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AIFMD II - European Parliament Draft Report - Investor protection
For each EU AIF they manage and each AIF they market in the EU, AIFMs should also disclose:
- The portfolio composition of originated loans.
- On an annual basis, all direct and indirect fees and charges directly or indirectly charged to the AIF. The European Parliament draft report does not refer to any of the AIF’s investments, in contrast to the Commission proposal. These are positive amendments as the widening proposed by the Commission proposal appears to be relatively burdensome and not particularly relevant.
- On an annual basis, any parent company, subsidiary or special purpose entity established in relation to the AIF’s investments by the AIFM. The EU Parliament Report restricts such disclosure to the AIFM, whereas the Commission proposal includes the parent company, the subsidiary or special purpose entity established by the staff of the AIFM or its direct or indirect affiliates.
The other significant change is the frequency of the disclosure, set as annually in the European Parliament draft report.
Reporting regarding markets and instruments which the AIFM trades on behalf of the AIF (no longer only the principal markets and instruments, as modified in the Commission proposal) is complemented by other relevant economic and accounting information from the following list:
- The total amount of leverage within the AIF’s net assets employed by the AIF.
- Information regarding delegation arrangements regarding portfolio management or risk management functions, and in particular:
- information on entities to which such functions have been delegated (name and LEI of each delegate, its jurisdiction of establishment and, where relevant, its supervisory authority.
- information on the function delegated, the type of delegation (full or partial), and the date of the delegation agreement or contract.
- where sub-delegation arrangements are in place, the same information in respect of the sub-delegates and the functions sub-delegated.
- the date of conclusion and expiration of the delegation and sub-delegation arrangements.
- a description of the periodic due diligence measures carried out by the AIFM to oversee, monitor and supervise the delegate, including the date of performance of those measures, the issues identified and, where relevant, the measures and timeline adopted to address those issues. There is no reference to other economic and accounting information in the Commission proposal.
Access the draft report of 16 May 2022 from the European Parliament here.
AIFMD II - European Commission proposed directive, November 2021 - Investor protection
Investor protection is one of the main objectives of EU financial law. The Commission proposal includes the following changes and additions:
Details of the possibility and conditions for using selected LMTs should be made available to investors by the AIFM as part of the description of the AIF’s liquidity risk management.
For each EU AIF that it manages and each AIF it markets in the EU, an AIFM should also disclose to investors:
- The originated loan portfolio.
- On a quarterly basis, all direct and indirect fees and charges directly or indirectly charged or allocated to the AIF or any of its investments.
- On a quarterly basis, any parent company, subsidiary or special purpose entity established in relation to the AIF’s investments by the AIFM, its staff or direct or indirect affiliates.
Reporting to regulatory authorities of the AIFM’s home member state is widened regarding markets and instruments in which it trades on behalf of the AIF it manages and the exposure of each AIF (no longer only the principal markets and instruments, and principal exposures).
For each EU AIF that it manages and each AIF it markets in the EU, an AIFM should provide the following information to the regulatory authorities of its home member state:
- The percentage of the AIF’s assets that are subject to special arrangements arising from their illiquid nature.
- Any new arrangements for managing the liquidity of the AIF.
- The current risk profile of the AIF and the risk management systems employed by the AIFM to manage market risk, liquidity risk, counterparty risk and other risks including operational risk.
- The results of stress tests under normal and exceptional liquidity conditions that enable them to assess and monitor the liquidity risk of the AIFs as well as risks associated with each investment position of the AIF and the overall effect of such risks on the AIF’s portfolio.
This information is already included in the current AIFMD, but the obligation to report information on the main categories of assets in which the AIF invests is removed in the Commission proposal.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - The Council position - Activities and services performed by AIFMs
The addition of benchmark administration and credit servicing to the list of ancillary services is also found in the Council position, but the following clarification is added: “Member states may prohibit AIFs from servicing credits granted to consumers in their territory.”
AIFMs should not be authorised to provide only the activities of points 2, 3 and 4 of appendix I. The change consists of a reference to the two new services, loan origination and servicing securitisation special purpose entities.
