The RR deal amongst others with performance-based remuneration (“PBR”). PBR must be based on a combination of the individual’s performance and the AIF(M)’s business. To secure long term alignment between the AIF(M)’s staff and its business, the fixed part must be substantial, and the variable part of the remuneration (usually PBR) should for at least 50% be paid out as equity-linked products that vest over time. The RR prohibit renumeration dependent on the AIF(M)’s business performance for control functions, e.g. risk management and compliance.

In the usual set up, a Host AIFM delegates portfolio management (“PM”) to the USFM. In such a case the USFM’s team has a material impact on the risk profile of the relevant AIF. The EU financial regulator (ESMA) has issued guidelines ("RGL") that require the Host AIFM to ensure that the RR cascade down to the delegate. The RGL are not binding on national regulators, but subject to a comply or explain principle. The Luxembourg regulator has chosen for compliance. Host AIFMs are not required to report on the USFM’s compliance with the RR. To effectuate the RGL, the Host AIFM usually requires the USFM to commit as per the PM agreement to apply the RR to its identified staff. Earmarking the identified staff is usually left to the reasonable assessment of the USFM.

Alignment by the USFM to the RR is usually not problematic for closed-ended funds. The USFMs team members that are entitled to carry in relation to the relevant AIF are usually designated as identified staff. A typical carried arrangement (which provides for vesting rights) should normally comply with the rules for PBR. Concerns may however arise for USFM’s identified staff in control functions, who are also entitled to carried interest.

The aggregate amount of remuneration paid to the identified staff of: (i) the Host AIFM, usually limited to the remuneration of the staff that deals with the relevant AIF and of the (ii) USFM is to be disclosed in the AIF’s annual report. When it comes to disclosures it is key that the USFM is made well aware that such disclosures are to be provided even if the Luxembourg SCSp makes up for a small part of the commitments to the overall fund.

As so often, to avoid any potential frustration in the USFM’s and Host AIFM’s team, all boils down to managing expectations on the RR & RGL and disclosures in the early stage of the relation.

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