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In a recent letter to the European Commission, the European Securities and Markets Authority (ESMA) highlighted no fewer than 19 key areas of the Alternative Investment Fund Managers Directive (AIFMD) Framework that it recommends the Commission address as part of its upcoming review.

ESMA notes that it has had significant exchanges with National Competent Authorities in Member States (NCAs) regarding their practical experience in supervising firms in accordance with the AIFMD rules. During the course of such exchanges with NCAs, ESMA has identified areas of the AIFMD framework that could be improved and encourages the Commission to support the areas identified in the Letter in order to improve the effectiveness and soundness of AIFMD. Annex I of the Letter sets out the 19 key proposed policy enhancements which we detail below. Many of the recommendations also require consideration of changes to the UCITS legislative framework.

Annex I – ESMA’s proposed changes to AIFMD

1. Harmonisation of AIFMD and UCITS regimes

ESMA points out that in some cases, AIFMD provisions (such as risk management and liquidity management requirements) are more specific than the comparable ones under the UCITS framework. ESMA recommends that the Commission consider aligning AIFMD and UCITS frameworks where appropriate, as applying different requirements to managers of both UCITS and AIFs creates additional burdens for the managers concerned and leads to divergences in supervisory and regulatory outcomes.

2. Harmonised reporting for UCITS

ESMA recommends that UCITS reporting should generally be aligned with improved AIFMD requirements, while allowing them to be tailored to the characteristics of UCITS funds.

3. Scope of additional MiFID services and application of rules

Due to differences in interpretation by NCAs, the permissible activities in relation to so-called MiFID “top up” services is broader in some Member States than others. Accordingly, ESMA recommends that the scope of permissible business activities listed in Article 6(4) of AIFMD and Article 6(3) of the UCITS Directive be clarified.

4. Delegation and Substance

  • ESMA understands that delegation of portfolio management functions to non-EU entities is likely to increase post Brexit. ESMA notes that delegation may increase operational and supervisory risks and raises questions as to whether those AIFs and UCITS can be effectively managed by the AIFM or UCITS management company.

  • ESMA proposes legal clarification on the maximum extent of delegation to ensure supervisory convergence and ensure AIFMs and UCITS managers maintain sufficient substance in the EU.

  • Specifically, ESMA proposes a clearer redraft of Article 82 of the AIFMD Delegated Regulation[1] to reconsider or complement the qualitative criteria in Art 82 (1) (d) with quantitative criteria or provide a list of core or critical functions that must always be performed by an AIFM and may not be delegated to third parties. ESMA also proposes that this be matched in the UCITS Directive.

  • ESMA states that to avoid regulatory arbitrage and protect EU investors, legislative amendments should ensure that delegates in jurisdictions not directly subject to AIFMD/UCITS are subject to the regulatory standards of the AIFMD/UCITS frameworks

  • ESMA observes the increase of secondment arrangements where staff from professional services firms/consultancies or group entities are seconded to AIFM and UCITS management companies on a temporary basis. In some of those cases, the seconded staff was not operating in the Member State of establishment of the authorised AIFM or UCITS management company, but in another Member State or even outside of the EU. ESMA suggests legislative clarification as to whether those secondment arrangements are in line with the substance and delegation rules set out in the AIFMD and UCITS frameworks.

5. Liquidity management tools (“LMTs”)

ESMA believes that LMTs should be available throughout all EU jurisdictions and that LMTs should be consistent within the EU. Accordingly, ESMA proposes an EU legal framework governing the LMTs and recommends that the Commission use the opportunity of the AIFMD review to provide for the full availability of all LMTs as outlined in the ESRB Recommendation within the AIFMD framework and that this should similarly be the case for the UCITS Directive.

6. Leverage

ESMA believes that the gross method of calculation of leverage under Article 7 of Commission Delegated Regulation (EU) No 231/2013 should be revised in order to ensure alignment with the IOSCO Recommendations for a Framework Assessing Leverage in Investment Funds.

7. AIFMD reporting regime and data use

ESMA has conducted a separate ad-hoc analysis of the issues it sees merit in addressing regarding the AIFMD reporting regime and data use. ESMA's analysis is set out in Annex II to the Letter and covers matters such as clarifying the definition of 'leveraged fund'; restricting the use and publication of the reported data and outlining requirement to report on ESG metrics.

8. Harmonisation of supervision of cross-border entities

ESMA is of the opinion that there is a lack of clarity in relation the responsibilities of home and host NCAs when it comes to activities such as delegation, the cross-border marketing and management of AIFs. ESMA recommends further clarification in relation to of the roles and responsibilities of home and host NCAs in relation to the supervision of branches, management of AIFs on a cross border basis and marketing of AIFs on a cross-border basis.

