Welcome enhancements proposed to the Alternative Investment Fund Managers Directive

The proposed amendments cover a number of areas including loan origination, delegation and liquidity management and are designed to improve the functioning of the alternative investment funds market. The proposals also include amendments to the UCITS Directive with the aim of harmonising rules on delegation, reporting and liquidity management under the AIFMD and the UCITS frameworks. 

Under the proposal, common minimal rules allowing loan-originating funds to operate cross-border will be introduced. These funds can be an alternative source of funding for companies in addition to bank lending, but incur risks which are also addressed in the proposals. Investment funds expert Gayle Bowen of Pinsent Masons said AIFMs in Ireland would need to consider the proposed new rules against the Central Bank of Ireland’s (CBI) existing rules in relation to loan origination funds.

“While the AIFMD did not require national competent authorities to implement rules governing loan origination, the CBI has implemented detailed requirements which apply to Irish loan origination funds,” Bowen said. “The Commission noted that diverging national regulatory approaches in respect of loan-origination funds undermine the establishment of an efficient internal market for loan-originating alternative investment funds by promoting regulatory arbitrage and varying levels of investor protection. The CBI has indicated that it is currently considering its loan origination regime in light of this statement and will provide its views when responding to the proposals.”

The proposed changes seek to achieve a coherent approach to delegation activities by AIFMs and their supervisors, in order to ensure the protection of investor interests. The European Securities and Markets Authority (ESMA) will receive data on delegation and conduct peer reviews, and report its conclusions to the Commission and legislators.

“It will be of comfort to AIFMs to note that whilst the proposals require national competent authorities to notify ESMA if an AIFM delegates more portfolio management or risk management functions to entities located in third countries than it retains, the proposals do not prohibit such delegation arrangements,” said investment funds expert Claire Winrow of Pinsent Masons.

In order to address the lack of depositaries in some concentrated markets, the Commission has proposed allowing funds to appoint a depositary situated in another EU jurisdiction. The Commission noted that the current AIFMD requirement that a depositary should be located in the same member state as the appointing EU fund is difficult to fulfil in smaller, more concentrated markets, where there are fewer service providers and that this lack of competition can affect investor returns.

Another change to the rules governing depositaries is a proposal to regard central securities depositaries appearing in the custody chain as delegates of the depositary. The Commission said this would enable depositaries to obtain the necessary information on portfolio movements and to perform their oversight duties where the fund's assets are kept by a central securities depositary. 

The proposed changes to the directive also harmonise the set of liquidity management tools to better facilitate liquidity risk management by managers of open-ended alternative investment funds, in line with recommendations by ESMA and the European Systemic Risk Board. Meanwhile, national and EU authorities will gain better access to data, and reporting duplications will be removed.

The changes to the AIFMD were published alongside a number of other legislative proposals forming the 2021 Capital Markets Union package. The package will now be discussed by the European Parliament and the European Council before the changes come into force.