EFAMA Response to ESMA s Consultation Paper on Guidelines on sound remuneration policies under the AIFMD

EFAMA Response to ESMA s Consultation Paper on Guidelines on sound remuneration policies under the AIFMD EFAMA 1 appreciates the opportunity to provide comments on the ESMA Consultation paper on Guidelines on sound remuneration policies under the AIFMD (the Consultation Paper ). We would first like to provide you with a few general comments before answering the specific questions raised in the Consultation Paper. A. General Remarks EFAMA fully supports the general aim that remuneration policies and practices shall be consistent with and promote sound and effective risk management and shall not encourage excessive risk taking. EFAMA also welcomes that ESMA seeks to develop its guidelines taking into consideration the CEBS Guidelines but bringing due adaptations for the specificities of the asset management sector as compared to the banking sector, on the one side, and the differences between the text of the CRD and AIFMD on the other side 2. However EFAMA has a number of general concerns regarding the proposed Guidelines: 1. Consistency with other remuneration guidelines EFAMA would like to stress once again the need for consistency between the proposed Guidelines and other remuneration guidelines. All EFAMA Members will in the future be falling under the scope of several directives, as they will be holding licenses as AIFM, as UCITS Management Companies and possibly as MiFID firms. They will act as management companies of investment funds and also perform investment services of individual portfolio management or non core services. Many of them are also part of financial groups, thus falling as group companies under the CRD requirements or relevant requirements for insurance groups or pension groups. 1 EFAMA is the representative association for the European investment management industry. EFAMA represents through its 27 member associations and 59 corporate members about EUR 14 trillion in assets under management of which EUR 8.4 trillion managed by 54,000 investment funds at end June 2012. Just under 36,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds. For more information about EFAMA, please visit www.efama.org. 2 ESMA Consultation Paper para. 12. rue Montoyer 47, B 1000 Bruxelles +32 2 513 39 69 Fax +32 2 513 26 43 e mail : info@efama.org www.efama.org VAT Nr BE 0446.651.445

2 These EFAMA members will have to apply at least four sets of remuneration guidelines, namely the guidelines to be issued by ESMA under AIFMD, guidelines to be issued by ESMA under MiFID, guidelines to be issued by ESMA under UCITS V and the existing CEBS Guidelines (to be modified by EBA). These sets of remuneration guidelines will also have to be implemented at different times, increasing the complexity. It is crucial that consistency be ensured between the different guidelines while leaving enough room to take the specificities of the different business models into account. The guidelines should be consistent but not identical. EFAMA would therefore favour the application of a broader principles based approach to ensure the measures can be adapted to fit the circumstances of the firm or funds and the wider group context in which many such firms will be operating. 2. Proportionality EFAMA welcomes that ESMA seeks to apply the proportionality principle throughout the proposed Guidelines, taking into account the size, internal organisation and nature, scope and complexity of activities. However, EFAMA disagrees with the clarification in paragraph 36 that categorically excludes neutralisation of certain provisions by an AIFM. This approach is too strict, given that the language within AIFMD accommodates the concept of neutralising provisions. Article 13 and Annex II of the AIFMD state that AIFMs shall comply with the following principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities 3. Annex II thus explicitly allows neutralization of principles should they not be appropriate for the AIFM. Furthermore, it is very important to put these Guidelines into the wider context of remuneration requirements across the financial sector, and the risks posed by variable remuneration in credit institutions as compared to asset managers. Asset managers were not a root cause of the financial crises and should therefore not be treated more strictly than credit institutions and investment banks. EFAMA therefore urges ESMA to review and broaden its current interpretation of the proportionality principle and to allow for neutralisation as foreseen in the Level 1 text of the Directive. 3. Structure of the Guidelines: Application to entire staff of AIFM 3 AIFMD Annex II Para. 1.

