EU finalises updates to the Alternative Investment Fund Managers Directive

The publication of the updated directive (148-page PDF/794KB), known as ‘AIFMD II’, comes nearly two years after the European Commission first proposed its draft amendments in December 2021. The changes cover a number of areas including loan origination, delegation and liquidity management and are designed to improve the functioning of the alternative investment funds market.

The directive also makes a number of parallel amendments to the Undertakings for Collective Investment in Transferable Securities Directive (UCITS), with the aim of harmonising rules on delegation, reporting and liquidity management under the AIFMD and the UCITS frameworks. 

Asset management expert Mark Shaw of Pinsent Masons said the final text reflects an understanding of the commercial realisms of fund distribution within the EU, which has been largely missing from previous UCITS directives and AIFMD.

“The changes are largely evolutions of the current state of play, or updates to bring regulation in line with good practice and commercial reality,” he said. “While the rules on loan origination funds bring AIFMD II into the realm of product regulation, rather than manager regulation, it should be noted that the original directive had product elements in this area.”

“Loan origination funds get special attention from the EU legislature given broader regulatory concern about the potential systemic risk of shadow banking within the EU. The retention requirement and leverage limits on such funds aim to mitigate such risk,” he added.

The formalisation of liquidity management tools under AIFMD II, according to Shaw, reflects both existing commercial practice and also the liquidity risk management recommendations by the International Organization of Securities Commissions (IOSCO).

“Codifying them for both alternative investment funds and UCITS is an important step forward for the industry, both in terms of ensuring harmonised minimum standards and also enhancing regulatory supervision through the requirement for national competent authorities to be notified when a mechanism is used,” he said.

The final version of the directive broadly follows the compromise draft published by the European Commission in June 2022. As part of the legislation process, once the final text of the directive is formally adopted by the European Parliament and published in the Official Journal of the EU, member states will then have two years to incorporate the changes into their domestic legislation. It is expected to go live in member states in the second half of the decade.

In the UK, a review of the UK’s alternative investment funds regulatory regime has been proposed for next year. Last month, Ashley Alder, the chair of the Financial Conduct Authority (FCA), acknowledged the industry's calls to retain the core framework of the EU’s AIFMD while tailoring it more effectively to the UK market.