Liquidity risk management: The Commission has attempted to further harmonise the AIFMD liquidity management rules across the EU by introducing rules that require EU AIFMs that manage open-ended AIFs to:

• in exceptional circumstances, temporarily suspend the purchase or redemption of AIF units.
• Select at least one liquidity management tool (LMT) from the list set out in a new Annex V to AIFMD II (e.g., redemption gates, notice periods, redemption fees, side pockets, or swing pricing).

The AIFM will be required to implement policies and procedures regarding the use of the selected LMT and to notify its national regulator “without delay” when the LMT is activated and deactivated.

National regulators will be given the power to require AIFMs to suspend/resume redemptions and subscriptions, impose/terminate redemption gates or activate/deactivate their selected LMT in order to protect investors or the wider public.

Non-EU AIFMs marketing AIFs in the EU and/or EU AIFMs managing non-EU AIFs may also be required to activate or deactivate LMTs. The precise scope and application of this requirement should be monitored as the proposed AIFMD II moves through the EU legislative process.

• Direct lending restrictions: AIFMD II includes a set of measures aimed at EU AIFMs that manage AIFs that engage in certain lending activities, including:
  • Requiring the AIF to have effective policies, procedures and processes in place for granting loans, assessing credit risk, and administering and monitoring its credit portfolio. These arrangements must be reviewed annually.
  • Ensuring that an AIF that originates loans in excess of 60 per cent of its net asset value is closed-ended. This is intended to avoid maturity mismatches due to redemption demands.
  • Requiring that any loan to a single financial undertaking (e.g., a bank, MiFID investment firm, insurer, reinsurer, or mixed financial holding company) or a collective investment undertaking (e.g., an AIF or UCITS) does not exceed 20 per cent of the AIF’s capital.
  • Requiring the AIF to retain, on an ongoing basis, 5 per cent of the notional value of the loans that it originates and sells off on the secondary market. This will not apply to loans that the AIF acquires on the secondary market.
  • Expressly prohibiting the AIF from making loans to: (i) its AIFM; (ii) staff of the AIFM; (iii) its depositary; or (iv) a delegate. Arguably, this is already prohibited under the conflict of interest rules in the existing AIFMD framework.

• Depositaries: Depositaries will not be required to be established in the same EU Member State as the AIF. However, they will be required to cooperate with their national regulator as well as the national regulator of the AIF. Where a non-EEA depositary is appointed, the criteria for such an appointment will be amended to exclude depositaries in jurisdictions which are identified as high-risk under the EU Fourth Anti-Money Laundering Directive (EU AMLD) or on the EU list of non-cooperative tax jurisdictions (EU Tax List). In addition, a central securities depositary (CSD) providing custody services will be treated as a delegate of the depositary in an effort to “level” the playing field.
• Investor disclosure and reporting: Additional disclosures to investors under article 23 of the AIFMD are proposed to require: (a) disclosure of details of fees and charges borne by the AIFM or its affiliates; and (b) open-ended funds to disclose information on the possibility and conditions for using any LMT. In addition, amendments to the investor periodic reports are also proposed to require: (i) disclosure of the composition of the originated loans in the AIF’s portfolio (where relevant); (ii) disclosure of details of all direct and indirect fees and charges that were charged or allocated to the AIF or its investments (on a quarterly basis); and (iii) disclosure of details regarding any parent company, subsidiary or special purpose entity established in relation to the AIF’s investments by the AIFM, the staff of the AIFM or the AIFM’s direct or indirect affiliates.
• Regulatory reporting: There are proposed changes to the article 24 reporting regime which will require AIFMs to report on the markets in which they trade (as opposed to the principal markets in which they trade), which may result in the need for AIFMs to provide more expansive regulatory reporting. In this regard, ESMA will prepare new regulatory technical standards and regulatory implementing standards to replace the current supervisory reporting template laid down in annex IV to the AIFMD.
• National Private Placement Regime (NPPR): Non-EU AIFMs will not be permitted to market AIFs into the EU under the NPPR if the AIFM and/or the AIF is located in a jurisdiction that is high risk under the EU AMLD and/or in the EU Tax List. Similar changes are proposed for the marketing of non-EU AIFs managed by EU AIFMs, and also to the third-country passporting provisions. The third country must sign a qualifying agreement on the exchange of information on tax matters with each EU Member State where the marketing is intended to take place.

• Level 2: ESMA has been tasked with developing regulatory technical standards and implementing technical standards in a number of areas including:
  • the delegation notification process;
  • the criteria for the selection and use of LMT;
  • the circumstances when a national regulator can require an AIFM to suspend units, or to activate or deactivate an LMT; and
  • reporting and disclosure templates.

Impact on non-EU AIFMs

• The proposed changes will primarily apply to EU AIFMs when managing and marketing EU and non-EU AIFs. However, there will be some implications for non-EU AIFMs including:
  • Non-EU AIFMs marketing an EU or non-EU AIF into the EU under the NPPR will still be required to comply with the annual reporting (article 22), disclosure to investors (article 23) and regulatory reporting (article 24) requirements. This also means that the proposed changes to the investor disclosure and regulatory reporting regime (described above) will also apply to non-EU AIFMs.
  • Non-EU AIFMs and non-EU AIFs must not be located in jurisdictions that are identified by the EU as high-risk third countries for EU AMLD or EU Tax List purposes if they wish to market into the EU.
  • Delegation requirements – fund structures, which include non-EU entities, will need to consider whether any issues are posed by the sub-delegation prohibition that prevent delegates from delegating to entities that are not authorised or registered to carry on asset management activities.

Next steps

The proposed amendments are currently being reviewed by the European Parliament and European Council. EU Member States will be required to implement AIFMD II two years after it is published in the Official Journal. This means that any proposed changes to the existing framework are unlikely to apply before late 2024 or early 2025.

Firms should continue to track the progress of the AIFMD II as it works its way through the legislative process. To ensure that firms are prepared to implement the new requirements in due course, they should:

• Undertake an impact assessment against the proposals to identify changes that they may need to make to existing policies, procedures, controls, strategy, data collection procedures personnel and disclosures.
• Assess whether any restructuring of arrangements with delegates and third party service providers will be required. and
• Determine the timeframe that would be needed to implement the required changes.

If you have any questions, please do not hesitate to get in touch with our contacts.