On 22 October 2020, the European Commission (EC) published a consultation: Review of EU rules on alternative investment fund managers.¹ The consultation is open until 29 January 2021 and marks the next step in the EC's formal review of the Alternative Investment Fund Managers Directive 2011/61/EU (AIFMD). The purpose of the consultation is to seek the views of stakeholders as to how to "achieve a more effective and efficient functioning of the EU AIF market as part of the overall financial system". The consultation covers items that apply to firms other than those regulated under the AIFMD, and consequently these firms, as well as institutional investors in AIFMD and UCITS regulated firms, may also want to review this consultation and assess how it might affect them.

The EC is required to review the application and scope of the AIFMD under Article 69 of the AIFMD. Accordingly, the EC submitted a report on these aspects of the AIFMD on 10 June 2020 (the Report)². The Report concluded that, whilst the AIFMD has been successful in contributing to the creation of the EU AIF market, protecting investors and monitoring financial stability, there are areas where the legal framework could be improved. The Report was also accompanied by certain priority recommendations in the AIFMD Review compiled by the European Securities and Markets Authority (ESMA) dated 18 August 2020.³ While the preparatory work leading up to the consultation has been extensive, the EC has stated that the AIFMD review aims to advance targeted adjustments rather than a complete overhaul of what it considers to be a robust regulatory regime. Importantly, the consultation and responses thereto are complementary rather than secondary to the efforts of ESMA and the policy considerations of the EC.

The current AIFMD consultation is split into seven sections of questions centred on a particular theme, reflecting the findings of the Report. These are set out in the following sections below.

Scope and authorisation

The Report found that the efficacy of the EU AIFM passport is reduced by national gold-plating, divergences in national marketing rules and varying national interpretations. It also found that the limited scope of AIFMD creates problems for marketing to semi-professional and retail investors, who are not covered by the AIFM passport but covered by varied national rules, and to smaller AIFMs who are unable to comply with all of the requirements of AIFMD. A key concern of the Report is the role of National Private Placement Regimes (NPPRs) which allow investors within that member state to access global markets. However, NPPR governance varies between member states. Allowing non-EU AIFMs, who do not need to comply with the full AIFMD requirements, to market to EU investors has resulted in an uneven playing field between EU and non-EU AIFMs.

Investor protection

The Report found that, whilst AIFMD has improved investor protection, there is room for further improvement. In particular, the lack of a depositary passport contradicts the spirit of the EU's Single Market and poses a concentration risk in member states with limited depositaries. Concern was also raised in relation to the clarity of valuation rules and suitability of the disclosure rules, given that some professional investors request information outside the AIFMD-prescribed disclosures.

International relations

Again, the Report highlighted the potential uneven playing field between EU and non-EU AIFMs and the EC wants to assess stakeholder views on how to address it. Another concern, also raised by ESMA, relates to delegation rules and methods to ensure effective risk management. Ever since the UK voted to leave the EU in 2016, ESMA has expressed concern over a potential "race to the bottom" facilitated by AIFMs acting as "letterbox entities" with the actual responsibilities carried out elsewhere. This is likely to manifest in the form of either limits on the extent of delegation permitted, or a requirement that delegates be subject to equivalent regulatory standards to AIFMD. This could be potentially very impactful for UK managers post Brexit, particularly if the AIFMD were to substantially diverge from the UK's onshored regime.

Financial stability

The Report found that, whilst AIFMD supervisory reporting requirements are necessary, there is a need to consider streamlining these requirements, given the compliance cost incurred by AIFMs and potential overlap with other EU requirements. The increased popularity of non-bank lending, the Report found, raises financial stability concerns specifically in relation to leveraged loans, collateralised loan obligations and loan-originating AIFs, as there are currently gaps in the regulation of these activities. Furthermore, the Report and the current consultation assess the potential for more centralised supervisory reporting and improved information-sharing among relevant national supervisory authorities. As with other efforts⁴ to increase Europeanisation of supervision, beyond what has been achieved in the Banking Union, this may be advanced even if stakeholders responding to the consultation do not necessarily share the same view as EU supervisory policymakers.

Investing in private companies

The Report found that AIFMD could be changed to increase its suitability for the private equity sector, as the rules surrounding reporting, depositaries, risk management and remuneration do not explicitly account for the specificities of investing in private companies. Smaller private equity fund managers, due to their size, who are not bound by the full regulatory parameters of AIFMD or EUVECA, face significant difficulties in marketing their funds in other member states. The consultation seeks stakeholder views on the current rules and whether they could be improved.

Sustainability/ESG

The Report noted the EU regulation on sustainability-related disclosures in the financial services sector and the consultation follows on the theme of how the AIF sector can participate in sustainability and ESG.

Miscellaneous

The questions in this area are designed to cover various issues, including whether national supervisors have sufficient powers under the AIFMD, as well as whether managers of AIFs and UCITS should be subject to a single licensing regime and/or harmonised metrics for leverage calculations, and the reporting on the use of liquidity management tools. The consultation also permits respondents to provide their views on other AIFMD-related issues and submit their proposals on how to improve the AIFMD legal framework concerning areas not otherwise addressed by the consultation.

The consultation remains open for responses until 29 January 2021, with the Commission intending to publish legislative proposals between June and September 2021. The EC's consultation, coupled with the Report and the work of ESMA, lays the cornerstones for what could become AIFMD II, which could be adopted in 2022 or 2023 and would likely need to be contrasted with the asset management regulatory framework of other fund jurisdictions, notably the UK. As with the current AIFMD framework in force, AIFMD II will have extra-territorial effect on funds, managers and equally investors that are domiciled in EEA jurisdictions.

While the UK has attempted to replicate AIFMD in its current form as part of the onshoring of EU legislation following the UK's departure from the EU, this does not cover future changes to AIFMD, and the UK is not bound to adopt AIFMD II if it comes into force. As of writing, it is unclear if the UK intends to align its own regime with any changes which may arise out of this review process, or if we will begin to see divergence between the two sets of rules.

In any event, any changes to AIFMD will have significant implications for UK managers managing EU funds or marketing their funds into the EU.

If you would like to discuss strategic options or any of the items mentioned above, in particular how to plan ahead for any operational impact from meeting compliance requirements and/or documentation, or how these priorities may affect your business or your clients more generally, please get in touch with our Global Asset Management contacts or our key contacts.

Dentons' global Asset Management & Investment Funds group is a team of more than 200 asset management-focused lawyers led from key management jurisdictions within the world's largest law firm, whose dominant focus is investment funds work, both transactional and advisory. Through our unrivalled global coverage, clients can be sure that wherever they have assets, make investments, do business or see opportunity, we can assist.

1. Details of which are available here and here.
2. Available here.
3. Details of which are here.
4. Including in the EU's IFR/IFD regime impacting MiFID investment firms – for further details, see the latest in our dedicated series of coverage available here.