On 16 May 2022, the draft report on the proposal for a directive of the European Parliament and of the Council amending Directives 2011/61/EU on alternative investment fund managers (the AIFMD) and Directive 2009/65/EC on undertakings for collective investment in transferable securities (the UCITSD) as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds (the Report) was published by MEP Isabel Benjumea, Rapporteur for the AIFMD and UCITSD reviews.
The Report mostly validates and further consolidates the legislative proposal from the European Commission (the Commission) published on 25 November 2021 (please refer to our previous publication on this topic), but also includes a number of notable changes. This article focuses on the most significant changes to the AIFMD, which are briefly explained below.
2. Key highlights
(a) Inclusion of a new sub-category of “professional investors”
The Report suggests that the term “professional investors” should no longer exclusively correspond to the definition given to such term in Annex II of the Directive 2014/65/EC (MiFID II) and should instead also capture two additional types of investors, namely those:
- who have committed to investing a minimum of EUR 100 000 and have stated in writing, in a separate document from the contract to be concluded for the commitment to invest, that they are aware of the risks associated with the envisaged commitment or investment; or
- who are members of senior staff, portfolio manager, director, officer, agent or employee of the manager or of an affiliate of the manager and have sufficient knowledge about the relevant alternative investment fund (AIF).
Subject to further potential amendments, the definition of “professional investors” within the meaning of the AIFMD would therefore become broader by including current semi-professional or well-informed investors. This significant change would facilitate the marketing by alternative investment fund managers (AIFMs) of their AIFs under management to these types of investors in the European Economic Area (the EEA) via the marketing passport which should be a welcomed development for the market. This could have however an impact for distributors of AIFs who are licensed under MiFID II and it will be interesting to see whether this development at the level of the AIFMD will have an impact on the MiFID rules in the future.
On a side note, the fact that “professional investors” within the meaning of the AIFMD would no longer always qualify as “professional clients” within the meaning of MiFID II might lead to situations where a key information document (a KID) under the Packaged Retail and Insurance-based Investment Products Regulation (the PRIIPS Regulation) would be required for this new sub-category of professional investors.
(b) Rules applicable to loan origination funds
Harmonised definition of “loan origination”
The Report introduces a new definition of “loan origination” as “the granting of loans by an AIF as the original lender”. This definition at EU level would be welcomed and seems to focus only on the granting of loans and to not include the acquisition of loans.
Definition of shareholder loans
The Report clarifies that AIFMs shall implement effective policies, procedures and processes for the granting of credit, for assessing the credit risk and for administering and monitoring their credit portfolio only in respect to loan originating activities, other than in respect of shareholder loans where such loans do not exceed in aggregate 150% of the net asset value of the AIF.
In this context, a new definition of “shareholder loan” is being introduced as “a loan granted by an AIF to an undertaking in which it holds directly or indirectly at least 5% of the capital or voting rights, where the loan cannot be sold to third parties independently of the capital instruments held by the AIF in the same undertaking”.
Prohibition of “originate-to-distribute” investment strategy
The Report also clarifies that AIFMs are prohibited from managing AIFs whose investment strategy is to originate loans with the sole purpose of transferring those loans to third parties (so-called “originate to distribute strategy”). While the Commission’s proposal suggested that such loans should be subject to a 5% risk-retention requirement, the Report goes one step further by prohibiting any strategy whereby loans are originated with the sole purpose of selling them.
Obligation to adopt a closed-ended structure
While the Commission’s proposal imposed open-ended AIFs to adopt a closed-ended form if the notional value of the AIF’s originated loans exceed 60% of the AIF’s net asset value, the Report amends such requirement by adding a derogation to that principle for AIFMs that are able to demonstrate to their competent authorities that the relevant open-ended AIF under management has “liquidity robustness”.
To that effect, the Report suggests that power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts on the basis of a draft developed by the European Securities and Markets Authority (ESMA) to ensure consistent criteria for the determination by competent authorities of whether an AIF has demonstrated “liquidity robustness”. This change would be a welcomed response to the market participants’ critics on the initial proposal of the Commission prohibiting these types of loan originating AIFs to adopt an open-ended form. This derogation would constitute a significant amendment as this should allow such types of open-ended AIFs with appropriate liquidity management mechanisms to keep their open-ended forms. The regulatory technical standards to be adopted by the Commission will therefore be key to assess the liquidity management principles to be complied with by these AIFs for being authorized to keep or adopt an open-ended form.
(c) Rules pertaining to fund distributors
The marketing of AIFs is not always conducted by the AIFM directly but can be performed by one or several distributors either on behalf of the AIFM or on their own behalf. In this context, the Report clarifies that a distributor should be considered as a delegate of the AIFM under the AIFMD rules only when it is appointed by the AIFM pursuant to a contractual agreement.
(d) More restrictive approach on redemption gates for open-ended AIFs
With respect to the liquidity management instruments available to AIFMs managing open-ended AIFs, the Commission’s proposal included the possibility of redemption gates allowing a temporary full restriction of the investors’ right to redeem their shares, so that investors cannot redeem their shares at all. The Report seems to restrict this possibility to partial redemptions only. This change would have an impact on liquidity management tools and principles that will be available to AIFMs or open-ended AIFs.
(e) Expansion of the AIFM’s permitted “ancillary services” list
As a means to increase the efficiency of the AIFM’s activities, the original Commission’s proposal already suggested to add “benchmark administration” within the meaning of Regulation (EU) 2016/1011 (the Benchmark Regulation) and “credit servicing” within the meaning of Directive (EUR) 2021/2167 (the NPL Directive) to the list of ancillary services that could be performed by AIFMs under Article 6(4) of the AIFMD. The Report suggests that such list of authorised ancillary services should be further extended to also include any other ancillary service which is not regulated as an investment service under MiFID II and represents “a continuation of the services already undertaken by the AIFM or a use of internal competences, and which does not create conflicts of interest that could not be managed by additional rules”. This addition will need to be closely monitored and further clarification should be sought on the meaning and scope, as these remain uncertain at this stage.
Follow this link if you would like to read the Report: https://www.europarl.europa.eu/doceo/document/ECON-PR-732549_EN.pdf , and feel free to reach out to your CMS experts for any questions you may have.