Letter from Brussels

The European Commission report on AIFMD that was released in August of last year concluded that AIFMD is working well and only fine tuning of certain provisions is needed. Since then, policy makers in Brussels publicly identified five priority areas that they want to focus on in a targeted revision. These include the introduction of a depositary passport; stronger liquidity management tools; improved supervisory reporting; revised CSD safekeeping rules; and harmonisation of loan origination requirements.

In response to the Commission consultation that closed in January of this year, INREV and nearly all other real estate and alternative asset class industry associations agreed with the Commission report and identified some areas where improvements could be made through Level 2 or 3 supplemental measures. 
Importantly, however, all strongly urged that any changes to AIFMD be achieved without opening up the directive itself for revision . A legislative proposal to amend AIFMD would involve significant delay and uncertain outcomes as the European Parliament and Council consider the proposal and add their own proposals about what reforms are needed to the mix. Ultimately the Commission, Parliament and Council would have to agree on all changes, which would also involve making compromises to reach agreement. 

Importantly, however, all strongly urged that any changes to AIFMD be achieved without opening up the directive itself for revision

This regulatory uncertainty could have a chilling effect on investment as institutional investors take a wait-and-see approach before committing further investment in the EU, just at a time when investment in assets such as real estate and infrastructure are badly needed to help restart the European economy in the wake of the Covid crisis’ financial downturn and help create jobs within the EU.

Policy makers at the Commission have been working to digest and analyse public responses to the consultation to determine what changes they believe should be made to the directive.  At the same time, political influences from the Commission leadership are exerting a strong influence on the recommendations that are expected to come out of the Commission, introducing a new set of perspectives and motives.

Policy makers at the Commission have been working to digest and analyse public responses to the consultation to determine what changes they believe should be made to the directive

In Brussels, the indications are that, despite the urging of the alternative investment funds industry, strong political currents from the top will result in the Commission recommending opening up Level 1 of AIFMD. Concerns that rules regarding delegation of fund manager functions need to be strengthened with qualitative limits and additional clarification, that agreements with third-country supervisors do not to give EU adequate oversight and that misalignment of AIFMD and MiFID II rules regarding delegation create unequal treatment will likely all be addressed. 

Stronger rules regarding loan origination and additional tools for liquidity management, including gates on redemptions from open-end funds and more supervisory authority for National Competent Authorities, are also likely to be addressed through new Level 1 measures. Reporting of liquidity management may also be recommended via a revision in AIFMR Annex IV. 

The details are not public yet, but the Commission is expected to issue recommendations and a legislative proposal to the European Parliament late in the third or early in the fourth quarter. Efforts are being made to limit the scope of the recommendations, but nothing will be certain until the recommendations are released.