The Council of the European Union (EU), following extensive negotiation, has adopted amendments to the Alternative Investment Fund Managers Directive (AIFMD) as well as the Undertakings for the Collective Investment in Transferable Securities Directive that are jointly referred to as "AIFMD II".
The new rules introduce targeted amendments to several key areas of which European alternative investment fund managers (AIFMs) need to be aware. While AIFMD II does not apply to AIFMs from the UK, it will affect UK managers that, for example, use the services of host AIFMs in Luxembourg and Ireland.
The amendments will soon be published in the Official Journal of the EU and will come into force in March or April 2026, allowing time for member states to transpose the changes and managers to prepare.
Additional compliance standards
AIFMD II is a significant package covering a range of areas, but it does not overwrite the existing regime. Instead, it offers a targeted approach reforming the following:
- Authorisation and organisation
- AIFMs must employ at least two senior managers resident in the EU who are committed full-time to the conduct of the AIFM's business.
- The recitals encourage the appointment of at least one independent non-executive director when marketing to retail investors.
- On applying for authorisation, AIFMs will have to provide more detailed information on the human and technical resources which will be used to carry out its duties and supervise delegates.
| - Fair treatment of investors
In addition to the current requirements, AIFMs will be under an obligation to clearly identify fees and charges they allocate to AIFs and disclose and report on all fees, charges and expenses.
| - Liquidity management tools
- A list of specific liquidity management tools has been introduced. AIFM's managing open-ended funds will be obliged to select at least two of the tools from the list and produce policies and procedures for their operation.
The tools are the application of: - Redemption gates.
- Extension of notice periods.
- Redemption fees.
- Swing pricing.
- Dual pricing.
- Anti-dilution levies.
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- Host AIFM provisions and delegation
- Host AIFMs will face enhanced conflict of interest obligations and must submit detailed explanations and evidence of compliance with these.
- When delegating more risk or portfolio management to third-country entities (including the UK), retained AIFMs must notify the European Securities and Markets Authority accordingly.
- It is clarified that delegation or sub-delegation will not affect the AIFM's liability to the alternative investment fund or its investors, regardless of the location or regulatory status of a delegate.
- Delegation arrangements apply to all functions listed in Annex I, such as administration and marketing, as well as the Markets in Financial Instruments Directive top-up ancillary services.
| - Depositaries
EU AIFM's can now select a depositary in a different EU member state than an EU alternative investment fund's (AIF) own member state, subject to certain conditions and approval of the AIF's financial regulator.
| - Distribution and marketing requirements
Anti-money laundering compliance for non-EU AIFMs/AIFs will be updated to align with current EU money laundering standards and requirements, rather than Financial Action Task Force listings and exchange agreements from the Organisation for Economic Co-operation and Development
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- Loan origination activities
- A new regime for AIFs involved in loan origination has been introduced. This will partially overwrite the patchwork of rules AIFMs currently have to deal with across the EU.
- The provisions implicitly acknowledge that AIFs may originate loans, and introduces requirements and restrictions when doing so. This includes diversification rules, retention requirements (banning pure "originate-to-distribute strategies") and enhanced disclosure requirements relating to loan-related costs, as well as restrictions on lending to certain borrowers.
- Certain "grandfathering" provisions will apply to loan origination requirements.
- Loan-originating AIFs must be closed-ended unless their liquidity risk management system can be demonstrated as compatible with their investment strategy and redemption policy.
- Specified leverage limits are introduced for loan-originating AIFs of not more than 175% for open-ended and 300% for a closed-ended AIFs.
| - Extension of ancillary services
AIFMs may now administer benchmarks and credit servicing.
| - Reporting requirements
- The regulatory reporting has been expanded to include more market and asset-related data.
- "Annex IV" reporting will require AIFMs to report on all instruments, assets, exposures and relevant markets it trades in on behalf of each AIF, having previously being limited only to the AIF's principal markets and instruments.
- The scope of pre-contractual investor disclosures has also been expanded. This will include disclosures on the fees, charges and expenses borne by the AIFMD allocated to the AIF and information on the use of liquidity management tools for open-ended funds.
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What next?
AIFMD II will be less disruptive than first anticipated, but AIFMs will need to address the additional obligations imposed and ensure appropriate monitoring and compliance procedures are implemented. Furthermore, the EU's supervision of asset managers will increase as the European Securities and Markets Authority (ESMA) has been tasked to provide a more active oversight rule, including conduct peer reviews of supervisory practices: for example, to address the concerns of AIFM "letterbox" entities.
Osborne Clarke comment
AIFMD II is the first significant regulatory divergence between the UK and EU for AIFMs following the Financial Conduct Authority's clarification of where its future reform priorities lie.
It clarifies areas that have been less clear in practice and has helpfully introduced a cross-border depositary regime that will facilitate the servicing of funds in member states with a poorly developed selection of available depositaries. AIFMD II has not taken the opportunity to introduce a passport regime for third-country AIFMs; however, the national private placement regimes remain intact.
There are, however, points of interpretation and scope that still need to be resolved, including its retrospective effect and impact on non-EU AIFMs. The exact ambit of the rules will become clearer during the transposition period and as the ESMA publishes required Level 2 measures.
We welcome a framework clearly acknowledging loan origination as an investment activity funds may undertake. This will be beneficial to the growing amount of loan origination by alternative investment funds and direct lending strategies in the EU, although the impact will likely be evolutionary rather than revolutionary in nature in terms of increasing competition with the banking sector. Furthermore, funds already participating in loan origination will have to comply with AIFMD II's restrictions. AIFMs in this space will need to be proactive in considering the impacts on future fund structures undertaking direct lending activities.
AIFMD II will not apply to UK AIFMs or other non-EU AIFMs but will impact their cross-border business models when marketing into EU and acting as delegates. AIFMs operating or distributing into the EU will need to map out how the AIFMD will affect them and start planning accordingly. International businesses will need to consider how best to efficiently manage the two diverging regimes.
