On 25 November 2021, the European Commission adopted a package of measures on the Capital Markets Union (the CMU). The package includes four legislative proposals and delivers on key commitments in the Commission's 2020 Capital Markets Union Action Plan. According to the Commission's press release, the new proposals will ensure that investors have better access to company and trading data, encourage long-term investment, and make it easier and safer for investment funds to be sold cross-border. It is hoped that these, and other measures to be announced in 2022, will help Europe's economic recovery from the COVID-19 crisis, as well as aid the digital and green transitions.
Among the legislative proposals is a directive to amend the Alternative Investment Fund Managers Directive (AIFMD). The Commission’s review of the AIFMD legal framework concluded that the AIFMD standards for ensuring high levels of investor protection are "mostly effective" and that "the EU-wide harmonisation of regulatory standards has facilitated integration of the European collective investment fund market". However, the Commission identified areas where specific fine-tuning is required. Some of these proposed changes are discussed below.
Delegation
- Delegation of both portfolio and risk management is expected to be able to continue.
- AIFMs may delegate more portfolio management or risk management than they retain.
- The AIFM must employ or commit at least two natural persons who are resident in the EU on a full-time basis.
- Delegation to third countries will be subject to increased reporting and supervisory engagement. Specifically, National Competent Authorities (NCAs) will have to send annual notifications of delegation arrangements where more risk management or portfolio management is delegated to a third country entity than is retained.
- ESMA will be empowered to conduct peer reviews every two years to monitor the application of the delegation requirements with respect to third country delegation.
- Sub-delegation to non-authorised entities is explicitly prohibited.
National Private Placement Regimes: Articles 36 and 42
A non-EU AIF must not be domiciled in either a non-cooperative jurisdiction (as defined by the Council of the EU from a tax perspective), or a “high risk country” pursuant to the Fourth Anti-Money Laundering Directive (4AMLD).
Liquidity
- Fund managers of open-ended AIFs/UCITS may temporarily suspend the repurchase or redemption of fund units or shares in situations of market stress.
- Managers must select at least one other liquidity management tool (LMT) from a new defined list, which must be included in the fund rules or the instruments of incorporation of the AIFM. Funds may select from suspension of redemption and subscriptions, gates, notice periods, redemption fees, swing pricing, anti-dilution levies, redemption in kind and side pockets.
- Managers will be required to notify NCAs when activating or deactivating.
- It may also be possible for NCAs to force the activation or deactivation of LMTs, not limited to those in the fund rules or instruments of incorporation.
Data reporting
Limitations to data reporting are removed, which could result in full portfolio reporting rather than reporting on "main instruments traded". ESMA has a mandate to amend the Annex IV reporting template.
Loan funds
Loan origination is listed as a permitted regulated activity of AIFMs. There are specific new requirements for loan origination funds.
Fees and charges
A list of operational fees and charges is proposed.
Depositary
- A depositary passport is not proposed.
- NCAs are to allow depositary services to be procured in other Member States until the introduction of a depositary passport.
- For depositaries established in a third country, these should not be established in a non-cooperative jurisdiction as defined by the Council from a tax perspective or a “high risk country” pursuant to 4AMLD.
Securitisation special purpose entities (SSPEs)
AIFMs are specifically permitted to service SSPEs.
Amendments to AIFMD and the UCITS Directive
The Commission intends to harmonise rules on delegation, liquidity risk management and reporting for both AIFMD and the UCITS Directive, so any changes on those topics will also be relevant for UCITS management companies and UCITS funds.
The other proposals
The package also includes three other legislative proposals:
1. European Single Access Point (ESAP)
A new ESAP Regulation will offer a single access point for public financial and sustainability-related information information about EU companies and EU investment products.
2. Review of the Markets in Financial Instruments Regulation (MiFIR)
In order to ensure more transparency on capital markets, trading rules will be adjusted to introduce a “European consolidated tape”, which will give investors access to near real-time trading data for stocks, bonds and derivatives across all trading venues in the EU. A regulation amending MiFIR and a directive amending MiFID are proposed.
3. Review of the European Long-Term Investment Funds (ELTIFs) Regulation
A regulation amending the Regulation on ELTIFs is proposed to increase the attractiveness of ELTIFs for investors and their role as a complementary source of financing for EU companies. It will also make it easier for retail investors to invest in ELTIFs, in particular by removing the minimum €10,000 investment threshold.
Next steps
These proposals are still at an early stage in the legislative process. There will be significant debate at EU level over the next 12-18 months. The Commission is projecting that political agreement between the European Council and the European Parliament will be reached mid- to late-2022. ESMA would then engage in its Level 2 rulemaking between 2023 and 2025.
The Commission will follow up in 2022 with more CMU actions, including a proposal on listing, an open finance framework, an initiative on corporate insolvency and a financial competence framework.
For more information please contact a member of the Asset Management & Investment Funds team.
Thanks to Desmond Cooke for his assistance with this update.
