The directive amending the Alternative Investment Fund Managers Directive ("AIFMD") has now been published in the Official Journal of the EU, clarifying the application dates of the revised requirements. The amending directive, known as AIFMD 2.0, must be transposed into the national law of member states by 16 April 2026. We have set out below the key changes introduced to both the AIFMD and UCITS framework.
Authorisation
In an effort to harmonise requirements in member states with regard to substance, the recitals to AIFMD 2.0 require that AIFMs and UCITS management companies (fund management companies or "FMCs") should provide information when applying for authorisation about the human and technical resources it will employ to carry out its functions and supervise its delegates. The recitals state that at least two EU-resident natural persons who are employed by the FMC or are executive members or members of the board should be appointed to conduct the business of the FMC. It is acknowledged that this is a minimum and that more resources may be necessary depending on the size and complexity of the FMC. This does not alter the current Irish position, as the Central Bank's expectation, as set out in its Dear Chair letter of October 2020, is that FMCs should have a minimum of three full time employees and specifies that this is a minimum expectation only.
Delegation
While the European Securities and Markets Authority ("ESMA") has in the past expressed reservations about delegation from a risk oversight perspective, and some member states believe restrictions ought to be introduced in order to relocate portfolio management activities within the EU, the text of AIFMD 2.0 acknowledges the role of delegation in allowing for the efficient management of investment portfolios and for accessing necessary expertise in particular geographic markets or asset classes. No new restrictions on delegation are included, although FMCs will be subject to increased reporting requirements in relation to delegation arrangements.
The amended provisions relating to delegation will require FMCs to report their delegation arrangements to national competent authorities ("NCAs") on authorisation and as part of their regular regulatory reporting. The information to be reported as part of the authorisation process will include:
- the legal name, legal identifier, jurisdiction of establishment and, where relevant, the supervisory authority of the delegate;
- a detailed description of the resources employed by the FMC for performing day-to-day portfolio or risk management tasks within the FMC and for monitoring the delegated activity;
- a brief description of the delegated portfolio management and risk management functions, including whether the delegation amounts to a partial or full delegation; and
- a description of the periodic due diligence measures to be carried out by the FMC for monitoring the delegated activity.
The regulatory reporting will include:
- the legal name, legal identifier, jurisdiction of establishment and, where relevant, the supervisory authority of the delegate and whether they have any close links with the FMC;
- the number of full-time equivalent human resources employed by the FMC for performing day-to-day portfolio or risk management tasks within the FMC;
- a list and description of the activities concerning risk management and portfolio management functions that are delegated;
- where portfolio management is delegated, the amount and percentage of the AIF's assets that are subject to delegation arrangements;
- the number of full-time equivalent human resources employed by the AIFM to monitor the delegation arrangements;
- the number and dates of periodic due diligence reviews carried out by the AIFM to monitor the delegated activity, a list of issues identified and, where relevant, the measures adopted to address those issues and the date by which those measures are to be implemented;
- where sub-delegation arrangements are in place, the information required in the first three bullet points in respect of the sub-delegates and the activities that are sub-delegated; and
- the commencement and expiry dates of the delegation and sub-delegation arrangements.
Under the final provisions, ESMA is required to draw on supervisory reporting to "receive more complete information on the application of this Directive, including in the area of appropriate oversight and control of the delegation arrangements, in all Member States". ESMA must prepare a report analysing market practices on delegation, substance requirements and compliance with the EU's delegation requirements, which must be provided before the next review of the AIFMD and UCITS Directive. The EU legislators will use this report to assess whether further measures in relation to delegation are deemed to be required in a future iteration of the AIFMD / UCITS Directive.
The provisions amending the regulatory reporting requirements are due to apply from 16 April 2027. ESMA is tasked with preparing regulatory technical standards specifying the details of the information to be reported, the appropriate level of standardisation and the reporting frequency and timing.
Liquidity Risk Management
FMCs must select at least two liquidity management tools ("LMTs") from a list of LMTs set out in the relevant annex. Procedures for activating and deactivating any selected LMTs and operational and administrative arrangements for using LMTs must be implemented by FMCs. NCAs will be empowered under "certain circumstances" to require AIFMs to activate or deactivate a liquidity risk management tool.
Costs and Charges
AIFMs will be required to report annually all direct and indirect fees and charges incurred by the AIF. In relation to "undue costs", ESMA will be required to prepare a report within 18 months after the entry into force of AIFMD 2.0 assessing the level, reasons for and differences in the costs charged to retail investors and analysing whether the criteria set out in ESMA's 2020 supervisory briefing on undue costs are to be complemented with regard to the notion of undue costs.
Third-Party Management Companies and Conflicts of Interest
AIFMD 2.0 includes a new requirement that, where an FMC manages an AIF / UCITS at the initiative of a third-party, including cases where that AIF / UCITS uses the name of a third-party initiator or where an FMC appoints a third-party initiator as a delegate, the FMC must, taking account of any conflicts of interest, submit detailed explanations and evidence of compliance with the conflicts of interest provisions to its home state regulator.
ESMA is required to prepare a report on the requirements applicable to third-party FMCs and the need for any additional safeguards by April 2029.
Loan Origination Funds
AIFMD 2.0 introduces a new loan origination funds ("LOFs") regime, introducing a harmonised passport regime for LOFs. Some of the new rules in AIFMD 2.0 will apply to all AIFs engaged in loan origination activity, while other requirements will only apply to AIFs that come within the definition of an LOF. The key features of the new regime are summarised in the table below.
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