The European Commission published its legislative proposal for AIFMD2 on 25 November 2021 (the "Proposal"). The Proposal is a mixed bag, with some potentially problematic provisions (for example, new rules on liquidity risk management) but also some potential opportunities (for example, in respect of pan-EEA loan origination). The Proposal will be modified further as it progresses through the legislative process, as a result of input from the European Parliament and European Council.

ESMA (the European Securities and Markets Authority) had urged the European Commission in its 18 August 2020 letter to propose some radical alterations to key aspects of AIFMD (including new quantitative limits on delegation), many of which were tested in the consultation conducted in late 2020 by the European Commission. But the Proposal has steered away from most of the challenging ideas pushed by ESMA. Many, upon reading the Proposal, will have been relieved. But it contains some provisions which would empower ESMA and national competent authorities to take a harder line in key areas such as delegation and liquidity risk management.

Many UK asset management groups had to restructure their EEA operations in advance of their loss of passporting rights at the end of the Brexit transition period. Many of their restructuring proposals were scrutinised by relevant national competent authorities, with ESMA helping to ensure that they applied a common approach. This exercise in scrutiny convinced ESMA that AIFMD2 needed to be tightened in some key areas, such as rules on delegation and substance, with some asset management groups, in its view, pushing the boundaries in terms of acceptable levels of EEA-based substance.

The Proposal seeks to strengthen the ability of national competent authorities to identify structural weaknesses in asset managers.

For example, when seeking authorisation as an alternative investment fund manager in an EU member state, the applicant firm will need to provide a detailed description of governance arrangements, including details of senior management reporting lines, time allocated to their responsibilities, resources available to support their activities and "a detailed description of the appropriate human and technical resources that will be used by the AIFM for monitoring and controlling the delegate", where there is delegation of portfolio management.

Further, the Proposal provides that national competent authorities must make an annual notification to ESMA in respect of delegation arrangements under which AIFMs delegate more portfolio or risk management functions to non-EEA managers than they retain.

All of this points to ESMA continuing, via national competent authorities, to scrutinise delegation arrangements and levels of EEA substance. Particular areas worth watching, in terms of where this scrutiny will focus, are "AIFMs for hire" and the continued use of non-EEA distribution teams to raise funds from EEA investors.

By contrast, there is significant commercial opportunity in the Proposal's addition of loan origination as a permitted activity of AIFMs, with the Proposal explaining that the addition of loan origination to Annex I of AIFMD "means AIFs could extend loans anywhere in the Union, including cross-border".  

Our detailed briefing on the Proposal is here.

Author: Simon Crown