June 2020

The European Commission has issued its much-awaited report (PDF 410 KB) on the Alternative Investment Fund Managers Directive (AIFMD). The report is short - only six pages of substance - but gives a clear sense of the direction of travel. A consultation is expected later in the year, followed by legislative proposals in early 2021. The report indicates that amendments will be few and targeted, and that a fundamental rewrite of AIFMD is not on the cards.

Meanwhile, managers of retail AIFs await final proposals from the European Supervisory Authorities to the Commission on amendments to the Level 2 rules on the PRIIP KID. Managers of AIFs investing in financial instruments, including institutional securities funds and many hedge funds, should keep a close eye on the evolving discussions on the review of MiFID II and MiFIR.

EU AIF managers may be pleased to note that major legislative change seems unlikely for the sector, but there could be changes to important points of detail, rules on remuneration policies being one example.

The Commission's report is issued in accordance with AIFMD Article 69, which required the Commission to start a review in July 2017 on the application and scope of the Directive and whether it has achieved its objectives. The June 2020 report includes multiple references to the study undertaken by KPMG in Germany for the Commission, which the Commission published in January 2019. In line with KPMG's findings, the Commission does not propose a full re-opening of the Directive.

The key points in the report are:

• AIFMD improved access to national markets, but the marketing passport permits marketing only to professional investors and is impaired by national interpretations and gold-plating. Also, smaller AIFMs that are unable to comply with all AIFMD requirements encounter significant barriers to raising capital across borders. The Commission notes that any change to the AIFMD definitions of types of investors needs to take into account the interaction of AIFMD with the relevant provisions of MiFID II.
• The report also notes that financial intermediaries, such as banks and insurance companies, actively promote mainly in-house funds to retail investors, rather than offering a broader range of third-party AIFs. The increasing role of platforms is changing this dynamic and, under Capital Markets Union, the Commission is considering improvements to the distribution of investment products and is reviewing disclosure requirements.
• The importance of national private placement regimes (NPPRs) is acknowledged, but the report notes that they differ among Member States and require AIFMs to implement only a very limited number of the AIFMD requirements, creating an un-level playing field between EU and non-EU AIFs/AIFMs. There are differing views on whether to activate the third-country passports or harmonise NPPRs. The Commission makes no assessment, saying that because the passports have not been activated, there is no market information to draw on.
• On regulatory reporting, the report says the requirements are confirmed to be necessary but need to be streamlining, while being mindful of the sunk costs already incurred by AIFMs. The provisions relating to the acquisition of controlling stakes in private companies and against asset-stripping are said not to be overly burdensome, but it was not possible to establish their added value due to the lack of available data.
• The current gross and commitment methods for the calculation of leverage are judged to be appropriate by many stakeholders, says the Commission. However, some adjustments may be called for by the recommendations of IOSCO and the ESRB. This work will be covered by a specific proposal covering both UCITS and AIFs.
• The reported shift from variable to fixed remuneration is said to have introduced greater risk-aversion in the sector and increased overall awareness of good remuneration systems. The Commission says, though, that some stakeholders have called for aligning the AIFMD rules with the similar regimes in other sectorial legislation such as under the Capital Requirements Directive (CRD). 
• It is noted that targeted clarifications may be needed to the depositary rules where AIFMs use tri-party collateral management or when central securities depositories act as custodians. Also, the lack of a depositary passport is said to be at odds with the spirit of the single market.
• As noted in the KPMG study, there may be issues with the binary nature of the valuation rules, whereby stakeholders understand that a combined use of internal and external valuers is excluded, as well as uncertainty around the liability of external valuers, which is determined under national laws.
• Provisions on conflicts of interest and disclosure are said to achieve their objective. The call in the KPMG report for a rationalise of the disclosure requirements, on the basis that professional investors make their own transparency demands of AIFMs, is not mentioned. However, this point has been recognised up by the Commission in the context of the MiFID II review.
• The Commission says that several stakeholders have asked it to reassess the case for setting common standards for loan-originating AIFs. The possibility of specific rules in this area has been on the table for some time.

• Are we closely following the AIFMD and MiFID II reviews and assessing what they might mean for our business?
• How important to our business are maintenance of NPPRs versus the potential for third country passports (which would enable us to manage and market AIFs cross border via one registration)? 
• Have we considered how IOSCO's recommendations on leverage calculation might impact our product offerings and disclosures, especially when coupled with the ESRB's recommendation for national regulators to set leverage limits?
• Are we knowledgeable of the current remuneration rules under CRD and how we might be impacted if the AIFMD remuneration rules are aligned more closely with them?