AIFMD
AIFMD II - Introduction
This introduction has been updated in December 2023.
AIFMD II in a nutshell
The European Commission released a proposal to amend the AIFMD along with the UCITS directive and other directives and regulations relating to investment funds on November 25, 2021. Its main aim is to strengthen the EU Capital Markets Union. In particular, the European Commission seeks to address issues relating to the build-up and spread of risks to the broader financial system and to improve investor protection. It argues that changes are needed concerning, inter alia, delegation, liquidity risk management, data reporting and regulatory treatment of custodians. The review of AIFMD and the UCITS regime is an essential part of the CMU project, one of the EU’s biggest ambitions since 2015.
The key takeaways of the Commission proposal deal with additional services and functions that an AIFM may perform, stricter requirements on delegation and substance requirements, a light depositary passport (in practice), new provisions for loan-originating funds, harmonisation of liquidity management tools, an update of the national private placement regime and distribution regime, as well as increased reporting and disclosure obligations.
The European Parliament published a draft report regarding the Commission proposal on May 16, 2022, intended to improve, enhance, and facilitate the growth of the asset management market in Europe, which remains smaller than that in the US. The parliament’s amendments included:
- An extension of the definition of professional investor to semi-professional investors by including a €100,000 investment threshold and self-certified investors within the definition of professional investor.
- A definition of loan origination.
- Amendments relating to loan-originating funds.
- Clarifications of AIFMs’ liability relating to delegation.
- Widening of the range of services and activities that an AIFM may perform.
- Removal of the notification to ESMA regarding delegation of portfolio and/or risk management to third-country institutions.
- Clarification and amendment of the rules relating to LMTs and additional information to be disclosed to investors.
The EU Parliament and the EU Council reached a political agreement on 24 January 2023, and the EU Parliament released its EU Parliament final report on 2 February 2023 with several changes to the EU Parliament draft report. The changes to the EU Parliament draft report are, inter alia, the following:
- No extension of the scope of the definition of professional investors;
- Insertion of precise information required for authorisation relating to delegation and sub-delegation;
- Narrower widening of the range of services and activities that an AIFM may perform;
- Requirement to appoint one non-executive manager if the AIFM manages AIFs marketed to retail investors;
- Increased scrutiny and reporting obligation over certain conflicts of interests;
- An AIF that cannot demonstrate its sounds liquidity management system shall be closed-ended even if its AuM do not exceed EUR 5 billion;
- 5% risk retention requirement until maturity for loan origination;
- Insertion of a transitional period for loan origination;
- Requirement to choose 2 LMTs for open-ended AIFs;
- The notion of ‘distributor’ is defined without any references to the existence of an agreement;
- Stricter rules applicable to the appointment of a depositary in another Member State.
The below sections “EU Parliament final report” only refer to the changes to the initial EU Parliament draft report. Therefore, the changes provided in the EU Parliament draft report sections to AIFMD which are not mentioned in the sections EU Parliament final report remain in the EU Parliament final report.
The EU Council published its position on the Commission’s proposed updating of the AIFMD Commission proposal on June 21, 2022. It stresses the importance of consistent harmonisation in liquidity risk management to improve the use of LMTs, favours the creation of an EU framework for loan-originating funds and clarifies the rules for outsourcing and delegation of certain functions by AIFMs. Although the amendments and additions in the Council position are similar to those in the European Parliament draft report, there are some divergences. On 15 February 2023, the European Parliament confirmed the entry into the trialogue negotiations by plenary vote. The provisional agreement resulting from the trialogues must then be voted on by both Parliament and Council. On 20 July 2023, the press release detailing the Provisional Agreement on new rules for Alternative Investment Fund Managers (AIFMs) was published. On 6 November 2023, the EU Council has published the final compromise text for the new AIFMD 2 directive.
Terms not defined here should be deemed to have the same definition as in the AIFMD. Please also refer to the glossary at the end of this publication.
AIFMD II - European Parliament Final Report - Loan origination
The EU Parliament final report adds the following three definitions, as in the Council position:
‘loan-originating AIF’ means an AIF whose principal activity is to originate loans and for which the notional value of its originated loans exceeds 60 % of its net asset value; and
‘capital’ means aggregate capital contributions and uncalled committed capital, calculated on the basis of amounts investible after the deduction of all fees, charges and expenses that are directly or indirectly borne by investors;
‘leveraged AIF’ means an AIF whose exposures are increased by the managing AIFM, whether through the borrowing of cash or securities, or leverage embedded in derivative positions or by any other means.
