The AIFM II Directive

What is the AIFM II Directive?

The AIFM II Directive revises both the AIFM Directive and the UCITS Directive.

The UCITS Directive was originally adopted to create a common market for undertakings for collective investment in transferable securities (UCITS) within the European Union. UCITS are investment funds that can take advantage of a general-public marketing authorisation across the European Union. They comply with rules that are harmonised at European level and are subject to approval by the AMF or another European Union Member State national authority. Since its first version in 1985, the UCITS Directive has been amended and enriched several times in order to adapt the regulatory framework to market developments, at the same time as ensuring a high level of protection for retail investors.

The AIFM Directive, adopted in 2011, established a harmonised European framework for the authorisation, activities and transparency of managers of alternative investment funds (AIFs) that manage and/or market AIFs in the European Union. AIFs are investment funds that are not UCITS. The aim of this directive was twofold:

• to increase the transparency of the AIF managers subject to this directive vis-à-vis their supervisory authorities, their investors and other key stakeholders in order to strengthen investor confidence;
• to regulate the main sources of risk associated with alternative management.

Who is affected by the AIFM II Directive?

The AIFM II Directive revises both the UCITS and AIFM directives. The new text therefore affects:

• management companies authorised under the AIFM Directive (AIF management companies), i.e.:
  • management companies that manage, through one or more AIFs, more than €100 million where leverage is used or more than €500 million where leverage is not used and who block redemptions for a period of five years following the initial investment in each AIF;
  • management companies that manage AIFs below these thresholds, but which have opted for the full application of the AIFM Directive; and
• management companies authorised under the UCITS Directive (UCITS management companies).

Management companies that manage AIFs whose total value of assets under management is below the thresholds of the AIFM Directive and which have not opted to submit to the AIFM regime are not directly affected by the changes made by the AIFM II Directive. However, under French law, they are currently subject, unless otherwise provided, to the regime resulting from the UCITS Directive. Subject to the laws transposing and adapting this directive into French law, they will therefore likely be impacted.

Timetable for the application of the AIFM II Directive

The AIFM II Directive must be transposed into French law by 16 April 2026 at the latest and Member States must apply most of its measures from the same day. Implementing legislation is also planned. This will take the form of directly applicable regulations.

The new provisions will begin to apply to the management companies concerned on the date set by the transposition measures or, failing that, the day after their publication, or, in the case of regulations, on the date provided therein.

However, the new requirements in terms of reporting to the AMF will apply from 16 April 2027.

What are the main changes to the UCITS and AIFM Directives?

The following information is not exhaustive. Management companies must refer to the provisions of the directive.

Provisions common to UCITS and AIF management companies

Delegation and sub-delegation

The AIFM II Directive provides new clarification by explicitly identifying the functions and services that may be delegated or sub-delegated to third parties: these are the collective management activities of UCITS or AIFs, and portfolio management and ancillary services, which include, for example, investment advice services.

The AIFM II Directive strengthens the rules applicable to delegation and sub-delegation by requiring management companies to provide additional information when applying for authorisation. This information relates in particular to the delegate, the human and technical resources employed by the management company and the scope of the delegation, including in the event of sub-delegation. In addition, in terms of reporting, the directive adds new fields dedicated to delegation relating to the amount and percentage of the assets delegated, the resources for monitoring the delegate and the list of delegated activities.

Liquidity management tools

The new laws integrate into the AIFM and UCITS directives a list of liquidity management tools available to the management companies of open-ended AIFs or UCITS:

• suspension of subscriptions, repurchases and redemptions: this means temporarily disallowing the subscription, repurchase and redemption of the fund’s units or shares;
• redemption gates: this means a temporary and partial restriction of the right of unit-holders or shareholders to redeem their units or shares, so that investors can only redeem a certain portion of their units or shares;
• extension of notice periods: this consists of extending the notice period that unit holders or shareholders must give to fund managers, beyond a minimum period which is appropriate to the fund, when redeeming their units or shares;
• redemption fee: this means a fee, within a predetermined range that takes account of the cost of liquidity, that is paid to the fund by unit-holders or shareholders when redeeming units or shares, and that ensures that unit-holders or shareholders who remain in the fund are not unfairly disadvantaged;
• swing pricing: this means a pre-determined mechanism by which the net asset value of the units or shares of an investment fund is adjusted by the application of a factor (“swing factor”) that reflects the cost of liquidity;
• dual pricing: this refers to a pre-determined mechanism by which the subscription, repurchase and redemption prices of the units or shares of an investment fund are set by adjusting the net asset value per unit or share by a factor that reflects the cost of liquidity;
• anti-dilution levy: this is a fee that is paid to the fund by a unit-holder or shareholder at the time of a subscription, repurchase or redemption of units or shares, that compensates the fund for the cost of liquidity incurred because of the size of that transaction, and that ensures that other unit-holders or shareholders are not unfairly disadvantaged;
• redemption in kind: this consists of transferring assets held by the fund, instead of cash, to meet redemption requests of unit-holders or shareholders;
• side pockets: this mechanics allows the separation of certain assets, whose economic or legal features have changed significantly or become uncertain due to exceptional circumstances, from the other assets of the fund. This separation can be physical by creating a new fund or accounting in nature, by creating a dedicated unit class in the existing fund.

