8. Investor protection

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.

 

by Olivier Sciales

AIFMD II - The Council position - Investor protection

An AIFM should provide information on the instruments in which it is trading, markets of which it is a member or where it actively trades, and the exposures and holdings of each AIF it manages, along with relevant identifiers to connect the data provided on assets, AIFs and AIFM to other supervisory or publicly available data sources. The disclosure of the exposure and holdings of each AIF is broader than the existing AIFMD, the Commission proposal and the European Parliament draft report, which refer to “principal exposures” (AIFMD) and “exposures” (Commission proposal and Parliament report), but not to the holdings of each AIF. The reference to “relevant identifiers to connect the data provided on assets, AIFs and AIFM” is also new compared to the Commission proposal and the European Parliament draft report.

Although the obligation to report to the regulatory authorities information on the main categories of assets in which the AIF is invested is deleted in the Commission proposal, the Council position replaces this requirement with the following:

Obligation to report information on delegation arrangements that involve the delegation of collective or discretionary portfolio management or risk management functions as follows:

  • Information on delegates, specifying their name and domicile, whether they have close links with the AIFM, and whether they are authorised or regulated entities for asset management. The information should include relevant identifiers of the delegates to connect the information provided to other supervisory or publicly available data sources.
  • A list and description of activities relating to risk management and portfolio management functions that are delegated.
  • Where the portfolio management function is delegated, the amount and percentage of the AIF’s assets which are subject to delegation arrangements.
  • The number of full-time equivalent human resources employed by the AIFM to monitor delegation arrangements.
  • A description of periodic due diligence measures carried out by the AIFM to oversee, monitor and supervise the delegate, including the date of performance of these measures, issues identified and, where relevant, measures and timeline adopted to address these issues.
  • Where sub-delegation arrangements are in place, information required in points (i) to (iii) on the sub-delegates and activities related to the portfolio and risk management functions that are sub-delegated.
  • The commencement and expiry dates of delegation and sub-delegation arrangements. Some information included in the other relevant economic and accounting information in the European Parliament draft report is not included in the Council position, such as reporting of the total amount of leverage of the net assets employed by the AIF.

The Council position has added the following reporting obligation to the regulatory authorities: the list of member states in which the units or shares of the AIF are marketed by the AIFM or by a distributor acting on behalf of that AIFM. However, the Council position shortens the current obligation to report the current risk profile of the AIF and the risk management systems employed by the AIFM to the current risk profile of the AIF only. Neither the Commission proposal nor the European Parliament draft report includes such provisions.

AIFMs should, for each EU AIFs that they manage and for each AIF that they market in the EU, disclose to investors:

  • The originated loan portfolio.
  • On an annual basis, all direct and indirect fees and charges directly or indirectly charged or allocated to the AIF or any of its investments.
  • On an annual 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.

The difference from the Commission proposal is the frequency of such disclosure, annually in the Council position and the European Parliament draft report, but quarterly in the Commission proposal.

Access the European Council position of June 2022 here.

by Olivier Sciales

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.

by Olivier Sciales

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.

by Olivier Sciales