On February 25th, the EU’s two legislative bodies, the European Parliament (EP) and the European Council (Council), agreed to restrict retail asset managers’ bonuses. After going back and forth during 2013, the two bodies settled their differences last month as part of the fifth iteration of the Undertakings for Collective Investments in Transferable Securities Directive (UCITS V). We expect UCITS V to be passed into law by both the EP and Council this spring, and for it to be implemented by EU member states by early 2016.
Most importantly, the Council agreed to not include a bonus cap for managers and advisors of UCITS funds (UCITS funds are similar to US-registered mutual funds). In place of the cap, the Council and EP resolved that at least 50% of bonus amounts must be paid in shares of the fund under management, and at least 40% of bonus amounts must be deferred for three years.
These and other changes generally align UCITS V’s remuneration terms with those of the EU’s Alternative Investment Fund Managers Directive (AIFMD), thus imposing similar bonus restrictions on EU fund managers regardless of the type of fund being managed. AIFMD’s requirements go into effect before UCITS V’s do, so as UCITS managers prepare for 2016 implementation they will have opportunity to learn from the experience of alternative fund managers.
The requirement that 50% of bonuses be paid in UCITS shares may impact US managers of UCITS assets particularly hard because US citizens face limits in owning UCITS shares. However, lawmakers may change these terms before passing UCITS V, or subsequent regulation by the European Securities and Markets Authority will more likely do so.
This Regulatory Brief provides background on UCITS V, overviews the proposed law’s most recent remuneration restrictions, and assesses the potential impact on US managers and advisors of UCITS assets.