The mechanisms for (i) suspending subscriptions, repurchases and redemptions and (ii) creating side pockets do not have to be included in the fund documentation in order to be activated, but may only be activated in exceptional cases, when circumstances so require, and the interests of the investors in the AIF or UCITS justify this.

Furthermore, after having assessed their suitability to the investment strategy, the liquidity profile and the reimbursement policy, and subject to the other conditions provided for in the laws, UCITSs and AIFs must have at least two liquidity management tools to be selected from:

• redemption gates;
• extension of notice periods;
• redemption fees;
• swing pricing;
• dual pricing;
• anti-dilution levies (ADL);
• redemption in kind (only for professional investors).

However, money market UCITS and AIFs, authorised in accordance with the Money Market Funds Regulation (MMFR) may decide to select only one liquidity management tool from those listed above.

Activities of management companies

The AIFM and UCITS directives currently allow management companies to provide, beyond collective management:

• the service of portfolio management on behalf of third parties,
• ancillary services, for example investment advice. 

The AIFM II Directive has revised the scope of activities that can be carried out by adding:

• the administration of benchmarks (except those used in the AIFs or UCITS that the management company manages);
• for AIF management companies, credit servicing activities in accordance with Directive (EU) 2021/2167;
• any function or activity already carried out by the management company in relation to an AIF or a UCITS which it manages, or the services which it provides, provided that any possible conflict of interest created by the exercise of this function or activity to other parties is appropriately managed;
• for UCITS management companies, the service of reception and transmission of orders in relation to financial instruments (which was already permitted for AIF management companies).

As part of the transposition work, the AMF will adjust its existing doctrine on the ancillary activities of management companies.

Senior managers

The AIFM II Directive maintains the obligation for management companies to be managed by at least two natural persons. While, as the applicable laws currently stand, the AMF considers that at least one of the senior managers must work full-time at the company (Position-Recommendation DOC-2012-19), the AIFM II Directive raises the requirements since these two natural persons must be domiciled in the European Union and work full-time for the management company, either by being employed by the latter, or by being executive members or members of management company’s management body (for example, managing director or executive board member).

Reporting to the competent authorities

The reporting obligations of AIF management companies to their competent authorities (the AMF for French management companies) could be supplemented by more granular data about the markets on which they trade and the instruments traded.

These obligations are being extended to UCITS management companies since European reporting is introduced for UCITS that is similar to that of the AIFM Directive. The latter will therefore have to report regularly to the competent authorities of the country of origin of the UCITS managed (the AMF for French UCITS).

ESMA will submit to the Commission by 16 April 2027 draft regulatory and implementing technical standards which shall enter into application after their adoption by the Commission and on the terms of the laws published in the Official Journal of the European Union.

Provisions specific to AIF management companies

Granting of loans by AIFs

The AIFM II Directive now governs the lending activities of AIFs in order to improve risk management across the financial market and increase transparency for investors. While leaving it possible for Member States to establish national product frameworks that define certain categories of AIFs with more restrictive rules, the AIFM II Directive sets out requirements, including:

• management companies managing such funds (including where such AIFs are exposed to lending through third parties) must implement effective policies, procedures and processes for originating loans, and, to this end, for assessing credit risk, administering and managing their loan portfolios, ensure that they remain up to date and effective, and review them regularly and at least annually;
• risk diversification rules. For example, the notional value of the loans originated by the AIF to a single borrower must not exceed in total 20% of the capital of the AIF when the borrower is a financial firm, an AIF or a UCITS;
• maintaining exposure below specific limits: the leverage of the AIF must in principle not be more than 175% when the AIF concerned is open-ended and 300% when it is closed-ended;
• rules for managing conflicts of interest through the prohibition of originating loans to the management company or its staff, to the depositary or to entities to which the depositary has delegated functions in relation to the AIF concerned, to a delegate of the management company or its staff, or, in principle, to an entity of the same group;
• the proceeds of the loans, less the deductible costs of managing these loans, are allocated to the AIF in their entirety and the costs and commissions linked to the management of the loans are communicated to the investors;
• the prohibition on originating loans for the sole purpose of transferring these loans or exposures to third parties;
• retention obligations. In principle, the AIF retains 5% of the notional value of each loan originated and then transferred to third parties;
• loan-originating AIFs are in principle closed-ended. By way of exception, they may be open-ended provided that the management company is able to demonstrate that the AIF's liquidity risk management system is compatible with its investment strategy and its redemption policy.

Transitional provisions are provided for management companies managing loan-originating AIFs that were established prior to 15 April 2024.

Forthcoming laws

The AIFM II Directive must be transposed into French law. Amendments to the Monetary and Financial Code, the AMF General Regulation and its doctrine are therefore to be expected.

This European directive will also be clarified and supplemented with implementing regulations. Some delegated acts will be drafted and adopted directly by the European Commission. However, the AIFM II Directive also provides for a number of mandates entrusted to the European Securities and Markets Authority (ESMA). Some will then have to be taken up by the European Commission in the form of regulations. Others will be the subject of ESMA guidelines which, once published in the languages of the European Union, will be subject to a “comply or explain” notification procedure by the competent national authorities.

These implementing regulations concern:

• liquidity risk management,
• delegation,
• reporting to the competent authorities.

The relevant regulations can be found in the More information section.