The “final text” of the amending directive (AIFMD II) on the amendment of Directive 2011/61/EU on alternative investment fund managers (AIFMD) has now been published, following the political agreement on 19 July 2023, a technical trialogue on 9 October 2023 and the subsequent process of written amendments. The final text largely reflects the headlines that were outlined in our previous note, subject to a few clarifications. 

Many of the changes made to the final text from the political agreement version are minor. The more substantive changes concern three main areas: (1) the distinction between directly and indirectly originating loans, (2) supervisory reporting, and (3) delegation arrangements.

There remains a process of translation and Member States will have 24 months from the date AIFMD II comes into force to transpose the Directive into local rules. ESMA and the European Commission are empowered to produce various Level 2 rules and reports, as detailed below.

Loan origination

The final text specifies that loan origination by a fund (defined as being “involved in structuring the loan, defining or pre-agreeing its characteristics prior to the purchase”) can happen “indirectly” as well as loans being “directly” created and granted by the fund. Accordingly, indirect loan origination activities via a third party or special purpose vehicle would also presumably fall in scope of the new regime on Loan Origination Funds (LOF) outlined in our previous note.

However, the final text deletes a provision in an earlier version of Recital 9a, which stated that indirect loan origination by third parties “should be considered as delegation”. The deleted provision had presumably implied that such activities should be subject to an approval by national competent authorities (along with other delegation arrangements) and would need to be reported under the new delegation requirements to be created by AIFMD II. There is now no such implication in Recital 9a. 

Earlier versions of Article 15 had also prohibited AIFs from engaging in originate-to-distribute models (i.e., originating loans “with the sole purpose of transferring those loans or exposures to third parties”). The final text of Article 15 deletes the words “direct or indirect” in reference to loan origination – seemingly because the change to Recital 9a makes such distinction redundant.

Supervisory reporting

The final text of Recital 18 grants the European Commission, rather than ESMA, the final say on determining the form and content of supervisory reporting templates and the frequency of reporting. However, ESMA would develop a draft of the rules in the first instance, which the Commission can amend and/or adopt in the form of a Commission delegated act. Recital 16a also makes it possible for national competent authorities to share the information that they receive among their peer regulators and the European Supervisory Authorities “whenever necessary for the purpose of carrying out their duties”. 

Delegation arrangements

The final version of Recital 28 strengthens ESMA’s role in reviewing delegation arrangements. Additions to the final text state that ESMA should draw on supervisory reporting to “receive more complete information on the application of this Directive including in the area of appropriate oversight and control of the delegation arrangements, in all the Member States”. ESMA is also required to produce a report analysing market practices on delegation, substance requirements, and compliance with the EU’s delegation rules. The final text also adds a requirement that ESMA must produce its report before the next legislative review of AIFMD and UCITS Directive.

The removal of provisions from the final version of Article 20 in relation to substance requirements means that the Commission retains the power to define via delegated acts the conditions under which an AIFM might be deemed a “letter box entity” (a similar power is likewise retained in respect of UCITS). Notwithstanding this power, the final text of Recitals 5 and 35 propose a minimum level of substance for AIFMs: “At least two natural persons who are on a full-time basis either employed by the AIFM or executive members or members of the governing body of the AIFM and who are domiciled, in the sense of having their habitual residence, in the Union (should be appointed to conduct business of the management company)”.

ESMA Level 2 rules 

The final text will also require ESMA to produce:

(1) draft rules on liquidity management by open-ended AIFs that originate loans, and on supervisory reporting content and processes, within a year of AIFMD II coming into force;

(2) guidelines on the power of regulators to initiate or end the suspension of a fund, and on fund naming conventions, within 24 months of AIFMD II coming into force; and

(3) before the next reviews of the AIFMD and UCITS Directive, a report on delegation arrangements (as mentioned above).