Falcon Fund Management (Lux) | Policies
I. Voting Rights Policy
FFM has determined that it will not exercise its voting rights for the managed funds.
II. Best Execution Policy
The transactions initiated by the Investment Managers are executed as a rule by FPB which has issued guidelines with respect to “best execution” in their respective own internal regulations.
The respective FPB internal regulation gives more detailed information of the broker selection, best execution and order handling and allocation processes, and are specifically designed as a guide for the Investment Managers.
Brokers used, the respective volumes granted and commissions paid are disclosed to the Board on a yearly basis.
Order execution policy
The UCITS IV Directive requires management companies to act in the best interests of a UCITS they manage when:
a) executing decisions to deal on behalf of the UCITS in the context of the management of their portfolios.
b) placing orders to deal on behalf of the managed UCITS with other entities for execution, in the context of the management of their portfolios.
Management companies must take all reasonable steps to obtain the best possible result for the UCITS, taking into account price, costs, speed, likelihood of execution and settlement, order size and nature or any other consideration relevant to order execution. This obligation is known as the duty of “best execution”.
The purpose of this document is to detail the Management Company`s arrangements in relation to order execution, which will be applied to all managed UCITS funds.
The Management Company does not execute orders itself, neither does it transmit orders for execution; all such activity is delegated to appointed Investment Manager, who will determine how orders will be placed or executed.
The Management Company does not execute orders itself, neither does it transmit orders for execution; all such activity is delegated to appointed Investment Manager, who will determine how orders will be placed or executed.
This policy outlines the duties placed on the appointed Investment Manager to ensure the Management Company `s compliance with the regulatory requirements (which incorporate the UCITS requirements) with respect to “Best execution” and “Handling of Orders”.
3. Best execution factors and best execution criterias
The best execution factors to be taken into account when executing orders for a fund include:
- likelihood of execution and settlement
- order size and nature
- any other relevant consideration
The applicable Investment Manager will take all reasonable steps to obtain the best possible results for the fund taking into account the above factors.
In determining the relevant importance of each of the above factors, the Investment Manager will take into account the following best execution criteria:
- the objectives, investment policy and risks specific to the fund, as indicated in the prospectus of the fund;
- the characteristics of the order;
- the characteristics of the financial instruments that are the subject of that order;
- the characteristics of the execution venues to which the order can be directed.
The Management Company would generally expect price to be the most important execution factor for the majority of trades that are executed, however there will be trades where price is not the most important factor when executing a trade. For example:
- For smaller capitalised equities and less liquid stocks, the likelihood of execution and the provision of liquidity may be more important than the price.
- When raising cash to fund redemptions, the speed and likelihood of execution may be more important.
- When executing a large order, the ability to transact the whole of the order at a less favourable price may be more important than only executing a part of the order at the best available price at that time.
- In certain markets, the level of price volatility may mean that timeliness of trade execution is the priority.
- When executing certain instruments (e.g.: OTC derivatives or structured products) the choice of execution venue may be limited.
4. Execution venues
The applicable Investment Manager will either determine the ultimate execution venue/entity for a fund’s order on the basis of the order execution factors as described above (giving specific instructions to the broker) or the Investment Manager will satisfy itself that the broker has arrangements in place to enable the Investment Manager to comply with its obligations, the Management Company`s obligations and ultimately, their funds.
The Investment Manager maintains a policy identifying, for each class of instrument, the entities with which orders may be placed. Arrangements are only permissible when they are consistent with the obligations detailed in this policy.
The Investment Manager will assess which venues are likely to provide the best possible result for the funds on an order by order basis.
For transactions in the shares or units of Collective Investment Schemes, the sole point of execution will be the Scheme Operator or their agent and the price will be established as per the Scheme’s Prospectus. Orders will be placed with the relevant single venue according to the known valuation point of the Scheme in question at the quoted price.
5. Order handling
The Management Company does not trade for its own account. The following procedures and arrangements are in place to ensure the prompt, fair and expeditious execution of orders.
The Investment Manager shall:
- ensure orders executed for a fund are promptly and accurately recorded and allocated;
- ensure orders are executed sequentially unless prevailing market conditions make this impracticable or the interests of the fund require otherwise;
- (where they are responsible for overseeing or arranging settlement of an executed order) ensure financial instruments/ sums of money received in settlement of the executed orders shall be promptly and correctly delivered to the appropriate account;
- ensure that there will not be a misuse of information relating to pending orders, and take all reasonable steps to prevent the misuse of information.
The Investment Manger shall ensure the fair allocation of aggregated orders, including how the volume and price of orders determine allocations and the treatment of partial executions. In so doing, the Investment Manager shall consider the following factors:
- it must be unlikely that the aggregation will work to the overall disadvantage of the fund;
- where orders are aggregated but are only partially executed, the related trades shall be allocated in accordance with the order allocation policy.
- where the Investment Manager aggregates an order of a fund with a transaction for its own account or other client orders it must not allocate trades in a way that is detrimental to the fund or the client
- where the Investment Manager aggregates an order of a fund with a transaction for its own account and it is partially executed, it shall allocate the related trades to the fund in priority over those for its own account.
Proportionate allocation should not occur unless the management company has given prior approval.
- if the Investment Manager is able to demonstrate to the fund or its other client on reasonable grounds that it would not have been able to carry out the order on such advantageous terms without aggregation, or at all, it may allocate the transaction for its own account proportionally, in accordance with the policy referred to above.
6. Monitoring and review
This order execution policy has been approved by each management company’s Board of Directors.
The Investment Manager will monitor, on a regular basis, the effectiveness of their arrangements and order execution policy, in order to identify and correct any deficiencies including allocation of trading orders and whether the quality of the execution venues/entities included in the order execution policy provide for the best possible result for the fund or whether changes are required to the execution arrangements.
The Management Company will also seek to monitor their delegates to ensure that this policy is adopted by them. Delegates will be required to submit on a monthly basis, specific Key Risk Indicator reporting (“KRI”) to the Management Company together with exceptions based reporting on an occurrence basis.
The Management Company will review the reports of the Investment Manager so as to enable them to demonstrate that they have executed orders on behalf of the funds in line with this best execution policy.
This policy will be reviewed on an annual basis and whenever a material change occurs that affects the management company’s ability to continue to obtain the best possible result for the execution and placing of orders on a consistent basis.
7. Shareholder / information
The best execution policy is made available on the website of the Management Company and any material changes to the order execution arrangements or order execution policy will be made available to shareholders in the same manner.
III. Code of Conduct
Each of the principles of the Code is supported and explained by a number of recommendations which in most cases will represent the practice to be followed in order to implement the Code's principles.
The recommendations underpinning the ten principles of the Code have been reviewed and updated to take account, in particular, of the increased focus on the management of conflicts of interest, risk management and internal controls which have been major features of new regulations and development in practice over the last years. Additionally, greater focus on the role and the composition of fund boards is reflected in new and revised recommendations covering the role of the Chairperson, diversity in board membership, the role of independent directors and the recommendation for fund boards to perform periodic reviews of their performance.
The purpose of the Code of Conduct is to provide members of the board of directors with a framework of high-level principles and best practice recommendations for the governance of investment funds and of the management company where appropriate. The Code is "principles" rather than "rules" based in that it relies upon good judgment rather than prescription. As such, the recommendations recognize that the "right approach" for many issues depends on the circumstances.
The Code is not designed to supersede applicable law and regulations.
References in the Code to the "Board" are to the body responsible by law for managing, administering and supervising the relevant fund or the supervisory function responsible for the management company. Unless otherwise specified or the context otherwise requires, all references to the Board in the Code shall therefore include, as appropriate, the boards of both Luxembourg funds and the management company.
References to "fund" in the Code cover all types of Luxembourg undertakings for collective investment, whether UCITS or non-UCITS (including SlFs) and other investment vehicles as appropriate.
Principles - Overview
- The Board should ensure that high standards of corporate governance are applied at all times.
- The Board should have good professional standing and appropriate experience and ensure that it is collectively competent to fulfil its responsibilities.
- The Board should act fairly and independently in the best interests of the investors.
- The Board should act with due care and diligence in the performance of its duties.
- The Board should ensure compliance with all applicable laws, regulations and with the fund's constitutional documents.
