1. Welcome to EQUITY ISSUES, a short note on a relevant issue in the private equity
and venture capital industry.
If you would like to discuss any of the points we raise below, please contact me or
one of our other lawyers.
Claire Cummings
020 7585 1406
claire.cummings@cummingslaw.com
www.cummingslaw.com
EQUITY ISSUES
Private equity funds and FCA guidance on the AIFMD Remuneration Code
The FCA has published its final guidance on the AIFM Remuneration Code for
AIFMs, which is contained in SYSC 19B of the FCA Handbook. The guidance is of
particular interest to those private equity and venture capital firms with carried
interest arrangements in place, as it indicates that if those carried interest
arrangements are sufficiently robust, the firm should not be required to comply with
the pay-out process rules.
The guidance sets out the FCA’s view of when a firm may reasonably conclude that
it may disapply the pay-out process rules for the payment of carried interest to senior
management on the grounds of proportionality. The guidance helpfully includes
AUM threshold tables, indicating when it may be appropriate to disapply the rules
and this will be the case where AUM amount to less than £5 billion. Further, the
FCA sets out other additional elements which may be taken into account, such as the
nature of certain fee structures, including carried interest. The FCA states that this
factor may be considered in disapplying the pay-out process rules where fee
structures satisfy the objectives of alignment of interest with investors and avoid
incentives for inappropriate risk-taking (but perhaps not meeting the ESMA
guidelines). This view would appear to be sensible, given that the nature of carried

2. interest, i.e. payment linked to the performance of the underlying fund and deferred
over a long performance period, reflects the risk management objectives of the payout process rules. The Appendix to the guidance provides a useful example relating
to a private equity firm as to how to apply proportionality in this respect.
The FCA expects firms to implement the AIFMD remuneration regime for new
awards of variable remuneration to relevant staff for performance periods following
that in which the firm becomes authorised. The FCA has confirmed that the guidance
will apply only to full performance periods and will therefore not apply to any
remuneration periods prior to the first full performance period after authorisation.
The FCA’s guidance is directed at firms authorised as full-scope UK AIFMs under
the AIFMD. The Remuneration Code will not apply to those managers designated as
small AIFMs, although firms may elect to implement some or all of these
remuneration rules.
The FCA guidance on the AIFMD Remuneration Code took effect from 31 January
2014
This document is for general guidance only. It does not contain definitive advice.
Cummings
Tel: + 44 20 7585 1406
Mob: + 44 7734 057 327
www.cummingslaw.com
17 February 2014