3 EFAMA is concerned with the distinction between general and specific requirements for risk alignment in the structure of the Guidelines. The proposed distinction contradicts the legal requirements in Article 13 and Annex II of the AIFMD. According to Recital 24 and Article 13(1) of the AIFMD, AIFMs shall determine remuneration policies and practices only for those categories of staff stated in Annex II and whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage. In particular, there are no requirements for the proposed approach that some of the principles stated in Annex II of the AIFMD should apply to AIFMs and their staff as a whole while others apply only to Identified Staff. The current ESMA proposal would lead to the situation that the proposed general requirements for risk alignment would also apply to those categories of staff whose activities have no connection with the risk profile of the AIFM or the AIFs (such as caretakers, secretaries etc.). B. Answers to questions raised in the Consultation Paper II. Background Q1: Do you agree with the approach suggested above for developing the present Guidelines? If not, please state the reasons for your answer and also suggest an alternative approach. EFAMA fully supports the overall policy aim that remuneration policies and practices in the financial sector should be consistent with and promote sound and effective risk management 4. EFAMA also welcomes that ESMA seeks to develop its Guidelines taking into consideration the CEBS Guidelines but bringing due adaptations for the specificities of the asset management sector as compared to the banking sector, on the one hand, and the differences between the text of the CRD and AIFMD on the other hand 5. EFAMA understands that ESMA is also bearing in mind that AIFM may not only be part of banking groups but also of insurance groups or other financial groups 6 and encourages ESMA to take into consideration the relevant remuneration principles and practices. This being said, EFAMA fears that the current approach will lead to a very complicated situation which will be difficult to grasp and apply for authorities and the industry: Most EFAMA Members will in the future hold at the same time a UCITS Management Company license, an AIFM license and possibly a MiFID license. They will act as management companies of investment funds and also perform investment services of individual portfolio management or noncore services. A large number of them are part of a banking group or a pensions or insurance group. These members will have to apply at least four sets of remuneration guidelines, namely the Guidelines to be issued by ESMA under AIFMD, guidelines to be issued by ESMA under MiFID, guidelines to be issued by ESMA under UCITS V and the existing CEBS Guidelines (to be modified by EBA). These guidelines will be implemented over differing timescales, requiring multiple changes to existing remuneration policies over the coming years. 4 ESMA Consultation Paper para. 6. 5 ESMA Consultation Paper para. 12. 6 ESMA Consultation Paper para. 46.

4 To add further complication, the different activities of these asset managers are exercised by the same personnel which is each day working on different product lines falling under the different directives. Under its employment agreement, this personnel will receive one remuneration only covering all work performed. It is extremely difficult if not impossible to determine which part of the remuneration would be falling under which rule. Therefore, it is important that consistent principles of remunerations be applied across those different pieces of legislation. Furthermore, consistent principles are also crucial regarding the scope of application of remuneration guidelines, i.e. personnel covered. Only consistent principles will permit to avoid a patchwork of remuneration principles across a single company. While EFAMA welcomes consistent principles, these principles should not be identical and EFAMA welcomes that ESMA seeks to bring due adaptations for the specificities of the asset management sector as compared to the banking sector. However, as currently proposed the result seems to be stricter regulations and more rules for AIFMs than for systemically important firms such as banks. In particular, the proposed requirements on the proportionality principle seem stricter than those applied to banks (see our request to Question 9 et seq.). EFAMA therefore believes that a principles based approach for the remuneration Guidelines would be preferable leaving enough flexibility to meet the nature, scale and complexity of the firms to which the Guidelines apply. This would also allow not only to take into account the developments in the banking sector, as ESMA is currently doing, but also to monitor developments in other sectors, such as the insurance and pension sector which will also impact asset managers being part of groups in these sectors 7. Some EFAMA Members believe that such principles based approach should not be included into different pieces of legislation, leading to a regulatory patchwork. Instead, the principles based approach should be presented in a horizontal measure. EFAMA Members also voiced strong concerns regarding the proposed interpretation of the impact and the implementation of the disclosure requirements of the Recommendation and the distinction between general and specific requirements on risk alignment 8, which are not reflected in the AIFMD. III. Structure of the Guidelines EFAMA raises concerns regarding the distinction between general and specific requirements for risk alignment in the structure of the Guidelines. The proposed distinction contradicts the legal requirements in Article 13 and Annex II of the AIFMD. According to Recital 24 and Article 13(1) of the AIFMD, AIFMs shall determine remuneration policies and practices only for those categories of staff 7 As ESMA is indicating in its Consultation, para. 46. 8 ESMA Consultation para. 5.