Regarding the requirements to have, for loan originating activities, effective, up-to-date and annually reviewed policies, procedures and processes for granting credit, assessing the credit risk and administering and monitoring the credit portfolio, the EU Parliament final report excludes the shareholder loans where they do not exceed in aggregate 150 % of the capital of the AIF. The reference to capital is broader than the reference to 150% of the NAV of the AIF as mentioned in the EU Parliament draft report.
The 20% limit of the AIF capital relating to certain types of borrowers is not broadened in the EU Parliament final report, there are no additional references to “commitments or overall subscription”.
The ban on the granting of loans to an entity within the same group as the AIFM does not apply where that entity is a financial undertaking that exclusively finances borrowers that are neither AIFM and its staff, depositary and its delegates nor an entity to which the AIFM has delegated functions pursuant to Article 20 of the AIFMD.
The following new obligation is added in the EU Parliament final report: the proceeds of the loan, minus the fees for the administration of the loan, shall be attributed to the fund in full. All costs and expenses linked to the administration of the loan shall be clearly disclosed to investors according to the disclosure to investors obligation in the AIFMD.
The EU Parliament final report does not remove the retention obligation of 5% of the notional value of loans originated by the AIF applicable on an ongoing basis, and this obligation is extended until the maturity of the loans.
The 5% retention obligation does not apply to the loans that the AIF has purchased on the secondary market or where one of the following applies: a) the sale of the loan is necessary for the AIF not to be in breach of its mandate or of one of its investment or diversification rules and such potential breach is unintentional on the part of the manager, for instance as a result of the exercise of subscription or redemption rights; b) the disposal is necessary as a result of the Union sanctions; c) the AIF needs to dispose of the loans in order to redeem investors' units or shares as part of the wind-down of the AIF.
The EU Parliament final report only requires the loan-originating AIF to be closed-ended when the AIFM cannot demonstrate that the AIF has a sound liquidity risk management system that ensures the compatibility of its liquidity management system with its redemption policy. The EU Parliament draft report requires all AIF that cannot demonstrate its liquidity robustness to be closed ended. The EU Parliament final report is more precise in this regard and only applies to loan-originating AIFs. ESMA shall develop RTS relating to the assessment by competent authorities whether a loan-originating AIF has a sound liquidity management system and may maintain an open-ended structure, having regard to the underlying loan exposure, average repayment time of the loans and overall granularity and composition of AIF portfolios.
The following transition period is added in the EU Parliament final report: AIFMs in so far as they manage AIFs that originate loans and that have been constituted before the date of entry into force of AIFMD 2 may continue to manage such AIFs for 5 years following the date of entry into force of AIFMD 2 without having to comply with the obligation for originating AIFs to be closed-ended when the AIFM cannot demonstrate that they have a liquidity management system compatible with the redemption policy. By way of derogation, loan-originating AIFs constituted before the date of entry into force of AIFMD 2 and that do not raise additional capital for 5 years following the date of entry into force of AIFMD 2 shall be deemed to comply with the AIFMD 2.
Access the European Parliament Final Report of 2 February 2023 here.
AIFMD II - European Parliament Final Report - Liquidity management tools
After assessing the suitability in relation to the investment strategy of the AIF, its liquidity profile and the redemption policy, the AIFM managing open-ended AIFs shall select at least two LMTs from the following list to be used in the interest of the investors: redemption gates, notice periods, redemption fees, swing pricing, anti-dilution levy, and redemption in kinds. The EU Parliament draft report requires the AIFM of open-ended AIF to select at least only 1 LMT, with side pockets instead of the redemption in kinds. The EU Parliament final report has also added the two following points:
- the LMTs selection performed by the AIFM does not prevent it to use the other LMTs mentioned in this paragraph (including side pockets); and
- an AIFM that manages an MMF may select only 1 LMT between redemption gates, notice periods, redemption fees, swing pricing, anti-dilution levy, and redemption in kinds.
