1. Introduction
The European Commission wanted to harmonize
the regulatory framework governing the European funds market. To achieve this
objective the European institutions reached a political agreement on the text
of a new Directive which amends and builds upon the existing AIFMD. The new
amending Directive (AIFMD II) was published in the official Journal in March
2024 and entered into force on April 15th, 2024. On the 16th
of April 2026, the new measures will become effective.
This article will summarise the most
significant amendments introduced by the AIFMD II. AIFMD II focuses on rules
around authorisation of an AIFM, delegation, reporting, depositary regime,
non-EU AIFMs, liquidity management tools and the loan origination regime.
2. Authorisation of an AIFM
From now on, the alternative investment fund managers (AIFMs) and UCITS management companies (Mancos) when applying for authorisation must provide information beyond what was already required.
Therefore, an AIFM will need to provide additional information to its national competent authority (“NCA”) when applying for authorisation. This includes: (i) information about personnel effectively conducting business of the AIFM, previous requirement, which has expanded to include a description of the personnel’s role, title and level of seniority, a description of their reporting lines and AIFM responsibilities, an overview of how much time is spent on each responsibility, a description of the technical and human resources supporting these personnel activities, the AIFM’s legal name and identifier, a description of resources the AIFM would use to comply with the relevant provisions, specific information about delegation and sub-delegation, description of the technical resources used by the AIFM and a description of the periodic due diligence.
Currently, for granting authorisation a NCA must be satisfied that the conduct of AIFM’s business was decided by at least two persons who are sufficiently experienced in relation to the investment strategies pursued by the AIFs managed by the AIFM. AIFMD II relevant provision requires that the two persons are in addition either employed full-time by the AIFM or executive members of the AIFM’s governing body. Moreover, the two persons have to be domiciled in the EU.
Delegation
AIFMD 2 emphasizes the importance of delegation/sub-delegation arrangements. AIFMs and Mancos must provide more information to their respective NCA on these arrangements. The information must be provided at the time of application and in the regulatory reports sent to the respective NCA. These reports must contain: (i) information on the delegates and sub-delegates, (ii) quantitative information (reports on assets of AIFs subject to delegation), and (iii) justification by Mancos of the delegation structure based on objective reasons.
Reporting
AIFMs reporting obligations to NCAs have been further expanded. Each AIFM will be required to provide additional information to its home NCA for (i) each EU AIF under its management and (ii) AIF (EU or non-EU) that it markets in the EU.
The EU co-legislators tasked ESMA (European Securities and Markets Authority) to prepare draft regulatory technical standards (RTS) on the details of the information to be provided. ESMA is tasked with drafting RTS with the appropriate level of standardisation, the reporting frequency, and timing.
While the technical details for the regulatory reporting will still need to be prepared by ESMA, it is to be expected that Luxembourg AIFMs and Mancos are already complying with quite a substantial part of the newly agreed rules considering that they already are subject to the strict substance requirements and reporting duties set out by CSSF Circular 18/698 on substance.
3. Depositary regime
Under AIFMD, an AIF’s depositary must be established in the AIF’s home Member State (EU AIFs) or in the third country where the AIF is established (for non-EU AIFs).
Under AIFMD 2, an EU AIF’s home Member State has discretion to entitle its NCA to allow the AIF to appoint an EU credit institution as its depositary even when that credit institution is established in another Member State. For this to happen, certain conditions must be met such as: (i) the NCA had received from the AIFM “a motivated request”, (ii) the request demonstrates a lack of relevant depositary services in the AIF’s home Member State and (iii) the depositary market in the AIF’s home Member State does not exceed EUR 50 billion. Even where these conditions are met, a depositary from another Member State can only be appointed after a case-by-case assessment of the lack of relevant depositary services in the AIF’s home Member State. The NCA must notify ESMA if permission is given.
4. Non-EU AIFMs
The changes to the AIFMD which will impact non-EU AIFMs are set out in multiple articles such as article 23, article 24, article 37, article 40, and article 42. Non-EU AIFs and Non-EU AIFMs are prevented from marketing in the EU if the AIFM or AIF was established in a country listed on the EU’s list of high-risk third countries or on a list of countries that does not fulfill all the AML or tax rules.
