Reed Smith Client Alerts

On 22 October 2020 the European Commission (the Commission) published a wide ranging consultation (the Consultation) on the European Securities and Markets Authority’s (ESMA) proposed review of the Alternative Investment Fund Managers Directive1 (the AIFMD). The Consultation signals the appetite for significant amendments to the AIFMD. The AIFMD has been in force since 2013 and has been the bedrock for the marketing and management of funds in Europe, aside from those subject to the Undertakings for the Collective Investment in Transferable Securities (UCITS) regime2 (i.e., targeted at retail clients).

Authors: Tim Dolan Emily E. Cartwright David Calligan Shervin Shameli Karen Butler Winston Penhall Matthew Evans

Background

The Consultation was prompted by ESMA’s letter3 outlining areas of the AIFMD that could be developed and improved which ESMA submitted to the Commission in August 2020. The Consultation picks up many of the issues ESMA highlighted and invites respondents to provide feedback on a range of areas covered by the AIFMD. The Consultation closes on 29 January 2021 and any resulting legislative changes are unlikely to materialise until mid-to-late 2021 at the earliest. This alert focuses on a number of key topics covered by the Consultation that may give an insight into what changes the AIFMD 2 will bring.

Key topics for consultation

Functioning of the AIFMD regulatory framework, scope and authorisation requirements

In this section of the Consultation views are sought on how to enhance the functioning of the AIFMD framework. The questions focus on improving the AIFMD passporting process and levelling the playing field between Alternative Investment Fund Managers (AIFMs) and other financial intermediaries.

The Consultation raises the potential of extending the licence to sub-threshold AIFMs. Sub-threshold AIFMs currently have to navigate the National Private Placement Regimes (NPPRs) of each EEA Member State. Negotiating disparate NPPRs can be a costly operational and regulatory exercise. Some EEA Member States have particularly restrictive NPPRs which include ‘depositary-lite’ requirements. Notwithstanding the potential benefits of extending the licence to sub-threshold AIFMs, it is not at all clear that there would be an appetite for this change. The level of interest would be determined in no small part by the extent to which the full AIFMD requirements applicable to full-scope AIFMs would be applied to a sub-threshold AIFM. The introduction of a passport for sub-threshold AIFMs may not be entirely welcome in the market if its introduction resulted in such managers being prevented from marketing under EEA Member State NPPRs.

The Consultation seeks further feedback from stakeholders on the scope of the AIFM licence as it relates to AIFMs that also undertake activities regulated by the Markets in Financial Instruments Directive (MiFID). Views are sought as to whether the AIFMD should be amended to clarify the requirements relating to AIFMs authorised to provide ancillary MiFID activities and, importantly, whether such AIFMs should be subject to capital requirements that correspond to those applicable to investment firms providing similar services. The Consultation further focuses on levelling the regulatory playing field between AIFMs and MiFID firms, credit institutions and UCITS managers.

The Consultation makes clear that the Commission is seriously considering harmonisation between the AIFMD and UCITS regimes. Questions are posed as regards to the treatment of UCITS, including as to whether Alternative Investment Fund (AIF) and UCITS managers should be subject to a single licensing requirement, whether harmonised metrics should be used for leverage calculations and what the reporting requirements should be when using liquidity management tools. Respondents are also asked to consider whether delegation rules under the AIFMD Level 2 Delegated Regulation should also be extended to UCITS.

In addition the Consultation highlights a number of areas that may benefit from harmonisation, including the strengthening of consistent enforcement of the AIFMD delegation rules. However, it does not address issues arising from a lack of clear delineation of the supervisory responsibilities of the home and host regulators. This was a subject raised by ESMA and such lack of clarity increases regulatory compliance costs. Its exclusion from the Consultation does not, however, mean that this issue will not be picked up later in the legislative process.