- The Board should ensure that investors are properly informed, are fairly and equitably treated, and receive the benefits and services to which they are entitled.
- The Board should ensure that an effective risk management process and appropriate internal controls are in place.
- The Board should identify and manage fairly and effectively, to the best of its ability, any actual, potential or apparent conflict of interest and ensure appropriate disclosure.
- The Board should ensure that the remuneration of Board members is reasonable and fair and adequately disclosed.
Principles & Recommendations
I. The Board should ensure that high standards of corporate governance are applied at all times.
- The Board is accountable to the investors for good governance.
- The Board should ensure that sound management is in place.
- The Board should discharge its functions soundly, honestly and professionally.
- The Board should place emphasis on promoting transparency, good practices and conduct of business rules and efficiently manage conflicts of interest.
- The Board should provide independent review and oversight, including effective oversight of delegated functions.
- The Board should demonstrate leadership, integrity, ethical behaviour and expertise.
II. The Board should have good professional standing and appropriate experience and ensure that it is collectively competent to fulfil its responsibilities.
- The composition of the Board should be balanced and diverse so it can make well-informed decisions. Members of the Board should therefore have appropriate experience, with complementary knowledge and skills, relative to the size, complexity and activities of the fund.
- Consideration should be given to the inclusion in the Board of one or more members that are, in the opinion of the Board, independent.
- The Chairperson, whether appointed on a permanent, ad hoc or rotating basis, should demonstrate leadership during as well as outside meetings. The Chairperson's duties should include setting the agenda, managing the meeting, steering the discussions and ensuring that effective and fair conclusions are reached.
- The Board should ensure that it keeps abreast of relevant laws and regulations and that it remains vigilant about evolving risks and market developments.
- The Board may call upon expert assistance and/or create Board committees for the proper fulfilment of its duties. The establishment of Board committees should not affect the collective responsibility of the Board.
- The members of the Board are expected to understand the activities of the fund and devote sufficient time to their role.
- The Board should conduct a periodic review of its performance and activities.
III. The Board should act fairly and independently in the best interests of the investors.
- The Board should at all times put the interests of the investors first.
- The Board is expected to act fairly and independently irrespective of any Board member's affiliation.
- The Board should arrive at decisions taking into consideration, where possible, any broader potential impact of such decisions on market integrity and on the wider community.
- Fund expenses and their impact on fund returns should be subject to scrutiny by the Board. The Board should ensure that the expenses charged to the fund are reasonable, fair and appropriate.
IV. The Board should act with due care and diligence in the performance of its duties.
- Board members should regularly attend and participate actively at Board meetings.
- The Board should meet as often as required in order to oversee effectively the fund's activities and all Board meetings should be formally minuted.
- The Board is responsible for approving the fund's strategy and for ensuring that the fund consistently follows its stated investment objectives.
- The Board is responsible for the appointment of delegated parties and should oversee their activities and performance.
- The Board should ensure it acts on a fully informed basis.
- Where required, the Board should seek external professional advice or information to assist it in its duties.
V. The Board should ensure compliance with all applicable laws, regulations and with the fund's constitutional documents.
- The Board should verify that adequate organization, procedures and safeguards are established to ensure compliance with all relevant laws and regulations and with the fund's constitutional documents.
- The Board should verify that regular monitoring of such compliance is in place and that it receives regular reports to that effect.
VI. The Board should ensure that investors are properly informed, are fairly and equitably treated, and receive the benefits and services to which they are entitled.
- The Board should ensure that the information provided to investors about the fund particularly with regard to the fund's investment objectives, risks and costs, is true, fair, timely and not misleading.
- The Board should ensure that investors are kept informed of matters relevant to their investment in a form and language that is clear and easy to understand.
- The Board should ensure that information relating to the fund's financial situation and performance be prepared and disclosed in accordance with relevant accounting standards (e.g. Lux GAAP, IFRS) and applicable legal and regulatory requirements.
- The Board should take into account the interest of all investors, in particular where Board decisions may affect investor groups differently.
- The Board should ensure each investor complaint is reviewed and, if it is upheld, that reoress rs provided within a reasonable time.
- The Board should ensure that investors receive the benefits and level of services to which thev are entitled as defined by law, contractual arrangements and the fund's constitutional documents.
- The Board should ensure that there is adequate disclosure to investors of the fund's policies on complaint handling, prory voting, best execution and conflicts of interest.
VII. The Board should ensure that an effective risk management process and appropriate internal controls are in place.
- The Board should ensure that an adequate and documented risk management policy is established, implemented and maintained which identifies the risks to which the fund is exposed and how such risks are managed.
- The Board should ensure that the permanent risk management function is adequately staffed, or properly managed when provided on any outsourced basis, and that it is independent of the investment and operational processes.
- The Board should ensure that the risk management policy enables the proper identification, measurement and assessment of the fund's exposure to market, liquidity and counterparty risks, and exposure to all other risks including operational risks.
- The Board should ensure that it receives regular risk management reporting and that it regularly assesses the adequacy and effectiveness of the risk management policy and processes.
- The Board should ensure that it understands the impact of any complex financial products or strategies on the risk profile of the portfolio and the aggregate exposure of the fund to these products.
- The Board should seek assurance that delegated parties comply with relevant and adequate Compliance and Internal Audit obligations.
- The Board should ensure that Compliance and Internal Audit functions are independent of the investment and operational processes.
- The Board should require direct and timely reporting of any material internal control and compliance issues, and ensure that they are appropriately addressed.
- The Board should ensure that appropriate business continuity plans are in place, including for delegated parties.
VIII. The Board should identify and manage fairly and effectively, to the best of its ability, any actual, potential or apparent conflict of interest and ensure appro-priate disclosure.
- The Board should identify the circumstances which constitute or may give rise to a conflict of interest which may entail a material risk of damage to the interests of investors.
- The Board should establish, implement and maintain an effective conflict of interests policy (i) to identify such conflicts of interest and (ii) to provide for procedures to be followed and measures to be adopted in order to prevent them where possible and to manage such conflicts in an independent manner.
- The Board should make all reasonable efforts to resolve conflicts of interest but in cases where a conflict of interest is unavoidable, the Board should seek to address it on an arm's length basis and to disclose it adequately to interested parties.
- The Board should keep an updated record of the situations where conflicts of interest entailing a material risk of damage to investors may arise, have arisen and how they have been addressed.
IX. The Board should ensure that the remuneration of Board members is reasonable and fair and adequately disclosed.
- The Board should ensure that where appropriate a policy on remuneration of Board Members, is in place and is adequately disclosed.
- The remuneration of Board members should reflect the responsibilities of the Board, the experience of the Board as a whole and be fair and appropriate given the size, complexity and investment objectives of the fund.
- The total amount of remuneration of Board members charged to the fund should be disclosed in the annual financial statements.
IV. Conflict of Interest Policy
Following the Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company, the European Commission took measures concerning rules of conduct and organisational requirements for investment companies. This Directive is an implementing measure of the Directive on the rules applying to UCITS. It specifies the organisational requirements with which management companies managing UCITS must comply, as well as rules of conduct and rules on handling conflicts of interest. Furthermore, the Directive establishes requirements concerning the risk management process for UCITS.
Likewise, an authorised AIFM must maintain and operate organisational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent conflicts from adversely affecting the interests of the AIF and the investors in it. Authorised AIFMs must segregate, within their own operating environment, tasks and responsibilities that may be regarded as incompatible with each other or which may potentially generate systemic conflicts of interest.
Where arrangements are not sufficient to ensure, with reasonable confidence, that the risk of damage to investors will be prevented, an authorised AIFM must clearly disclose the conflicts to the investors before undertaking business on their behalf, and develop appropriate policies and procedures. An authorised AIFM must have and maintain a written conflicts of interest policy, which must identify the circumstances which constitute or may give rise to a conflict of interest as well as procedures to be followed to prevent, manage and monitor such conflicts. An authorised AIFM needs to ensure that the persons responsible for managing conflicts of interest are independent from the rest of the AIFM, including how such persons are supervised, remunerated and influenced. Authorised AIFMs are required to record the types of activities in which a conflict of interest has arisen or may arise, and the senior management of an authorised AIFM is required to review such records frequently and at least once a year.