AIFMs should not be authorised to administer benchmarks used in the AIFs they manage. Neither the Commission proposal nor the European Parliament draft report prohibits AIFMs from administering benchmarks used by the AIFs they manage.
An AIFM applying for authorisation should provide the information described above in the Commission proposal to the regulatory authorities of its home member state and keep this information updated.
As in the Commission proposal, the business of the AIFM should be conducted by at least two individuals who are either employed full-time by the AIFM or who are committed full-time to conducting its business and who are resident in the EU. There is a similar requirement in CSSF Circular 18/698 applying, inter alia, to authorised AIFMs.
Access the European Council position of June 2022 here.
AIFMD II - European Parliament draft report - Activities and services performed by AIFMs
The European Parliament draft report has added the following ancillary service:
Any other ancillary service that is not regulated as an investment service under Directive 2014/65/EU (MiFID II), which represents a continuation of services already undertaken by the AIFM or use of internal capabilities, and which does not create conflicts of interest that cannot be managed by additional rules. The scope of this extension is not clear and should be clarified.
Regarding the information to be provided by an AIFM seeking authorisation from a national regulator, the requirements are similar to those in the Commission proposal but the description of the role, title and level of seniority of persons effectively conducting the business of the AIFM does not have to be set out in detail. Regarding information on arrangements made for delegation and sub-delegation of functions to third parties, a description of the human and technical resources to be used by the AIFM is also required in the European Parliament draft report. However, the following list of required information is added by the European Parliament draft report:
- The legal name and legal entity identifier of the AIFM.
- The legal name and LEI of the AIF and its investment strategy.
- The legal name and LEI of each delegate, the jurisdiction in which it is established and, where relevant, its supervisory authority.
- A brief description of delegated risk management functions, including whether each such delegation amounts to partial or full delegation.
- A brief description of delegated portfolio management functions, by investment strategy and relevant geographical areas, including whether each such delegation amounts to partial or full delegation.
- A brief description of other functions listed in appendix I that the AIFM additionally performs.
Access the draft report of 16 May 2022 from the European Parliament here.
AIFMD II - European Commission proposed directive, November 2021 - Activities and services performed by AIFMs
The list of ancillary services member states may authorise AIFMs to provide is extended to benchmark administration and credit servicing.
Originating loans and servicing securitisation special purpose entities are activities added in Appendix I.
An AIFM applying for authorisation shall provide the following additional information to the regulatory authorities of its home member state:
- Information about the persons effectively conducting the business of the AIFM, in particular concerning the functions referred to in appendix I, including:
- a detailed description of their role, title and level of seniority.
- a description of their reporting lines and responsibilities within and outside the AIFM.
- an overview of their time allocated to each responsibility.
- a description of the technical and human resources that support their activities.
- A detailed description of the appropriate human and technical resources to be used by the AIFM to comply with its obligations relating to the authorisation, operating conditions, transparency requirements and, where applicable, the specific types of AIFs, the rights of an EU AIFM to market and manage EU AIFs, the specific rules relating to third countries and marketing to retail investors.
- A detailed description of the human and technical resources to be used by the AIFM for monitoring and supervising its delegate(s).
The business of the AIFM shall be conducted by at least two individuals who are either employed full-time by the AIFM or committed full-time to running its business, and who are EU residents. Please note that a similar requirement in CSSF Circular 18/698 applies, inter alia, to authorised AIFMs.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - The Council position - Depositaries
Unlike the Commission proposal, the Council position refers to investor CSD with the same provision as in the European Parliament draft report: the provision of services by a central securities depositary acting in the capacity of an investor CSD as defined in article 1, point (f) of Commission Delegated Regulation (EU) 2017/392 shall be considered a delegation of the depositary’s custody functions.
The home member state of an AIF may empower its national regulatory authorities to permit, following a case-by-case assessment, a credit institution with its registered office in the EU and authorised in accordance with Directive 2006/48/EC (Banking Consolidation Directive) with reference to point (a) of Article 21(3) and established in another member state to be appointed as a depositary, provided that the regulatory authorities have received a request with justification from the AIFM that demonstrates the lack of relevant depositary services, given the AIF’s investment strategy, in its home jurisdiction, justifying the appointment of a depositary in another member state.