9. Professional investor status

ESMA has identified a wide variety of definitions across the EU on what constitutes a “professional investor”, therefore it sees merit to clarify the definition of “professional investors” under AIFMD.

10. Loan origination in AIFMD

ESMA proposes that there should be a specific framework for loan origination within the AIFMD. This reflects an earlier opinion issued by ESMA in April 2016 on key principles for a European framework on loan origination by funds.

11. Application of depositary rules to CSDs

ESMA recommends that AIFMD be clarified to allow depositaries not to apply the delegation rules to CSDs in their capacity as Issuer CSDs. Depositaries should be required to apply the delegation rules to CSDs in their capacity as Investor CSDs. Furthermore, this change should also be made in the UCITS Directive when it is reviewed.

12. Proportionality principle for remuneration requirements

ESMA recommends that AIFMD and UCITS frameworks be updated to clarify that the proportionality principle applies to all remuneration requirements in paragraph 1(a) to (r) of Annex II of AIFMD (Article 14b(1)(a) to (r) in the UCITS Directive).

13. Sub-thresholds AIFMs

Member States currently have discretion as to what rules they impose on sub-threshold AIFMs[2]. ESMA notes that some NCAs would prefer to have an explicit EU legal basis for Member States to introduce national requirements with a view to supervising sub-threshold AIFMs sufficiently. ESMA recommends that the Commission consider further clarifying the power of Member States to apply additional requirements under their national law to sub-threshold AIFMs.

14. Liability of External Valuers

At present some external valuers may be unwilling to accept valuation mandates from AIFMs because the standard of liability is understood to cover not only 'gross negligence' but also 'simple negligence'. ESMA proposes that the definition of “negligence” could be limited to “gross negligence” in AIFMD legislation rather than through ESMA guidance.

15. Amendments to definitions

  • ESMA proposes further defining ‘AIFs’ consistent with the ESMA guidelines on key concepts of the AIFMD
  • ESAM proposes clarification as to whether the issuance of certificates, and crypto assets fall within the scope of AIFMD and welcome clear rules in order to achieve a harmonised EU approach.

16. Clear definition and rules for reverse solicitation

ESMA states there is merit in achieving greater clarity on the definition of reverse solicitation. ESMA acknowledges that the AIFMD review may not be the most appropriate context (i.e. taking into account the separate review to be undertaken by the Commission under Regulation 2019/1156 on facilitating cross-border distribution of collective investment undertakings), however, ESMA would like to seize the opportunity of the Letter to underline the importance of clarifying the notion of reverse solicitation, which is currently subject to divergent practices and interpretation at national level, to protect investors.

17. Convergence in treatment of significant influence

ESMA suggests that further consideration be given to the possible significant influence that fund managers may exercise over the management of an issuing body, an issue covered in Article 56(1) of the UCITS Directive but not specifically dealt with in AIFMD. ESMA would also wish to see further EU harmonisation on what constitutes "significant influence" (eg expressed in terms of harmonised EU thresholds) in both AIFMD and the UCITS Directive.

18. Increasing digitalisation in AIFMD

ESMA believes that the AIFMD review is an opportunity for the Commission to allow more digital communication instead of paper form. For instance, Article 8(5) AIFMD on applications for authorisation states that the home NCA of the AIFM “shall inform the applicant in writing”. This particular provision could be amended in a way to make sure that it would be sufficient if the NCA informs the applicant in an electronic format.

19. Depositary passport

ESMA notes that there has long been a discussion in the EU on the merit of a depositary passport, since the UCITS II debate in 1993 at least. While not recommending the creation of such a passport in AIFMD and the UCITS Directive, ESMA believes the Commission may study the benefits and risks further in the context of the AIFMD Review.


ESMAs Letter feeds into the Commissions current and ongoing review of the application and scope of AIFMD, which the Commission is required to carry out under Article 69 of AIFMD. It is expected the Commission will issue a detailed consultation in September 2020 regarding a review of the AIFMD framework. While ESMAs Letter has no formal force and it is unclear at the moment if any of ESMAs recommendations will be taken up by the Commission, it is worth bearing in mind their recommendations.

A legislative proposal amending AIFMD is targeted for publication in Q2 2021. We continue to monitor developments and any outcome of the Commissions consultation in advance of any legislative proposals to follow.

If you would like to discuss the above or have any questions, please contact a member of our Investment Funds team.

[1] Commission Delegated Regulation (EU) No 231/2013

[2] AuM of €100mn including assets acquired through use of leverage or €500mn in case of management of only unleveraged AIFs that have no redemption rights exercisable during a period of 5 years)

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