The European Commission has published its long awaited report that assesses the application and scope of AIFMD.
On 10 June 2020, the European Commission published a report assessing the application and scope of the Alternative Investment Fund Managers Directive (AIFMD). The report was prepared pursuant to Article 69 of the AIFMD and follows an earlier report prepared by KPMG in January 2019. (For more information on the AIFMD, see Latham & Watkins’ Client Alert European Commission Report on the Operation of the AIFMD.) However, whether the Commission will ultimately suggest any proposals for change remains to be seen.
The report covers four main topics, which are summarised below.
- Impact on alternative investment funds (AIFs) and alternative investment fund managers (AIFMs)
According to the report, the efficacy of the EU AIFM passport has been impaired by national “gold-plating” as well as divergences in national marketing rules and varying interpretations of the AIFMD by national supervisors.
The report also highlights the fact that the AIFM passport allows marketing only to professional investors, and not, for example, retail investors (who are often the subject of restrictive national marketing rules). The distribution of AIFs is subject to MiFID II, which differentiates between retail and professional investors. Therefore, any change to the definitions of the types of investors in the AIFMD needs to take into account the interaction between the AIFMD and MiFID II.
In relation to third-country entities, the report acknowledges that national private placement regimes (NPPRs) are an important factor in market development, given that the passport for third-country entities has not been activated. NPPRs differ across Member States, but do not generally require firms to comply with as many requirements as under the AIFMD. This can lead to an un-level playing field between EU and non-EU AIFMs. A variety of opinions and stances exist across the EU on third-country access. While some advocate harmonising NPPRs, others favour activating the third-country passport and phasing out NPPRs. And certain Member States have prevented access entirely by third-country AIFMs.
- Impact on investors
According to the report, the AIFMD depositary regime is functioning well, but “targeted clarifications” might be needed to address situations in which AIFMs use tri-party collateral management, or when central securities depositories act as custodians. The Commission also notes that a lack of a depositary passport is at odds with the spirit of the single market.
Rules on disclosures have increased transparency, however, the report notes that some investors request information other than that prescribed by the AIFMD.
- Impact on monitoring and assessment of systemic risk
The Commission did not find any evidence that suggests AIFMD thresholds of assets under management, above which the activities of AIFMs may pose significant systemic risk, require adjustment.
The report also mentions that the expansion of non-bank lending raises financial stability concerns but that some granular information on certain assets classes (such as leveraged loans and collateralised loan obligations) is currently missing but relevant for macro-prudential oversight. Some have called for the Commission to reassess whether there is a case for setting common standards for loan-originating AIFs.
- Impact of rules on investment in private companies
The report found that transparency requirements (the so-called “portfolio company provisions”) and provisions that prevent asset stripping are not “overtly burdensome”.
The AIFMD requires the Commission, if appropriate, to put forward any proposals for change, including amendments to the AIFMD. Whether the Commission will ultimately do so remains to be seen.