New pay disclosure rules under the Alternative Investment Fund Managers directive, which will enter effect July 2013, are raising concerns over how to report carried interest.
There is little recognition of the differing business models used by asset classes covered by the directive, said Timothy Wright, a director at PwC. “For example, carried interest based on capital returns from the sale of portfolio assets in private equity versus performance fees based on portfolio NAV in the open-ended hedge fund model.”
There’s an indication carry will be treated as variable income which leads to the question of exactly how to report carried interest
Consequently there remain questions as to whether carried interest should in fact be considered remuneration for these purposes and indeed where carried interest would fall under the directive text, said Michael Newell of law firm Norton Rose.
“However ESMA gave a clear steer in the consultation that their view is that carried interest payable by the fund should be treated as part of the total variable remuneration to be reported on.
“This itself leads to a question of exactly how to report carried interest – as a contingent interest in the fund or only at the point actual payments are received upon investment realisations,” he added.
The directive is currently undergoing consultation on a number of proposals released by EU regulators earlier this month. Regarding pay disclosures, the directive requires a breakdown between fixed and variable remuneration.
At least 40 percent of a GP’s variable pay must be deferred for at least three to five years (depending on a funds’ life cycle). Firms must also disclose senior management and other key staff’s pay for the financial year.
The consultation paper asks stakeholders whether they agree with the approach taken by the government and if the proposals would cause issues for any particular funds.
However, “given the importance of remuneration strategy to the types of business affected by AIFM, many organisations will be surprised at the lack of detailed questions posed in the consultation”, said Wright.
European regulators will open further consultation periods in which the industry will be able to voice its concerns over pay disclosure rules, according to a source close to the UK’s Financial Services Authority, the agency responsible for crafting remuneration proposal questions for European regulators.