The procedure adopted by the Management Company for the management of conflicts of interest is based on four basic principles:
With reference to the investment services and the activities and the services ancillary to them, the Management Company shall identify the circumstances that generate or could generate a conflict of interest that could seriously harm interests of an authorized scheme or its shareholders;
The Management Company shall define the procedures to follow and adopt organisational measures in order to manage the conflicts that were identified;
In the event that the Management Company considers that the organisational and administrative measures adopted to manage certain types of conflicts of interest do not sufficiently ensure, with reasonable certainty, that the risk of harming interests is averted, they shall clearly inform those affected , where required, prior to acting on their behalf, of the nature and the sources of the conflict of interests, so that they can make an informed decision on the services provided given the context in which the conflict situations arise.
(4) Good faith
Given their duty to act honestly and fairly, in providing investment and/or ancillary services the Management Company shall act in a correct, fair and professional manner to serve the interests of its customers.
The provisions contained herein have been approved by the Board of Directors.
2. Regulatory references
Following regulation CSSF 10-4, CSSF Circular 12/546, Art. 17-21 of the Commission Directive 2010/43/EU and Art. 109 of the Law of 17.12.2010 the Management Company put in place procedures for the effective identification and handling of conflicts of interest.
Directive 2009/65/EC (UCITS IV)
- Article 12, paragraph 1.b)
- Article 14, paragraph 1.d)
- Article 14, paragraph 2.c)
- Considering 15; 17
- Article 17 “Criteria for the identification of conflicts of interest”;
- Article 18 “Conflicts of interest policy”;
- Article 19 “Independence in conflicts management”;
- Articles 20 “Management of the activities giving rise to detrimental conflict of interest”
Regulation CSSF N° 10-4
- Articles 18; 19; 20; 21; 22
Furthermore, provisions dealing with conflicts of interest are contained in Chapter III, Section 2 of the Level 2 AIFMD Regulations.
3. Our policy
As a general principle, the Board and the Conducting Officers have always to act in the best interest of the investors of the investment funds managed by the Management Company.
Management companies are obliged to define in writing an effective policy as regards conflict of interest, which preserves the independence of the relevant persons.
Directive 2010/43/EU identifies as “Relevant Persons” who are:
- a director, partner or equivalent, or manager of the management company;
- an employee of the management company, as well as any other natural person whose services are placed at the disposal and under the control of the management company and who is involved in the provision by the management company of collective portfolio management;
- a natural person who is directly involved in the provision of services to the management company under a delegation arrangement to third parties for the purpose of the provision by the management company of collective portfolio management.
In general, each relevant person is obligated to disclose to the manager of the operating unit to which he/she belongs any situation that could even potentially generate a conflict of interest, modify the conflict map identified by the Management Company or indicate incomplete efficiency of the protection and management measures set up by the Management Company.
Conflicts of interest may exist or arise in relation to various activities. However, the protection of the interests of undertakings for collective investment (hereinafter the “UCITS”) and of alternative investment funds (hereinafter the “AIF” and together the “Fund” or “Funds”) managed by the Company and of their shareholders is our first concern and so our conflicts policy sets out how:
- to identify circumstances which may give rise to conflicts of interest including a material risk of damage to the Funds interests; and
- to established and maintain appropriate mechanisms and systems to manage those conflicts.
When a conflict of interest arises, measures shall be taken to mange it in order not to damage Fund’s interests. This may involve disclosing the conflict of interest to the investors. Conflict of interest shall always be managed in a reliable and consistent manner.
The main measure to prevent conflicts of interest from adversely affecting a client is to ensure that actions taken in respect of the Fund are based solely on the Fund’s interests, and are taken independently of the interests of any of the Management Companies other clients, other services or activities, or Director’s or Conducting Officer’s personal interests.
4. Areas of conflict of interest
The following situations may lead to conflicts of interest, where:
- the management company is likely to make a financial gain, or avoid a financial loss, at the expense of the Fund;
- the management company has an interest in the outcome of a service provided to the Fund or another client which does not share the interests of the Fund;
- the management company has an incentive to favor the interest of another client;
- the management company carries out the same activities for the Fund as for another client;
- the management company receives money, goods or services illegally.
The Management Company will take into account conflict of interest that may arise in the course of managing the Fund between:
- the Management Company, including its managers, employees or any person directly or indirectly linked to the Management Company by control, and the Fund managed by the Management Company or the investors in that Fund;
- the Fund or the investors in that Fund and another Fund or the investors in that Fund;
- the Fund or the investors in that Fund and another client of the Management Company;
- the Fund or the investors in that Fund and another Fund managed by the Management Company or the investors in that other Fund; or
- two clients of the Management Company.
Within the Management Company, conflicts of interest may arise in a variety of situations. These situations include, but are not limited to:
- dual roles of Directors as employees of service providers to the Management Company;
- the fact that a service provider or investment manager conducts the same type of business as the Management Company;
- the fact that there might be several investment managers managing different sub-funds, and
- distribution of costs between the sub-funds.
Dual roles of Directors
In order to manage and mitigate possible conflicts of interest relating to the dual roles of Directors as employees of service providers to the Management Company, a Director who is also employed by a service provider and is taking part in the service provider’s daily operations and its delivery of services to the Management Company, shall not take part in decisions by the Board of Directors relating to such service provider.
Distribution of costs between sub-funds
In order to manage and mitigate possible conflicts of interest relating to the distribution of costs between sub-funds, the Management Company has established a principle according to which the distribution of costs which are joint between sub-funds shall be made proportionally between sub-funds by net asset value at the time of invoice payment, to the effect that a sub-fund with a smaller net asset value shall take on a lower amount of common costs than a sub-fund with a higher value.
Conflict of interest may also arise from the fact that the promoter of the Management Company, Falcon Private Bank Ltd., and the Management Company are members of the same group of companies, the Falcon Group (an “Affiliate”).
The Management Company may from time to time:
- effect transactions in securities issued or placed by an Affiliate or in which an Affiliate plays a role or in the issuance of which an Affiliate may have a financial or other business interest at any time within the previous 12 months;
- use an Affiliate for placing deposits or execution of transactions;
- use research provided by an Affiliate;
- be prevented from dealing in certain securities which are on a banned or restricted list;
- effect transactions in securities in respect of which an Affiliate may benefit from a commission, fee, mark-up or mark-down;
- effect transactions in units, shares or other securities of an in-house Fund or any company or trust or any other investment vehicle of which we or an Affiliate may be the manager or operator.
5. Management of conflicts
We have adopted policies and procedures throughout our businesses to manage conflicts of interests. These policies and procedures are subject to our normal monitoring and review processes and include, but are not limited to the following:
Separation of functions
If a business with two functions would lead to conflicts of interest, it may separate the functions into two separately managed businesses or ensure that they are managed by different senior members of staff.
Pay and bonuses may be linked, directly or indirectly, to the profits of the Falcon Group or the business or department in which the member of staff works without resulting in a conflict of interest. In some cases, however, there would be a conflict and so we avoid such staff payments.
Gifts and inducements
The giving and receiving of gifts or inducements has the potential to create conflicts of interest. Employees must not solicit or provide anything of value directly or indirectly to or from anyone, except under limited circumstances, which would impair our duty to act in the best interest of the client.
Where necessary, Relevant Persons may be asked to step aside from working on a specific transaction or participating in the management of a potential Conflict of Interest.
Implementation of ad hoc transaction specific Chinese Walls or other additional information segregation methods following consideration of all of the facts available to relevant management.
Escalation to senior management who have responsibility for the strategy and an appreciation of the relationship and reputation risks that may arise.
Declining to act
Where we consider that the conflict of interest cannot be managed in any other way, we may decline to act for a client.
There is a periodic review of the adequacy of this policy.
6. Record keeping and reporting of services and activities giving rise to conflicts of interest
The Board shall ensure that,
- in the event that it identifies an actual or potential conflict of interest which could entail a material risk of damage to the interests of the Management Company or any of its Funds or its shareholders, such actual or potential conflict is reported to the Conducting Officers and the Compliance Officer of the Management Company,
- record is kept of all conflicts of interest identified, through reports submitted by the Conducting Officers, the Compliance Officer or otherwise, and
- a review to identify the potential conflicts of interest that could entail a material risk of damage to the interests of a Fund or its shareholders is carried out at least on an annual basis that the provisions which it has put in place pursuant to this policy remain adequate.
