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Fund Distribution Alert 2020-07

Fund Distribution Alert 2020-07

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Said Fihri

Partner, ADV – Investment Services

KPMG in Luxembourg

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On 3 April, ESMA released guidelines on performance fees for UCITS funds and certain AIFs. The guidelines follow the consultation paper which closed 31 October 2019, covered in our Fund Distribution Alert of 18 July 2019, and aims to harmonize how and when fund managers charge performance fees to investors. The items covered by the guidelines are as follows:

  • Calculation method;
  • Consistency between the performance fee model and the fund’s investment objectives, strategy and policy;
  • Crystallization frequency;
  • Negative performance recovery;
  • Fee model disclosure.


Important to note:

  1. The crystallization frequency should not be more than once a year;
  2. Funds employing a performance fee model based on a benchmark index should claw back any underperformance compared to the benchmark, during a reference period of at least five years or the whole life of the fund, before any performance fee becomes payable;
  3. Performance fees for funds employing a high water-mark model should only be payable where the new high water-mark exceeds the previous one, during a reference period of at least five years or the whole life of the fund;
  4. Funds allowing performance fee payment in times of negative performance should include a prominent warning to this effect in the KIID;
  5. The performance fee model and the computation methodology should be explained in legal documents (particularly prospectus) as well as marketing material.


The AIFs impacted by the guidelines are those which are open-ended and marketed to retail investors in accordance with AIFMD art. 43, except for EuVECAs (or other types of venture capital AIFs), EuSEFs, private equity AIFs or real estate AIFs.

ESMA will have the guidelines translated into the official EU languages and subsequently published on their website. Two months after publication they will become applicable. Existing funds with performance fees should apply the guidelines by the beginning of the financial year following six months from the application date. New funds created after the guidelines become applicable and which intend to make use of performance fees should be compliant upon inception.

The guidelines are available here.

Please feel free to contact us should you require any additional information.

Please note that any information provided is general in nature, is based on the latest publicly available information as analyzed on a best endeavor basis and does not constitute any specific legal opinion or advice. 

Contact

Said Fihri
Partner
+352 22 51 51 7892
said.fihri@kpmg.lu


Stephanie Zedda
Senior Manager
+352 22 51 51 7271
stephanie.zedda@kpmg.lu

© 2020 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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