AIFMD II Timeline – latest developments

LMTs allow AIFMs of open-ended alternative investment funds to manage redemption pressure in exceptional circumstances such as stressed markets, black swan events and other low-probability events that may have a major financial impact on either an AIFM or an AIF or other areas of the financial markets. LMTs may therefore protect either financial market participants or global financial...

AIFMs of open-ended AIFs based in any member state are required to choose at least one LMT from the harmonised list set out in Appendix V under points 2, 3, 4, 5, 6 and 8) (i.e. redemption gates, notice periods, redemption fees, swing pricing, anti-dilution levy and side-pockets). The European Parliament draft report added the last three LMTs.

An AIFM that manages an open-ended AIF may, in...

After assessing suitability with regard to the investment strategy pursued, the liquidity profile and redemption policy, an AIFM that manages an open-ended AIF should select at least two appropriate LMTs from the list set out in Appendix V, points 2 to 7 (i.e. redemption gates, notice periods, liquidity fees on redemption, swing and/or dual pricing, anti-dilution levy, and redemptions in kind)...

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...

Since the growth of loan originating funds in the EU internal market is seen as a positive development, amendments and additions seek to remove unnecessary risk retention requirements and avoid creating product-specific rules. Favouring loan originating funds is also a means to increase financing to SMEs, green projects and other companies. The following changes and amendments to the AIFMD are...

The European Parliament draft report has added two definitions:

Loan origination means the granting of loans by an AIF as the original lender. This definition is relatively narrow and funds acquiring mostly syndicated debt are excluded.

A shareholder loan is a loan granted by an AIF to an entity in which it holds directly or indirectly at least 5% of the capital or voting rights, where the...

Loan origination is the most detailed topic in the Council position, in which the amendments and additions to the AIFMD are somewhat different from those in the Commission proposal and the European Parliament draft report, although there is convergence on some provisions. The amendments and changes included in the Council position are as follows.

The Council position includes a new definition...

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...

The Commission proposal includes clarifications and additions, particularly in cases of delegation where an AIFM delegates more portfolio management or risk management functions to entities located in third countries than it retains.

The Commission proposal clarifies the application of the delegation requirements (article 20 of the current AIFMD) to all functions listed in appendix I and the...

The European Parliament draft report has modified the Commission proposal by removing the reporting by national regulators to ESMA of situations in which an AIFM delegates more portfolio management or risk management functions than it retains. The second point of the delegation section in the  Commission proposal is completely deleted in the European Parliament draft report, including the...

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...

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...

Various changes and amendments have been provided by the Commission proposal regarding the marketing of non-EU AIFs in view of strengthening distribution conditions relating to third countries.

More restrictive conditions for the distribution in member states of AIFs managed by a non-EU AIFM, in particular, non-EU AIFs:

• The third country in which the non-EU AIF or non-EU AIFM is...

The European Parliament draft report extends the definition of professional investor to investors

• That have committed to investing a minimum of €100,000 and have stated in writing, in a document separate from the contract incorporating the commitment to invest, that they are aware of the risks associated with the envisaged commitment or investment; or
• That are executives, portfolio...

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.

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...

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....

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...

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...

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...

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:

...

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 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...

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...

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,...

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...

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...

• 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...

The threshold for the regulatory authorities of one member state to notify ESMA and the authorities of the home and host member states of an AIFM suspected of carrying out acts contrary to the AIFMD is lowered to reasonable grounds, but still restricted to acts committed by an AIFM, as discussed above in the Depositaries section.

All information exchanged under the AIFMD between ESMA,...

Clarification of the use of the terms shares and shareholders with additional references to units and unitholders. Use of the term liquidity management tools in appendix V, rather than liquidity management instruments.

ESMA should follow a risk-based approach in carrying out its functions under the AIFMD. Neither the Commission proposal nor the Council position includes such a provision.

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...

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...