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AIFMD under review

AIFMD under review
  • United Kingdom
  • Financial services and markets regulation - AIFMD
  • Financial services


On 10 June 2020 the European Commission published a 10 page report assessing one of the cornerstones of European financial regulation. This cornerstone, the Alternative Investment Fund Managers Directive (“AIFMD” or “the Directive”) is a regulatory framework for alternative investment fund managers (“AIFMs”) introduced to address perceived weaknesses in the wake of 2008. Any manager that operates an alternative investment fund (“AIF”) in the European Union is subject to AIFMD regulation, regardless of whether it is set up within or outside the Union’s borders.

The report from the Commission to the European Parliament and the Council assessing the application and the scope of Directive 2011/61/EU of the European Parliament and of the Council on Alternative Investment Fund Managers (the “AIFMD Report”), is the product of a clause in AIFMD that requires the Commission to conduct a review of the Directive’s application after July 2017. The scope of this review is set out clearly in Article 69: “that review shall analyse the experience acquired in applying this Directive, its impact on investors, AIFs or AIFMs, in the Union and in third countries, and the degree to which the objectives of this Directive have been achieved.” Perhaps more significantly, Article 69 further requires the Commission to “propose appropriate amendments” if and where necessary. Given the scope of the AIFMD, these proposals could have far reaching implications for asset managers and the wider financial services industry.

In this briefing, we discuss the findings of the AIFMD report, and review the independent report published alongside it (Report on the Operation of the Alternative Investment Fund Managers Directive (AIFMD) (the “Independent Report”)).

This briefing also takes account of the ‘Commission Staff Working Document - Assessing the application and the scope of Directive 2011/61/EU of the European Parliament and of the Council on Alternative Investment Fund Managers’ (the “Working Document”), an internal draft of the AIFMD Report, which offers more detail on some of the headline claims put forward in final publication.[1]

Perhaps unsurprisingly, the Commission’s AIFMD Report present a positive assessment of AIFMD. That said, the Commission does highlight a number of areas, where AIFMD could be revised in the future. Issues surrounding market access, harmonisation of national private placement rules (“NPPRs”), barrier to entry for smaller managers, tweaks to the rules affecting depositaries, revised disclosure requirements, issues with binary valuation models and  a more streamlined passporting system for private equity funds, are all under some degree of scrutiny in the AIFMD Report.

Assessing market sentiment

Much of the information in the AIFMD report is derived from data provided in the Independent Report, a wide-ranging assessment of the Directive commissioned from KPMG in 2018. The Independent Report draws heavily on the survey responses of 478 responses from individuals and institutions representing investors, fund managers and service providers across the EU, together with available industry data.

The Independent Report offers some insight into industry sentiment, the key takeaways being that:

  • competition between AIFMs was thought by survey respondents to have slightly increased since implementation of the AIFMD;
  • the large majority of institutional investors and trade bodies representing institutional investors (including from third countries) said that the AIFMD had not influenced their decisions to invest through AIFs;
  • the large majority of institutional investors and trade bodies representing institutional investors (including from third countries) said that the AIFMD had not led them to favour, or avoid, EU/EEA AIFs over third country AIFs when making investment decisions;
  • a majority of respondents felt that the AIFMD had increased costs;
  • most respondents felt that the current disclosure rules ensure that investors are sufficiently and adequately informed (though concerns were expressed about superfluous disclosures and inconsistent overlap with disclosure requirements in other Directives); and
  • while several areas were highlighted as potential areas of reform, most interviewees indicated that only “a small number of areas” need further harmonisation.

In general, while these results do indicate wholesale support for AIFMD, they do suggest that the Directive has not had the detrimental effect that some initially feared. This view is supported by KPMG’s statistical analysis, which compared AIFMD’s impact with a hypothetical ‘no-EU policy’ scenario, concluding that the AIFMD has had no material impact on the size of the EU AIF market. The Commission’s AIFMD Report promotes this positive assessment, citing market figures which show that total net assets of AIFs have more than doubled in size from € 2.3 trillion to € 5.9 trillion since the implementation of AIFMD in 2011. It is worth noting however, that more negative points, such as the strength of opinion suggesting that AIFMD had increased costs for asset managers, are not addressed in the AIFMD Report.

Issues with the marketing passport

While survey data implies that the EU management passport is working well, the Independent Report suggested that there are significant barriers to entry in many national markets.

In theory, AIFMD’s marketing passport should allow AIFs authorised in any Member State to market to professional investors across the EU, however, this is not reflected in practice. National gold-plating by Member States, diverging national marketing rules, and varying interpretations of the AIFMD by national supervisors all limit the efficacy of the AIFMD marketing passport. Notable examples in this regard include:

  • the mandatory one month delay some AIFMs face before they can start to market;
  • additional fees implemented by states such as Austria, France and Luxembourg;
  • the opaque approaches to the calculation of many of these fees; and
  • onerous additional hurdles such as Spain’s requirement for a local agent.

In June 2017 only 3% of AIFs were marketed in two or more Member States. While this has seen limited growth in recent years, the low uptake remains surprising given that 76% of AIFs are eligible for cross border marketing. Given the high concentration of the EU’s AIF market (five countries –France, Germany, Ireland, Luxembourg, and the Netherlands – account for over 82% of net assets), the lack of an effective cross border passport undermines the Commission’s goal of a ‘harmonised’ EU-wide market for AIFs.

It seems clear, therefore, that greater coordination of Member State regulators will play a significant role in any reform of the AIFMD. The  package on Cross-Border Fund Distribution of Investment Funds addresses some of the concerns in this area by increasing transparency in relation to regulatory fees and national marketing rules implemented by regulatory bodies, however, more work is required in this area.