5 stated in Annex II and whose professional activities have a material impact on the risk profiles of the AIFMs or of the AIFs they manage. In particular, there are no requirements for the proposed approach that some of the principles stated in Annex II of the AIFMD should apply to AIFMs and their staff as a whole or some only to Identified Staff. The current ESMA proposal would lead to the situation that the proposed general requirements for risk alignment would also apply to those categories of staff whose activities have no connection with the risk profile of the AIFM or the AIFs (such as caretakers, secretaries etc.). For example, according to the proposed general requirements and the application of paragraph 1(p) of Annex II, discretionary pension benefits for those categories of staff (caretakers, secretaries) shall also be attributed in parts of AIF and be held by the AIFM for a period of five years in the form of special instruments, if the employee leaves the AIFM before retirement. Therefore, EFAMA requests that ESMA should make no distinction between general and specific requirements for risk alignment. AIFMs and the competent authorities should determine themselves to which Identified Staff the principles stated in Annex II should apply. Furthermore, some EFAMA Members suggested that a materiality threshold be included into the Guidelines. These EFAMA Members propose to set a European materiality threshold under which the specific requirements of the Guidelines on remunerations (deferred bonus, payment in shares ) wouldn t be applicable. If Identified Staff members receive a variable remuneration above a materiality threshold, they should be covered by all the AIFMD remuneration rules (deferred bonus, payment in shares ) and specific requirements of the Guidelines on remunerations. If they are below the materiality threshold, application of the rules could bring them into financial difficulties. IV. Scope of the Guidelines Q2: Do you agree with the above considerations on the scope of the Guidelines? In particular, do you agree with the clarifications on what should be considered as a remuneration falling into scope and what should be considered an ancillary payment or benefit falling outside the scope of the Guidelines? If not, please state the reasons for your answer and also suggest an alternative approach. EFAMA agrees with the considerations on the scope of the Guidelines. Q3: Do you see any benefit in setting a quantitative or qualitative threshold at which the portion of the payment made by the AIF exceeding the pro rata investment return for the investment made by the relevant staff members is transformed into carried interest? If yes, please make suggestions on the threshold to be used. Carried interest is a particular form of remuneration mostly used by the Private Equity and Venture Capital Industry and not by EFAMA Members.

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7 Q4: Do you agree that the AIFMD remuneration principles should not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities? EFAMA agrees and welcomes the clarification that the AIFMD remuneration principles do not apply to fees and commissions received by intermediaries and external service providers in case of outsourced activities. These are fees for services rendered and not part of the remuneration of AIFM staff. Q5: Notwithstanding the fact that the provisions of the AIFMD seem to limit the scope of the principles of remuneration to those payments made by the AIFM or the AIF to the benefit of certain categories of staff of the AIFM, do you consider that the AIFMD remuneration principles (and, therefore, these Guidelines) should also apply to any payment made by the AIFM or the AIF to any entity to whom an activity has been delegated by the AIFM (e.g. to the remuneration of a delegated investment manager)? EFAMA considers that the AIFMD remuneration principles and these Guidelines should not apply to payments made by the AIFM or the AIF to an entity to whom an activity has been delegated by the AIFM. Several reasons can be raised against such an extension of the application of the principles and Guidelines: First of all, the scope of the AIFMD is limited to those payments by the AIFM or the AIF to the benefit of certain categories of staff of the AIFM. The scope of application of the Level 1 text should be respected and not extended. Secondly, the aim of the AIFM remuneration principles is to address an individual s remuneration, not fees paid between two legal entities for services rendered. Furthermore, it is not necessary to extend the application of the AIFMD Level 1 to payments not covered by the Level 1 in order to achieve the legislative aim of promotion of sound and effective risk management. The entities receiving the delegation of portfolio management by the AIFM will in most cases already be subject to remuneration requirements, such as the requirements under MiFID. Other functions which can be delegated, such as administration, have no material impact on the risk profile of the AIFM or the AIF they manage. Last, these fees are already fully disclosed to potential and existing investors in the prospectus or offering documentation as well as the financial report of the AIFs.