Whereas the EU Parliament draft report requires an AIFM activating or deactivating either suspension of redemptions and subscriptions, redemption gates, notice periods or redemption fees to notify its competent authority, the EU Parliament is more specific. Indeed, the AIFM shall notify its competent authority in any of the following circumstances:
- when an AIFM activates or deactivates suspensions of redemption and subscription in situations of liquidity stress;
- when activating or deactivating side pockets;
- when activating or deactivating any other LMT in a manner that is not in the ordinary course of business as envisaged in the fund documentation.
ESMA shall develop guidelines specifying best practices as regards the characteristics of the 8 LMTs set out in Annex V of AIFMD taking into account the diversity of investment strategies and underlying assets. The EU Parliament draft report refers to RTS, not guidelines.
ESMA shall also develop draft RTS more focused on the disclosure to competent authorities and investors of information related to the selection and calibration of LMTs by the AIFMs for liquidity risk management and for mitigating financial stability risks. The EU Parliament draft report refers directly to the selection and use of LMTs by the AIFMs.
The power of competent authorities to request AIFMs to apply certain LMTs in the interest of investors, in exceptional circumstances and after consulting the AIFM may be used by the competent authorities provided that there are reasonable and balanced investor protection or financial stability risks that necessitate this requirement.
Access the European Parliament Final Report of 2 February 2023 here.
AIFMD II - European Parliament Final Report - Distribution and national private placement regimes
The EU Parliament final report does not extend the definition of professional investors.
The EU Parliament final report exempt AIFs constituted exclusively for the purpose of purchasing company shares and proposed to employees of these companies within the framework of employee savings schemes from Article 31 (Marketing of units or shares of EU AIFs in the home Member State of the AIFM) and Article 43 (Marketing of AIFs by AIFMs to retail investors).
Regarding the provisions of the AIFMD applicable to non-EU AIFs, the EU Parliament final report clarifies that the new requirements in the European Commission proposed directive shall be met at the time of the AIFM’s application for authorization. Also, if a third country where the non-EU AIF is established is added to Annex I to the relevant last updated version of the Council conclusions on the revised EU list on non-cooperative jurisdictions for tax purposes, after the AIFM applied for authorisation, closed-ended funds shall continue to be considered to meet that criterion for a period of two years. A third country that has been continuously mentioned in Annex II to the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes (the ‘grey list’) for over three years shall be considered to be mentioned in Annex I to those conclusions. Regarding the marketing without a passport of AIFs managed by a non-EU AIFM, the third country where the non-EU AIFM or the non-EU AIF is established shall not be identified as an AML/CFT high-risk third country at the time the Member State allows the non-EU AIF to be marketed to professional investors in its territory.
Access the European Parliament Final Report of 2 February 2023 here.
AIFMD II - European Parliament Final Report - Delegation
The AIFM's liability towards its clients, the AIF and its investors shall not be affected by the delegation and sub-delegation(s), irrespective of the regulatory status or location of any delegate or subdelegate. The obligation for the AIFM to comply with the requirements of the AIFMD is irrespective of the regulatory status or location of any delegate or subdelegate.
The report analysing market practices regarding delegation and compliance with Articles 7 and 20 shall be provided by ESMA 24 months after the date of application of AIFMD 2, not 12 months.
Where the marketing function is performed by one or several distributors which are acting on their own behalf and which market the AIF under MiFID II or through insurance-based investment products in accordance with the Insurance Distribution Directive, such function is not a delegation subject to the other rules of Article 20 irrespective of any distribution agreement between the AIFM and the distributor. This change is in line with the fact that MiFID II and the Insurance Distribution Directive provide for distribution safeguards and with the Council position. The EU Parliament draft report refers to the contractual agreement with the distributor to assess whether there is a delegation of the marketing activity by the AIFM, but not the EU Parliament final report.
The peer review of the application of the delegation regime to be conducted by ESMA shall be conducted as a one-off comprehensive peer review analysis, whereas the EU Parliament draft report stated that ESMA may conduct such peer reviews as necessary.
Access the European Parliament Final Report of 2 February 2023 here.