The national depositary market of the AIF’s home member state must fulfil at least one of the following conditions: the market must consist of fewer than seven depositaries providing depositary services to EU AIFs (authorised under article 4 (k) (i)) of the AIFMD) and managed by an EU AIFMs(authorised under article 7(1)) and no depositary has AIF assets under custody exceeding €1 billion or the equivalent in other currency.
This threshold excludes depositaries acting under article 36(1a) of the AIFMD and the depositary’s own assets; the aggregate volume in the market of assets under custody on behalf of EU AIFs and managed by an EU AIFMs does not exceed €30 billion or the equivalent in other currency. This threshold excludes depositaries acting under AIFMD article 36 (1a) and the depositary’s own assets.
Even if these conditions are fulfilled, the authorisation to allow the appointment of a depositary in another member state shall be granted on a case-by-case assessment of the lack of available depositary services in the AIF’s jurisdiction, given its investment strategy. When authorising the appointment of a depositary in another member state, the regulatory authorities shall notify ESMA. This provision is without prejudice to the full application of article 21, with the exception of point (a) of paragraph 5 on the place where the depositary is to be established. These precisions regarding the appointment of a credit institution appear only in the Council position but neither in the Commission proposal nor the European Parliament draft report. In fact, the Council position envisages no desire to establish a depository passport and therefore does not stipulate the drafting of a study by the European Commission in this respect.
The transitional provision relating to the appointment of a depositary in an EU country that is not the AIF’s home member state, or in cases where the AIF is not regulated, the home member state of an AIFM, is not modified by the Council position. By contrast, the Commission proposal and European Parliament draft report have removed the transitional date from the wording.
Where the regulatory authorities of the home member state of an AIF or, where the AIF is not regulated, the authorities of the home member state of an AIFM, have reasonable grounds to suspect that acts contrary to the AIFMD are being carried out by a depositary not subject to their supervision, they shall without delay notify ESMA and the regulatory authorities of the depositary in question in a manner as specific as possible. The recipient authorities shall take appropriate action and inform ESMA and the notifying regulatory authorities of the outcome of that action. The Council position follows the approach of the European Parliament draft report, with the threshold lowered to reasonable grounds, and the obligation applies in relation to depositaries and AIFMs.
The Council position does not refer to the Council conclusions of 2020 on the revised EU list on non-co-operative jurisdictions for tax purposes but only to the Council conclusions on the revised EU list on non-cooperative jurisdiction for tax purposes.
Access the European Council position of June 2022 here.
AIFMD II - European Parliament draft report - Depositaries
The provision of services by a CSD acting in the capacity of an investor CSD shall be considered a delegation of the depositary’s custody function, contrary to the case of an issuer CSD.
Some institutions (see above) are allowed by the regulatory authorities of the home member state of an AIF or AIFM to be appointed as a depository, although they are established in another member state. The European Parliament draft report has added the requirement for the regulatory authorities to decide on a case-by-case basis and notify ESMA of the decision taken. The end date of the transitional provisions is deleted as in the Commission proposal.
The European Commission shall, by 24 months after the entry into force of AIFMD II, carry out a comprehensive study on the potential benefits and risks of introducing an EU depositary passport, in particular in terms of reducing cost, and making a greater choice of competitive depositary services from other member states available to managers. The Commission proposal refers to a review, not a comprehensive study, by 60 rather than 24 months after the entry into force of AIFMD II.
Where the regulatory authorities of a member state have reasonable grounds to suspect that acts contrary to this directive are being or have been carried out by an AIFM not subject to the supervision of that regulatory authority, or by an entity appointed as depositary by an AIFM, they should notify ESMA and the regulatory authorities of the home and host member states of the AIFM or of the entity concerned as specifically as possible. The recipient authorities shall take appropriate action and inform ESMA and the notifying regulatory authorities of the outcome of their action and, to the extent possible, of significant interim developments. The threshold for the notification obligation is lowered to reasonable grounds and may relate to a depositary, whereas the Commission proposal limits the notification obligation to acts committed by an AIFM only.
