Reed Smith In-depth

The European Commission’s review of the Alternative Investment Fund Managers Directive framework (AIFMD II) has been years in the making so there will be some disappointment that measures to: (i) widen the scope of the marketing passport to include “semi-professional investors” and (ii) clarify and harmonise the application of the “reverse solicitation” regime under the AIFMD have not been proposed under AIFMD II. In addition, there is still no clear indication if and when the third-country marketing passport will be “switched on”.

The key changes proposed under AIFMD II can be summarised as follows:

  • AIFM permitted activities: The scope of the activities that can be conducted by alternative investment fund managers (AIFM) will be extended to include benchmark administration and credit-servicing and the scope of AIFM functions in Annex I to the AIFMD will be expanded to include loan origination and servicing of securitisation SPVs.
  • Substance: Changes to the AIFMD substance requirements are proposed to require an EU AIFM to have at least two natural persons, resident in the EU, who are either employed on a full-time basis by that AIFM or committed to conduct business for the AIFM on a full-time basis. When applying for authorisation, the AIFM will be required to provide its national regulator with details regarding the individuals who conduct the business of the AIFM. This will include: a detailed description of their role, title and level of seniority; a description of their reporting lines and responsibilities (at the AIFM and outside of the AIFM); an overview of their time allocated to each responsibility; and a description of the technical and human resources that support their activities.
  • Delegation: AIFM delegation arrangements continue to be an area of focus but the proposals in AIFMD II do not materially alter the existing “letterbox entity” regime. Rather, the emphasis (for now) is placed on strengthening the supervisory oversight of an AIFM’s delegation arrangements by requiring:
    • AIFMs to provide additional information to national regulators on their delegation arrangements during the authorisation process including the extent of delegation and sub-delegation arrangements as well as detail on their personnel, systems, controls and procedures implemented to effectively monitor, supervise and control their delegates. The entire delegation structure will have to be justified based on objective reasons.
    • The delegation rules to be extended to cover delegation of the AIFM’s new services and functions.
    • National regulators to submit annual reports to ESMA if the AIFM delegates more portfolio or risk management functions than it retains to an entity located in a non-EEA country.
    • ESMA to review and report on the effectiveness of the delegation arrangements at least every two years.

Sub-delegation to non-authorised entities will be prohibited, although further detail will be required to fully understand the scope and application of this rule. Some of the proposed changes to the delegation rules may require EU AIFMs to review and/or repaper their existing arrangements