AIFMD II - European Parliament Final Report - Investor protection
According to the objective of the AIFMD to promote fair treatment of AIF investors, ESMA shall, by 18 months from entry into force of the AIFMD 2, submit a report on undue costs charged by AIFMs to investors in AIFs:
- assessing the costs charged by AIFMs to investors in AIFs, and the reasons for cost levels and differences between them;
- proposing criteria for assessing whether the level of such costs is or is not appropriate, in particular when compared to the level of costs in other jurisdictions worldwide;
- proposing, if necessary, options for action by competent authorities or by legislators in respect of inappropriate or undue levels of such costs.
Regarding the reporting obligations to NCAs, the information regarding delegation arrangements concerning portfolio management or risk management functions shall be reported for each AIF managed or marketed in the Union by an authorized AIFM.
The EU Parliament final report adds a recital relating to the remuneration policies of AIFMs which shall be consistent with long-term risks, including ESG risks and sustainability goals, in particular where AIFMs make claims as to the sustainable investment policies of AIFs they manage.
Access the European Parliament Final Report of 2 February 2023 here.
AIFMD II - European Parliament Final Report - Activities and services performed by AIFMs
The list of ancillary services member states may authorise AIFMs to provide is not extended to “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”.
Regarding the information to be provided by the AIFM seeking authorisation from a national regulator, the applicant AIFM shall disclose how it complies with its obligation under SFDR. Also, the list added in the European Parliament draft report of information to be shared by the applicant AIFM is developed with an explanation of the added value of the delegation to the investor and, for each of the following, a description of the human and technical resources:
- employed by or committed to the AIFM for performing day-to-day portfolio or risk management tasks within the AIFM;
- employed by or committed to the delegate for performing those services on a delegated basis; and
- employed by or committed to the AIFM for monitoring and controlling the delegate.
An authorised AIFM shall report to the competent authority any material changes that may affect the scope of the authorisation by that authority and in particular any modification on the arrangements of the delegation and sub-delegation to third parties provided at the time of authorisation. Also, the competent authorities shall, every quarter, inform ESMA of any changes in the scope of authorisations by those authorities, and in particular of material changes to the information provided by applicant AIFMs.
The RTS detailing information to be provided by applicant AIFMs to competent authorities shall specify situations where the name of the AIF(s) an applicant AIFM intends to manage could be materially deceptive or misleading to the investor.
Where an AIFM manages an AIF marketed to retail investors, the AIFM shall ensure that at least one member of its governing body is a non-executive director. The AIFM, in appointing a non-executive director of its governing body, shall determine whether such a member is independent in character and judgement and whether there are relationships or circumstances, which are likely to affect that member’s judgement. The AIFM shall take reasonable steps to ensure that any non-executive directors appointed to its governing body have sufficient expertise and experience to be able to make judgements on whether the AIFM is managing AIFs in the best interest of investors. Non-executive directors shall contribute to ensuring that the AIFM complies with the requirements regarding conflicts of interests and acting in the best interests of the AIFs and their investors, as specified in the AIFMD.
Where an AIFM intends to manage an AIF on behalf of a third party, including, but not limited to, under a mandate given on a discretionary basis for the management of portfolio of investments or under a delegation in accordance with Article 20, and where the third party has significant control over the AIF’s design, distribution and management, the AIFM shall employ heightened scrutiny of the potential for conflicts of interest. AIFMs engaging in such a relationship shall submit detailed explanations and evidence on their compliance in this regard to the competent authorities of their home Member State. In particular, they shall specify how they prevent systematic conflicts of interest or any other material conflicts of interest arising from the relationship, how any existing or potential conflicts are effectively managed in the best interest of investors and how this is clearly and comprehensively disclosed to investors. Therefore, attention should be drawn to the review of the AIFM agreement with such third party and the control over the AIF’s design, distribution and arrangement kept by the third party. As the relevant conflicts of interest shall be disclosed to the investors, the AIFM shall continuously review the actions performed by such third party. ESMA shall develop RTS specifying:
- the types of relationship between the AIFM and a third party when the AIFM manages an AIF on behalf of the third party and of conflicts of interest as referred to in this paragraph;
- the criteria to be used by the relevant competent authorities to assess whether AIFMs comply with the obligations mentioned in this paragraph.
Regarding the obligation for an AIFM to have at least natural two persons conducting the business of the AIFM, the EU Parliament final report adds the option for these two natural persons to be committed on a full-time equivalent basis.
Access the European Parliament Final Report of 2 February 2023 here.
