On 22 October 2020, the European Commission (EC) launched a consultation on the review of the Alternative Investment Fund Managers Directive (AIFMD).
This consultation follows the EC’s June 2020 report on the AIFMD’s scope and application that was submitted to the European Parliament and the Council.
That report concluded that while the AIFMD has contributed to the creation of the EU AIF market, provided a high-level protection to investors and facilitated monitoring of risks to financial stability, there are a number of areas where the legal framework could be improved.
Given the EC’s ongoing efforts to develop the capital markets union (CMU), this consultation seeks stakeholders’ views on how to achieve a more effective and efficient EU AIF market as part of the overall financial system.
The purpose of the EC’s consultation is to focus on the areas where the Commission believes improvement is possible.
Much of the attention in relation to the AIFMD review focused on potential amendments to the delegation rules and, in particular, to delegation to non-EU entities. The questions on delegation are dealt with in the International section of the report.
Readers will be familiar with the AIFMD rules aimed at preventing AIFMs from being a letter-box entity. These are currently a qualitative list of criteria set out in Article 82 of the AIFM Regulations.
The Commission asks whether there should be additional quantitative criteria in relation to what cannot be delegated and whether a list of core or critical functions that would be always performed internally by the AIFM and which may not be delegated should be created.
Also, the Commission asks whether the AIFMD rules on delegation should be extended to UCITS where the delegation rules have not been as prescriptive.
National Private Placement Regime (NPPR)
The issue of the continued existence of national private placement regimes is also raised. NPPR were due to be phased out following the introduction of a 3rd Country AIFM Passport regime. As this regime has not materialised some countries continue to allow non-EU AIFM’s to privately place funds in their market. The Commission questions whether this could give rise to an unlevel playing field between EU AIFMs who must comply with AIFMD rules and non-EU AIFMs who can continue to access the parts of the EU via the NPPR.
The Consultation also focuses on a number of other areas including:
Functioning of the regulatory framework, scope and authorisation requirements – The Commission raised questions on the possible improvement of the authorisation regime and scope of the AIFMD (appropriateness of licencing mechanism, own funds and capital requirements). The Commission also considers the prospect of encompassing smaller AIFMs and level-playing field concerns between AIFs and other financial intermediaries that provide similar services. A number of questions also look for feedback on functioning of the AIFM passport to enhance cross-border marketing and investor access.
Investor protection – The Commission is seeking feedback on how the investor protection regime could be improved to better account for the differences between retail and professional investors as well as on the adequacy of existing disclosure requirements. Questions in this section cover depositary regime, including whether a depositary passport should be made available, rules on prime brokers, adequateness of mandatory disclosures and conflict of interest rules, as well as clarity of valuation rules.
Financial stability – The consultation includes questions on whether national regulators and AIFMs have the appropriate tools to effectively manage systemic risks. The Commission focuses in particular on improvements to Annex IV reporting, the benefits of more centralised supervisory reporting and improved information sharing among relevant supervisors particularly as it pertains to liquidity. This section also considers harmonisation of liquidity management tools, definition of illiquid assets, and adjustments to remuneration rules to provide for the de minimis threshold.
This section also looks at whether there should be specific reporting for loan originating funds or for funds with exposure to CLOs and the leverage loan market.
Investing in private companies – The Directive has specific rules in relation to the investment in private companies and the Commission questions whether the rules for investing in private companies are appropriate. They also ask whether provisions against asset stripping in the case of an acquired control over a non-listed company or an issuer necessary, effective and proportionate.
Sustainability – The consultation includes a section on whether an AIFM should quantify sustainability risks, and adverse impacts.
Miscellaneous – The final section includes questions on the competences and powers of supervisory authorities. It asks whether ESMA should be given enhanced powers, including being entrusted with authorisation and supervision of all EU and non-EU AIFMs. It also questions the effectiveness of intra-EU cross-border entities supervision.
The Consultation remains open until 29 January 2021. It is likely that any changes which arise following the consultation are still some way off in terms of implementation. Depending on the scope of the changes they may require changes to with the AIFM Directive or Regulations.
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