The Conducting Officers shall ensure that,
- conflicts of interest handling is duly reported to the Board of Directors of the Management Company, i.e. on an annual basis and when needed.
In accordance with principles above, the Management Company has put in place a conflicts of interest register, in order to record activities carried out which produce or can produce a conflict of interest. In particular, the register will record the following information:
- activity that have given or might give rise to a conflict
- type of conflict
- date of acknowledgement of conflict
- names of relevant persons informed as well as date when information was received
- risk analysis
- measures taken
- additional comments
Such register is updated by the Compliance officer, who keeps the Conducting Persons informed about such updates and submits the register, together with explanatory information, if necessary, to the Board of Directors at least on a yearly basis.
7. Disclosure of conflicts of interest
Where the organizational or administrative arrangements made by the Management Company, despite procedures apriori appearing adequate, are not sufficient to ensure with reasonable confidence, that risks of damage to the interests of the Funds or the investors of the Funds will be prevented, the Conducting Officers shall promptly be informed in order to take any necessary decision or action to ensure that the Management Company acts in the best interests of the Funds or the investors in that Funds.
The Management Company may report situations referred to above to investors by any appropriate durable medium, e.g. half-yearly and annual report of the authorized scheme, to enable those affected to make an informed decision.
 In this document the term „shareholders“ shall be understood as comprising shareholders as well as unitholders.
V. Renumeration Policy
The Remuneration Policy adopted by the Company aims at promoting sound and effective risk management and shall encourage risk taking which is consistent with the risk profiles, rules or instruments of incorporation of any of the funds managed by the Company.
1. List of abbreviations
Insofar as the context does not require any other interpretation, means
- AIF: Alternative Investment Fund
- AIFM: Alternative Investment Fund Manager
- BoD: Board of Directors
- Company: Falcon Fund Management (Luxembourg) S.A.
- Remuneration, fixed: the basic monthly gross salary and benefits; it remunerates role, responsibility and expertise.
- Remuneration, variable: also referred to as “bonus”; remunerates personal and collective achievements; it can be paid to the employee, when and if the financial result of the company and the work performance of the employee allow so
2. Applicable regulations and other relevant documents
Directive 2011/61/EU on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (known as “AIFMD”); and Directive 2014/91/EU, amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions
relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions (known as “UCITS V”); and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (together known as “CRD IV”).
Luxembourg law of 17 December 2010 on undertakings for collective investment (the “UCI Law”); and Luxembourg of 12 July 2013 on alternative investment fund managers (the “AIFM Law”).
Final report “Guidelines on sound remuneration policies under the UCITS Directive and AIFMD” (31 March 2016 | ESMA/2016/411)
Proportionality principle and remuneration rules in the financial sector (31 March 2016 ESMA/2016/412)
3. Remuneration Rules
CRD IV  and UCITS V  are the latest iterations of the Directives governing EU credit institutions and investment firms and UCITS funds and management companies. European Economic Area (“EEA”) Member States were required to apply CRD IV on 1 January 2014 and will be required to apply UCITS V on 18 March 2016.
Both CRD IV and UCITS V contain rules on the manner in which staff are remunerated, which are designed to promote sound and effective risk management. This policy focuses on the remuneration rules in these Directives on asset managers. Following their original introduction in CRD III, remuneration rules were introduced for alternative fund managers in 2013 under the Alternative Investment Fund Managers Directive (“AIFMD”). AIFMD provides the “blueprint” for the rules in UCITS V for fund managers regulated under the UCITS Directive.
3.1. Remuneration rules under CRD IV
CRD IV remuneration rules apply to credit institutions (broadly, EU deposit-taking banks) and some types of EU investment firms . Broadly, the types of investment firms that are subject to CRD IV are investment firms that have permission to engage in proprietary trading (encompassing broker-dealers) or certain corporate finance activities (such as “placing” or underwriting). In addition, there are a number of asset managers that have sought to be subject to CRD IV to qualify as a “sponsor” for securitization risk retention purposes.
CRD IV makes a number of changes to the existing remuneration rules that apply to EEA firms that are subject to the CRD. In particular, CRD IV imposes the bonus cap, which imposes a ratio of fixed and variable remuneration of 1:1, or 1:2 with shareholder approval (with a quorum of 50% of shareholders, 66% of votes in favor would be required, and, if that quorum is not reached, 75% of votes must be in favor) . CRD IV also requires that all variable remuneration should be subject to “claw-back” arrangements (in light of subsequent poor performance by the individual) .
CRD IV includes the proportionality principle, which is that the rules must be applied in a manner appropriate to the size of the firm and the types of activities that it undertakes . The European Banking Authority (“EBA”) is responsible for publishing guidelines on, amongst other things, the precise application of this principle. The EBA published a consultation paper and draft guidelines in March 2015, where it outlined its proposed approach in regard to proportionality. In this paper, the EBA expressed its view that proportionality cannot act to disapply individual requirements of CRD IV (such as the bonus cap and the requirement to pay a portion of the remuneration “in kind” in equity). In the EBA’s view, all remuneration requirements must be applied to at least the minimum thresholds set by CRD IV, and that proportionality means application of all the rules in a manner appropriate to the institution’s size, internal organization and nature, scope and complexity of its activities. The EBA has acknowledged that its interpretation will have a significant impact on small and less risky firms. The European Commission`s recent (October 2015) announcement of two consultations on the impact of the CRD IV remuneration rules suggests that it will not release final remuneration guidelines until the results of these consultations, meaning that resolution of this issue may not take place until 2016.
3.2. Position of asset managers that are part of a group
Many alternative investment fund managers (“AIFMs”) and UCITS managers are part of a group (such as a banking group) that is subject to CRD IV. CRD IV requires a group-wide remuneration policy to apply to all staff at group, parent and subsidiary levels, and states that CRD IV’s requirements for the contents of remuneration policies should apply at least to those staff members whose professional activities have a material impact on the group’s risk Profile . According to the EBA’s draft guidelines:
- Staff within an AIFM or UCITS manager whose professional activities have a material impact on the group’s risk profile on a consolidated basis are subject to CRD IV remuneration rules, including the bonus cap. Firms will need to identify any such staff and determine whether, for instance, the activities of an individual portfolio manager within an AIFM or a UCITS manager can be said to have an impact on the group’s risk profile. It is likely that an individual in an AIFM or a UCITS manager would need to exercise significant influence either within the firm or at the group level to be subject to CRD IV, such as a board member of an AIFM or UCITS manager.
- Where specific CRD requirements conflict with the “sectoral” requirements (meaning the specific remuneration rules put forward under the AIFMD or the UCITS Directive), the remuneration policy should set out for the relevant individuals which requirements should apply within the entity on an individual basis. This means that, for instance, the requirement in the AIFMD or UCITS Directive to pay part of the variable remuneration in units in the fund would “trump” the equivalent requirement in CRD IV to pay part of the variable remuneration in equity in the firm.
Subject to these qualifications, staff within an AIFM or UCITS manager that is within a group that is subject to CRD IV are subject to the rules in the AIFMD and UCITS Directive (which are broadly similar, but not identical, to the rules in CRD IV).
The European Securities and Markets Authority (“ESMA”), the pan-EEA regulator, published a consultation paper
on guidelines on sound remuneration policies under the UCITS V Directive on 23 July 2015. According to ESMA’s
draft guidelines (which form part of the consultation):
There should be no exception to the application of the UCITS remuneration principles to any management company which is a subsidiary of a credit institution.
Where staff of the UCITS management company or the AIFM are “identified staff” for the purpose of CRD IV rules, they should be remunerated either:
- On activities carried out on a pro rata basis between CRD IV, UCITS and AIFMD (based on, for instance, time spent on each service); or
- Where there is a conflict between CRD IV and UCITS (or AIFMD) remuneration principles, by applying “sectoral” remuneration principles which are deemed more effective for discouraging excessive risk taking. Where the firm determines that compliance with CRD IV is more effective, this should deem compliance with remuneration requirements under UCITS and AIFMD. However, where specific CRD IV requirements conflict with requirements under UCITS or AIFMD, the remuneration of the individual should follow the specific requirements under UCITS or AIFMD. This is in line with the EBA’s guidance.