AIFMD II - European Commission proposed directive, November 2021 - Depositaries
The depositary role is vital for trust and confidence in the fund industry. The current AIFMD depositary regime is deemed to be effective concerning investor protection. However, the current regime may entail a lack of competition for depositary business in some member states - hence the creation of the possibility for the depositary to be established in a different member state from the AIF. These are the Commission’s proposed updates and additions.
The definition of central securities depositary is added by a reference to Regulation (EU) No 909/2014 (Central Securities Depositories Regulation).
The regulatory authorities of the home member state of an AIF or, in cases where AIFs are not regulated, regulatory authorities of the home member state of an AIFM, may allow a credit institution registered in the EU, authorised under Directive 2013/36/EU (Capital Requirements Directive), and established in another member state to be appointed as a depositary. This option is without prejudice to the full application of article 21 of the AIFMD incorporating the main provisions applicable to depositaries, except their place of establishment. This wording was already included in the transitional provisions of the existing AIFMD but with July 22, 2017, as an end date. In the Commission proposal, the end date of the transitional provision is deleted, meaning the appointment of such a depositary was already a possibility until 22 July 2017 under the current AIFMD . However, this wording would be the main provision in AIFMD II, without any end date.
A depositary established in a third country may be appointed as depositary of an AIF if:
- The third country is not at high risk of money laundering as defined by article 9 of the fourth AML Directive. As mentioned above, some jurisdictions have been recently added to this list by the European Commission, including the Cayman Islands, Jordan, and Morocco.
- The third country is not mentioned in appendix I to the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions for tax purposes. As mentioned above, the Cayman Islands appears in appendix I, preventing the use of services provided by a depositary in the Cayman Islands. However, the Cayman Islands does not appear in the latest conclusions of the Council dated October 4, 2022. Therefore, attention should be paid to the final wording of AIFMD II regarding the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions.
The requirement for the depositary to exercise due skill, care, and diligence in the selection, appointment, and monitoring of a delegate does not apply to a central securities depositary acting as an issuer CSD.
The provision of services by a CSD acting as an issuer CSD is not a delegation of the custody function.
Within 60 months after the entry into force of AIFMD II, the European Commission shall initiate a review which that includes an assessment of the appropriateness of complementing the AIFMD II with a depositary passport.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - The Council position - Distribution and national private placement regimes
There is no extension of the professional investor definition in the Council position.
The Council position does not refer to the Council conclusions of 2020 on the revised EU list on non-cooperative jurisdictions for tax purposes but only to the Council conclusions on the revised EU list on non-cooperative jurisdictions for tax purposes.
Access the European Council position of June 2022 here.
AIFMD II - The Council position - Delegation
Before the review by the European Commission of the functioning of the rules laid down in the AIFMD and experience acquired in applying them, ESMA shall provide a report analysing market practice regarding delegation and compliance with articles 7 (AIFM authorisation) and 20 (delegation of AIFM functions), based, inter alia, on data reported to regulatory authorities in accordance with point (d) of article 24(2) and on the exercise of its supervisory convergence powers. The difference between the Council position and the Commission proposal as well as the European Parliament draft report on this point is the absence of a time period stipulated for ESMA to provide such a report in the Council position.
Article 20 relating to delegation is also amended by the Council position, including the same amendments as those in the Commission proposal. However, the following addition in the Council position does not appear in the Commission proposal:
Where the marketing function is performed by one or multiple distributors that are acting on their own behalf and that market the AIF under Directive 2014/65/EU (MiFID II) or through insurance-based investment products in accordance with Directive 2016/97/EU (Insurance Distribution Directive), this should not be considered delegation subject to the requirements laid down in the above paragraphs irrespective of any distribution agreement between the AIFM and the distributor. This addition is broader than that included in the European Parliament draft report, since the performance of the marketing function would not be considered delegation irrespective of the existence of a distribution agreement between the distributors and the AIFM.
The Council position does not refer to a peer review of the application of the delegation regime, focusing on measures to prevent AIFMs that delegate portfolio management or risk management functions to independent entities in third countries from becoming letter-box entities. There is no new article 38a referred to in the Commission proposal.
Access the European Council position of June 2022 here.
