AIFMD
AIFMD II - European Commission proposed directive, November 2021 - Liquidity management tools
LMTs allow AIFMs of open-ended alternative investment funds to manage redemption pressure in exceptional circumstances such as stressed markets, black swan events and other low-probability events that may have a major financial impact on either an AIFM or an AIF or other areas of the financial markets. LMTs may therefore protect either financial market participants or global financial stability, but they may not be used in the best interests of investors.
The AIFMD II aims to regulate and harmonise LMTs at the EU level.
AIFMs of open-ended AIFs based in any member state must choose at least one LMT from the harmonised list in Appendix V points 2 to 4 of the Commission proposal (i.e. redemption gates, notice periods or redemption fees).
Member states shall ensure that at least the LMTs set out in Appendix V are available to AIFMs managing open-ended AIFs:
- Suspension of redemptions and subscriptions.
- Redemption gates.
- Notice periods.
- Redemption fees.
- Swing pricing.
- Anti-dilution levy.
- Redemptions in kind.
- Side pockets.
The LMT(s) selected by the AIFM should be appropriate and used in the interest of the AIF’s investors based on the suitability of the LMT(s) for the fund’s investment strategy, liquidity profile and redemption policy.
In the interest of AIF investors, an AIFM that manages an open-ended AIF may temporarily suspend the repurchase or redemption of units or activate redemption gates, notice periods and redemption fees if these LMTs are included in the fund rules or the articles of incorporation of the AIFM. The temporary suspension is an option strictly limited to exceptional cases and circumstances and should always be justified according to the interests of the AIF’s investors.
An AIFM should promptly notify the regulatory authorities of its home member state when activating or deactivating redemption gates, notice periods or redemption fees. The regulatory authorities of the AIFM’s home member state should notify without delay the regulatory authorities of a host member state of the AIFM, ESMA and ESRB of any notifications received regarding the activation and deactivation of LMTs.
LMTs should be activated and deactivated based on detailed policies and procedures explaining the operational and administrative arrangements for their use.
Redemption fees are defined as fees charged to investors when redeeming their fund’s shares or units.
Redemption gates are defined as a temporary restriction of the right of shareholders to redeem their shares. This restriction may be full, in which case investors cannot redeem their shares or units at all, or partial, where the investors can only redeem a certain portion of their shares or units.
In the interest of investors or of the public, national regulators may require an AIFM to activate or deactivate an LMT, such as suspension of redemptions and subscriptions and redemption gates or another LMT selected by the AIFM as considered the most suitable given the type of open-ended AIF or group of open-ended AIFs concerned, and investor protection or financial stability risks that necessitate this requirement.
ESMA may require non-EU AIFMs that are marketing AIFs that they manage in the union, or EU AIFMs managing non-EU AIFs, to activate or deactivate certain LMTs, the suspension of redemptions and subscriptions and redemption gates or another LMT selected by the AIFM as considered the most suitable given the type of open-ended AIF or group of open-ended AIFs concerned, and investor protection or financial stability risks.
ESMA should develop draft regulatory technical standards on criteria for the selection and use of suitable LMTs by AIFMs for liquidity risk management, including appropriate disclosures to investors, for adoption by the European Commission.
ESMA should develop draft RTS to specify the characteristics of the eight LMTs detailed above.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - European Commission proposed directive, November 2021 - Distribution and national private placement regimes
Various changes and amendments have been provided by the Commission proposal regarding the marketing of non-EU AIFs in view of strengthening distribution conditions relating to third countries.
More restrictive conditions for the distribution in member states of AIFs managed by a non-EU AIFM, in particular, non-EU AIFs:
- The third country in which the non-EU AIF or non-EU AIFM is established is not identified as a high-risk third country according to article 9(2) of Directive (EU) 2015/849 (AML Directive IV); and
- The third country in which the non-EU AIF or non-EU AIFM is established is not mentioned in appendix I to the EU Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions for tax purposes. The Cayman Islands appears in appendix I, preventing the marketing under national private placement regimes of funds established in the Cayman Islands if this wording is retained in the final version of AIFMD II. However, the Cayman Islands are not mentioned in the most recent conclusions of the EU Council dated October 4, 2022. Note that the European Parliament draft report does not update the reference to the conclusions of 2020, which mention the Cayman Islands.
Some countries and territories have been recently added to the EU list of high-risk third countries by the European Commission, such as the Cayman Islands, Jordan, and Morocco.
The impact of references to the lists of high-risk countries for AML/CFT and tax purposes will depend on how the EU deals with the third countries that raise issues in this regard. The process to be followed by an AIFM when a third country is added to such lists should be clarified.
[1] On 4 October 2022, the Council added the Bahamas, Anguilla and Turks and Caicos in their conclusions. The current EU list of non-cooperative jurisdictions for tax purposes is composed of the following: American Samoa, Anguilla, the Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos, US Virgin Islands, and Vanuatu. This EU list is due to be revised in February 2023.
You can access a copy of the directive proposed by the European Commission here.
AIFMD II - European Parliament Draft Report - Distribution and national private placement regimes
The European Parliament draft report extends the definition of professional investor to investors
- That have committed to investing a minimum of €100,000 and have stated in writing, in a document separate from the contract incorporating the commitment to invest, that they are aware of the risks associated with the envisaged commitment or investment; or
- That are executives, portfolio managers, directors, officers, agents or employees of the manager or its affiliates and have sufficient knowledge about the AIF concerned.
These additions widen the scope of the marketing passport and may increase the use of co-investment financing in relation to AIFs. The PRIIPs Regulation should be amended in line with these new categories of professional investor since they may require a KID.
Access the draft report of 16 May 2022 from the European Parliament here.