As Falcon Fund Management (Luxembourg) S.A. is a subsidiary of Falcon Private Bank Ltd., Zurich, which does not fall under the CRD, no conflict between CRD IV and UCITS (or AIFMD) remuneration principles have been identified. The remuneration should follow the specific requirements under UCITS or AIFMD.
As Falcon Fund Management (Luxembourg) S.A. operates as so called “Super-ManCo”, which is understood as a management company authorized to manage UCITS and alternative funds, both, the UCITS as well as the AIFMD remuneration rules are applicable. As the assessment shown in appendix 2 (“Comparison table UCITS V vs. AIFMD texts on remuneration and assessment of distinctions”) suggests the UCITS V remuneration rules are similar to the rules under the AIFMD, i.e. no substantial deviation was identified. Taking into consideration the allocation of assets managed by Falcon Fund Management (Luxembourg) S.A. under UCITS or AIFMD, Falcon Fund Management (Luxembourg) S.A. has decided to follow the UCITS V remuneration rules.
3.3. Remuneration rules under UCITS V
To date, UCITS management companies have not been subject to specific rules on staff remuneration. UCITS V
introduces remuneration rules that are similar to the rules for AIFMs under the AIFMD, requiring UCITS management companies to put in place remuneration policies that are consistent with sound risk Management .
- the manager must have a remuneration policy that is consistent with and promotes sound and effective risk management and does not encourage risk-taking that is inconsistent with the UCITS’ risk profiles or rules;
- the remuneration policy should be in line with the business strategy, objectives, values and interests of the UCITS, the manager and the investors in the UCITS, and include measures to avoid conflicts of interest;
- the management body of the manager should adopt the remuneration policy and perform at least an annual review (according to UCITS V, this can only be undertaken by members of the management body who do not perform any executive functions and who have expertise in risk management and remuneration);
- the compliance function should, at least annually, review implementation of the remuneration policy;
- staff in control functions (such as senior legal and compliance staff) should be compensated in accordance with their functions’ objectives, independently of the performance of the business areas that they control;
- a remuneration committee should oversee remuneration of senior officers in risk management and compliance;
- performance-related remuneration must be based on a combination of the assessment of the performance of the individual and of the business unit or fund concerned and the overall results of the UCITS manager, taking into account financial and non-financial criteria;
- performance must be assessed in a multi-year framework (appropriate to investors’ recommended holding period in the fund), so that the assessment is based on longer-term performance of the fund;
- guaranteed variable remuneration must only be paid in the first year following a new hire and even then only in exceptional circumstances;
- fixed and variable remuneration components must be balanced appropriately, and the manager must have the option of paying no variable remuneration;
- payments for early termination reflect the performance achieved over time and are designed in a way that does not reward failure;
- variable remuneration must be put in place with an adjustment mechanism that integrates all types of current and future risks;
- a substantial portion (at least 50%) of the variable remuneration component must be paid in non-cash instruments, such as units of the UCITS concerned, equivalent ownership instruments or other instruments with equally effective incentives. Where the management of UCITS funds accounts for less than 50% of the total portfolio managed by the manager, the 50% minimum does not apply, but the obligation to pay a substantial portion of variable remuneration in non-cash instruments remains. This requirement is subject to the fund’s legal structure, its fund rules or instruments of incorporation. In practice, managers are likely to take a pragmatic approach to satisfy this requirement;
- pay-out of between 40% and 60% of variable remuneration must be deferred over a period of three to five years, subject to the requirements that the deferral period is (1) appropriate in the view of investors’ holding period, and (2) correctly aligned with the nature of the risk of the fund in question;
- variable remuneration (including the deferred portion) must only be paid if it is sustainable according to the manager’s financial situation as a whole and the individual’s and fund’s performance, and provide for variable remuneration to be reduced where either the manager or the fund concerned performs badly, or where the individual performs a “bad act” (including claw-back of remuneration already paid);
- discretionary pension benefits must be held in non-cash instruments for five years if a staff member leaves before retirement. Following retirement, the manager must also pay discretionary benefits in the form of non-cash instruments which must be subject to a five-year retention period;
- staff may not use personal hedging strategies or insurance to undermine the risk alignment in the remuneration arrangements; and
- variable remuneration may not be paid through vehicles or methods that facilitate avoidance of the requirements in UCITS V.
The remuneration provisions apply to senior management, risk takers (such as portfolio managers, traders and senior sales staff), control functions (such as senior legal, compliance and finance staff) and any other staff member whose remuneration falls in the remuneration bracket of senior management, and other risk takers whose professional activities have a material impact on the risk profile of the management company or UCITS .
3.4. Remuneration committee
UCITS management companies that are significant in terms of their size or the size of the funds managed, their
internal organization and nature, scope and complexity of their activities, must establish a remuneration
The Board has determined in light of the size, internal operations, nature, scale and complexity of the Company that a remuneration committee is not required. Remuneration matters will be dealt with by the Board with the relevant affected director absenting himself from such discussions.
4. Proportionality principle
In AIFMD and UCITS V, remuneration principles are subject to the proportionality principle, which is that the rules must be applied in a manner appropriate to the size of the firm and the types of activities which it undertakes. Article 14(b)(1)  of the UCITS Directive (as amended by the UCITS V Directive) states that UCITS management companies must comply with the rules “in a way and to the extent that is appropriate to their size, internal organization and nature, scope and complexity of their activities” – noting at the same time that UCITS management companies must “apply all the principles governing remuneration policies" .
Therefore, a key element of the UCITS Remuneration Guidelines (as well as the other aforementioned guidelines) relates to proportionality and, in particular, whether proportionality can lead to a situation in which the specific requirements on the pay-out process (i.e. the requirements on variable remuneration in instruments, retention, deferral and ex-post incorporation of risk for variable remuneration)  set out in the Directives may not have to be applied.
Proportionality may lead “on an exceptional basis” to the dis-application of some requirements, if this fits with the risk profile, risk appetite and strategy of the management company and the UCITS. Managers must be able to explain the basis for dis-application to competent authorities, if requested. The following requirements may be dis-applied:
the requirements on the pay-out process, namely the requirements on
- variable remuneration in instruments;
- deferral and
- ex-post incorporation of risk for variable remuneration; and
the requirement to establish a remuneration committee.
4.1. ESMA’s stance on proportionality (ESMA/2016/412)
Both the AIFMD and UCITS Directive prescribe that proportionality shall apply to the full set of remuneration principles set out under these Directives. This is made clear by the language in both Directives stating that management companies and AIFMs “shall comply with the [remuneration] principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities”. ESMA considers, therefore, that proportionality applies to the full set of requirements under Article 14b(1)(a) to (r) of the UCITS Directive and letters (a) to (r) of paragraph 1 of Annex II of the AIFMD. Proportionality is also a key element that had to be taken into account by ESMA when elaborating guidelines under both the AIFMD and UCITS Directive .
Recent work and legal analysis have called into question the existing understanding that the aforementioned proportionality provisions as set out under the UCITS Directive and AIFMD may lead to a result:
where – under specific circumstances – the requirements on the pay-out process (i.e. the requirements on variable remuneration in instruments, retention, deferral and ex post incorporation of risk for variable remuneration) are not applied; or
- where it is possible to apply lower thresholds whenever minimum quantitative thresholds are set for the pay-out requirements (e.g. the requirement to defer at least 40% of variable remuneration).
ESMA considers that the scenarios under a) and b) should remain possible in certain situations and further legal clarity on this possibility could be beneficial to all the interested parties (market participants, investors and regulators).
This is true, in particular, in light of the specificities of the fund management sector. Fund managers operate according to an agency model and do not accept deposits nor deal on their own account. As a consequence, Fund managers, unlike credit institutions, do not issue liabilities to fund investors. Fund investors have a claim on the investment portfolio which is ring-fenced from the fund manager. Fund managers manage a portfolio of securities on behalf of a fund, in the interest of the investors in such fund, under an investment mandate. Their discretion on how to dispose of the assets in the relevant portfolio is constrained by the investment objectives and specific limits and restrictions set out in the investment management mandate and in specific product regulation (e.g. UCITS concentration limits). ESMA recalls that remuneration rules under the UCITS Directive and AIFMD are aimed to align the interests of, including the risks taken by, the fund managers with those of the investors of the funds that they manage.
