The European Commission’s AIFMD Review is Out

On 25 November 2021, the European Commission published its long-awaited proposal to amend the AIFMD as part of a new Capital Markets Union (CMU) legislative package, available here.

This proposal follows the Commission’s public consultation on how to achieve a more efficiently functioning EU AIF market.

Overall, the Commission concludes that the AIFMD standards for ensuring high levels of investor protection and protecting financial stability are mostly effective. However, the Commission has identified a need to, amongst others, harmonise the rules for AIFMs managing loan-originating AIFs, impose cross-border access to depositary services and to facilitate the use of liquidity management tools across the Union.

The proposal harmonizes and clarifies the regulatory standards which member states shall transpose into their national laws to improve market monitoring and ensure the same level of investor protection across the Union.

The proposed amendments will affect AIFMs in several ways, including:

AIFM activities

The list of authorised ancillary services that AIFMs can provide is extended to also include:

• benchmark administration (controlling the provision of indexes measuring and tracking for example the performance and return of AIFs).
• credit servicing (providing credit in the form of a deferred payment, a loan or other similar financial accommodation).

When applying for an AIFM authorization

When applying for an authorization, AIFMs shall provide more detailed descriptions of the human and technical resources used to carry out its functions and, where applicable, to supervise delegates.

Additionally, to obtain an authorization, the business of the AIFM must be conducted by at least two senior managers who are (i) employed or committed on a full-time basis, and (ii) resident in the Union – thus hindering pro-forma establishment of EU AIFMs in tax lenient third countries.

Loan-originating AIFs – Risk management

To ensure that the Union has a uniform level of investor protection and to facilitate access to finance by EU companies, the Commission proposes to establish common rules for loan-originating AIFs.

In terms of risk management, managers of AIFs engaged in lending activities shall implement effective policies, procedures, and processes for (i) granting of loans (ii) assessing credit risks, and (iii) administering and monitoring their credit portfolio.

Granting of loans to a single borrower is restricted. Going forward, an AIFM shall ensure that such loans granted by the AIF does not exceed 20 % of the AIF’s capital, when the borrower is either a financial undertaking or a collective investment undertaking.

To avert conflicts of interest, AIFs may not grant loans to its AIFM or the staff of its AIFM, its depositary or the entity to which its AIFM has delegated functions.

An AIFM shall ensure that the loan originating AIFs it manages is closed-ended if the notional value of its originated loans exceeds 60 % of its net asset value. The notional value is the total nominal amount that is used to calculate payments made on the loan.

Open-ended AIFs – Liquidity management tools

The Commission proposes that managers of open-ended AIFs are required to select at least one appropriate liquidity management tool (LMT) from a harmonised list and to implement detailed policies and procedures for the activation and deactivation of any such LMT. Further, the AIFM shall notify the competent authorities when activating or deactivating the LMT. Additionally, the competent authorities may require such AIFMs to activate or deactivate a LMT if in the interest of investors or the public.

To ensure harmonization, the Commission may, based on a draft developed by ESMA, adopt regulatory technical standards to specify the process for choosing and using LMTs.

Delegation

The scope of AIFMs’ liability is extended to cover clients (which is not further defined in the proposal) as well. Such liability shall neither be affected by the fact that the AIFM has delegated functions to a third party nor by any sub-delegation.

Also, delegates, who are not authorized or registered for the purpose of asset management and subject to supervision, may not sub-delegate any of the functions delegated to them by an AIFM.

Depositary

At this stage, no EU-wide depositary passport is introduced, however, AIFMs may (unlike today) appoint a depositary in another EU member state than where the appointing EU AIF is located, provided the depositary is a credit institution. The aim is to address shortage of service providers in concentrated markets.

This opportunity is accompanied by increased supervisory, as depositaries shall upon request from competent authorities provide all information that it has obtained while performing its duties.

Third countries

Non-EU AIFs may appoint a depositary in the third country where the AIF is established or in the member state of the AIFM managing the AIF. However, the depositary may not be established in a third country identified as a high risk third country or deemed un-cooperative in tax matters.

Further, non-EU AIFs (marketed by EU-AIFMs) and non-EU AIFMs (marketing either an EU or non-EU AIF) may not be established in third countries identified as high risk third countries or deemed un-cooperative in tax matters.

Investor information and competent authorities

To increase investor protection and to allow investors to better track the expenses of the AIF, the scope of disclosures from AIFMs to AIF investors is extended.

The AIFM shall (i) disclose to investors the possibility and conditions for using LMTs, and (ii) provide a list of fees and charges that will apply in connection with the operation of the AIF and be borne by the AIFM or its affiliates. The purpose it to improve the transparency of AIFM activities.

Additionally, the information to be included in the periodic disclosures from the AIFM to investors is extended to also include, amongst others, information on originated loan portfolio and all fees and charges directly or indirectly charged or allocated to the AIF or to any of its investments.

In terms of reporting to the competent authorities, the AIFM shall regularly report on the markets and instruments in which it trades, and the exposures of each of the AIFs it manages. ESMA will provide draft technical standards specifying in more detail what must be reported.

Now, the proposal is discussed and negotiated by the European institutions. Once the proposal has been adopted, the member states have two years to transpose the new rules into national law. Five years after adoption of the new rules, the Commission shall initiate a review of the functioning of the rules and the experience acquired in applying them.