European Union: AIFMD II (Near) Final Text Agreed: What's New?

In our previous alert  AIFMD II Gathers Momentum: The European Parliament Finalises Its Proposed Text and recent update  October 2023 Horizon Scan for Private Investment Funds, we noted the draft text of the Alternative Investment Fund Managers Directive (AIFMD II) published by the European Parliament's Committee on Economic and Monetary Affairs (ECON). The Council of the European Union has now published the  final compromise amending text setting out the amendments to the AIFMD II (together with amendments to the UCITS Directive, which are outside the scope of this alert).

ECON is due to consider the text in early February 2024, after which the AIFMD II (subject to any delays and/or changes) will enter into force 20 days following its publication in the Official Journal of the EU.

EU member states will then have 24 months to implement the AIFMD, with the member state laws therefore likely to take effect in 2026.

Further EU Level 2 measures to supplement the AIFMD II are also due to come into force in 2026. In addition to member state implementation, the Level 2 measures will be a focus of attention until then.

We have highlighted below the main changes of note since the last published set of amendments. We have also prepared a  blackline document identifying the changes to the AIFMD that this near-final text of the AIFMD II has introduced. We intend to produce an updated version of the conformed copy, along with a detailed practical guide, once the AIFMD II text is finalised.

• Delegation: The text points to more robust authorisation and reporting requirements but not to the substantive restrictions originally proposed.
• Loan origination AIFs: There are new definitions of loan origination and a loan-originating AIF, together with various requirements and restrictions on loan origination matters such as concentration, risk retention, and originate-to-distribute strategies. Also, new leverage limits are introduced for open-ended and closed-ended loan-originating AIFs (with a carve-out for shareholder loans provided those loans do not exceed 150% of the AIF's capital). The text confirms that a loan-originating AIF can be open-ended only if the AIFM can demonstrate that the AIF's liquidity risk management system is compatible with its investment strategy and redemption policy.
• Liquidity management tools (LMTs): These provisions are designed to allow supervisory authorities to handle potential spillovers of liquidity tensions into the wider market more effectively. AIFMs will have to select at least two LMTs from those set out in a new Annex V with rules limiting, for example, the circumstances for suspending redemptions and subscriptions and use of side pockets.
• More flexibility on depositary appointments: The proposals for a “depositary passport” have fallen away. However, powers are granted to a national competent authority (NCA), subject to certain restrictions, to allow an EU AIF to appoint a depositary located in another member state.
• Conflict of interest provisions for third-party AIFMs: A host AIFM will have to provide detailed explanations to its home NCA of how it complies with the AIFMD conflict of interest provisions in respect of a white-label AIFM.
• Inclusion on “undue costs”: Within 18 months of the AIFMD coming into force, i.e., mid- to late 2025, ESMA must finalise an assessment of costs charged by AIFMs to their investors, explaining the reasons and differences for the level of costs. This relates to the general principle of treating investors fairly and the concept of “undue costs” together with value-for-money for retail investors (see our  client alert for background).

UK Impact

Although the AIFMD II will not apply to firms authorised under the UK AIFM rules, many of the provisions in the AIFMD II will still be relevant for UK fund operations, whether marketing cross-border under the Article 42 national private placement regimes or acting as a delegate of an EU AIFM. We would note the unusual ability (albeit limited to any occurrence of particular market instability or investor protection concerns), as mentioned in our  previous briefing, for NCAs to require a third-country AIFM marketing an open-ended fund in Europe to activate or deactivate a LMT.

Further, the  FCA has confirmed it will consult next year on updating the UK's asset management rules. The review will seek to drive the UK's long-term competitiveness by taking “a smarter approach to proportionality” for alternative fund managers, as one of three priorities for the FCA as it reflects on industry feedback to its February 2023 Discussion Paper.

What Now?

A near-final text should give managers the confidence to start focussing more on any changes to business models to accommodate the AIFMD II, noting the transitional provisions in particular for loan origination by preexisting AIFs.

AIFMD II changes will need to be considered together with other developments, such as the EU Retail Investment Strategy, SFDR, and market developments connected with the structures of fund vehicles, including the ELTIF II (which are covered, along with the UK asset management review, in our recent  Horizon Scan for Private Investment Funds).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.