On 16 May 2022, the European Parliament issued its draft report (“Report”) on the European Commission’s (“EC”) proposals to amend the existing Alternative Investment Fund Managers Directive (“AIFMD”). The Report, which reflects stakeholder feedback, seeks to align regulation with commercial and legal reality.
The Report proposes the following key changes to AIFMD:
- expansion of the definition of “professional investor” to effectively include high net worth individuals (“HNWI”) and family offices;
- changes to AIFMD delegation rules which prevents the appointment of a third-party distributer by an alternative investment fund (“AIF”) being considered a delegation under AIFMD; and
- the removal of certain quantitative thresholds in loan-originating funds.
These changes are discussed in further detail below.
expanded definition of “professional investor”
The definition of a “professional investor” under AIFMD currently mirrors the definition of a “professional client” under the MiFID II Directive. The Report proposes to expand the definition of “professional investor” under AIFMD to include the following:
- persons who have committed to investing a minimum of EUR 100,000 in an AIF and who have provided written agreement to be treated as a professional investor and an acceptance of the associated risks of this classification, which could be akin to a client classification or opting up letter; and
- persons who are senior staff members, portfolio managers, directors and employees of the AIFM or an affiliate and who are sufficiently knowledgeable about the AIF concerned.
The proposals aim to make it easier to market to HNWI, family offices and experienced professionals. The proposals align AIFMD at a European level with national law in certain jurisdictions which have greater scope to consider HNWI and family offices as professional investors (such as Luxembourg and Ireland). Note that this change does not apply to offerings by non-EU AIFMs which are determined by local rules. Following its departure from the EU, the UK has put in place a domestic regime which generally maintains the rules set out in AIFMD (the “UK AIFMD”) and which mirrors the definition of a “professional client” under the MiFID II Directive. As AIFMD no longer binds the UK, the UK may choose to align the definition of “professional investor” under the UK AIFMD with any changes to AIFMD, however it is not bound to do so and it may diverge in its approach from that of the EU.
The Report acknowledges that the marketing of an AIF is not always conducted by the AIFM, and may be conducted by third-party distributors, either on behalf of the AIFM or on their own behalf, or by an independent financial advisor without the AIFM’s knowledge. The Report proposes changes to the AIFMD delegation rules that result in:
- the appointment of a third-party distributer by the AIF; or
- a third-party distributer acting on its own behalf
not amounting to a delegation under AIFMD, and therefore, not being subject to the AIFMD delegation rules.
Additionally, the Report proposes removing the requirement for national competent authorities (“NCAs”) to report annually to ESMA on AIFMs delegating more portfolio or risk management function than they retain to entities in third countries (effectively imposing a 50% quantitative threshold). Instead, the Report proposes that AIFMs should be required to provide information as part of their annual reporting to regulators under Article 24 AIFMD (such as the functions delegated, or sub-delegated and the periodic due diligence measures carried out by the AIFM overseeing the delegate).
The Report states that “loan originating funds have positioned themselves as a very positive alternative financing instrument for real economy, SMEs and other investors”. The Report’s proposals aim to “do away with unnecessary risk retention and to caution against creating specific rules”. On this basis, the Report proposes the following:
- instead of the EC’s proposal for AIFs to be required to retain 5% of the notional value of loans the AIF has originated and subsequently sold on the secondary market, an AIF will be prohibited from having an investment strategy of loan origination with the “sole purpose” of transferring such loans to third parties;
- instead of the EC’s proposed requirement to adopt a closed-ended structure if the notional value of an AIF’s originated loans exceeds a quantitative threshold of 60% of its NAV, an AIF will be required to adopt a close-ended structure where the AIFM cannot demonstrate to its NCA that the AIF has sufficient liquidity robustness (and ESMA will adopt regulatory technical standards on criteria for this);
- for shareholder loans that do not exceed 150% of the AIF NAV, an exemption to the requirement for an AIFM to implement effective policies, procedures and processes for the granting of loans;
- lending to a single borrower that is a financial institution should be limited to 20% of the fund’s capital, commitments, or overall subscriptions. The original proposal only referred to “capital” and the addition of the term “commitments” provides a less ambiguous definition (as the term is already widely used as a reference point for investment limitations); and
- a specific, narrow definition of “loan origination” being “the granting of loans by an AIF as the original lender”, which should, for example, exclude funds acquiring mostly syndicated debt.
The Report’s proposals will be debated, following which, a majority of Members of the European Parliament will determine which amendments are to be passed through to the Committee Report stage to be scrutinised by the Council of the EU. Overall, the proposals are to be welcomed and are an improvement on the amendments proposed by the EC. However, the number of amendments which are adopted in the course of the legislative process are yet to be seen.
For more information, and any guidance or advice on AIFMD, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.
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 Annex II of the MiFID II Directive states that a “Professional client is a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risk that it incurs” and provides criteria to be complied with to be regarded as a professional.