Drastic changes to AIFMD and UCITS Directive?




The Alternative Investment Fund Managers Directive (AIFMD) entered into force on July 21, 2011, and became effective in most member states on July 22, 2013. That means that for seven years now, both the investment fund market and regulatory authorities have worked with and gained experience with the AIFMD. Like many other European directives, the AIFMD requires that its application and functioning is reviewed by the European Commission (EC).The EC is currently performing this review.

An important part of the EC review process includes taking the views of stakeholders, national competent authorities (NCAs) and other bodies into account. One of these institutions is ESMA, which in August 2020 published a lengthy and detailed letter to the EC in which it shared the key topics of the AIFMD review where ESMA sees the need to consider amendments to the framework. In many cases, these suggestions also require consideration of changes to the UCITS framework. The letter has two annexes. Annex I sets out 19 key issues in the legislative framework where ESMA recommends revisions and Annex II sets out more specifically the key reporting issues where improvements could be made. This article focusses on Annex I.

We feel the letter itself is worth reading and easily understandable. We in particular recommend to read ESMA’s views on the delegation and substance requirements, where the market might face important changes. To facilitate your review of the letter and its possible implications, in the overview below we briefly address the 19 key areas and proposed improvements. We also reflect on the possible market impact, should the EC follow ESMA’s recommendations.


ESMA’s letter can have a major impact on the fund industry. We at Dentons follow these developments very closely. We would be happy to discuss the ESMA recommendations with you and what these might mean for you and your business.

Feel free to contact Pien Kerckhaert, Partner Financial Regulation in Amsterdam.


Key area  Concerns / proposed improvements  Possible impact
1. Harmonization of AIFMD and UCITS regimes • On some topics, the AIFMD provisions are more granular and specific than comparable provisions under the UCITS directive. Examples are risk management, liquidity management and delegation requirements.

• ESMA feels that there might not be any objective justification for such differences, and suggests that the EC considers aligning the frameworks where appropriate. 

• UCITS regime might become more granular and specific with respect to certain topics such as risk management, liquidity management and delegation requirements.
2. Harmonized reporting for UCITS • ESMA suggests that after improvements to AIFMD Annex IV reporting have been made, harmonized UCITS reporting should generally be aligned with those requirements, while allowing for tailoring to the characteristics of UCITS funds. • AIFMD Annex IV reporting and UCITS reporting may become more similar.
Scope of additional MiFID services and application of rules
• ESMA states there is need for legislative clarification on the scope of permissible business activities listed in Article 6(4) AIFMD and Article 6(3) UCITS Directive.

• By way of example, there is a lack of clarity on whether and to which extent MiFID and/or AIFMD/UCITS rules could be applied to discretionary portfolio management or investment advice on assets that do not qualify as ‘financial instruments’ under MiFID, such as real estate (taking into account that the relevant MiFID provisions do not apply to them). NCAs expressed divergent views on this.

• ESMA emphasizes the importance of ensuring that AIFs / UCITS and its managers and MiFID investment firms continue to be subject to the same regulatory requirements when delivering the same level of services.

• In some jurisdictions the scope of permissible business activities for AIFMs might be broadened and in some jurisdictions it might be narrowed.

• Clarity on whether MiFID rules must be applied to AIFMs that provide individual portfolio management with respect to real estate.

Delegation and substance
• Extent of delegation: ESMA sees that in many cases, AIFMs and UCITS management companies delegate to a large extent the collective portfolio management functions to a third party. This creates a need for further legal clarity on the maximum extent of delegation to ensure that adequate substance is retained by AIFMs and UCITS management companies within the EU.

• Applicable regime in case of delegation and regulatory arbitrage: ESMA sees that in many cases the delegates are subject to different regulatory regimes, which adds further regulatory complexity and provides for additional supervisory challenges for NCAs, in particular where the delegate is established in another member state or outside the EU. ESMA would like legislative changes to ensure that the management of AIFs and UCITS is subject to the AIFMD or UCITS framework, wherever the delegate may be located.