8 Q6: Do you consider that payments made directly by the AIF to the AIFM as a whole (e.g. payment of a performance fee or carried interest) shall be considered as payments made to the benefit of the relevant categories of staff of the AIFM and, therefore, fall under the scope of the AIFMD remuneration rules (and, therefore, of these Guidelines)? EFAMA considers that the distinction should be underlined between a management fee paid by the AIF to the AIFM as Management Company on the one hand and remuneration paid to individual staff members on the other hand. The management fee paid by an AIF to the AIFM constitutes parts of the revenue of the AIFM. The management fee will cover various services, such as portfolio and risk management but also administrative services and distribution. From all revenues the AIFM receives costs and expenses must be deducted, such as rent, salaries, social security charges, costs for IT equipment etc. An employee of the AIFM on the other hand will receive one monthly salary for different product lines on which he works. A compliance officer, for example, will receive one salary for compliance work performed for different AIFs, UCITS and in connection with individual portfolios managed by the AIFM. Given this setup, it is impossible to consider payments made by an AIF to the AIFM as payments made to the benefit of certain categories of staff. The AIFMD remuneration principles and therefore also these Guidelines have as scope remuneration staff members of the AIFM receive. They shall not have as scope a management fee which an AIFM receives and shall not be extended thereto. Carried interest is a particular form of remuneration mostly used by the Private Equity and Venture Capital Industry and not by EFAMA Members. Q7: Do you agree with the categories of staff identified above which should be subject to the remuneration principles set out in the Guidelines? If not, please state the reasons for your answer and also suggest an alternative approach. EFAMA advocates a consistent approach to categories of staff covered ( Identified Staff ) under the different remuneration guidelines which will be applicable to asset managers, namely under the AIFMD, the UCITS Directive, MiFID and CRD. It will be impossible in practice to apply part of the remuneration Guidelines to certain parts of the salary of certain staff members but not to other parts of the salary or other staff members who exercise the same activities, possibly in the same team. Some EFAMA Members raised concern regarding the examples of staff set out in paragraph 31 under Other risk takers which refers to persons capable of entering into contracts and taking decisions that materially affect the risk positions of the AIFM or of an AIF it manages (sales persons, individual traders and specific trading desks) and individuals whose activities could potentially have a significant impact on the AIFM s results and/or balance sheet and/or on the performance of the AIFs they manage.

9 IV.III. Timing of entry into force of these Guidelines EFAMA suggests that the proposed date of entry into force of these Guidelines on 22 July 2013 should be complemented by a provision allowing for a phased introduction of these Guidelines with each AIFM. EFAMA understands that the assessment of remunerations and reporting shall be based on the annual salary of staff members. For many asset managers the reporting year follows the calendar year. An application of the Guidelines as of July 2013 would mean that Guidelines would be applicable for any remuneration paid in 2013 leaving nearly no room between now and beginning of January 2013 for implementation. Instead of this, it would be preferable that the Guidelines be applicable for each AIFM for the salary year following the entry into force of the Guidelines. This will also leave more time for the AIFM to modify employment agreements and coordinate with the unions in the different Member States. Some EFAMA Members also underlined that the Guidelines shall only apply after the management company will have been authorized as an AIFM. This approach would take the transitional provisions of Article 61 para. 1 AIFMD into account. Q8: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section IV (Scope of the Guidelines) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. V. Proportionality principle Q9: Do you agree with the clarifications proposed above for the application of the proportionality principle in relation to the different criteria (i.e. size, internal organisation and nature, scope and complexity of activities)? If not, please state the reasons for your answer and also suggest an alternative approach. EFAMA agrees overall with the clarifications and welcomes in particular that the list of criteria proposed is not an exhaustive list 9, that the criteria shall be assessed on a case by case basis and the focus be placed on an assessment based on a combination of all criteria 10. EFAMA considers that national regulators should have discretion to assess how to apply proportionality in relation to the remuneration policies of the AIFMs in their jurisdiction, since they will already be closely monitoring the risk management approach in firms that they supervise. 9 ESMA Consultation, para. 42. 10 ESMA Consultation, para. 42.

