AIFMD: An outline of the European directive’s ongoing review

AIFMD: An outline of the European directive’s ongoing review

The Alternative Investment Fund Managers Directive (AIFMD) came into effect in 2014 with the principal purpose of protecting European investors. AIFMD achieves this by regulating alternative investment fund managers (AIFMs) who want to market their funds to European investors.

All of the requirements under AIFMD come under these main headings:

  • Delegation
  • Depositary
  • Independent valuations
  • Independent risk management
  • Reporting
  • Remuneration
  • Equity / liability ratios
  • Capital requirements
  • Third country requirements, passport and marketing

Article 69 of the AIFMD requires the European Commission to review the directive’s application and scope. This entails assessing the AIFMD's impact on investors, alternative investment funds (AIFs) and AIFMs in the EU and in third-world countries in order to establish the achieved objectives. As part of this review, the European Commission continues to consult with a range of industry bodies.

ESMA recommendations

On 19 August 2020, the European Securities and Markets Authority (ESMA) published a letter to the European Commission highlighting areas for consideration during the review of the AIFMD.

ESMA's letter identifies areas for improvement and includes recommendations for changes in:

  • Harmonisation of AIFMD and UCITS regimes – In some cases, such as risk management and liquidity management requirements, the newer AIFMD provisions are more granular or specific compared to UCITS requirements. ESMA has recommended aligning the frameworks; particularly in relation to the different requirements for UCITS funds and AIFs, which create additional burdens for the firms that manage both.
  • Delegation and substance – Recognising that AIFMs delegate much of the collective portfolio management functions, and that a large percentage of the management fees generated by the authorised AIFM is paid to delegates, ESMA highlights the potential for increased operational and supervisory risks, and recommends further legal clarifications on the maximum extent of delegation and maintaining substance in the EU.
  • Availability of additional liquidity management tools – ESMA believes that the availability of additional liquidity management tools should be consistent throughout all EU jurisdictions, and that a common Union legal framework governing the liquidity management tools would support this.
  • Leverage – Referring to a report issued by IOSCO in December 2019, which recommended a new two-step framework for assessing leverage in investment funds, ESMA states the need to amend the current reporting of the gross method to ensure alignment with the IOSCO framework.
  • AIFMD reporting regime and data use – An annex of the letter contains a detailed analysis of various reporting requirements under the AIFMD. One of the main changes suggested is for funds to report leverage that is contained in their portfolio companies. This could mean private equity funds appear as highly leveraged. ESMA also recommended an explicit requirement for all AIFMs and AIFs to acquire and report a legal entity identifier (LEI) code.
  • Harmonisation of supervision of cross-border entities – ESMA asserts that experience with the AIFMD framework shows there is still a lack of clarity regarding the precise responsibilities of home and host supervisors in some cross-border marketing, management and delegation cases. Where AIFs are marketed on a cross-border basis, the AIFMD requires the home national competent authority (NCA) to assess fund documents during authorisation but ESMA recommends that the Commission needs to provide further clarity on the depth of the analysis to be done by the host NCA. ESMA states that there is a need to further clarify the roles and responsibilities of home and host NCAs where AIFs are managed on a cross-border basis and where functions are delegated across different jurisdictions.
  • Depositary passport – ESMA recommends exploring the introduction of a depositary passport to allow for greater competitiveness between different providers of such services.
  • Loan origination – ESMA recommends the creation of a framework under the AIFMD for loan origination. This could have consequences for funds that engage in lending.

European Commission consultation

On 22 October 2020, the European Commission launched a consultation on the EU's AIF market, seeking views on how to achieve a more efficiently functioning EU AIF market as a part of a stable financial system.

The consultation focuses on seven broad categories:

  1. General functioning of the AIFMD, its scope and authorisation requirements
  2. Investor protection
  3. International issues
  4. Financial stability, including supervisory reporting
  5. Rules on investment in private companies
  6. Sustainability requirements for AIFMs and the link with EU’s Taxonomy Regulation
  7. Other miscellaneous areas including harmonisation with UCITS

In addition, the consultation welcomes stakeholders to raise other AIFMD-related issues and submit proposals on how to otherwise improve the AIFMD legal framework with regard to any issues not directly addressed in the consultation.

The consultation closes on 29 January 2021.

What are the next steps?

ESMA’s letter and subsequent responses to the European Commission’s consultation are expected to form the foundation of any changes to the AIFMD in the coming months. However, any such changes are not anticipated to alter the main structure of the directive.

Get in touch

The above changes have potentially wide-ranging implications for fund managers in Europe and beyond. IQ-EQ is monitoring the process closely and is contributing to the consultation at various levels.

If you feel you may be impacted by any of the changes and want to discuss your options then please feel free to contact me or reach out to your usual IQ-EQ relationship manager. With AIFMD-related services offered from all major European fund jurisdictions, IQ-EQ can help with all of your changing AIFMD compliance needs.

T: +44 289 590 7516