AIFMD II final text published in the EU's Official Journal

The final legislative text of the Alternative Investment Fund Managers Directive II (AIFMD II) was published today in the EU’s Official Journal. The publication marks the conclusion of the AIFMD Review process that formally began in 2020, however, there remain some outstanding rules to be finalised and managers have a transition period to comply with the new rules.

What does the final legislation contain?

The AIFMD II legislation comprises a series of amendments to the original AIFMD text. The publication in the Official Journal consists of a consolidated version of the revised, and now applicable, AIFMD legislation.

The main changes are as follows.

• A new regulatory regime for loan origination funds.
• Amendments to the rules governing the delegation of portfolio management activity outside of the EU.
• Changes to the liquidity risk management requirements for open-ended AIFs.
• Changes to the reporting of AIF costs and charges.
• Introduction of the ability of an AIFM to appoint a depositary outside of an AIF’s home Member State.

You can read more about the AIFMD II changes in our note published on conclusion of the legislative negotiations in August 2023. We subsequently provided an update on the limited changes that were made to the AIFMD II in November 2023 after the EU’s legal and technical review stage.

What are the outstanding rules?

The newly published legislation completes the ‘Level 1’ or primary legislation stage of AIFMD II. The Level 1 text delegates certain areas to ESMA for more detailed rulemaking under ‘Level 2’.

The main areas for ESMA’s further work are:

• draft rules on liquidity management by open-ended AIFs that originate loans, and on supervisory reporting content and processes, within a year of AIFMD II coming into force (i.e., by April 2025);
• guidelines on the power of regulators to initiate or end the suspension of a fund, and on fund naming conventions, within 24 months of AIFMD II coming into force (i.e., by April 2025); and
• before the next review of the AIFMD Directive, scheduled for April 2029, a report on delegation arrangements, the loan origination regime, and the impact of liquidity risk management tools on financial stability.

Implementation and grandfathering

The AIFMD II will enter into force on 15 April 2024. The rules will take effect two years after publication on 16 April 2026.

The most significant of the changes is the introduction of a loan origination fund regime. Existing funds that would meet the definition of a loan origination fund (for which, see our note) have an additional five years to comply with the new rules. Therefore, those funds will have until April 2029 to comply with requirements such as the new leverage limits and risk retention rules, before being able to benefit from the pan-EU passport. Funds that are newly constituted, and which meet the definition of a loan origination fund, must comply with the new regime immediately. The text defines loan origination funds as closed-ended, but open-ended loan origination funds are permitted if the fund meets certain liquidity conditions to be defined by ESMA. It is important to note that, even when grandfathering applies, AIFs that are already fundraising will not be able to increase leverage if the fund is over the new limits defined in the AIFMD II legislation.

By the end of 2025, ESMA will produce a report for the EU’s authorities reviewing the data on AIF costs and charges with a view to scrutinising any “undue costs” imposed on investors. ESMA will also produce a report for the EU’s authorities on compliance with the AIFMD’s substance requirements in relation to delegation by April 2029. A broader review of the AIFMD rules is expected by April 2029.