Understanding AIFMD II: Key changes and implications for non-EU and EU AIFMs

Introduction

To streamline regulations across the European fund market, AIFMD II entered into force on April 15, 2024, amending the existing Alternative Investment Fund Manager Directive (AIFMD). Apart from certain provisions subject to a transitional period, EU member states have until 16 April 2026 to transpose the new rules into national law.

AIFMD II introduces rules affecting all EEA full-scope AIFMs while excluding sub-threshold AIFMs. Notably, the updated directive introduces specific provisions tailored to AIFs engaged in loan origination. While AIFMD II does not have direct applicability to non-EEA AIFMs, many of its provisions are relevant to their operations, particularly new rules concerning marketing in the EEA and acting as delegates of EEA full-scope AIFMs.

Impact on non-EU AIFMs

AIFMD II introduces new marketing requirements and new regulatory reporting obligations under the National Private Placement Regime (NPPR) for non-EU AIFMs. Marketing within the EU is restricted unless specific AIFMD II requirements are met, such as not being based in a “high-risk third country” in accordance with Directive (EU) 2015/849 (Fourth Anti-Money Laundering Directive), not being on the EU list of non-cooperative jurisdictions for tax purposes and having signed a qualified tax information exchange agreement. Moreover, regulatory reporting obligations for both EU and non-EU AIFMs marketing funds without a European passport as part of a national private placement are expanded to include further asset and market-related data, subject to similar conditions regarding the fund’s location and tax compliance.

Impact on EU AIFMs

AIFMD II ushers in a new regulatory landscape for AIFs engaging in corporate lending, acknowledging their potential role as loan originators, and imposing corresponding requirements and constraints. It extends liquidity management provisions for open-ended funds, mandating that EU AIFMs managing such funds employ at least two liquidity management tools, except for money market funds for which a single tool is required.

Additionally, AIFMD II expands the range of services AIFMs offer under MiFID II rules, shifting their regulatory oversight from AIFMD to MiFID II. It also eases depositary regulations, permitting EU-wide operations without physical proximity to the appointing fund, contingent upon full compliance with AIFMD II conditions and prior authorization by the competent authority.

AIFMD II imposes stricter requirements on AIFMs regarding reporting obligations, authorization, and delegation arrangements. AIFMs must delineate their human and technical resources in authorization applications, necessitating the employment of at least two EU-resident senior managers dedicated full-time to the AIFMs business conduct.

Under AIFMD II, all authorized functions and services of AIFMs fall under delegation requirements, necessitating regulatory approval. AIFMs must notify supervisory authorities of a broader array of delegation arrangements and ensure delegate and sub-delegate compliance with AIFMD II regulations, regardless of their regulatory status or location. Enhanced reporting obligations mandate the inclusion of these aspects in periodic submissions to national regulators, covering both substance and delegation.

Furthermore, AIFMD II introduces provisions for fair treatment of investors, requiring AIFMs to transparently identify and report of all fees, charges, and expenses allocated to AIFs.

Loan-originating funds

AIFMD II introduces a new regime comprising of two sets of rules, one which only applies to all AIFs that originate loans, irrespective of whether loan origination is their main strategy and the other which applies only to AIFs falling within the new definition of “loan-originating AIF”, being an AIF whose investment strategy is mainly to originate loans or if the originated loans represent at least 50% of its net asset value.

Under the new AIFMD II, all AIFs engaged in loan origination (including loan-originating AIFs) must comply with a risk retention requirement set in the directive, subject to the applicable exemptions. Further, AIFMs that manage AIFs engaged in loan origination must implement effective and up-to-date policies, procedures and processes for the granting of loans. Lending to a single borrower if it is another AIF, an undertaking for the collective investment in transferable securities (UCITS) or a financial institution, is restricted. Additionally, to prevent conflicts of interest, AIFMD II includes a prohibition on loans to fund governing bodies.

AIFMD II imposes specific requirements for loan-originating funds, distinguishing between open-ended and closed-ended funds and establishing varying leverage limits for each. A loan originating fund should generally be closed-ended, unless the management company can demonstrate to the competent supervisory authority that the open-ended AIF it manages has an adequate liquidity management system that takes sufficient account of the fund’s investment strategy and its unit redemption rules.