Under AIFMD II, there is an expansion of the National Private Placement Regime. The scope of the regulatory reporting obligation for non-EU fund managers that market funds without a European passport as part of a national private placement is to be expanded to include further asset and market-related data.
5. Liquidity Management Tools (LMT)
AIFMD article on Liquidity management (article 16) states that every AIF that an AIFM manages must have a consistent investment strategy, liquidity profile and redemption policies. Also, for open-ended AIFs, AIFMs must have an appropriate liquidity management system, monitor liquidity risk, and regularly assess the AIF’s liquidity risk. Under AIFMD II, there is a new regime for LMT designed to ensure AIFMs comply with these obligations from the AIFMD article 16. ESMA has the task of developing RTS and guidelines in relation to the LMTs. This new regime relates to (i) selecting LMT, (ii) activating and deactivating LMT, (iii) redemption in kind, (iv) suspension and side pockets and (v) notifying the AIFM’s Home NCA.
Therefore, AIFM’s managing open-ended AIFs and mancos must select at least two LMTs from the list of the of LMT which are set under the AIFMD II. Moreover, the list includes the usual LMTs that Luxemburgish AIFMs are familiar using while conducting activities. Member States must ensure that AIFMs managing open-ended AIFs have the option of using LMT in the List. There must be detailed procedures in place for the selected LMT to be activated and deactivated. The policies must also cover the operational and administrative arrangements for the use of LMTs. The AIFM must let its home NCA know about the policies and procedures for activating and deactivating LMT and which LMT was selected.
An AIFM can only activate redemption in kind (i) to meet redemptions requested by professional investors and (ii) if the redemption in kind corresponds to a pro-rata share of the assets held by the AIF. It is worth noting that if the AIF is marketed solely to professional investors, pro-rata share requirement does not apply.
The AIFM can only use suspensions or side pockets in exceptional cases where circumstances so require and if doing so is justified to the interests of the AIF investors. Consequently, in exceptional cases an AIFM can temporarily suspend repurchase or redemption of shares if the AIF is open-ended. Likewise, side pockets can be activated if this was justified to the interests of the AIF investors.
Finally, an AIFM must notify its home NCA when it activates or deactivates LMT related to the suspension of redemptions and subscriptions, activates or deactivates LMT related to side pockets or if LMT are activated or deactivated in a way other than their ordinary business use as contemplated in the instruments and rules of incorporation.
6. Loan Origination Regime
Loan origination refers to an AIF granting a loan, either directly or indirectly through a third party or SPV, where the AIFM or AIF is involved in structuring the loan before gaining exposure.
New rules will apply to these AIFs, including:
- Loan-originating AIFs must be closed ended, unless compatible liquidity risks management systems are established. ESMA will develop draft RTS for open-ended AIFs;
- Leverage limits are set at 300% for closed-ended AIFs and 175% for open-ended AIFs;
- A single borrower concentration limit of 20% for financial undertakings, AIFs or UCITs;
- AIFMs must ensure a 5% retention of originated loans transferred to third parties, with differing conditions based on loan type and maturity;
- AIFMD 2 prohibits AIFMs from managing loan-originating AIFs with “an originate-to-distribute strategy”;
- Transitional rules differentiate between existing loan-originating AIFs and existing loans, offering opt-on possibilities and exemptions for specific rules.
To conclude, AIFMD II builds upon AIFMD and will be less disruptive than initially anticipated. It offers new opportunities for cross-border depositary services and for AIF distribution with expanded National Private Placement Regime but AIFMs will have to cope with additional obligations, reporting. ESMA will take a more active role in the supervision of investment fund managers with RTS and guidelines on reporting and liquidity management to come, with ever more scrutiny on delegation arrangements. It is unknown at this point how the Luxembourg national legislator will transpose the AIFMD II into Luxembourgish law. Moreover, it is unclear if the national regulatory framework will impose more burdensome requirements than those contemplated under the AIFMD II. The ESMA and CSSF AIFMD II frameworks are therefore much awaited by all actors, as the new regulation will come into force in less than two years.
Borna Lisic
Legal Officer at
alterDomus
Laurie-Anne Takerkart
Company Secretary Senior Manager – Legal Specialist Lead at alterDomus
Juliette Thiebaut
Director of Compliance at alterDomus
