Permitted activities for EU AIFMs
AIFMD II extends the scope of permitted activities for EU AIFMs to include benchmark administration under the EU Benchmarks Regulation and credit-servicing under the EU Credit Servicers Directive as additional “top-up permissions”. However, EU AIFMs will not be able to administer benchmarks used in the AIFs they manage.
Originating loans and servicing securitisation SPVs are also included as permitted ancillary activities for EU AIFMs. This would allow for loan origination activities to be carried on in other member states on a cross-border basis – effectively allowing for some form of passport – although following recent statements from the European Commission it is unclear the extent to which this can be done independently from any management activity.
EU AIFMs will also be able to provide any other service that is already provided by the EU AIFM in respect of the AIFs it manages or related to its top-up permissions provided that any conflicts are appropriately managed. This appears to be intended to capture activities such as HR or IT services rather than regulated activities.
Finally, portfolio management will no longer be a mandatory top-up permission. This will allow firms to hold top-up permissions for the other top-up activities, such as advising, without having to also be authorised for portfolio management.
Delegation
AIFM delegation arrangements have been a key focus of AIFMD II. Although “letter-box entities” are already prohibited, the authorities have been concerned about the scope of many delegation arrangements.
The AIFMD delegation requirements have been explicitly extended to cover delegations of Article 6(4) “top-up services” such as segregated portfolio management services and also to apply “irrespective of the regulatory status or location of any delegate or sub-delegate” clarifying that non-EU delegates will also need to comply with AIFMD (if they were not doing do already).
There is also a new additional requirement for EU AIFMs managing AIFs on behalf of a third-party to provide additional information on their management of conflicts of interest to their competent authority. This may result in the third-party AIFM model being put under some pressure.
EU AIFMs will have to provide additional information to regulators on delegations including:
- details of the delegates;
- information on the delegation;
- a detailed description of the human and technical resources to be used by the EU AIFM for day-to-day portfolio and risk management and for monitoring the delegated activity; and
- a description of the periodic due diligence measures used to monitor the delegated activity.
Rules on distributors
Marketing carried on by distributors who are acting on their own behalf and marketing under the EU Markets in Financial Instruments Directive (MiFID II) or the EU Insurance Distribution Directive (IDD) are not subject to the EU AIFMD delegation requirements. This applies irrespective of any distribution agreement between the EU AIFM and the distributor.
On the face of it, therefore, marketing by non-EU entities, which would not generally be marketing under MiFID II or the IDD, would not be able to benefit from this provision. Taken further, this may also mean that non-EU distributors would need to be treated as delegates of the EU AIFM even where they are acting on their own behalf and have no relationship with the EU AIFM.
Authorisation and organisational requirements
Reflecting ongoing concerns about the level of EU-based substance within AIFM arrangements, the business of the EU AIFM needs to be conducted by at least two natural persons, domiciled in the EU, who are either employed full-time by that EU AIFM or who are executive members of the governing body of the EU AIFM who are committed full-time to conduct the business of that EU AIFM. It is unclear whether this applies retrospectively but, if member states interpret this as applying to existing EU AIFMs, then this may require some EU AIFMs to re-examine their management structures.
EU AIFMs also have to provide to the relevant competent authorities additional information at the time of authorisation, including, for the persons effectively conducting the business of the EU AIFM, a description of their reporting lines and an overview of their time allocated to each responsibility and a description of the technical and human resources that support the EU AIFM’s activities.
Liquidity management – open-ended AIFs
The existing liquidity management provisions in EU AIFMD have been extended, with new obligations and powers for EU AIFMs that manage open-ended AIFs.
EU AIFMs that manage open-ended AIFs are required to select at least two additional liquidity management tools (LMTs) from a specified list set out in a new Annex V:
- redemption gate;
- extension of notice periods;
- redemption fees;
- swing pricing or dual pricing;
- anti-dilution levy; and
- redemptions in kind.
EU AIFMs which manage money-market funds are only required to select one LMT. The selected LMTs must be appropriate to the investment strategy, liquidity profile and redemption policy of the AIF.