Given the nature of activities of fund managers, and the variety of funds they manage and strategies they implement for those funds, it is appropriate to recognise the possibility to tailor the rules on the pay-out process of variable remuneration when these do not, in the specific circumstances, achieve the goal of aligning the interests of the fund manager’s staff with those of the investors in the funds. For example:
Small and non-complex fund managers and small amounts of variable remuneration:
Small and non-complex fund managers and small amounts of variable remuneration: small and non-complex fund managers have a relatively high number of identified staff compared to larger fund managers, to whom the remuneration requirements could apply (even though this number is low in absolute terms). For these fund managers, the application of the pay-out process rules needs to be proportionate so as not result in significant one-off and on-going administrative and systems costs which could put them at a competitive disadvantage against larger fund Managers .
Similarly, certain staff only receive small amounts of variable remuneration. The pay-out process rules are only effective in aligning long-term interests when the amount of variable remuneration is meaningful enough to be spread over a multi-year horizon.
Application of the deferral rules:
Article 14b(1)(n) of the UCITS Directive requires a substantial portion, and in any case at least 40%, of the variable remuneration component to be deferred over a period which is appropriate in view of the holding period recommended to the investors of the UCITS and is correctly aligned with the nature of the risks of the UCITS in question. The same article then goes on to clarify that the deferral period should be at least three years.
Certain types of funds may have an investor’s holding period which is significantly shorter than three years. Because of this, it can be argued that the application of the deferral rules is unlikely to align the interests of the management company’s staff with those of the investors in the UCITS and the risks of the UCITS in question.
Application of the payments in instruments rules:
Article 14b(1)(m) requires that a substantial portion of any variable remuneration component consists of units of the UCITS concerned, equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments.
The payment of variable remuneration in shares or UCITS or equivalent non-cash instruments might not achieve an effective alignment of interests for certain staff of the management company who have no direct involvement in the management of UCITS, for example the head of the compliance or internal audit function. In such cases, it could be desirable to include other types of instruments in the remuneration packages of those staff such as, for example, shares in the management company.
Application of payout process rules to delegates:
the UCITS remuneration guidelines, as well as the AIFMD remuneration guidelines clarify that the remuneration requirements apply to delegates of the management company. This is the case even when the delegate’s contract with the management company sets out strict investment guidelines or it only covers a small portion of the UCITS portfolio. As a consequence, the delegate would have little or no discretion to affect the risk profile of the UCITS. In light of the above, there might be cases where the application of the payout process rules to the staff of the delegate would not be proportionate and would not achieve the outcome of aligning the delegates’ staff interests with those of the investors in the UCITS. There is also a risk that the unwillingness of delegates outside of the EEA to be subject to some requirements they consider disproportionate, could prevent access of EU management companies to certain investment strategies.
Application of pay-out process rules to portfolio managers who do not manage only portfolios of UCITS:
certain portfolio managers employed by the management company do not manage the UCITS as a whole. For example, they may have responsibilities for managing an asset class / strategy in which they have a very specific expertise. These portfolio managers would apply this expertise across the various products managed by the management company, which could be UCITS, alternative investment funds or segregated mandates, but they might only affect the risk of a small proportion of the relevant portfolio.
As a consequence, the application of the pay-out process rules, for example the payment of a portion of variable remuneration in shares of the UCITS, could be disproportionate and may impose an excessive burden on certain portfolio managers which may ultimately reduce the level of diversification and choice available to the funds’ investors.
It is also important to note that the fund manager’s decision not to apply certain remuneration requirements should never be automatic. In applying proportionality, it is the responsibility of the fund manager to review how each remuneration principle should apply to it in a way that it aligns the interests of its staff with those of the underlying investors and having taken into account its size, internal organisation and the nature, scope and complexity of its activities. Fund managers must document this process and be able to demonstrate at any time, with the support of objective evidence, to their national competent authorities the way in which they have applied the relevant remuneration principles.
Given, inter alia, these specificities, it would be inappropriate to impose the payout requirements where their implementation would not achieve the intended policy outcome. Moreover, to achieve an effective alignment of interests between the fund managers’ staff and the investors, ESMA believes that it would be inappropriate for the following fund managers to be subject in all circumstances to the requirements on the pay-out process:
- smaller fund managers (in terms of balance sheet or size of assets under management),
- fund managers with simpler internal organisation or nature of activities, or
- fund managers whose scope and complexity of activities is more limited.
ESMA also considers that it would be disproportionate to apply the requirements to relatively small amounts of variable remuneration and to apply certain requirements to certain staff when this would not result in an effective alignment of interests between the staff and the investors in the funds.
ESMA is of the view that legislative changes in the relevant asset management legislation could be one way to further clarify the applicable regulatory framework and ensure consistent application of the remuneration requirements in the asset management sector. These could further clarify the requirements in order to allow for the scenarios outlined in (a) and (b) above.
4.2. The Company’s approach to the Proportionality principle
Following the principle of proportionality, Falcon Fund Management (Luxembourg) S.A. has decided to dis-apply the following requirements:
the requirements on the pay-out process, namely the requirements on
- variable remuneration in instruments;
- deferral and
- ex-post incorporation of risk for variable remuneration; and
the requirement to establish a remuneration committee.
The management company should assess its own characteristics and develop and implement remuneration policies and practices that align with the risks faced and provide adequate and effective incentives. In applying the proportionality principle, the types of factors that a manager may take into account will include:
- the manager’s total assets under management (AuM);
- the average ratio between its fixed and variable remuneration paid to staff;
- the complexity of its investment strategy (in this regard, index or tracker funds are regarded as lower risk); and
- the percentage of UCITS assets under management relative to other fund assets under management.
The European Banking Authority (EBA) agreed on its final draft Regulatory Technical Standards (RTS) on criteria to identify categories of staff whose professional activities have a material impact on an institution's risk profile. These identified staff will be subject to provisions related, in particular, to the payment of variable remuneration. The EBA submitted the draft RTS on 16 December 2013 to the European Commission. They are part of the EBA work on the Single Rulebook aimed at enhancing regulatory harmonization in the banking sector in the European Union (EU). As a general principle, staff shall be identified as having a material impact on the institution's risk profile if they meet, for example, standard quantitative criterion related to the level of total gross remuneration in absolute terms. In this respect, staff should be identified if their total remuneration exceeds, in absolute terms, EUR 500,000 per year. The RTS allow in justified cases, under additional conditions and subject to supervisory review, the exclusion of staff identified only according to standard quantitative criteria. In this respect, for staff with an awarded total remuneration of EUR 500,000 or more, institutions need to notify exclusions to the competent authority. Considering this standard quantitative criterion applicable to banks and following the objective to enhance regulatory harmonization, it seems appropriate to follow a less restrictive approach, as the cumulated total remuneration of all staff paid by the Company does not exceed EUR 500,000 per year.
Falcon Fund Management (Luxembourg) S.A. is not significant in terms of its size or the size of the funds managed, its internal organization and nature, scope and complexity of its activities (i.e. UCITS and AIF).
(as of 31st March 2016)
- Assets under management: approximately EUR 1.768b
- Number of employees: 3
- Their cumulated total remuneration does not exceed EUR 500,000 per year
- Average ratio between its fixed and variable remuneration: less than 1 : 0.20
- Percentage of UCITS assets relative to other fund assets approximately 3:1
Complexity of investment strategies: Falcon Fund Management (Luxembourg) S.A. does not engage for any of the funds in securities lending transactions or (reverse) repurchase agreements. For the time being derivatives are only traded for hedging purposes. Following a conservative approach, centrally cleared plain-vanilla derivatives may be traded for speculative purposes in the future.
In any case, the Company ensures that the fixed and variable components of the total remuneration are appropriately balanced and the fixed component represents a sufficiently high proportion of the total remuneration, including the possibility to pay no variable remuneration component.
5. Variable Remuneration
5.1. Malus and clawback
Malus means the adjustment of an award of variable remuneration, such as a performance-linked bonus or share award, before it has vested. Clawback means the recovery of variable remuneration which has already been paid.