• Use of seconded staff: ESMA sees an increased use of secondment arrangements where workers from professional services firms are temporarily seconded to an AIFM or UCITS manager. ESMA would like to see legislative clarifications as to the question whether those arrangements are in line with the AIFMD/UCITS substance and delegation rules, especially where the secondee is not working in the AIFM or UCITS home member state.

• List of collective portfolio management functions and distinction from ‘supporting tasks’: Group entities within or outside of the EU often provide ‘supporting tasks’ to the authorized AIFM or UCITS management company. NCAs expressed divergent views on whether those activities qualify as mere ‘supporting tasks’ or rather as collective portfolio management functions subject to the delegation regimes set out in the AIFMD and UCITS frameworks. ESMA is in favor of more specific and granular requirements in this respect in order to ensure legal certainty and supervisory convergence.

• White-label service providers: ESMA suggests more clear criteria for white-label service providers. These are fund managers who provide a platform for business partners by setting up funds and generally delegating investment management functions to business partners or appointing them as investment advisors or informally following their guidance/instructions; in the market these are also referred to as ‘host AIFMs’. There is a discrepancy between NCAs as to whether those business models comply with the AIFMD and UCITS regimes.

• Could potentially have large impact, for instance: existing delegation arrangements might be no longer permitted, service providers that are currently not subject to AIFMD/UCITS might become so, existing seconded staff arrangements might be no longer permitted or need to be altered.
Availability of additional liquidity management tools
• ESMA notes that the availability of additional liquidity management tools (LMT) in all EU jurisdictions should be consistent. A common legal union framework regulating liquidity management instruments would support this.

• ESMA also proposes including the availability of LMT in the UCITS Directive.

• LMT may be expanded.
• AIFMD has two measures of leverage calculation: the gross notional exposure (GNE) method and the commitment method. ESMA believes that IOSCO recommendations of December 2019 for a framework assessing leverage in investment funds give rise to a need to amend the current reporting of the gross method calculation.

• ESMA proposes that there is merit in considering amending the measurement of the commitment amount by changing the notional amounts of interest rate derivatives contracts by the 10-year equivalent bond duration. This would allow comparability between contracts of different underlying duration, making aggregation and comparison possible for systemic risk monitoring purposes.

• May amend the way in which AIFMs and UCITS managers calculate and report leverage.
AIFMD reporting regime and data use
• ESMA conducted a separate ad-hoc analysis of the problems it sees merit in resolving in relation to the AIFMD reporting system and the use of data. This analysis can be read in Annex II of ESMA’s letter. • Fund managers may face various changes in reporting requirements.
8. Harmonization of supervision of cross-border entities • Experience with the AIFMD (and UCITS) framework shows that there is still a lack of clarity in what the precise responsibilities of home and host supervisors are in some cross-border marketing, management and delegation cases.

• ESMA is calling for clarity to reduce uncertainty about cross-border internal market activities, not least because AIFMs often use branches or delegate a variety of functions to third parties across member states.

• ESMA is pushing the Commission to provide greater clarity on what analysis the host NCA should undertake when an AIF is marketed on a cross-border basis under Article 32 of AIFMD.

• The supervision of branches is another area where ESMA sees merit in further harmonization.

• In cross-border activities, the powers of host and home NCAs may change, leading to new or other obligations for fund managers.
Semi-professional investors
• Currently there is no definition of “semi-professional” investor in AIFMD. There are, however, slightly different approaches used in the EuVECA, EuSEF and ELTIF regulations.

• ESMA sees merit in clarifying the definition of 'professional investors' under AIFMD and believes that the potential implementation of any new categories of investors under AIFMD (such as ‘semi-professional’ investor) should be followed by acceptable investor protection rules and that passporting activities should only be allowed for professional investors in relation to marketing.

