : US Manager
o AIFM – Malta Man CO
o Risk Management
o Delegating Portfolio Management
o Delegate: US Manager providing portfolio
management
o No look through (hence dissimilar to the UK regulatory
framework)
o Profits through dividend
38

39. Panel discussion
39
What doesn't the Remuneration Code say?
Moderated by Jonathan Wilson, Director of Project
Consulting, Cordium

40. Questions
40
You can submit your questions
using the Questions area in the
GoToWebinar console
For more information or sales enquiries please
contact sarah.donnelly@cordium.com for UK or
adam.dedomenico@cordium.com for Malta.