10 EFAMA disagrees with the clarification in paragraph 36 that categorically excludes neutralisation of certain provisions by an AIFM. In particular for AIFM being part of banking groups, this would lead to the situation that a requirement neutralised under the CEBS Guidelines cannot be neutralised under the AIFMD. Article 13 and Annex II of the AIFMD state that AIFMs shall comply with the following principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities 11. Annex II thus explicitly allows neutralization of principles should they not be appropriate for the AIFM. Q10: Do you agree with the clarifications proposed above for the application of the proportionality principle to the AIFM s categories of staff? If not, please state the reasons for your answer and also suggest an alternative approach. EFAMA welcomes that the criteria should also apply on a case by case basis for categories of staff. EFAMA would appreciate a clarification that also in these cases the criteria mentioned are not exhaustive. Q11: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section V (Proportionality principle) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. VI. AIFMs being part of a group Q12: Do you agree that there is a need for consistency in the potential application of different requirements for AIFMs which belong to a group subject to other principles? EFAMA agrees that there is a need for consistency in the potential application of different requirements to AIFM which belong to a group. EFAMA welcomes that ESMA also makes reference in this context to AIFM belonging to insurance or other financial groups and does not limit this discussion to banking groups. However, EFAMA is concerned that the proposed patchwork of regulation will not result in a consistent approach, given the different approaches to proportionality and neutralization. EFAMA welcomes the statement that the application of the remuneration principles set out in the AIFMD and in the present Guidelines by AIFM which belong to banking groups is equivalent to the respect by such a group of the principles regarding remuneration applicable to the group. This being 11 AIFMD Annex II Para. 1.

11 said, this statement is not reflected in the CEBS Guidelines and EFAMA would appreciate a confirmation in this regard by EBA. Q13: Do you agree that the proposed alignment of the CRD and AIFMD remuneration provisions will reduce the existence of any conflicting remuneration requirements at group level for AIFMs whose parent companies are credit institutions subject to the CRD? If not, please state the reasons for your answer and provide quantitative details on any additional costs implied by the proposed approach. EFAMA agrees that the proposed alignment between CRD and AIFMD will contribute to a reduction of conflicting remuneration requirements at group level. This being said, the alignment as proposed will not sufficiently reduce conflicting remuneration requirements and even risks to add additional contradictions. The current proposal does for example not allow for neutralization of requirements which may be neutralized under the applicable CEBS Guidelines. Q14: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section VI (AIFMs being part of a group) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. VII. Financial situation of the AIFM (Annex II, paragraph 1(o) of the AIFMD) Q15: Do you agree with the above principle aimed at preserving the soundness of the AIFM s financial situation? If not, please state the reasons for your answer and also suggest an alternative approach. EFAMA disagrees with the above principle aimed at preserving the soundness of the AIFM s financial situation. The variable remuneration paid to personnel of an AIFM should be linked to their performance in services towards clients, for example the management of a particular AIF or UCITS or managed portfolio, not the overall financial situation of the AIFM. This remuneration structure is typical for the asset management industry where the asset managers are acting as agents on behalf of their clients. It is different from the banking and investment banking sector. This structure allows remunerating personnel having rendered good services to clients, for example achieving good investment returns or mitigating losses for the investors of AIFs and UCITS managed in adverse markets. EFAMA understands the policy objective of preserving the financial situation of the AIFM. However, the soundness of the AIFM s financial situations is already the subject of the capital requirements for the AIFM under the AIFMD.

12 Q16: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section VII (Financial situation of the AIFM) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. VIII. Governance of remuneration Q17: Do you agree with the proposed split of competences between the members of the management function and those of the supervisory function? If not, please provide explanations. While EFAMA agrees in general with the proposed split of competences, we would like to point out that this split as proposed may not be suitable for all structures in which AIFM may be set up, such as partnerships. Q18: Do you agree with the guidelines above on the shareholders involvement in the remuneration of the AIFM? EFAMA agrees with the proposed guidelines on shareholder involvement. Q19: Do you agree with the criteria above for determining whether or not a RemCo has to be set up? If not, please provide explanations and alternative criteria. EFAMA agrees with the criteria for determining whether or not a RemCo has to be set up. For AIFM being part of a group, it should be possible to have the RemCo at group level and not be subject to the requirement of setting up a RemCo at the level of the AIFM. EFAMA welcomes that ESMA agrees with this principle for AIFMs which are subsidiaries of a credit institution 12. EFAMA would welcome if ESMA could clarify that also AIFM which are not direct subsidiaries of credit institutions but part of banking groups, insurance groups or other financial groups are also not obliged to set up a RemCo but may rely on the RemCo at group level. Furthermore, existing national legislation in Member States regarding the governance structures must be taken into account. 12 ESMA Consultation Paper, para. 74.

