September 26, 2013
Timing and application of the Remuneration Code
The Directive and the Remuneration Code refer to the concept of proportionality. The application of the Remuneration Code should be proportionate to the AIFM’s size, internal organisation and the nature of its activities. An AIFM may choose not to apply parts of the Remuneration Code where the application of the Remuneration Code would be disproportionate.
In particular, an AIFM may be excused from restrictions in relation to (i) the proportion of variable remuneration that must consist of retained interests in the AIF concerned, (ii) the deferral of variable remuneration, and (iii) the processes by which performance is assessed for the purpose of variable remuneration awards (the "Pay Out Process Rules"), (iv) in relation to staff that receive variable remuneration of no more than 33% of their total remuneration (such total remuneration not to exceed £500,000), the ‘guaranteed variable remuneration rule’, and (v) the requirement to have an independent remuneration committee. In order to avoid the application of these onerous requirements the AIFM in question must determine that the relevant rules should not apply to them on the basis of the proportionality principle and positively opt-out of compliance with them.
The draft guidance suggests a number of factors that should be considered in assessing whether the Pay Out Process Rules should apply:
Assets under management ("AuM")
The FCA has tentatively suggested a number of size thresholds:
The above thresholds form part of a wider set of criteria to be applied in assessing proportionality (see below) and their satisfaction will not, in itself, automatically excuse an AIFM from the application of the Pay Out Process Rules.
The above figures are indicative and will be revised following on the FCA’s further analysis and receipt of responses to the consultation.
In addition to considering its AuM an AIFM must also consider the following factors:
Note that the FCA also propose to include a number of worked examples to aid firms in the application of the proportionality concept.
Application of the Remuneration Code to LLPs
Under the ESMA guidelines, dividends, distributions and other payments to owners of an AIFM are excluded from the scope of the remuneration requirements. The FCA have provided some additional information to address the application of this to owner-managed partnerships and owner-managed LLPs in the UK.
The application of the Remuneration Code varies according to the manner in which the earnings of owner/managers are classified. If remuneration is classified as (i) profit share it falls out of the scope of the Remuneration Code, (ii) fixed remuneration it is subject to a lighter set of restrictions, and (iii) variable remuneration it is subject to more onerous provisions.
The FCA have attempted to provide some guidance as to the classification of remuneration for these purposes:
Tax treatment of LLPs and Partnerships
The classification of monies paid to partners/members as remuneration under the code will give rise to some tax complications that the FCA are attempting to address. The allocation of remuneration in cash or units/shares in the relevant fund would give rise to a tax charge in the base year in accordance with partnership tax rules. Consequently, partners/members could be subject to a tax charge before they have actually received the remuneration that they are being taxed on.
The FCA is in discussion with Her Majesty’s Revenue and Customs and Her Majesty’s Treasury in order to address this issue and defer the tax point until actual distribution. Further tax guidance is to be published in the autumn alongside the draft Finance Bill 2014.
The FCA have stated that the Remuneration Code will not have to be applied to delegates of the AIFM (i.e. firms to whom the AIFM has delegated portfolio or risk management functions under the Directive) where that delegate is subject to "remuneration requirements that are equally as effective" as the Remuneration Code (this includes delegates who are subject to remuneration rules under the Markets in Financial Instruments Directive ("MiFID") and the Capital Requirements Directive ("CRD")).
In addition, the proportionality test described above can also be applied to delegates and may relieve them from the burden of compliance with the Pay Out Process Rules (particularly if the delegate has limited investment discretion).
Issues to consider
Consultation responses should be received by 6 November 2013
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the authors in the firm’s London office:
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