EU AIFMs must implement detailed policies and procedures for the activation and deactivation of the selected LMTs and the operational and administrative arrangements for the use of the LMTs. They must notify competent authorities of the selected LMTs and the associated policies and procedures as well as any activation or deactivation of certain LMTs. Certain information on LMTs must also be provided to investors.
EU AIFMs managing open-ended AIFs are also permitted temporarily, in the interests of investors, to suspend the repurchase or redemption of the AIF units or shares, activate or deactivate their selected LMTs or activate side pockets. Suspensions and side pockets may only be used in exceptional cases, where this is necessary in the circumstances and justified in the interests of the AIF investors.
Competent authorities also have the power, in exceptional circumstances and after consultation with the EU AIFM, to require EU AIFMs to suspend (or cease the suspension of) redemptions and subscriptions.
Article 23 disclosures to investors
Additional Article 23 investor pre-contractual disclosures also apply, including:
- the name of the AIF (with ESMA to develop guidelines on unfair, unclear or misleading names);
- a list of the fees, charges and expenses borne by the EU AIFM in connection with the operation of the AIF and directly or indirectly allocated to the AIF; and
- for open-ended funds, information on the possibility and conditions for using liquidity management tools.
EU AIFMs are also required to report periodically the composition of any originated loan portfolio to investors as well as the following on an annual basis:
- all fees, charges and expenses directly or indirectly borne by investors; and
- any parent company, subsidiary or special purpose entity utilised in relation to the AIF’s investments by or on behalf of the EU AIFM.
Annex IV regulatory reporting
The reporting obligations to competent authorities under Article 24 are also extended. Currently, an EU AIFM has to report on the principal markets and instruments in which it trades and provide information on the main instruments in which it is trading and on the principal exposures and most important concentrations of each of the AIFs it manages. However, in the future, an EU AIFM will be required to report on all markets, instruments and exposures and assets of each AIF that it manages. The relevant identifiers, such as Legal Entity Identifiers or LEIs, will also need to be included.
The total amount of leverage employed by the AIF will also need to be reported as well as relatively detailed information on delegation arrangements concerning portfolio management or risk management functions – this includes quantitative information on the delegated portfolio where portfolio management has been delegated.
EU AIFMs will also need to report on the member states in which the units or shares of the AIF are being marketed.
The Annex IV reporting requirements will apply one year after the rest of AIFMD II starts to apply (likely 2027).
Marketing requirements
Third-country entities accessing the EU single market will also be subject to enhanced AML and tax compliance requirements.
Non-EU AIFMs marketing into the EU under National Private Placement Regimes (NPPRs) and the AIF must not be established in jurisdictions identified as high risk under the Fourth Anti-Money Laundering Directive. Those jurisdictions would also need to have signed an agreement with each member state in which the fund is to be marketed which fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements. They must also not be on the EU list of non-cooperative tax jurisdictions.
Similarly, non-EU AIFs will only be able to be marketed in the EU if the non-EU AIF is established in a jurisdiction which is not identified as high risk under the Fourth Anti-Money Laundering Directive; has signed an agreement with the home member state of the EU AIFM and each member state in which the AIF is to be marketed complying with certain tax standards and allowing for tax information to be exchanged; and is not on the EU list of non-cooperative tax jurisdictions.
EU AIFMs are also able to market units or shares of an EU AIF which invests predominantly in the shares of a particular company to the employees of that company or its affiliates within the framework of employee savings or participation schemes, including on a cross-border basis. This follows requests for clarification from some industry bodies as this had been a point of uncertainty in some member states.
Depositaries
It will now no longer be necessary for a depositary to be established in the same Member State as the relevant EU AIF – acknowledging that there is a limited market in depositaries in certain member states. Therefore, where certain criteria are met, an EU AIFM will be able to make use of a depositary based in another member state. AIFMD II does not, however, provide for a depositary passport as some depositaries had hoped.
The criteria include that there are no appropriate depositary services in the home member state and a case-by-case assessment has been carried out by the relevant national competent authority.
Such depositaries will need to co-operate not just with their own competent authorities but also those of the AIF and (if different) the EU AIFM.
Where a third-country depositary is used, the use of depositaries in jurisdictions which are identified as high-risk under the Fourth Anti-Money Laundering Directive or on the EU list of non-co-operative tax jurisdictions is not permitted.