13 Q20: Do you agree that in assessing whether or not an AIFM is significant, consideration should be given to the cumulative presence of a significant size, internal organization and nature, scope and complexity of the AIFM s activities? If not, please provide explanations and alternative criteria. Please refer to the answer to question 9. Q21: Please provide quantitative data on the costs and benefits that the proposed criteria to determine whether a RemCo has to be set up would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. Q22: Do you see merits in adding further examples of AIFMs which should not be required to set up a RemCo? If yes, please provide details on these additional examples. EFAMA considers the use of only 2 examples is too narrow. The examples should be removed and the competent authorities and firms should have sufficient flexibility to apply the requirements on a case by case basis. Q23: Do you agree with the principles relating to the composition of the RemCo? Please provide quantitative data on the costs and benefits that the proposed principles on the composition of the RemCo would imply. EFAMA considers that the proposed principles relating to the composition of the RemCo are too strict. In particular the requirement of sufficient expertise and professional experience concerning risk management and control activities, namely with regard to the mechanism for aligning the remuneration structure to AIFMs risk and capital profiles 13 will considerably and unnecessarily narrow the list of potential candidates. The principles relating to the composition of the remuneration committee should be sufficiently flexible to accommodate different business models. Q24: Do you see any need for setting out additional rules on the composition of the RemCo? EFAMA sees no need for setting out additional rules. 13 ESMA Consultation Paper, Para. 77.

14 Q25: Do you agree with the role for the AIFM s RemCo outlined above? If not, please provide explanations. EFAMA agrees with the proposed role for the AIFM s RemCo. Q26: Do you agree with the principles above on the process and reporting lines to be followed by the RemCo? If not, please provide explanations. EFAMA agrees with the principles proposed on the process and reporting lines. EFAMA would appreciate the clarification that for AIFM being part of a group the process and reporting lines also reflect the communication and coordination with group level. Q27: Do you consider that the AIFM s RemCo should provide adequate information about the activities performed not only to the AIFM s shareholders meeting, but also to the AIFs shareholders meetings? When providing your answer, please also provide quantitative details on the additional costs involved by such requirement. EFAMA does not consider that the AIFM s RemCo should provide information about the activities performed at shareholder meetings of the AIF s managed by the AIFM. First, the information to be provided to the investors of AIF s is set out in the AIFMD Level 1 in Article 22 regarding disclosure of remuneration in the annual report. AIFMD Level 1 does not provide for any disclosure of information of the RemCo at a shareholder meeting. Secondly, there is a danger of misleading shareholders of an AIF when providing information regarding an entire AIFM as it will be difficult to draw the distinction which part of the activities do concern the specific AIF and which do relate to the entire AIFM. There is not necessarily a correlation between activities performed by a RemCo at AIFM level and the specific performance of staff members of the AIFM for a single client, the AIF. Q28: Do you agree with the above criteria on the remuneration of the control functions? If not, please provide explanations. EFAMA agrees with the criteria on the remuneration of control functions. EFAMA also considers that the remuneration of the control functions must be designed to minimise conflicts and must avoid compromising their independence.

