ESMA published on 3 April 2020, its Final Report, ‘Guidelines on performance fees in UCITS and certain types of AIFs’ (the “Guidelines”). The Guidelines are the culmination of a consultation process started by ESMA in July 2019 (the “Consultation”) which sought stakeholder feedback on a range of issues relating to the use of performance fees by fund managers.
The Consultation
Our OnPoint issued in August 2019 provided detailed analysis of the Consultation and other various regulatory initiatives which sought to harmonise the way fund managers charge performance fees to retail investors, as well as the circumstances in which performance fees can be paid.
The following five guidelines, as set out in the Consultation, now form part of the final guidance:
- Performance fee calculation methodologies;
- Consistency between performance fee calculation models and investment objectives, strategies and policies;
- Frequency of crystallisation;
- Negative performance (loss) recovery; and
- Disclosure of performance fee models in fund documents.
ESMA’s Consultation was initially aimed at UCITS funds only. In order to ensure a level playing field and consistent protection for all retail investors, the Guidelines will now apply to certain types of AIFs, further details of which are set out below.
ESMA received 48 responses to the Consultation, 14 of which were confidential, primarily from asset management industry associations and asset managers. The answers received are available on ESMA’s website.
Who is within the scope of the Guidelines?
The Guidelines apply to managers of (i) UCITS and (ii) AIFs marketed to retail investors except for (a) closed-ended AIFs; and (b) open-ended AIFs that are EuVECAs (or other types of venture capital AIFs), EuSEFs, private equity AIFs or real estate AIFs. While the applicability of the Guidelines to UCITS is clear, it will be necessary for alternative investment fund managers to determine if any of their AIF shareholders bring them within the scope of the Guidelines.
When do the Guidelines take effect?
The Guidelines apply from two months after the date of publication on ESMA’s website in all EU official languages (the “Effective Date”). We set out below the various compliance dates for funds.