From a practical point of view, it is easier for firms to apply malus since that involves an adjustment being made before any money or shares are paid over to the employee. Clawback is harder to apply in practice since it involves recouping money or shares that have already been paid or transferred to the employee.
Particular issues are, for example:
- in the case of individuals who remain in employment, money may be recovered by set-off against future bonus or share awards but this will not be possible for someone who is no longer an employee;
- how can clawback be enforced against employees who have insufficient resources?; and
- can the employee recover the tax and national insurance contributions paid on the bonus or other award?
Circumstances in which clawback may apply may be:
- there is reasonable evidence of significant employee misbehaviour;
- the firm or relevant business unit suffers a material downturn in its financial performance; or
- the firm or relevant business unit suffers a material failure of Management.
As with malus, clawback should apply not only to employees directly culpable of malfeasance. Firms should also consider applying clawback to other employees who could reasonably have been expected to be aware of the failure or misconduct at the time but failed to deal with it or who, because of their role or seniority, could be deemed indirectly responsible.
The ESMA final guidelines on sound remuneration policies under UCITS V state that any variable remuneration award shall be subject to malus and clawback provisions.
Falcon Fund Management (Luxembourg) S.A. believes that the Company does not pay any variable remunerations that may lead to excessive risk taking. Furthermore, the Company reserves the right to pay no variable remuneration component.
When appropriate, the Company will adjust an award of variable remuneration, i.e. the Company will apply a malus.
Regarding clawbacks, it remains unclear how tax and national insurance contributions paid can be reimbursed, e.g. tax bills over a period of three years would need to be appealed against. As clawbacks shall fall under the sole discretion of the company, the company may face compensation claims, litigation or other legal action. Taking into consideration these issues, the Company deems it appropriate to apply a malus instead of a clawback, if possible.
5.2. Performance assessment
When the remuneration of the employee is performance related, the remuneration is calculated in order to reflect the performance of the employee, the results of the business unit and the overall result of Falcon Fund Management (Luxembourg) S.A.
The employee can be evaluated on the basis of financial and non-financial criteria (e.g. unethical or non-compliant behaviours). The appropriate mix of both criteria can vary depending on the tasks and responsibilities of the employee.
When assessing the performance of the employee the Company applies an approach based on a multi-year perspective. The assessment takes into account the long term performance of the employee.
For staff members engaged in control processes and who are independent from the business units they oversee, the assessment is performed in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control (i.e. risk management, audit, and compliance functions).
The remuneration of senior officers in the risk management and compliance functions is directly overseen by the Board of Directors.
5.3. Award process
The Company translates the performance assessment into the variable remuneration component for each employee. Risks are taken into account when the amount is determined by the Company.
In case subdued financial performance of the Company or of the funds occurs, the variable remuneration of the employees will be considerably contracted, if appropriate.
The specific measure may effect both current compensation and reductions in payouts of amounts previously earned, including through malus or clawback arrangements.
The Company will ensure that the variable remuneration will not be paid through vehicles or methods that facilitate the avoidance of the requirements.
6. Application of remuneration rules to delegates
Under AIFMD, ESMA required, in its remuneration guidelines, the application of the AIFMD remuneration rules to portfolio management delegates (i.e., sub-advisors) of an AIFM, including delegates established outside the EEA. Although UCITS V did not include this principle within its provisions, a recital to the Directive mentions the possibility of this being required, referring to remuneration rules applying to third parties that “take investment decisions that affect the risk profile of the UCITS”, with such rules applying “in a proportionate manner”.
In its draft guidelines, ESMA has taken the same approach on this point as it did under AIFMD, and (based on the draft) will require the application of remuneration rules to portfolio management delegates of UCITS management companies, by either of the following means:
- satisfying the condition that the delegate is “subject to regulatory requirements on remuneration that are equally as effective as those applicable under these guidelines”; or
- the UCITS management company including a provision in the contract appointing the delegate, which states that the delegate must follow, to an appropriate degree, UCITS remuneration rules.
A delegate that is already governed by EU remuneration rules (such as a manager governed by AIFMD or CRD IV) will likely comply with whatever requirement is imposed on it by virtue of UCITS. There are questions as to the degree to which a delegate of a UCITS management company will be subject to the new rules. In particular:
- Under AIFMD, ESMA clarified that a delegate, in applying AIFMD remuneration rules, need only have regard to those staff who have a material impact on the fund’s risk profile and only in respect of the portion of the remuneration they receive for the delegated mandate. ESMA may provide the same guidance under UCITS.
- It seems sensible to apply the proportionality principle to the application of the remuneration rules to delegates. The UK Financial Conduct Authority’s (“FCA”) guidance under AIFMD allowed managers to dis-apply the “pay-out process rules”  to delegates where the delegate acts with limited investment discretion, and subject to the risk management of the appointing manager. It is unknown whether the FCA or ESMA will adopt a similar approach for UCITS remuneration rules. The FCA has stated that it will consider publishing further guidance once ESMA`s guidelines are finalized.
In practice, managers should consider the following possible approaches to address the requirement to apply remuneration rules to its delegates:
- It may be possible to argue that, in view of the strict regulatory risk controls to which a UCITS management company and its delegate are subject to, none of the delegate’s staff have a material impact on the fund’s risk profile.
- It may be possible to limit the identified staff within the delegate to a sub-set of the staff involved in the delegation, excluding for instance individual portfolio managers with limited investment discretion.
- It may be possible to argue that rules should be applied in a proportionate manner, because the UCITS mandate only represents a small portion of the delegate’s activities.
- It may be open to managers to take the FCA’s approach under AIFMD, which allows managers to dis-apply the “pay-out process rules” to delegates where the delegate acts with limited investment discretion, and is subject to the risk management of the appointing manager.
In the absence of any regulatory guidance, it is likely that the precise application of remuneration rules to delegates will be a matter for the principal and the delegate to discuss and tailor according to their interpretation of the rules and the risks that the principal perceives.
7. Remuneration disclosures
UCITS V includes the following requirements for remuneration disclosure.
7.1. Prospectus 
The prospectus must include:
- details of the remuneration policy, including a description of how remuneration and benefits are calculated, the persons responsible for awarding the remuneration and benefits, including the composition of any remuneration committee; and
- a statement that the details of the remuneration policy (outlined above) are available on a website and by a paper copy.
The key investor information document must also contain a statement that the details of the up-to-date remuneration policy is available on a website and on request.
7.2. Annual Report 
The fund’s annual report must include:
- the total amount of remuneration during the fund’s financial year, split into fixed and variable remuneration, paid by the management company to its staff, the number of beneficiaries, and any amount paid by the UCITS itself;
- the aggregate amount of remuneration broken down by categories of employees or other members of staff that are subject to the remuneration rules. This appears to require a break-down of remuneration by each category of staff, including senior management, other risk takers and control functions;
- a description of how the remuneration and benefits have been calculated;
- the outcome of the annual review of the remuneration policy; and
- details of any material changes to the policy.
UCITS V is not explicit as to whether this disclosure includes remuneration paid to portfolio management delegates – it is possible that UCITS management companies may take the view that it does, and may request details of remuneration paid by their delegates in order to satisfy this disclosure.
Falcon Fund Management (Luxembourg) S.A. reports the total amount of remuneration during the fund’s financial year, the ratio between fixed and variable remuneration, paid by the management company to its staff, the number of beneficiaries, and any amount paid by the UCITS itself.
As the number of employees on the payroll is low, i.e. three persons (as of 31st March 2016), and in order to protect the privacy rights of these persons, Falcon Fund Management (Luxembourg) S.A. will not brake down the aggregate amount of remuneration by categories of employees or other members of staff that are subject to the remuneration rules. Falcon Fund Management (Luxembourg) S.A. believes that it is not appropriate to disclose the remuneration of individuals, being otherwise the consequence.
Falcon Fund Management (Luxembourg) S.A. provides the investor with a description of how the remuneration and benefits have been calculated, the outcome of the annual review of the remuneration policy and details of any material changes to the policy.