15 Q29: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section VIII (Governance of remuneration) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. IX. General requirements on risk alignment Q30: Do you agree with the principles related to the treatment of discretionary pension benefits? If not, please provide explanations. EFAMA overall agrees with the principles related to the treatment of discretionary pension benefits. This being said, EFAMA would like to remind ESMA that in certain jurisdictions, personnel of AIFM may not hold parts of AIF they manage. Furthermore, AIFM may manage AIF which are not open to the public but reserved for certain investors such as professional investors or, for fund of funds for other funds, or which have been set up for a specific investors, for example a pension fund. In such cases, it will not be possible to pay the personnel of the AIFM in parts of AIF. The reference in the Consultation Paper para. 102 should be modified to take this into account. Furthermore, some EFAMA Members suggested that a materiality threshold be included into the Guidelines. These EFAMA Members propose to set a European materiality threshold under which the specific requirements of the Guidelines on remunerations (deferred bonus, payment in shares ) wouldn t be applicable. If Identified Staff members receive a variable remuneration above a materiality threshold, they should be covered by all the AIFMD remuneration rules (deferred bonus, payment in shares ) and specific requirements of the Guidelines on remunerations. If they are below the materiality threshold, application of the rules could bring them into financial difficulties. Lastly, as mentioned in our remarks above under III. Structure of the Guidelines, EFAMA disagrees with the distinction between general and specific requirements for risk alignment in the structure of the Guidelines. As mentioned above, this proposed distinction would lead to the situation where the proposed general requirements for risk alignment would also apply to those categories of staff whose activities have no connection with the risk profile of the AIFM or the AIFs (such as caretakers, secretaries etc.). It does not seem adequate to apply the proposed principles related to the treatment of discretionary pension benefits also to these categories of staff. Q31: Do you consider appropriate to add any further guidance on the payments related to the early termination of a contract? If yes, please provide suggestions. EFAMA does not consider that further guidance on the payments related to the early termination of a contract will be necessary.

16 Q32: Do you consider that the above guidance is sufficiently broad to cover any kind of hedging strategies that may be pursued by a member of the staff of an AIFM? If not, please provide details on how the scope of the guidance should be enlarged. EFAMA considers that the proposed guidance is sufficiently broad. Q33: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section IX (General requirements on risk alignment) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. X. Specific requirements on risk alignment Q34: Do you consider these common requirements for the risk alignment process appropriate? If not, please provide explanations and alternative requirements. EFAMA does not agree that ex post risk adjustments should take errors into account. A direct linkage of errors to variable remuneration might encourage non reporting of errors. A better approach might be to require this only where there has been gross negligence or recklessness on the part of the relevant person. Q35: Do you agree with the proposed criteria on risk measurement? If not, please provide explanations and alternative criteria. Q36: Do you agree that in order to take into account all material risks AIFMs should also take into account the risks arising from the additional management of UCITS and from the services provided under Article 6(4) of the AIFMD? EFAMA agrees that the AIFM should take into account all material risks arising from the additional management of UCITS and from the services provided under Article 6(4) AIFMD. This being said, EFAMA invites ESMA to clarify that the part of the remuneration derived from the management of the UCITS or from the services provided under Article 6(4) AIFMD should not be treated as the part derived from the management of the AIF (in terms of deferral schemes, 50% in instruments ).These parts shall be treated under the relevant Guidelines which ESMA is currently consulting on for the services rendered under Article 6(4) AIFMD and which will be issued in the future for UCITS. It would be an inopportune to anticipate the entry into force of these sets of rules and would lead to overlaps in the future.

17 Q37: Do you agree with the proposed guidance for the financial and non financial criteria to be taken into account when assessing individual performance? If not, please provide explanations and alternative guidance. Q38: Do you agree with the proposal to distinguish between absolute and relative performance measures on one side and between internal and external performance measures on the other? If not, please provide explanations. Q39: Do you agree with the requirement set out above to document the policy for the award process and ensure that records of the determination of the overall variable remuneration pool are maintained? If not, please provide explanations and an alternative procedure. EFAMA agrees with the requirement to document the policy for the award process and to ensure that records of the determination of the overall variable remuneration pool are maintained. Q40: Do you agree with the proposal according to which AIFMs should use both quantitative and qualitative measure for the ex ante risk adjustment? If not, please provide explanations and an alternative proposal. EFAMA believes that any ex ante risk adjustment has to be considered in the context of an asset management firm where fees paid are based upon realised performance. Investors who redeem their shares will receive that realised return. Regarding AIFM who belong to a group, the requirement to apply ex ante adjustment at an individual entity level could have unintended consequences where bonus pools are typically created at a group level, and not at entity level (given many staff members are providing shared services for multiple firms within the group). Q41: Do you agree with the guidance on the different components to be considered in relation with the deferral schedule for the variable remuneration? If not, please provide explanations and alternative guidance.

