New tool or burden?
The amendment to directive AIFMD II brings some welcome changes, but also a not so insignificant extension of the obligations for alternative investment fund managers, the advisability of which can be disputed.
On 25 November 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 EU market for capital through the so-called capital markets union. Currently, there is an intense debate at the European Parliament on what final form AIFMD II should take, with the latest addition being the amendment of 16 May 2022 (at the time of the editorial closure of this article). In this article, we explain what changes are ahead for alternative investment fund managers (alternative investment funds are hereinafter referred to as "AIFs" and their managers as "AIFMs").
Overview of changes
1. New complementary services and activities
AIFMD II expands the existing complementary services that AIFMs can provide. These include:
- the provision of credit, including on a cross-border basis;
- management of benchmarks;
- servicing of securitisation SPVs; and
- administration of loans in accordance with the directive on credit servicers and credit purchasers.
2. Funds providing loans
EU AIFMs managing loan funds will now be subject to new requirements and obligations:
- establishing effective procedures and processes for the provision of credit with annual review;
- loans granted by an AIF to a single borrower may not exceed 20 % of the AIF's capital if the borrower is a financial institution, another AIF or a UCITS fund;
- an AIF may not extend credit to its manager or the manager's employees, its depository or its representative;
- the AIF is obliged to hold at least 5 % of the notional value of the loans, excluding loans acquired on the secondary market; and
- AIFs providing significant loans (60 % or more of the net asset value of the AIF) must be in the form of a closed-end fund.
3. Rules on delegation activities of the AIFM
The competent supervisory authorities of EU Member States will be obliged to submit annual notifications of delegation to the ESMA if an AIFM delegates "a greater part of the portfolio management or risk management tasks of the AIF than it retains itself" to entities established in third countries. AIFMD II also extends the delegation obligations to all activities listed in Annex I to AIFMD, including additional functions. However, following the latest amendment, it is uncertain whether these obligations will remain in AIFMD II.
The changes introduced in AIFMD II also extend the obligations of AIFMs to report information to their national supervisory authorities on measures relating to the third-party delegation of functions during the licensing process.
4. Requirement for substance
AIFMD II introduces a regulatory presence requirement in the EU. This means that an EU AIFM must have at least two managing natural persons with the necessary knowledge and experience to perform the assigned function resident in the EU. These persons must be employed full-time 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 unknown in the Czech Republic, the scope of information on the managing persons required by the Czech National Bank may be extended.
5. Tools for liquidity management
AIFMs managing open-ended AIFs will in certain circumstances have access to the necessary liquidity management tools ("LMTs"). In addition to the possibility to suspend redemptions of units or investment shares, AIFMs will be required to select at least one additional LMT from the list set out in the new AIFMD II Annex.
6. Regulatory reporting
Changes to the regulatory reporting regime are also proposed, which will require AIFMs to report on "markets in which they trade" instead of the previous narrower category of "main" markets. This change will probably lead to more detailed and extensive reporting obligations.
AIFMD II loosens the obligation for AIFs to have a depositary in their home country. However, depositaries from another EU country will have to cooperate with both their home supervisor and the supervisor of the AIF. If a non-EEA depositary is appointed, the criteria for the appointment will be amended to exclude depositaries from jurisdictions that are designated as high risk under the EU Anti-Money Laundering Directive or are on the EU list of non-cooperative tax jurisdictions.
8. Disclosure of information to investors
AIFMD II expands the amount of information provided to investors. In particular, it adds the following obligations:
- disclose details of the fees and payments paid by the AIFM; and
- publish information about the possibility and conditions of using any LMT for open-ended funds.
In addition, changes are proposed to the periodic reports to investors, which should now also include:
- the composition of loans in the AIF portfolio;
- details of all direct and indirect fees and payments charged or allocated to the AIF;
- details of the parent company, subsidiary or SPV established in connection with the AIF's investments by the AIFM, its employees or its directly or indirectly related companies.
9. National private placement regime
Non-EU AIFMs will not be able to place AIFs in the EU under the national private placement regime if the AIFM and/or the AIF is located in a jurisdiction that is designated as high risk within the meaning of the EU 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 overall they are more negative than positive for AIFMs. We cannot help but feel that most of the changes only increase the administrative burden without providing corresponding benefits to AIFMs and supervisory authorities themselves.
At the time of publication of this article, the proposal was still under consultation in the European Parliament and the Council of the EU. The latest amendment proposal was presented on 16 May 2022 and it can be expected that AIFMD II will still undergo some changes.
Once AIFMD II enters into force, the Member States will have 24 months to implement it into national law. The changes will therefore not become effective in the Czech Republic until 2024 or 2025.