On 25 November 2021, the European Commission (“EC”) published a legislative proposal to amend the Alternative Investment Funds Manager Directive (the “AIFMD”) and the Undertakings for the Collective Investment in Transferable Securities Directive (the “UCITS Directive”) (the “Proposal”). The EC intends to address market concerns that have arisen since the AIFMD and the UCITS Directive came into force.
Some of the more important topics subject of the Proposal are the following:
Loan-originating AIFs
In an effort to harmonise requirements for loan originating funds (“LOFs”) the Proposal contains a number of provisions relating to LOF. It is proposed to amend Annex I of the AIFMD, which sets out the investment management and ancillary functions that an AIFM can carry out, to add loan origination and servicing securitisation special purpose entities as legitimate activities for AIFMs (provided the application of numerous requirements). In addition, it is proposed to introduce new requirements for risk and liquidity management policies for LOF.
Depositary
The Proposal aims to allow, as an exception to Article 21(5)(a) of the AIFMD, National Competent Authorities to approve the appointment of a depositary for an AIF that is not situated in the same Member State as the AIF or the AIFM. This is to allow smaller markets to access depositary services on a cross-border basis.
It is also proposed to clarify that the provision of services by a central securities depositary acting in the capacity of an issuer CSD shall not be considered a delegation of the depositary’s custody functions.
Additional oversight of delegation arrangements
Given that different national supervisory practices in fulfilling EU requirements for delegation can create inconsistencies and reduce investor protection, changes are proposed to both the AIFMD and the UCITS Directive on delegation requirements. Additional information will be required when applying for authorisation. Local regulators will need to notify the European Securities and Markets Authority (ESMA) if an AIFM or the UCITS management company delegates more of the risk or portfolio management functions than it retains to entities located outside Europe. The aim of this is to avoid the formation of “letterbox” entities.
Reporting requirements
The supervisory reporting template for AIFMs and UCITS management companies will be changed to avoid duplicative reporting requirements that exist under European and national legislations by creating a common data space to minimise reporting costs and burden.
In addition it is proposed to amend pre-contractual disclosure requirements for AIFMs to include more information regarding the use of LMTs, information on originated loan portfolios and further information on fees and charges to be borne by the AIF or the AIFM on behalf of the AIF.
Proposed amendments to Article 24 of AIFMD relating to reporting obligations to competent authorities indicate that further information on markets and instruments in which the AIF trades will be required.
Liquidity management
In order to harmonise rules round use of liquidity management tools it is proposed to add an annex to both the AIFMD and the UCITS Directive setting out a harmonised list of such LMTs for open-ended AIFs and UCITS. Fund managers of open-ended funds would be able to suspend the repurchase/redemption of the shares temporarily but would also be required to choose at least one other liquidity management tool of their choice. In addition it is proposed to add provisions whereby the NCAs will have the power to require an open-ended AIF or UCITS to activate an LMT if it is in the interests of the unit-holders or the public.
Ancillary services
The Proposal extends the list of ancillary services that AIFMs can provide in addition to collective investment management to include administration of benchmarks and credit servicing. In addition it is proposed to clarify what provisions of Directive 2014/65 (MiFID II) apply to AIFMs providing ancillary services involving financial instruments.
The Proposal is open for feedback for a minimum of 8 weeks i.e. until 17 March 2022. Thereafter it will be presented to the European Parliament and Council where it will continue its legislative journey.
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