8. Supplementary provisions
The company will ensure that:
- payments related to the early termination of a contract reflect performance achieved over time and are designed in a way that does not reward failure;
- guaranteed variable remuneration is exceptional, occurs only in the context of hiring new staff and is limited to the first year;
- staff is required to undertake not to use personal hedging strategies or remuneration- and liability-related insurance to undermine the risk alignment effects embedded in their remuneration arrangements.
9. Supplementary information
For the time being, the company does not grant the following types of remuneration (non-exhaustive enumeration):
- employer-funded pension
- company car
- lunch pass (chèque repas)
- contributions to loans (e.g. mortgage loan)
- subsidization of contracts (e.g. public transport, gym Membership)
 Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (together known as “CRD IV”).
 Directive 2014/91/EU, amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions (known as “UCITS V”).
 See definition of investment firm in Article 4(2) of Regulation 575/2013.
 Article 94(1)(g).
 Article 94(1)(n).
 Recital 66.
 Articles 92(1) and 92(2).
 Articles 14a and 14b of Directive 2009/65/EU, as amended by UCITS V.
 Article 14b of Directive 2009/65/EU, as amended by UCITS V.
 Requirements italicized may have been dis-applied, see section regarding proportionality principle.
 Article 14a(3) of Directive 2009/65/EU, as amended by UCITS V.
 Article 14b(4) of Directive 2009/65/EU, as amended by UCITS V.
 Article 14b(1) of Directive 2009/65/EU, as amended by UCITS V.
 Recital 3 of UCITS V.
 Article 14b(1)(m), (n) and (o) of the UCITS Directive and Annex II, paragraph 1, letters (m), (n) and (o) of the AIFMD.
 Both Article 14a(4) of the UCITS Directive and Article 13(2) of the AIFMD state that ESMA shall issue guidelines on the remuneration principles taking into account “the size of the [AIFMs/management company] and the size of [AIFs/the UCITS that] they manage, their internal organisation and the nature, the scope and the complexity of their activities”.
 This is particularly the case for UCITS management companies. This is because in the UCITS Directive there is no equivalent provision to Article 3 of the AIFMD exempting asset managers with lower amounts of assets under management from the scope of the AIFMD.
 The “pay-out process rules” comprise the rules on payment in kind in fund units, deferral of payment and adjustment of awards based on subsequent performance.
 Article 69(1).
 Article 69(3).
VI. Central Complaints Procedure
A Complaints Handling Procedure determines the management of complaints. Falcon Fund Management (Luxembourg) S.A. has implemented procedures for managing customer complaints which complies with the requirements of CSSF Regulation 16-07 relating to the out-of-court resolution of complaints.
The Complaints Handling Officer will ensure that adequate information concerning complaints received is reported to the Conducting Persons and to the Board. Such reports may comprise information regarding the nature of each complaint, its background, the financial, operational and reputational risks, the financial, contractual and regulatory impact, the achieved settlement, the mitigation actions undertaken and the next steps if applicable.
The Complaints Handling Officer is in charge of coordinating the handling of client complaints and issues regular complaints reports.
The Permanent Compliance Function can be consulted on client complaints which have been sent to Falcon Fund Management (Luxembourg) S.A. and are linked to a compliance matter.
In relation to complaints which may be sent directly to the Company, to Hauck & Aufhäuser acting as Depository, Transfer Agent and Central Administration or any other agent of Falcon Fund Management (Luxembourg) S.A., such complaints shall be forwarded to the Complaints Handling Officer upon receipt.
A complaint is considered as complaint if it fulfills the definition of CSSF Regulation N° 16-07 relating to out-of-court complaint resolution, i.e. a complaint filed with a professional to recognise a right or to redress a harm.
The Complaints Handling Officer forwards the complaint to the concerned service agents, depending on the subject of the complaint.
The draft response, prepared by the affected service agent, is sent back to the Complaints Handling Officer for review and approval.
When the drafting of a response and/or settlement of the complaint by the affected service agent takes more than 10 days, an acknowledgement of receipt will be sent to the complainant, indicating that his complaint will be answered in a timely manner.
The Complaints Handling Officer reports to the CSSF in accordance with the relevant regulation. According to Article 13 of the CSSF Regulation N° 16-07 relating to out-of-court complaint resolution it is required to communicate to the CSSF, on an annual basis, a table including the number of complaints registered by the professional, classified by type of complaints, as well as a summary report of the complaints and of the measures taken to handle them.
Referral to the CSSF
Where the complainant did not receive an answer or a satisfactory answer within one month from the date at which the complaint was sent, s/he may file his/her request with the CSSF within one year after s/he filed his/her complaint with Falcon Fund Management (Luxembourg) S.A. In the event of submitting a complaint to the CSSF it should be submitted in the English, Luxembourgish, German, or French languages by the following means:
- By mail addressed to the Commission de Surveillance du Secteur Financier, 283, route d’Arlon, L-2991 Luxembourg
- By email at email@example.com.
 A request for information, clarification or service is not a complaint.
Anyone can inform the Management Company securely, confidentially and in good faith of any misconduct or violations to supervisory regulations.
However, the whistleblowing procedure should not be used to report actions that are of a clearly criminal nature, such as unlawful dealings by the financial sector. Persons who discover actions that fall within the scope of criminal law (a crime or an offence) are requested to notify the Attorney General promptly.
Although the whistleblowing procedure is intended primarily for employees and former employees of the Management Company, it can also be used by companies engaged by the Management Company and by their employees.
However, if a customer has a conflict with the Management Company over the performance of contractual services, he should use the customer complaints procedure instead.
2. Legal bases
2.1. UCITS V
Whistleblowing, is a term which has been developed in the 1970s in the US and is the process of reporting wrongful, unethical or unlawful behaviour, misconduct internally or externally i.e. to a third party Organisation.
A company may be seen as being more transparent and trust worthy by having a robust process and protections for people who wish to report misconduct.
It has become an increasingly relevant issue at work as it implies labour law issues, data protection issues and regulatory since under UCITS V, management companies are required to have appropriate whistleblowing procedures in place.
The law of 10 May 2016 transposing UCITS V (Undertakings for Collective Investment in Transferable Securities) into Luxembourg law was published in the Mémorial (official gazette) on 12 May 2016. The text was adopted by the Parliament on 21 April 2016. The new law amends the Law of 17 December 2010 on Undertakings for Collective Investment and entered into force on 1 June 2016.
One of the main objectives of the UCITS V Directive is to achieve greater retail investor protection. In this respect, the text updates and harmonises the rules applicable to depositaries of UCITS funds, aligning them to the Alternative Investment Fund Managers Directive (AIFMD) regime and being even stricter in terms of the depositary liability. It also implements remuneration rules for management companies at European level that are broadly similar to the remuneration rules in the AIFMD. Retail investor protection is also strengthened by means of a harmonised system of sanctions including the implementation of a whistleblowing mechanism.
Whistleblowing constitutes a hot topic and has been formally enacted as described above. This legislation is not dedicated solely to whistleblowing protection but does include corresponding provisions.
3. Reporting to the Management Company
3.1. Reporting Channels
In principle, the Management Company only accepts written reports, which should be sent to the following email address: firstname.lastname@example.org
If this is not possible or you do not wish to establish first contact in this manner, you may instead contact the following representative:
Christina Büch, Attorney at Law
11, Boulevard Prince Henri
M +352 691 22 73 22
Ms. Christina Büch is a trusted attorney for internal warning systems (“whistleblowing”).
The Management Company provides no legal advice regarding the information provided.
3.2. Contents of the Report
You should be reasonably certain that the information you are providing to the Management Company is true.
You may of course also back your report with evidence in the form of documents, if you have any in your Possession.
4. Protecting the Whistleblower‘s Identity
We are committed to protecting the whistleblower‘s identity as well as the binding rules of law allow.
The whistleblower’s identity will only be disclosed in the cases permitted by law (e.g. when the CSSF and/or the Attorney General are under an obligation to report circumstances that may be a possible breach of criminal law, such as a crime or offence), or during a criminal case in which the whistleblower is obliged to testify.
Although, despite all precautions, disclosure of the whistleblower’s identity cannot be completely ruled out, the Management Company will make every effort to protect it.
5. Information on Subsequent Measures
Due to statutory duties of confidentiality, the whistleblower will not be informed of the outcome of investigations or of any measures undertaken.