On 16 July 2019, the European Securities and Markets Authority ("ESMA") published a consultation paper (the "Consultation") in respect of draft guidelines on performance fees in UCITS (the "Guidelines") applicable to undertakings for collective investments in transferable securities ("UCITS"). ESMA will consider all comments from stakeholders by 31 October 2019, with the aim of finalising the Guidelines after this.
The purpose of the Consultation is to harmonise regulations relating to UCITS performance fees across the EU. ESMA has stated that the need for regulatory convergence stems from the fact that:
- currently there are different practices across national competent authorities ("NCAs") regarding performance fee structures and the circumstances in which performance fees can be paid; and
- this divergence can create risks of regulatory arbitrage and inconsistent levels of investor protection.
The Consultation is specifically relevant for UCITS management companies and investment managers as their delegates ("Managers"), institutional investors, retail investors and relevant trade organisations. The Guidelines have the stated objective of aligning the interests of Managers and investors and cover:
- general principles on performance fee calculation methods;
- consistency between the performance fee model and the fund's investment objectives, strategy and policy;
- frequency for crystallisation of performance fees;
- circumstances where performance fees should be payable; and
- disclosure of the performance fee model.
In preparing the Guidelines, ESMA considered the IOSCO report on "Good Practice for Fees and Expenses of Collective Investment Schemes" – FRO9/16 August 2016 (the "IOSCO Report") and also relied on an ESMA survey sent to the industry in respect of various questions concerning performance fees.
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