Political agreement on the AIFM II Directive in the EU

Introduction to the AIFM II Directive

The European Commission presented the original draft of the AIFM II Directive on 25 November 2021. In addition to several minor adjustments, the draft primarily included modified rules regarding delegation, liquidity risk management, supervisory reporting and disclosure obligations, depositary and custody arrangements, and loan-issuing alternative investment funds (AIFs). In the table below, you can quickly overview which changes have been retained from the European Commission's original draft and which changes have been altered after negotiations with the EU Council and the EU Economic and Monetary Committee.

Table of changes from the European Commission's original draft and changes after negotiations with the EU Council and the EU Economic and Monetary Committee.

You can find a more detailed overview of the adjusted changes below. We have also summarized the changes that have not been altered after the political agreement, providing you with a comprehensive overview of the upcoming AIFM II Directive. However, please note that the following summary is not exhaustive.

What modifications have been made?

Application for authorization

Notification requirement for significant delegation of portfolio or risk management functions to third parties outside the EU: The requirement to notify significant delegation of portfolio or risk management functions to third parties outside the EU to the national supervisory authorities in the EU, ESMA, was included in the original draft. However, this requirement has been removed in the final version of the draft. Nevertheless, the final version includes additional lines in the application form for the delegation authorization.

Minimum subtance requirement: The requirement for a minimum level of substance in the original draft has remained unchanged. Specifically, this requirement states that AIFs must not be empty shell companies but must have at least two physically present full-time employees residing in the EU associated with the operation of the AIF. Therefore, this represents an additional organizational requirement in addition to those already known, such as those in the Danish Act on Managers of Alternative Investment Funds, etc., or the regulation that supplements the AIFM. It should be noted that the requirement for a minimum substance level applies not only during the application for authorization but also during the subsequent operation of an AIF.

Loan-issuing AIFs

Risk management

Prohbition of loan issuance with third-party transfer as the sole purpose: The final draft of the AIFM II Directive maintains the original proposal to introduce a prohibition on managing AIFs whose investment strategy solely consists of issuing loans for the purpose of transferring them to a third party.

Requirements for effective policies and procedures for credit risk assessment, etc.: The final draft also maintains the requirements that AIFs issuing loans must have effective policies and procedures for credit risk assessment, as well as management and control of their credit portfolios. However, the requirements for policies and procedures have been relaxed in cases where the borrower is a shareholder in the AIF, and the total loan amount does not exceed 150% of the AIF's capital.

Requirement for diversification if the borrower is a financial institutuion: The specific requirement for diversification in loans from AIFs to financial institutions is retained in the final draft of the AIFM II Directive. Managers must ensure that loans are not granted to the same borrower for more than 20% of the AIF's total capital if the borrower is either an AIF or a UCITS. Note that this lending restriction does not apply to borrowers other than those mentioned.

Liquidity management

Requirement for closed-ended structure for significant loan issuance: The final draft maintains the requirement that loan-issuing AIFs must have a closed-ended structure unless the manager can demonstrate to the national supervisory authority that the AIF has an appropriate liquidity management system. In the original draft, there was an exemption to this requirement if the AIF's assets under management were less than 5 billion euros, but this exemption has been removed in the final draft. It is expected that ESMA will develop regulatory technical standards (RTS) to assess whether a liquidity management system is "appropriate."

Requirement for selection og liquidity risk management tools: The European Parliament also follows the European Commission's original proposal that managers overseeing open-ended AIFs must choose at least two appropriate liquidity risk management tools from a predetermined list in the annex of the AIFM. The manager must also develop detailed policies and procedures for activating and deactivating the chosen liquidity risk management tools. Additionally, certain liquidity risk management tools require the manager to notify the national supervisory authorities of the activation or deactivation of such tools.

We assume that AIFs will have to choose liquidity risk management tools that apply regardless of whether the AIF is marketed to retail investors or professional investors. It is stated in the AIFM II Directive that disclosure of the chosen liquidity risk management tool is one of the disclosure obligations that AIFs must provide to investors according to Article 23(1) of the AIFM Directive, which is implemented in Section 62 of the Danish Act on Managers of Alternative Investment Funds – applicable to both professional and retail investors.

What about depositaries?

Relaxation of the requirement for depositaries to be established in the same member state as the appointing AIF: The original draft proposed an exception to a requirement in the AIFM that depositaries should be in the same member state as the appointed AIF if certain conditions were met. The proposal was made in response to the lack of depositaries in certain smaller European markets. The exception to the location requirement is still pending adoption after the political agreement, but the conditions for the exception have been changed. Now, the threshold for the exception is set at 60 billion euros instead of 30 billion euros. This means that the total value of assets to be managed by a depositary in a single market must be at least 60 billion euros before an exemption can be granted from the requirement for the depositary to be in the same member state as the appointed AIF.

Marketing authorization under the third-country regime

The final draft maintains the proposed changes from the original draft. The marketing authorization for AIFs from third countries is still obtained in accordance with Articles 36 and 42 of the AIFM. However, the blacklist is being amended so that it no longer includes AIFs established in countries listed as uncooperative by the FATF. Instead, the blacklist now includes AIFs established in high-risk countries under Article 9(2) of Directive (EU) 2015/849, as well as AIFs established in countries classified by the EU Council as non-cooperative in tax matters.

What will happen now?

Since 8 March 2023, trialogue negotiations between the European Commission, the European Council, and the European Parliament have begun. The purpose of these negotiations is to achieve a final formulation and wording of the amendments to the directive that will modify the AIFM. We expect the negotiations to be concluded in the very near future, after which the AIFM will have its final wording, and if all goes according to plan, the AIFM II will likely come into force in 2025. After the directive's entry into force, member states will have 24 months to implement the changes into their national legislation.

Whether you simply want more details about the upcoming AIFM II or if you are a manager wanting to know what steps you can already take to best prepare for the forthcoming directive, please contact Partner Kim Høibye or Attorney Jakub Zakrzewski from our Banking and Finance team, who are ready to assist you with comprehensive knowledge of the changes in this area.