To this end, the Commission floated the possibility of extending the AIFMD marketing passport to cover retail and semi-professional investors, as this would at least partially offset the costs associated with cross border marketing. Of course, any reform in this area will need to take full account of the overlapping MiFID II rules, which clearly differentiate between retail and professional investors.

Standardising NPPR: an uneven playing field

NPPRs allow AIFs to be marketed in a single Member State, subject to certain requirements. Generally, these requirements will be less onerous than the burden of full authorisation, but the AIFs marketed by way of NPPR will not be eligible for a cross border marketing passport within the EU.

NPPRs grant market access to third country AIFs and grant investors access to a broader range of products. In total, NPPR investments makes up one-fifth of the overall EU AIFs market.

The AIFMD Report suggests that, once again, heterogenous applications of the AIFMD are a cause for concern. The Commission’s internal Working Document, which explores the issue in far more detail that the final AIFMD Report, acknowledges that while NPPRs had played an important “bridging role”, as the Commission works on an AIFMD marketing passport for third country funds, the regime had only done so “by creating an unlevel playing field for EU and non-EU AIFMs.” Many Member States have introduced additional NPPR requirements, while others effectively deny third country entities access to their market. In addition, the majority of respondents to KPMG’s survey felt that it now took longer to obtain NPPR approval following the implementation of AIFMD.

Addressing this issue, two solutions are put forward in the AIFMD Report. The first is a gradual phasing out of the NPPR regime as the AIFMD marketing passport is extended to third countries. The introduction of a ‘non-EU passport’ has been in the works for some time. Indeed, the European Securities and Markets Authority advised on a possible extension in 2015, but there is still no timetable for implementation. The other option is to rationalise the NPPR regime across different Member States, ensuring that NPPR remains as a viable alternative to any new marketing passport. Most Member States and third countries have called for the NPPRs to be retained even if the non-EU passport is activated.

Smaller AIFMs face significant barriers to entry

The heterogenous approach to marketing under AIFMD disproportionately impacts smaller, or ‘sub-threshold’ AIFMs. In many cases these entities lack the resources to negotiate heterogonous cross-border requirements and –  because it has been left to national discretion whether Member States preserve the lighter rules smaller AIFMs enjoy under AIFMD – many face equivalent barriers to their larger and better resourced counterparts. As the AIFMD Report states “smaller AIFMs unable to comply with all the requirements of the AIFMD must forgo raising capital in other Member States or overcome significant barriers to market access”.

According to survey data in the Independent Report, the AIFMD has discouraged smaller AIFMs from operating in the EU, which – together with the increase in costs – suggests that the AIFMD has created a market that is less open to small managers, or start-up managers trying to set up a track record. This concurs with the related finding of the Independent Report that in general, AIFMD has led to less choice in the retail market.

No specific proposal are put forward to address this concern in the AIFMD Report.

Another look at the depositary regime

While the AIFMD Report is clear that the dedicated regime regulating functions and liability of depositaries is an effective measure for enhancing investor protection, the lack of a depositary passport was flagged as a source of concern “at odds with the spirit of the single market”. National markets are highly fragmented, which particularly impacts the supply side of depositary services in smaller markets, limiting competition and increasing concentration risk. In 2018, about 10% of the depositaries had a different domicile than the fund.

As the AIFMD Report makes clear, the Commission regards this as a potential area of reform:  “given expiration of the transitional arrangements, there seems to be a compelling reason to find a solution for the smaller markets.” However, larger Member States have expressed a desire to harmonise the regulation of depositaries before any passport is issued, with heterogenous treatment of tri-party collateral management and custody services provided by central securities depositories flagged as a particular area of concern.

With this in mind, it is not clear what the timeline might be for further reform.

Disclosure requirements

One of the key points to come out of KPMG’s Independent Report was clear market feedback that AIFMD’s disclosure requirements were overly onerous and overlapped with requirements in other Directives, giving rise to “duplicative, and potentially inconsistent, disclosures”. The final AIFMD Report, which draws heavily on KPMG’s survey, acknowledges these concerns, however, the Commission claims that no proposals can be put forward because the survey “did not identify which elements of the disclosure requirements could be superfluous”.

This is an underwhelming response, but it is clear that the Commission is reluctant to make significant concessions on this point. One of the headline claims of the AIFMD Report is that “AIFMs are now operating with greater transparency for investors and supervisors” and it is clear that the extensive disclosure requirements are regarded as a successful element of the original Directive. 

Binary choice on valuation runs counter to AIFMDs goals

On the subject of valuation, the AIFMD Report does acknowledge that there may be issues with “the binary nature of the valuation rules, whereby stakeholders understand that a combined use of internal and external valuers is excluded, as well as uncertainty around the liability of external valuers, which is determined under the national laws.”

The Independent Report clearly identified this as a potential area of reform, suggesting that a lack of external valuers in some Member States and the inconsistent regulation of these entities has decreased competition and placed more focus on internal valuation processes, a development which runs counter to the goal of introducing greater independency in the valuation process.

No proposals are put forward to address these concerns in the AIFMD Report.

A new regime for private equity?

The AIFMD Report briefly acknowledges that private equity managers are not effectively accounted for by the AIFMD or the EuVECA Regulation  and consequently face significant barriers to cross border marketing in the EU. However, the document is particularly vague on this point and no clear indication is given of how or when this issue might be addressed.


In general, the Report is much more tentative than the documents it draws from and it is clear that the Commission is still making its mind up whether proposals are needed, including amendments to the AIFMD.

In terms of next steps, the Commission is expected to publish a detailed consultation paper in the summer and hold a public hearing in September 2020, which should hopefully give a better idea of its thinking on the various issues.  If the Commission decides to propose changes to the existing legislation, these are unlikely to be published until the middle of 2021.

[1] The Working Document is not publicly available, though copies can be requested from the Commission directly.