• May possibly lead to a new category of investors under AIFMD, with its own regulatory treatment.
Loan origination in AIFMD
• ESMA believes that there should be a specific framework within the AIFMD for loan origination, with rules for authorization for loan-originating funds, types of funds (closed-ended vehicles), admitted investors (complying with ELTIF rules), and organizational and prudential requirements for loan-originating funds (e.g. leverage, liquidity, stress testing, reporting, diversification, etc.). • May possibly lead to a new tailor-made set of rules for loan originating funds.
Application of depositary rules to CSDs
• ESMA recommends that AIFMD be clarified to allow depositaries not to apply the rules of delegation to central securities depositories (CSDs) as issuer CSDs, although they should be required to apply them to CSDs as investor CSDs. ESMA argues that this amendment should also be made in the UCITS Directive in due course. • May allow depositaries to delegate to issuer CSDs without applying the AIFMD delegation rules.
12. Proportionality principle for remuneration requirements • ESMA is pushing for a clarification that the proportionality principle applies to all remuneration requirements in paragraph 1(a) to (r) of Annex II of AIFMD (Article 14b(1)(a) to (r) in the UCITS Directive). • Quantitative variable remuneration thresholds and pay-out structures may only have to be applied where it is proportionate to do so, taking into account the size, nature, scope and complexity of the activities of the relevant UCITS management company/AIFM.
Sub-threshold AIFMs
• AIFMD exempts small AIFMs (sub-threshold AIFMs) from most of the Directive, but leaves discretion to member states on what to expect of such sub-threshold AIFMs. ESMA recommends that the Commission further clarifies the powers of member states in this respect. • Might limit or increase the local requirements for sub-threshold AIFMs.
External valuer liability
• According to the AIFMD legislation “the external valuer shall be liable to the AIFM for any losses suffered by the AIFM as a result of the external valuer’s negligence or intentional failure to perform its tasks”. ESMA underlines that in some jurisdictions the reference to negligence is perceived as covering not only ‘gross negligence’ but also ‘simple negligence’, acting as a disincentive for external valuers to facilitate services due to liability issues. ESMA believes that AIFMD should be revised to refer to a ‘gross negligence’ norm, rather than negligence. • Might limit the liability of external valuers in some jurisdictions.
15. Amendments to definitions • ESMA recommend to further define ‘AIFs’ in line with the ESMA guidelines on key AIFMD concepts by introducing a definition of 1) general commercial or industrial purposes in connection with real estate projects, 2) pooled return in general and 3) investment policy.

• ESMA also sees merit in specifying the distinction between holdings and private equity funds and clarifying the definition of a joint venture.

• ESMA points out that the issuance of certificates and crypto assets might under some interpr

• Might limit or increase the scope of AIFMD in some jurisdictions.
Clear definition and rules for reverse solicitation
• ESMA would like to see a standard approach to reverse solicitation across the EU, with a single EU-wide definition and understanding. • Might limit or increase the possibility to rely on reverse solicitation in some jurisdictions.
17. Convergence in treatment of significant influence • ESMA suggests that further consideration be given to the potential significant influence that fund managers can exercise on the management of an issuing body, a matter covered by Article 56(1) of the UCITS Directive but not directly addressed in AIFMD. • A regime similar to that of Article 56(1) UCITS Directive might be introduced in AIFMD.
Increasing digitalization in AIFMD
• ESMA advises the Commission to explore the opportunity provided by the AIFMD review to allow more digital contact rather than using paper forms. For example, Article 8(5) of the AIFMD could be amended to allow an NCA to notify an applicant in electronic format of the authorization rather than "in writing". • Might increase the possibility to communicate with NCAs via email.
Depositary passport
• ESMA asks the Commission to research the benefits of introducing a passport for depositaries but does not go as far as suggesting that a depositary passport should be established. • Might introduce a passport for depositaries.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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