On April 3, 2020, the European Securities and Markets Authority (ESMA) published their report on the final guidelines on performance fees in investment funds. These guidelines are applicable to undertakings for the collective investment in transferable securities (UCITS) and certain types of alternative investment funds (AIFs).
The purpose of these guidelines is to establish consistent, efficient and effective supervisory practices and to ensure uniform and consistent application of rules within the European Union. Their objective is to promote greater convergence and standardisation in the field of performance fees and to promote a convergent supervision by competent authorities.
In particular, these guidelines aim to ensure that performance fee models used by the management companies comply with the principles of acting honestly and fairly in conducting their business activities. They also ensure companies act with due skill, care and diligence, in the best interest of the fund that they manage, in such a way as to prevent undue costs being charged to the fund and its investors. They also aim to establish a common standard in relation to the disclosure of performance fees to investors.
Who is subject to these guidelines?
These guidelines apply to managers and competent authorities.
In case Member States allow AIFMs to market to retail investors in their territory units or shares of AIFs they manage in accordance with Article 43 of the AIFMD, the guidelines also apply to AIFMs of those AIFs, except for:
- closed-ended AIFs; and
- open-ended AIFs that are EuVECAs (or other types of venture capital AIFs), EuSEFs, private equity AIFs or real estate AIFs.
When will these guidelines apply?
These guidelines apply from two months after the date of publication of the guidelines on ESMA’s website in all EU official languages. Managers of any new funds created after the application date of the guidelines with a performance fee, or any funds existing before the application date that introduce a performance fee for the first time after that date, should comply with these guidelines immediately in respect of those funds. Managers of funds with a performance fee existing before the application date of these guidelines should apply these guidelines in respect of those funds by the beginning of the financial year following six months from the application date of the Guidelines.
What do the guidelines address?
Guidelines on the following subjects have been issued:
- Performance fee calculation method
- Consistency between the performance fee model and the fund’s investment objectives, strategy and policy
- Frequency for the crystallisation of the performance fee
- Negative performance (loss) recovery
- Disclosure of the performance fee model