AIFMD II: what are the changes ahead?

Recent proposals for AIFMD II highlight targeted amendments that aim to build on the success of the existing AIFMD framework. We explain what the changes mean for alternative investment funds

Ten years after it first appeared, the European Union’s Alternative Investment Fund Managers Directive (AIFMD) is being refreshed. In November 2021, the European Commission published proposed changes that will form the basis of its successor, AIFMD II.

Once the update is finalised, member states will have 24 months to enshrine the new rules into legislation in their own countries.

What is AIFMD?

AIFMD, which came into force in 2013, sets out rules for managers of alternative investment funds to protect investors and the EU economy from the risks posed by previously unregulated financial products.

The directive tightened regulation of private equity, real estate and hedge funds, by essentially regulating managers, not funds.

It has helped create a single market for alternative investment funds, considerably strengthening investor protection and financial stability.

When the directive came up for review in 2017, it was decided to strengthen the rules and complete the EU’s internal market for such funds.

What’s new in AIFMD II?

AIFMD II isn’t a radical departure from the existing provisions, but there are potentially important changes, with tighter checks and requirements for fund managers.

1. Delegation

The proposals seek to place a check on fund managers to avoid the risk of delegating substantial parts of their portfolio management to entities outside the EU. EU alternative investment funds will be required to employ at least two full-time people resident in the EU with the necessary skills and expertise to oversee the delegated functions.

Managers will also have to provide relevant national competent authorities with information about the human and technical resources used to carry out their functions.

2. Marketing

The AIFMD II changes update existing requirements that non-EU fund managers and non-EU funds should not be established in jurisdictions identified as high-risk under the EU anti-money laundering directive.

AIFs must not be set up in a country on the EU list of non-cooperative jurisdictions for tax purposes. There will also have to be an agreement in place with the relevant member state of the authorised AIFM and other member states where the units or shares of the non-EU AIF will be marketed.

3. Reporting

The new directive will increase reporting requirements for fund managers. AIFMs will need to report to their member state’s competent authorities on all markets, instruments and exposures, extending the current reporting requirements.

AIFMD II will expand the list of authorised activities for AIFMs to include benchmark administration and credit servicing.

4. Liquidity

The updated directive will require AIFMs of open-ended AIFs to choose at least one liquidity management tool from a prescribed list, detailed in a new annex. These include:

• Suspension of redemptions and subscriptions
• Redemption gates
• Notice periods
• Redemption fees
• Swing pricing
• Anti-dilution levy
• Redemptions in kind
• Side pockets

Liquidity management is an increasing focus for both the European regulator, the European Securities and Markets Authority (ESMA), and individual national regulators. The stipulation in AIFMD II formalises this more stringent stance.

5. Loan origination

Turning to loan origination and lending activities, AIFMD II will tighten up rules on the policies, procedures and processes needed to grant the loan.

An AIF will also have to be closed-ended when the notional value of loans originated exceeds 60% of its net asset value. Loans to financial institutions must be capped at 20% of the AIF’s capital. These changes essentially formalise what was already best practice in the market.

In the original directive, AIFs established in one member state could choose a depositary established in another EU country until 22 July 2017. This was to provide some flexibility as the original rules were implemented. The time limit has now expired and will be removed. An AIF’s depository will have to be established in its member state.

What happens next with AIFMD II?

Final agreement is expected by mid- to late-2022. Once the final directive is published, probably in early 2023, member states will have 24 months to implement it, so AIFMD II will come into effect from the end of 2024 at the earliest.

How Intertrust Group can help with AIFMD II

• Intertrust Group has been authorised as an AIFM by the Central Bank of Ireland since 2015 and by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg since 2017. Our services are designed to comply with the AIFMD.
• We have watched the proposed changes closely.  Thanks to our emphasis on best practice, we already adhere to many of the proposed new standards.
• We will continue to ensure clients get access to the secure, sophisticated and compliant solutions they need.

Read our FastTrack to AIFM here.

 Why Intertrust Group

• Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world.
• Intertrust Group’s fund solutions is a one-stop-shop, offering funds AIFM, depositary, fund administration, capital markets and corporate services.