European Parliament and EU Council reach agreement on AIFMD II and UCITSD VI

At a glance

Despite the large integration of the EU market for Alternative Investment Funds (AIFs), high investor protection, and financial stability per Directive 2011/61/EU, the European Commission identified areas for improvement. These include harmonizing rules for loan-originating AIF managers, clarifying standards for Alternative Investment Fund Managers Directive (AIFMs) delegating tasks, ensuring equal treatment of custodians, enhancing cross-border depositary services, optimizing supervisory data collection, and simplifying the use of liquidity management across the EU.

The European Commission also recognized that several issues highlighted in the AIFMD review were equally relevant for Undertakings for Collective Investment in Transferable Securities (UCITS). Consequently, to better align the AIFM and UCITS requirements, the adopted text also amends UCITSD, encompassing rules about authorization and operation, as well as their management companies, in areas, such as delegation, asset safekeeping, supervisory reporting, and liquidity risk management.

A closer look

On 7 February 2024, the European Parliament adopted the proposed text of AIFMD II, which introduces amendments to the Alternative Investment Fund Managers Directive (AIFMD) and the Directive relating to Undertakings for Collective Investment in Transferable Securities (UCITSD). The new rules of the adopted Directive will come into effect two years after enactment, meaning in the first quarter of 2026. The reporting requirements will apply one year later, meaning around the first quarter of 2027. Member States will have 24 months to transpose and enforce these new rules.

The key points are summarized as follows:
 

Extension of “ancillary activities”:
 

• Two new core services are added: benchmarks administration and credit servicing

Dedicated regime for Loan Origination (LO) AIFs:

• This final version of the AIFMD now changed the definition of such funds, meaning that these are AIFs that directly grant a loan either (with the fund as the original lender) or indirectly through a third party or SPV (which originates a loan for or on behalf of the AIF). Additionally, if the AIFM or AIF is (i) involved in structuring the loan,  (ii) defining its characteristics or pre-agreeing to them (iii) before gaining exposure to the loan, falls withing this definition.
• This means that indirect loan origination activities via a third party or an SPV would also fall in the scope of the new regime on Loan Origination Funds (LOFs).

Increased scrutinyover Delegation arrangements:

• AIFMD II emphasizes the importance of delegation arrangements, requiring AIFMs to provide additional information on these arrangements to NCAs. This entails providing details both during the authorization application process and in their regulatory reports to NCAs. AIFMs must report various information, including details on the delegates and sub-delegates, descriptions of the delegated activities, the amount and percentage of fund assets subject to delegation arrangements concerning the portfolio management function.
  
• At least two persons should be appointed to conduct the business of the AIFM.
  
  
• Concerning IFMs that delegate fund distribution to third parties, these third parties will be considered as delegates under the AIFMD only if acting as “AIFM agents.”

Liquidity Management Tools (LMTs):
 

• The new rules introduce procedures for activating and deactivating any selected LMTs and the operational and administrative arrangements for using such tools.
• AIFMs that manage an open-ended AIF will have to select at least two appropriate LMTs from the list of such tools provided in the Annex (redemption gates, notice periods, liquidity fees on redemption, swing/dual pricing, anti-dilution levy, redemptions in kind). Whereas, for those managing a money market fund (MMF), at least one LTM can be selected.
• While liquidity risk management remains within the AIFM’s discretion, they are required to notify the NCA. However, the NCAs may require that the activation or deactivation of the suspension of redemptions and subscriptions occurs only in exceptional circumstances, prioritizing the interest of investors.
• ESMA will develop guidelines to specify “best practices” for the characteristics of the LMT outlined in the Directive’s Annex, considering the diversity of investment strategies and underlying assets.

Conflict of Interest:
 

• AIFMs managing AIFs marketed to retail investors must appoint at least one independent or non-executive director to their management body.

Investor disclosures:
 

• Reporting scope is broadened to include further disclosure obligations for AIFMs to investors, such as the possibility and conditions for using LMTs and a list of fees, charges and expenses that are borne by the AIFM in connection with the operation of the AIF and that will be allocated to the AIF.

Reporting requirements:
 

• Are harmonized through Level 2 measures. ESMA will develop RTS specifying reporting details the appropriate level of standardization of such information, as well as the reporting frequency and timing.
• Fund managers will be required to establish a sound pricing process and to compensate investors where undue costs have been charged.
• To support market monitoring by the supervisory authorities, information gathering and sharing through supervisory reporting should be improved by subjecting UCITS to supervisory reporting obligations. Duplicative reporting requirements that exist under EU and national law, in particular Regulations (EU) No 600/2014 and (EU) 2019/834 and Regulations (EU) No 1011/2012 and (EU) No 1073/2013, could be eliminated.

Not a Depositary Passport yet:
 

• Current AIFMD requirements imply that a depositary should be located in the same Member State (MS) as the appointing AIF. However, for some smaller markets (where there is a lack of such services, especially for funds with highly specific investment strategies), competent authorities will be able to allow funds to appoint a depositary in another MS. This arrangement is not a “depositary passport,”  and as such depositary can only be appointed if all AIFMD conditions are met and prior approval of the competent authority is obtained.

Introduction of comparable rules for UCITS:
 

• The UCITS Directive is amended to introduce equivalent regulatory requirements, regarding the delegation regime, the regulatory treatment of custodians, supervisory reporting requirements and the availability and use of LMTs.
  

How Deloitte can help

The Deloitte Regulatory Watch Kaleidoscope service helps you stay ahead of the regulatory curve by identifying changes to your environment and allows you to better anticipate, manage and plan upcoming regulations on the way to AIFMD II.

Our advisory specialists and dedicated services will help you design, update and align your business strategy in light of the future evolution of the regulatory framework and market trends. Deloitte teams can also help you implement required changes to adapt your business to the new environment.

Additionally, through its Reporting Factory service, Deloitte offers a range of solutions for upcoming investment fund reporting requirements tailored to your business needs.

Deloitte’s Regulatory Watch Kaleidoscope service actively monitors AIFMD and UCITS developments and publications on an ongoing basis. We carefully analyze all relevant published documents to identify any changes and provide the most updated view to our clients.

In this particular context, Deloitte teams can assist you in:

• Accompanying you on the road of compliance to AIFMD II
• Ensuring the compliance of both your AIFM and UCITS framework toward the upcoming regulation
• Operating the production of the different regulatory reporting on your behalf
• Accompanying you in setting up the most appropriate Liquidity Management Tools

Marijana Vuksic
Senior Manager – Risk Advisory
Tel: +352 45145 2311
mvuksic@deloitte.lu