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New tool or burden?
The modification of the AIFMD II directive brings some welcome changes, but also a not insignificant extension of the obligations of the managers of alternative investment funds whose appropriateness can be disputed.
On November 25, 2021, the European Commission presented a long-awaited amendment to the Alternative Investment Fund Managers Directive (AIFMD), referred to as AIFMD II. AIFMD II is part of the package presented by the 2020 Action Plan to create a single European capital market through the Capital Markets Union. Currently, there is an intense debate in the European Parliament on the final form that AIFMD II should take, the latest addition being the amendment of May 16, 2022 (at the time of the editorial close of this article). In this article, we explain what are the upcoming developments for managers of alternative investment funds (alternative investment funds are hereafter referred to as “FIA“and their managers as”AIFM“).
Overview of changes
1. New services and complementary activities
AIFMD II extends the existing complementary services that AIFMs can provide. These include:
- the granting of credit, including on a cross-border basis;
- benchmark management;
- securitization SPV services; and
- administration of loans in accordance with the directive on credit servicers and credit buyers.
2. Funds granting loans
Managers of EU AIFs managing loan funds will now be subject to new requirements and obligations:
- establish effective procedures and processes for granting credit with annual review;
- the loans granted by an AIF to the same borrower cannot exceed 20% of the capital of the AIF if the borrower is a financial institution, another AIF or a UCITS;
- an AIF may not grant credit to its manager or to its employees, to its depositary or to its representative;
- the AIF is required to hold at least 5% of the notional value of the loans, excluding loans acquired on the secondary market; and
- AIFs granting large loans (60% or more of the net asset value of the AIF) must take the form of a closed-end fund.
3. Rules relating to AIFM delegation activities
Competent supervisory authorities in EU Member States will be required to submit annual delegation notifications to ESMA if an AIFM delegates “more of the AIF’s portfolio management or risk management tasks than it itself” to entities established in third countries. AIFMD II also extends delegation obligations to all activities listed in Annex I of AIFMD, including additional functions. However, following the last amendment, it is not certain that these obligations will remain in AIFMD II.
The changes introduced in AIFMD II also extend the obligations of AIF managers to communicate information to their national supervisory authorities on the measures relating to the delegation of functions to third parties during the authorization process.
4. Substantive requirement
AIFMD II introduces a requirement for regulatory presence in the EU. This means that an EU AIF manager must have at least two leading natural persons with the necessary knowledge and experience to perform the assigned function residing in the EU. These persons must be employed on a full-time basis or may work with the administrator on another contractual basis, but in any case on a full-time basis. Although a similar regime is not unheard of in the Czech Republic, the scope of director information required by the Czech National Bank can be extended.
5. Liquidity management tools
Managers of AIFs managing open-ended AIFs will, under certain circumstances, have access to the necessary liquidity management tools (“LMTIn addition to the possibility of suspending redemptions of units or investment shares, AIF managers will be required to select at least one additional LMT from the list in the new AIFMD II appendix.
6. Regulatory reports
Changes to the regulatory reporting regime are also proposed which will require hedge fund managers to report on the “markets in which they trade” instead of the previous narrower category of “primary” markets. This change will likely lead to more detailed and extensive reporting obligations.
AIFMD II relaxes the requirement for AIFs to have a depositary in their home country. However, depositaries from another EU country will need to cooperate with both their home supervisory authority and the AIF supervisory authority. If a non-EEA custodian is appointed, the criteria for appointment will be amended to exclude custodians from jurisdictions which are designated as high risk under the EU Anti-Money Laundering Directive or which are on the EU list non-cooperative tax jurisdictions.
8. Communication of information to investors
AIFMD II increases the amount of information provided to investors. In particular, it adds the following obligations:
- disclose details of commissions and payments paid by the AIFM manager; and
- publish information on the possibility and conditions of use of any LMT for open funds.
In addition, changes are proposed to the periodic reports to investors, which should now also include:
- the composition of AIF portfolio loans;
- details of all direct and indirect fees and payments charged or allocated to the AIF;
- the contact details of the parent company, the subsidiary or the SPV set up within the framework of the investments of the AIF by the AIFM, its employees or its directly or indirectly related companies.
9. National private placement regime
Managers of non-EU AIFs will not be able to place AIFs in the EU under the national private placement regime if the manager and/or the AIF are located in a jurisdiction designated as high risk within the meaning of the European anti-money laundering directive. and/or is on the EU list of non-cooperative tax jurisdictions. Similar changes are proposed for the marketing of non-EU AIFs managed by EU managers.
Although the changes introduced by AIFMD II are not revolutionary, we believe that they are overall more negative than positive for AIFM. We cannot help thinking that most of the changes only increase the administrative burden without bringing the corresponding benefits to the managers of AIFs and the supervisory authorities themselves.
At the time of publication of this article, the proposal was still in consultation in the European Parliament and the Council of the EU. The last amendment proposal was presented on May 16, 2022 and AIFMD II can be expected to undergo some further changes.
Once AIFMD II enters into force, Member States will have 24 months to transpose it into national law. The changes will therefore only enter into force in the Czech Republic in 2024 or 2025.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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