AIFMD II: EU Commission Publishes Proposal to Reform AIFMD
On 25th November 2021, the European Commission published its long-awaited proposal to amend the EU Alternative Investment Fund Managers Directive (AIFMD), resulting in AIFMD II. The AIFMD II proposal does not aim at remodeling the complete AIFMD framework; instead, it proposes some targeted reforms to improve the AIFMD functioning.
Here are some of the critical changes in the proposal of AIFMD II relevant for Alternative Investment Fund Managers (AIFMs).
- New Addition to Ancillary Services
The Commission has proposed to extend the list of authorized ancillary services to include credit servicing and benchmark administration and improve the efficiency of AIFM activities.
- Increased Examination of Delegation Arrangements
National Competent Authorities (NCAs) will notify the European Securities and Market Authorities (ESMA) if an AIFM delegates more of AIF’s portfolio and risk management activities to entities located in third countries than it manages in-house.
- Liquidity Management Tools (LMT)
In times of market stress and liquidity pressures, AIFMs managing open-ended AIFs will be permitted to select at least one liquidity management tool (from the harmonized list set out in a new Annex V) in the AIF’s investors’ interest. In addition, the AIFMs must notify the competent authority regarding the activation and deactivation of an LMT.
- Reporting Requirements
The reporting template for AIFMs will be modified to avoid duplicate reporting requirements under European Union and national legislation. ESMA will develop Regulatory Technical Standards (RTS) that set out the content, procedure, and forms to standardize the supervisory reporting process.
- Disclosure Requirements to the Investors
Article 23 AIFMD will require additional disclosure to investors, including:-
- Conditions and possibilities of using LMTs
- Fees that are borne by AIFMs or their affiliates
- The portfolio composition of originated loans
- All direct and indirect fees that were allocated directly or indirectly to the AIF or its investments (quarterly)
- Any parent company or subsidiary established regarding the AIF’s investment by the AIFM, AIFM’s direct or indirect affiliates, or AIFM’s staff (quarterly)
- Amending Depository Regime
Central Securities Depositories (CSDs) will be included in the custody chain when providing custody services to AIFs. Why? To ensure a consistent and stable information flow between the AIF’s asset’s custodian and the depositary in all cases. Depositories will not be required to perform ex-ante due diligence when they intend to delegate custody to CSDs due to the already stringent sectorial requirements for authorized CSDs.
- No Passport to Market Non-EU AIFs by EU AIFMs
Artice 36 AIFMD states new requirements for EU AIFMs to market non-EU AIFs without a passport in the individual Member States, which include:-
- The third country where the non-EU AIF is established is not on the EU list of non-cooperative jurisdictions for tax purposes.
- According to the latest European laws regarding money laundering, the third country is not identified as a high-risk country.
- The third country has signed a qualifying agreement of information exchange related to tax matters with the home Member State of EU AIFM and the Member States where the marketing occurs.
- New Rules for Loan Originating
The European Commission proposed forming standard rules for loan originating AIFs to ensure a consistent level of investor protection. Moreover, AIFs will be enabled to extend loans anywhere in the European Union, including across borders. It will harmonize the rules to manage risk better in the financial markets and improve transparency for investors. AIFMs managing AIFs, engaging in lending activities will need to impose effective policies and procedures for assessing credit risk, granting loans, and monitoring their credit portfolios.
Annex IV Reporting
ESMA will develop a new RTS reflecting changes in the Annex IV reporting template that will require an AIFM to report concerning all instruments, markets, and exposures. The proposal opposes the current reporting standards of “main” or “primary” instruments, markets, and exposures.
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