Directive (EU) 2024/927, more commonly referred to as AIFMD II, amends the Alternative Investment Fund Managers Directive (“AIFMD”) with respect to the harmonisation of rules applicable to alternative investment fund managers (“AIFMs”) managing alternative investment funds (“AIFs”) which originate loans, as well as the clarification of the standards applicable in the delegation of functions to third parties. AIFMD II also amends the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive with regard to delegation, the equal treatment of custodians, coherent supervisory reporting, and a harmonised approach to the use of liquidity management tools.
This Directive takes into account the growth of the market for AIFs and UCITS, and provides that such continued growth should be steered towards the promotion of sustainable growth. It requires AIFMs and UCITS management companies to comply on an ongoing basis with their obligations under the Sustainable Finance Disclosure Regulation (“SFDR”), and consequently, to integrate environmental, social and governance parameters into the governance and risk management frameworks supporting their investment decisions.
AIFMD II vis-à-vis AIFMD
The principal amendments brought about by AIFMD II in terms of the AIFMD are aimed at establishing common rules for the development of an efficient internal market for loan origination by AIFs, thereby ensuring a uniform level of investor protection across the EU.
A loan-originating AIF is defined as an AIF whose investment strategy primarily consists of originating loans, or whose originated loans have a notional value that represents at least 50% of its net asset value. In this context, loan origination extends beyond the direct granting of a loan by an AIF acting as the original lender, as the Directive also recognises indirect loan origination through a third party or special purpose vehicle.
AIFMs that manage AIFs engaging in loan origination (even if not loan-originating AIFs) are required to establish and maintain adequate and effective policies, procedures and processes for the granting of loans, credit risk assessment, and the administration and monitoring of their credit portfolio. Such policies, procedures and processes must be proportionate to the extent of the loan origination and be subject to regular review. Additionally, the AIFM must ensure that the AIF it manages is closed-ended. Open-ended loan-originating AIFs are exceptionally permitted where the AIF’s liquidity risk management system is compatible with its investment strategy and redemption policy.
Loans originated by AIFs (when sold on the secondary market) are subject to risk retention requirements: the AIFM must retain 5% of the notional value of each transferred loan on an ongoing basis (until maturity for loans up to eight years or for consumer loans). This is to avert moral hazard and maintain loan quality. AIFMs must also implement an “originate-to-distribute” prohibition, meaning AIFs should not originate loans with the sole purpose of selling them. Loans should be granted solely for the purpose of investing the capital raised by the AIF in accordance with its investment strategy and regulatory constraints. Nevertheless, the AIFM must retain sufficient flexibility to implement the investment strategy in the best interests of the AIF’s investors.
The risks of loan-originating AIFs must be adequately diversified and subject to specific exposure limits. In particular, AIFMD II requires that the aggregate notional value of loans originated by a loan-originating AIF to any single borrower does not exceed in aggregate 20% of its capital, where the borrower is a financial undertaking, an AIF or a UCITS. Loan-originating AIFs are also subject to additional specific requirements, including leverage limits, which are set at lower thresholds for open-ended AIFs due to the higher potential risk to financial stability.
AIFs are prohibited from granting loans to the AIFM or its staff, or to an entity within the same group, in order to mitigate conflicts of interest. Similarly, the AIF’s depositary, entities to which the depositary has delegated functions in respect of the AIF, and the AIFM’s delegate and its staff are prohibited from receiving loans from the AIF.
The AIFM remains fully liable towards its clients, the AIF and its investors, even where functions or services have been delegated to a third party. The AIFM cannot delegate functions or services to such extent that it becomes a letter-box entity, and must at all times retain effective management of the AIF and the ability to provide the relevant services.
The proceeds of any loans originated by the AIF, excluding any administration costs, must accrue in full to the AIF.
In addition to the disclosure requirements applicable to all AIFs, AIFMs managing loan-originating AIFs are also obliged to make periodic disclosures regarding the composition of the originated loan portfolio, all fees, charges and expenses directly or indirectly borne by investors on an annual basis, and any parent undertakings, subsidiary or special purpose vehicle used in connection with the AIF’s investments.
AIFMD II also introduces amendments relating to depositaries, which play a significant role in safeguarding the interests of investors. Depositaries should be able to perform their duties irrespective of the type of the custodian safeguarding the AIFs’ assets. Accordingly, where custody services are provided to AIFs, the Directive requires central securities depositories (“CSDs”) to be included in the custody chain in order to ensure a stable flow of information between the custodian holding the AIF’s asset and the depositary. Services provided by a CSD acting as an issuer CSD are not considered a delegation of custody functions.
AIFMD II vis-à-vis UCITS
The amendments introduced by AIFMD II to the UCITS Directive aim to reduce divergences between the UCITS and AIFMD regimes, particularly for management companies that operate under both frameworks, while maintaining the specific retail investor focus of UCITS.
In relation to delegation, UCITS management companies remain fully liable to the UCITS and its investors for all delegated functions and must not delegate to the extent that they become letter-box entities. Enhanced reporting obligations apply in respect of delegated functions, including details of delegates, their activities, and related human and technical resources.
With regard to liquidity risk management, UCITS management companies managing open-ended funds must select and implement appropriate liquidity management tools from a harmonised list (aligned with the list available for AIFs). They are required to have at least two such tools (in addition to the possibility of suspension) available and calibrated in a manner compatible with the fund’s investment strategy and redemption policy. Exceptionally, money market funds authorised under the Money Market Funds Regulation need only select one such tool. One of the liquidity management tools available is redemption in kind, which may only be activated to meet redemptions requested by professional investors (and not retail investors); however, risks of inequality of treatment between redeeming investors and other unit-holders must be addressed.
AIFMD II introduces a new regular reporting obligation for UCITS management companies covering all markets and instruments in which the UCITS trades or is exposed, risk profiles, stress testing results, leverage usage, liquidity management arrangements, and detailed information on delegation structures. The objective is to ensure coherent data collection for supervisory and macro-prudential purposes, with application of these reporting obligations delayed until 16 April 2027.
In the same manner as for AIFs, CSDs providing custody to UCITS are explicitly included in the custody chain to guarantee a stable and reliable flow of information between the custodian and the depositary. Likewise, services performed by a CSD in its capacity as issuer CSD do not to constitute a delegation of the depositary’s custody functions.
All Member States, including Malta, are required to adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive by 16 April 2026 (with reporting obligations applying from 16 April 2027).