18 Q42: Do you agree with the types of instruments composing the variable remuneration which have been identified by ESMA? If not, please provide explanations. EFAMA agrees with the types of instruments composing the variable remuneration which have been identified by ESMA. EFAMA calls for sufficient flexibility in the application of the Guidelines regarding the types of instruments due to several difficulties which arise in this context: As a general remark, EFAMA underlines the legal difficulties of providing part of the variable remuneration in parts of AIF the personnel of AIFM manages. In some jurisdictions, personnel of an AIFM may not hold parts of the AIF they manage. Furthermore, AIFM may manage AIF which are not open to the public but reserved for certain investors such as professional investors or, for fund of funds for other funds, or which have been set up for a specific investors, for example a pension fund. In such cases, it will not be possible to pay the personnel of the AIFM in parts of AIF. The requirement of AIFMD Annex II para. 1 (m) is therefore highly problematic for many AIF. EFAMA understands that ESMA is aware of these difficulties and has therefore included the reference to the use of alternative instruments as mentioned in para. 165 of the ESMA Guidelines. However, it is not certain if the use of such alternative instruments will be legally possible. EFAMA understands that the purpose of remunerating staff in instruments is to align the staff s interest with those of the investors of the AIF. EFAMA is however not certain that this alignment can be achieved in the best interest of the investor by such remuneration. Such remuneration will create new conflicts of interest which need to be carefully managed and can be mitigated with a flexible application of the Guidelines. First, given that portfolio managers will often manage segregated mandates, UCITS and AIFs, such remuneration incentives could cause managers to give preference to AIFs over other products. A participation also risks influencing the manager s investment behaviour, so that decisions on running the AIF are no longer only based on clients instructions but also on considerations linked to his own investment preferences. It will also mean that managers may be reluctant to manage funds in markets which were currently out of favour or underperforming but which are strategically important for the investors. From a practical point of view, it is also difficult to envisage how this will operate in practice where very often single employees provide services regarding multiple AIFs, multiple UCITS and multiple separate accounts. Q43: Do you consider that additional safeguards should be introduced in these Guidelines in order to ensure that the payment of the Identified Staff with instruments does not entail/facilitate any excessive risk taking by the relevant staff in order to make short term gains via the instruments received? If yes, please provide details.

19 Q44: Do you agree with the proposed guidance for the retention policy relating to the instruments being a consistent part of the variable remuneration? If not, please provide explanations and alternative guidance. Q45: Do you agree with the proposed guidance for the ex post risk adjustments to be followed by AIFMs? If not, please provide explanations and alternative guidance. Q46: Do you agree with the analysis on certain remuneration structures which comply with the criteria set out above? If not, please provide explanations. Q47: Do you consider that there is a need for submitting to an equivalent/similar treatment any other form of remuneration? If yes, please provide details of the remuneration structure(s) and of the specific treatment that you consider appropriate. Q48: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section X (Specific requirements on risk alignment) would imply. XI. Disclosure Q49: Do you consider appropriate to require AIFMs to apply the same level of internal disclosure of remuneration as they apply to their external disclosure? Please state the reasons of your answer. EFAMA considers that there should not be the same level of internal and external disclosure of remuneration. Article 22(e) and (f) of the AIFMD sets out the external disclosure and the requirements in the Guidelines should not go beyond these requirements. Article 22 of the Level 1 text requires that remuneration disclosure is made in the annual report. In most cases annual reports for funds will not be made public but will just be sent or made available to

20 existing investors and to competent authorities as required by Article 22 and held at disposal of potential investors. EFAMA therefore does not agree with the statement in paragraph 151 of the Guidelines that there has to be public disclosure, since this clearly goes beyond Level 1. Finally, EFAMA would appreciate clarification that the annual reporting requirements under Article 22 come into effect for the first full financial year after the AIFM is granted authorisation under the Directive. Q50: Please provide qualitative and quantitative data on the costs and benefits that the rules proposed in this Section XI (Disclosure) would imply. EFAMA refers ESMA to the data provided by our members in their individual responses. Brussels, 28 September 2012 [12 4044]