AIFMD II - European Parliament Final Report - Depositaries
An authorised credit institution established in a Member State may be allowed by the competent authority of another Member State to be appointed as depositary of an AIF in this other Member State, following a case-by-case assessment, provided that:
- the competent authorities have received a motivated request by the AIFM for the appointment of a depositary in another Member State demonstrating the lack of the relevant depositary services able to meet the needs of the AIF having regard to its operational strategy; and
- the national depositary market of the home Member State of the AIF fulfils at least one of the following conditions:
- that market consists of fewer than seven depositaries providing depositary services to AIFs which are authorised or registered in a Member State under the applicable national law, and managed by an authorised EU AIFMs, and none of those depositaries has assets safekept (financial instruments that can be held in custody and other assets) exceeding EUR 1 billion or the equivalent in any other currency. Assets held by a depositary for non-EU AIF managed by an EU AIFM and the own assets of a depositary shall be excluded from the computation;
- the aggregate amount in that market of assets safekept (financial instruments that can be held in custody and other assets) on behalf of AIFs which are authorised or registered in a Member State under the applicable national law, and managed by an authorised EU AIFM does not exceed the amount of EUR 60 billion or the equivalent in any other currency. Assets safekept by depositaries for non-EU AIFs managed by EU AIFMs and the own assets of depositaries shall be excluded from the computation.
The depositary of a third-country AIF may be established in this third country provided that the third country is not listed as a high-risk country by the Commission at the time of the AIFM’s application for authorisation. The reference to the time of the AIFM applicant for authorisation is neither in the EU Parliament draft report nor in the Commission proposed directive. Also, the depositary shall not be situated in a third country mentioned in Annex I to the relevant last updated version of the Council conclusions on the revised EU list on non-cooperative jurisdictions for tax purposes. The reference to the last updated version of the Council conclusions was an expected change as the Council conclusions on such EU list may be amended from time to time. Also, the EU Parliament final report adds that if a third country where the non-EU AIF is established is added to Annex I after the time of the AIFM’s application for authorisation, closed-ended funds shall continue to be considered to meet that criterion for two years. Moreover, a third country that has been continuously mentioned in the grey list of the Council conclusions for over three years shall be considered to be mentioned in Annex I to those conclusions.
Access the European Parliament Final Report of 2 February 2023 here..
AIFMD II - Conclusion
The amendments and additions provided by the Commission proposal, the European Parliament draft report, and the Council position should lead to the strengthening and growth of the European alternative investment fund sector. They should help to make capital more accessible in Europe and, without wholesale changes to the AIFMD is not rewritten, some areas could have a significant impact on AIFMs. The level 2 legislation should also provide additional clarity. We expect AIFMD II to come into force in 2025.
Please do not hesitate to contact founding partner Olivier Sciales - we can provide you with further information and assistance in understanding the Commission proposal, European Parliament draft report and Council position, or AIFMD II more generally.
AIFMD II - The Council position - Miscellaneous
The Council position clarifies the use of the terms shares and shareholders with additional references to units and unitholders, as the European Parliament draft report does.
The Council position refers to the term liquidity management tools, not liquidity management instruments, as the European Parliament draft report does.
The notification obligations of the regulatory authorities concerning their cooperation obligation are also developed in the Council Proposal with the same approach as the European Parliament draft report, particularly regarding the notification of the ESRB if there are potential risks to the stability and integrity of the financial system.
All information exchanged under the AIFMD between ESMA, national regulatory authorities, the EBA, EIOPA and the European Systemic Risk Board is no longer considered confidential if the information disclosed is used in a summary or in an aggregate form in which individual financial market participants cannot be identified. This change relating to the confidentiality of some information is the same as that included in the Commission proposal and the European Parliament draft report.
The disclosure of derogations to the European Commission is broadened by the Council position with the derogation or option of articles 15.3 (risk management by loan-originating AIFs) and 15.4aa (leverage of a loan-originating AIF) included in the list of derogations to be disclosed to the Commission. Member states may choose to include derogations relating to these two articles when they transpose AIFMD II into national law. The European Commission will make information relating to these derogations public. Neither the Commission proposal nor the European Parliament Draft Report modifies the disclosure of derogations to the European Commission.
Access the European Council position of June 2022 here.