Article

EU Council adopts position on AIFMD II

On June 21, 2022, the Council of the European Union published its position on the European Commission's proposals to amend the Alternative Investment Fund Managers Directive (the "AIFMD II") ("General Approach").

Some of the key changes proposed by the European Council are outlined below:

  • Disclosure, Reporting and Delegation:
    • The European Council's approach is that reporting must also include additional, detailed information on delegation to provide supervisors with an overview of delegation activity in the European Union.
    • The frequency of some newly proposed reporting requirements is reduced from quarterly to annually.
  • Permitted AIFM Activities:
    • AIFMD II originally proposed to expand the scope of permitted activities for Alternative Investment Fund Managers (the "AIFMs") to include benchmark management and lending as "ancillary authorizations."
    • The European Council, on the other hand, wants to allow member states to prohibit alternative investment funds (the "AIFs") from lending to consumers in their jurisdictions. AIFMs would also not be able to manage benchmarks used in the AIFs they manage.
    • In addition, AIFMs would be allowed to provide any other "ancillary service" to third parties that is a continuation of the services the AIFM already provides in relation to the AIFs it manages and that does not create uncontrollable conflicts of interest.
  • Lending
    • A new, specific definition of "lending":
      The making of a loan by an AIF as the originating lender is proposed.
    • It is proposed to prohibit AIFMs from managing "originate-to-distribute" AIFs, i.e., AIFs whose investment strategy is to make loans or take exposures to loans through special purpose vehicles (the "SPVs") for the sole purpose of on-lending those loans or exposures to third parties.
    • The scope of persons to whom an AIF may not make loans, including certain entities within the same group as the AIF, is expanded.
    • A new leverage limit is also proposed, with leverage of a lending AIF limited to no more than 150% of the AIF's net asset value.
    • Private equity or real estate funds that make shareholder loans should not be subject to the full regulation of lending funds. However, it is proposed that some exemptions are discretionary and not fully harmonized.
    • Finally, a five-year transitional regime is proposed for AIFMs managing lending AIFs established before the adoption of AIFMD II.
    • The European Commission's draft amendment to AIFMD II provides for a harmonized European credit fund regime, but its requirements largely correspond to the current German legal situation. The new regulations cover risk and liquidity management, credit ceilings, the prohibition of loans to governing bodies, risk retention at the AIF, and structural and reporting requirements. These first-time regulations to create a uniform European product regulation will lead to a market expansion of credit funds in the harmonized fund location Europe. (read in: Hanten/Decker, Credit Funds under the Application of AIFMD II - Regulatory Key Points, RdF 2022, 244).
  • Liquidity Risk Management:
    • AIFMs of open-ended funds will be required to select at least two instruments for liquidity management, not just one, unless the AIF is a money market fund. It also introduces some restrictions on the use of in-kind contributions as a liquidity management tool.
    • Finally, the possibility for responsible authorities to require AIFMs to use certain liquidity management instruments in certain circumstances has also been removed.
  • Depositaries:

    Regarding depositaries, the objective is not to create a depositary passport, but instead proposes a limited framework for the provision of depositary services on a cross-border basis for concentrated markets with few providers.
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