The review of the Alternative Investment Fund Managers Directive (AIFMD) started more than two years ago with reports published by the EU Commission and a consultation conducted at the end of 2020. ALFI participated in related interviews and responded to requests for feedback (to the Commission roadmap and to the Commission legislative proposal), as well as to the public consultation.
On 25 November 2021, the EU Commission published its long-awaited proposal for a targeted review of the AIFMD. The Commission also presented proposed changes to the UCITS Directive where an alignment of rules was considered appropriate. The main areas of the review are liquidity risk management, delegation arrangements, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds.
Numerous ALFI working groups consisting of experts with different professional backgrounds met to analyse the text and provided comments on the various aspects. In particular the following key statements were elaborated:
- General aspects:
Overall, ALFI welcomes the targeted nature of the review. By this, the EU Commission recognises that the current framework generally functions well and already proved to be efficient in difficult market situations like recently the Covid-19 pandemic.
It is important to ensure that the hierarchy of acts as defined by the Lamfalussy process is always complied with. Accordingly, level 3 measures should not deviate from or go beyond the level 1 and level 2 acts, and level 2 measures should not deviate from or go beyond the level 1 acts.
Technical clarifications are often only adopted months or even more than a year after the adoption of changes at level 1. Implementation dates should be sequenced so as to ensure sufficient time, e.g. 12 months after publication of the final level 2 text.
- Delegation:
Delegation is integral to the EU's open global model and to the UCITS and AIFMD frameworks, granting EU investors access to global expertise (including local expertise that is not available in the EU itself), resulting in more diversified portfolios, significantly reduced costs, and efficient management, while benefitting from high levels of investor protection. It has also made an important contribution to the creation of the global UCITS and AIF brands.
If the mechanism of notification to ESMA in case of delegation of portfolio management or risk management functions to entities located in third countries is adopted, the expression “delegation of more functions than the AIFM retains” should be clarified, bearing in mind that there are already safeguards to prevent the creation of letter-box entities. Qualitative elements (like effectiveness of oversight, due diligence and monitoring of delegates) should be considered, e.g. on substance of risk management retained.
- Loan-originating AIFs:
Although the approach on loan funds is a targeted one, it is worth remembering that regulating products themselves is not in the spirit of the AIFMD, which is a “manager” directive.
Although many loan funds are closed-ended, there exists a considerable number of open-ended loan funds (including loan funds sponsored by government entities as part of their pensions system or to finance the real economy). Imposing a threshold above which loan funds shall be closed-ended is likely to jeopardise open-ended funds in a way that does not seem to be necessary nor does it seem to be the appropriate tool. A sound implementation of liquidity management tools by the AIFM would better protect investors.
- Liquidity management tools (LMTs):
LMTs should be available across EU Members States and their use should be documented. However, it is unusual to focus only on one tool. Fund managers normally provide for a “toolkit” of LMTs and then choose the appropriate one for the particular circumstances faced.
The LMTs listed in the proposed Annex V/IIA are not homogeneous and notably used under very different conditions, they also follow very different processes. Accordingly, these tools cannot be deemed as substitutes and should not be subject to the same mandatory requirements in terms of selection, notification and reporting.
An instruction by an NCA to (de)activate the use of an LMT would significantly intervene in the AIFM’s investment management discretion. The fund board should be responsible for the (de)activation of LMTs albeit with regular and timely reporting on as to how it is responding to changing market circumstances.
As from January 2022, ALFI performed substantial advocacy work, aiming at presenting its key messages on behalf of all alternative asset classes to international public bodies and national delegations. The association participated in meetings organised by EFAMA and exchanged views with other national trade associations on a bilateral basis. It is now up to the co-legislators, meaning the Council of the EU and the European Parliament to agree on a text during the trilogue negotiations.
Susanne Weismuller