Proposed amendments to EU rules for alternative investment funds have passed through technical discussions in Brussels without much damage. The outcome of these ‘level 1’ talks means that the AIFMD and Ucits review now is back on course to be completed shortly. The EU’s presidency is expected to issue a statement next week.
The update to Europe’s two main investment fund directives will see a number of improvements. Fund managers will have to adopt at least two liquidity management tools to be used in the event of unexpected high levels of redemptions. The new rules fall short of introducing a full-fledged ‘Depositary Passport’ but do enable funds to appoint a depositary in a country different to that of the fund. Investment fund managers now also face increased reporting on the services that they delegate to third parties.
The European Fund and Asset Management Association, also known as Efama, on Friday congratulated the European Commission and the co-legislators for keeping key elements of the directives intact. The EU review of the Ucits and AIFMD packages started in October 2020 with a consultation by the European Commission.
‘Robust framework’
“From the start, Efama advocated for a targeted review of the AIFMD in order not to undermine a successful framework,” said Tanguy van de Werve, Efama director general, in a statement. “We are pleased to see that this has broadly been achieved, allowing the AIFMD and Ucits Directive to remain a robust regulatory framework with improved rules. This will help Ucits and AIFs to remain internationally competitive and attractive investment options.”
The technical discussions did not address all of the industry’s objections. Efama said it questions the new provisions for loan-originating funds and retention requirements because these can impede risk management. And given that AIFMD is relevant only for a professional investor base, references to “undue costs” are not appropriate here, Efama said, adding that this is also unnecessary considering that EU supervisor Esma is already working on a report on the topic of costs.
EP objections forced delays
A push to complete the AIFMD and Ucits review last Spring when Sweden held the rotating presidency of the EU Council failed as the European Parliament insisted on a number of changes. The parliament had wanted, for example, to avoid rules that would force Alternative Investment Fund Managers, AIFMs, to report on both the assets under management and the percentage of fund assets subject to delegation arrangements. AIFMs are permitted to delegate parts of their service function to third parties.
Efama said the fact that the delegation framework under the AIFMD and Ucits remains largely unchanged is positive news, although new delegation reporting to national authorities “does introduce some unwelcome duplication”. The industry group however noted that it is confident that increased transparency will give national supervisors the desired overview of market practices.
The EU’s Spanish presidency now is expected to complete the trilogue talks between the co-legislators during the coming days, paving the way for a full adoption by the European parliament during the coming months. A person familiar with the discussions said the presidency is preparing to issue a statement in the coming days.
Luxembourg experience
When it comes to liquidity management tools, the updated frameworks will oblige EU member states to provide asset managers with a wide list of liquidity management tools within their national legislation. Asset managers then must choose at least two, and are able to decide when to activate or deactivate them.
The experience of Luxembourg’s fund industry with stranded Russian fund assets following Russia’s February 2022 invasion of Ukraine has played a major role in this legislative fine-tuning at EU level. Weeks of intense talks between the industry, represented by sector group Alfi, and regulator CSSF, eventually allowed funds to place the stranded assets in a ‘side pocket’, a liquidity management tool until then only available to hedge funds. Such a solution now becomes available also to other EU member states once the AIFMD update has been completed.
Such tools are “of fundamental importance to their ‘agency’ business model” of fund managers, said Efama. “National authorities can intervene in suspension of redemptions and subscriptions, but only in very limited and specific circumstances, and after consulting the fund manager.”
Depositary’s can be abroad
The new AIFMD rules also allow the appointment of a depositary in a country different to that of the fund, under particular circumstances and following a case-by-case assessment by the relevant authority. “While a full depositary passport across the EU was another option, we believe this would have weakened investor protection,” Efama said.