Change remains a constant in every successful evolutionary development. No less so for the Alternative Investment Fund Managers Directive (AIFMD), first introduced in 2014 and regularly reviewed and improved since then.
The European Commission’s most recent AIFMD public consultation closed on 29 January 2021. This followed on from the Commission’s earlier report, submitted in June 2020 to the European Parliament and the Council, which discussed the scope and application of the AIFMD.
There are seven sections and 102 questions in the publicly available consultation. In this article, we outline a high-level overview of the consultation, provide our assessment of the most likely changes to be implemented, and what fund managers can to do make ongoing compliance more achievable.
High-level overview of the latest AIFMD public consultation
The consultative engagement breaks into the following sub-headings and scope:
1. AIFMD regulatory framework functions, scope and authorisation requirements
- Functioning of the Alternative Investment Fund Manager (AIFM) passport
2. Investor categorisation and protection
- Investor categorisation, opening up the alternative investment funds (AIFs) universe to a larger pool of investors
3. International relations
- Competitiveness of EU AIFs, and national private placement regimes for third country AIFs and delegation rules
4. Financial stability and governance improvement
- A broad section that is split into macroprudential tools, supervisory reporting requirements and leverage
- Harmonisation and availability of liquidity, risk management and delegation across the EU
- Defining increased governance towards inherently liquid/illiquid assets
5. Private company investment
- Determining whether the rules regulating investment in private companies are achieving their aim to increase transparency and accountability of AIFs holding controlling stakes in non-listed companies
- How the AIFMD should interact with the EU’s new Sustainable Finance Disclosure Regulation (SFDR), sustainability-related impacts outside of current EU Law and the EU Taxonomy
- The powers and competences of the European Securities and Markets Authority (ESMA), the sanctioning regime, and the potential merger of the UCITS and AIFM regulatory frameworks.
ESMA also submitted its own submission to the review for consideration (as part of its August 2020 transcript), highlighting potential areas for improvement and recommendation.
An assessment of likely changes
New and re-crafted directives and legislation will be an inevitable consequence of the AIFMD review, requiring adaptation and adoption of revised practices and governance affecting both AIFMs and the funds they manage.
Whilst the formal outcomes of the AIFMD review remain unknown until published, we predict the most likely changes to be as follows:
- Changes to fund manager reporting requirements (a reasonably predictable outcome given the broad scope of the current review)
- Reciprocal merging of some UCITS and AIFMD framework directives, with exploration of potential mutual benefits of merged frameworks
- Increased digitalisation and automation
- Delegation scope expanded to include compliance obligations relating to non-EU held AIFs, plus a review of ‘Letterbox’ bi-lateral structures and international placements
- Introduction of a European depositary passport
- An increase in investor categories with greater scrutiny in relation to valuation and depositary rule-sets
- Review of calculation methodology relating to risk exposure towards leveraged loans and collateralised bond markets
- Investigation into whether current legislation and calculation surrounding liquidity governance is sufficient or needs supplementing with wider sustainability impact analysis and reporting
- Evaluation of whether ESMA should increase its influence to include authorising and supervising all European AIF managers.
Help is at hand
The constant of change, together with the requirement to simultaneously maintain existing business and regulatory compliance, will continue to require substantial investment by financial services firms.
As AIFMs are required to fully analyse, understand, interpret, implement and thereafter remain in compliance with the revised regulatory and compliance directives, the impact on (often already stretched) internal resources is likely to be significant.
Indeed, concerns are increasingly being raised by firms around the rising financial and resourcing burden of achieving and maintaining regulatory compliance, with many actively searching for ways to meet requirements while remaining within allocated budgets.
One option is partnering with a regulatory compliance specialist; one that offers the latest risk management, compliance and reporting software, hosted on resilient, architected platforms and supported by an abundance of subject matter expertise. Outsourcing regulatory and compliance reporting requirements delivers a panacea of heightened standards, reduced risk and improved efficiencies, while maintaining a predictable and manageable budget.
At Lawson Conner, our expert, tech-enabled AIFM solutions include a wide range of services from marketing and distribution support to ongoing and managed compliance services. Click here to find out more.