Exploring AIFMD II: Understanding Key Changes on delegation arrangements 

28th February 2024

Introduction  

On 9 November 2023, the European Council published the final compromise text (further referred to as “AIFMD II”), amending Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”) and Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS Directive”). 

The final text of the AIFMD II was approved by the member states of the European Union (“EU”) in the European Parliament on 7 February 2024 and on 26 February 2024, formally adopted by the EU Council. The entry into force will occur 20 days after the publication in the Official Journal of the European Union. The member states will then have a two-year period to transpose AIFMD II into their national laws, with the exception of the measures implementing reporting requirements, which must be applied three years after the entry into force of the AIFMD II. 

In this article, we address the changes concerning delegation arrangements under the AIFMD II and have focused on the practical implications we anticipate. 

Background 

The European legislator aims to establish a reliable overview of what is meant by the delegation activities within the EU and align the requirements set forth by the AIFMD and the UCITS Directive. This objective is particularly prompted in the context United Kingdom’s (“UK“) withdrawal from the EU on 31 January 2020. Following Brexit, a significant proportion of portfolio management activities remained in the UK, these activities being outside of the supervision of the relevant EU authorities. Post-Brexit, the UK, remains a common jurisdiction for the establishment of delegated portfolio managers for both, alternative investment fund managers (“AIFMs”) and UCITS management companies (“UCITS ManCo(s)”). The proposed changes seek to address these delegation arrangements and enhance oversight of the national competent authorities (“NCA”) of the member states. 

New disclosure requirements for the authorisation process and Annex IV reporting  

AIFMs and UCITS ManCos will need to regularly provide NCA with details on delegated functions. AIFMD II seeks to clarify that the delegation rules, outlined in Article 20 of the AIFMD and Article 13 of the UCITS Directive, apply to all functions listed in Annex I of the AIFMD and Annex II of the UCITS Directive, as well as ancillary services listed under Article 6(4) of the AIFMD and Article 6(3) of the UCITS Directive. 

In terms of data collection and provision, EU AIFMs and EU UCITS ManCo will be required to provide its NCA with a new set of information on its delegation arrangements during its authorisation process. This information will cover delegation details, resources, delegated functions, and details on due diligence. Additionally, as part of its Annex IV reporting, both EU AIFMs and UCITS ManCos, as well as non-EU AIFMs and UCITS ManCos, will be required to provide detailed information regarding the delegation of portfolio management or risk management functions. 

These new reporting standards will be defined through Level 2 measures, as specified by the AIFMD II. The European Securities and Markets Authority (“ESMA”) will prepare new draft regulatory technical standards (“RTS”) on the details of the information to be provided, as well as reporting frequency and timing. 

We expect that Luxembourg-domiciled AIFMs and UCITS ManCos’ are already complying with quite a substantial part of these new obligations as they are already subject to the strict substance requirements and reporting duties laid down by the Luxembourg law, in particular, Circular CSSF 18/698 of the Luxembourg NCA (Commission de Surveillance du Secteur Financier – “CSSF”). In other jurisdictions, these new requirements will result in the AIFMs and UCITS ManCos having to modify their processes for their Annex IV reporting.  

For further details on the information that will now need to be disclosed during the authorisation process and the Annex IV reporting, please refer to our articles on these specific topics.  

New controversial provision on extraterritorial application of the European law for non-EU intermediaries  

AIFMD II further introduces a new provision under the existing delegation framework of Article 20 AIFMD and Article 13 UCITS Directive requiring EU AIFMs and UCITS ManCo’s to ensure that the performance of delegated functions and/or services complies with the requirements set out in both directives. This shall apply regardless of the regulatory status or the domiciliation of any delegate or sub-delegate. The wording of this provision sparked controversy, as it suggests an extraterritorial application of European law to non-EU delegates. However, it can be presumed that the European legislator does not intend European law to be applied to all non-EU delegates of an EU AIFM or UCITS ManCo but rather expects the performance of these delegates not to contradict or undermine the requirements laid down by both directives. 

Exemption for distributors and implications for EU AIFMs and UCITS ManCos 

As fund marketing is not always conducted by the AIFM or UCITS ManCo, but rather by one or several distributors, AIFMD II seeks to acknowledge the diversity of distribution arrangements and recognise the existing safeguards for the arrangements where a distributor acts on its behalf when it markets the fund under either (i) Directive 2014/65/EU (“MiFID II”) or (ii) through insurance-based investment products as per Directive (EU) 2016/97 (“IDD”).  

In this context, AIFMD II provides clarifications regarding the delegation of the marketing function under Annex I (2) (b) of AIFMD and the third indent of Annex II of the UCITS Directive. Marketing activities by distributors acting on their behalf when marketing under MiFID II or through insurance-based investment products will not be considered delegation under the amended AIFMD or UCITS Directive, even if a distribution agreement exists between the distributor and the AIFM or UCITS ManCo.  

This will particularly impact EU AIFMs and UCITS ManCos, where the home state has established broad rules for the definition of delegation. For Luxembourg-domiciled AIFMs and UCITS ManCos, these distributors currently fall within the broad definition of a “delegate” under Circular CSSF 18/698, subjecting them to comprehensive delegation requirements. Essentially, this would imply a relaxation of regulatory requirements in Luxembourg. In other EU member states, this represents a tightening of the delegation concept. For instance, the German regulatory authority (Bundesanstalt für Finanzdienstleistungsaufsicht– “BaFin“) currently does not subject intermediaries conducting marketing activities to delegation requirements. 

Furthermore, this clarification implies that non-EU intermediaries would not benefit from this exemption, as they generally do not market under MiFID II or the IDD. Consequently, non-EU intermediaries could be considered delegates of the EU AIFM or UCITS ManCos, even if they independently market the fund without having a contractual relationship with these entities.  

Enhanced Disclosure Requirements for EU Third-Party AIFMs and UCITS ManCos 

Additionally, the AIFMD II introduces the definition of a “third party” AIFM or UCITS ManCo which “manages or intends to manage an AIF or UCITS at the initiative of a third party, including AIFs or UCITS using the name of the third-party initiator or appointing the third-party initiator as a delegate”.

These third-party AIFMs or ManCos will be required to provide information on the reasonable steps they have taken to prevent, manage, and monitor conflicts of interest arising from the relationship with the fund initiator and later appointed sub-distributor, as applicable, to their NCAs.  

 How can Zeidler help?  

As your trusted partner, the Zeidler legal team stands ready to assist and provide support. Our global team of professionals is well-versed in the latest legal, regulatory, and compliance developments impacting the asset management industry. We have closely monitored the developments of AIFMD II since the Original Draft. If you require additional information or assistance in understanding AIFMD II and its implications for your business, please get in touch with us.

Author

Tara Dutta