Legal development

AIFMD II: An Incredibly Friendly Modifying Directive, except for loan originating funds

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    AIFMD II was published on 10 November 2023. The changes will not come into effect until around 2026. The biggest changes are to managers of "loan originating AIFs".  The rest will require managers to tweak certain practices or policies, but should not present a huge burden. Unfortunately, we will not see the bonfire of law some would have hoped for in respect of the, frankly pointless, provisions of AIFMD that add little, if any, value. 

    Key points to note

    • These changes will apply directly to European fund managers and depositaries, but indirectly to other firms connected with European funds, including delegated portfolio managers, placement agents and distributors, and other delegates.

    • Fund which originate loans will be subject to the most changes. These are funds which, directly or indirectly, grant loans. A 5% risk retention requirement will be introduced (similar to the EU Securitisation Regulation), originate to distribute strategies will be banned and leverage limits will be introduced for some. But managers will be able to lend within the scope of their AIFMD permissions, hopefully creating a lending passport of sorts in Europe.  

    • The rules on delegation and substances are nowhere near as bad as first feared, but there is likely to be some "noise" around delegation and additional information requests from third party host AIFMs as that model comes under a bit more scrutiny.

    • Open ended fund managers will need to implement new liquidity management tools. 

    • There are more disclosures and reporting… it's an EU package, what did you expect? 

    • Depositaries will effectively get a "reverse passport" – the depositary will not be able to passport out but funds can appoint depositaries in any member state subject to some light conditions, hence a similar outcome in practice. 

    Who will be impacted? 

    EEA fund managers will need to comply with these new rules.  In addition, some of these rules will be important to delegated portfolio managers, other delegates and third-party placement agents who are not subject to AIFMD directly, but who will be required to indirectly comply with a number of rules that are imposed by an AIFM on them, when they manage portfolios of funds or help distribute funds.

    Fund managers marketing funds into the EEA may also be impacted. 

    Loan origination 

    Loan origination is defined to include:

    • directly granting a loan where the AIF is the original lender; or 

    • indirectly originating a loan through a third party or SPV where the manager or fund is involved in structuring the loan or defining or pre-agreeing its characteristics prior to gaining exposure to the loan. 

    There are then rules which apply to any fund which originates loans (unless exempt) and additional rules for "Loan Originating AIFs".  A Loan Originating AIF is one whose investment strategy is mainly to originate loans or where the notional value of the AIF's originated loans represents at least 50% of the fund's net asset value.

    Requirements applying to all AIFs that originate loans:

    • Contagion risk restrictions: the notional value of loans to any single borrower must not exceed in aggregate 20% of the capital of the AIF where the borrower is an AIF, a UCITS or a financial undertaking;

    • Connected party lending: prohibition on lending to the AIFM or its staff, its delegate(s), its depositary and entities to which the depositary has delegated and entities within the same group as the AIFM (subject to some exemptions);

    • Consumer lending: member states will be able to prohibit AIFs from lending to consumers or servicing credits granted to consumers unless they comply with the requirements of the Consumer Credit Directive and/or Credit Servicers and Purchasers Directive;

    • Ban on originate to distribute: prohibition on managing an AIF that originates loans with the sole purpose of selling them to third parties ("originate-to-distribute strategy"), regardless of whether those AIFs meet the definition of loan-originating AIF;

    • 5% risk retention requirement: AIFs are to be required to retain an economic interest of five per cent of the notional value of the loans they have granted and sold to a third part – there are some exceptions from this;

    • Policies and procedures: requirement to implement effective policies and procedures and processes for granting credit; and where managing AIFs carrying out loan origination (including when gaining exposure to loans via third parties) implement effective policies, procedures and processes for assessing the credit risk (these will need to be kept up to date and effective, as well as reviewed regularly (at least once a year));

    • Proceeds: the proceeds of loans must be allocated to the AIF which originated the loan, less any fees for administrating the loans. Costs and expenses will have to be disclosed.  

    Extra requirements for Loan Originating AIFs include:

    • Closed-ended: They must be closed-ended unless the manager can show the AIF's liquidity risk management system is compatible with its investment strategy and redemption policy. 

    • Leverage restriction: The leverage of a Loan Originating AIF should be no more than: (i) 175% where that AIF is open-ended; or (ii) 300% where the AIF is closed-ended. These limits are not applicable to lending activities solely consisting of shareholder loans, as long as the notional value of those loans does not exceed in aggregate 150% of that AIF’s capital. 

    Liquidity Management 

    AIFMD II will introduce new liquidity management rules for open-ended funds to deal with redemption pressures under stressed market conditions. The final text adds clarification as to the meaning of the various liquidity management tools set out in Annex II. It also adds an anti-dilution levy and dual pricing to the existing list of proposed LMTs, which include: suspension of redemptions and subscriptions; redemption gates; notice periods;  redemption fees; swing pricing;  redemptions in kind; and side pockets. ESMA is required to provide further detail in Level 2 measures on these LMTs. 

    AIFMs managing open ended funds will be required to select at least two tools, which cannot be limited to swing pricing and dual pricing, after assessing the tools against the investment strategy, liquidity profile and the redemption policy of the AIF. 

    Temporary suspensions and use of side pockets will only be permitted in exceptional circumstances where it is justified and in the interests of investors. The AIFM will be expected to implement detailed policies and procedures in relation to the activation and deactivation of selected liquidity management tools and AIFMs will be required to notify the competent authorities about activating liquidity management tools.

    Substance Rules

    Not much has changed in this area since the initial proposal. Provisions designed to address a perceived risk that some AIFMs delegating substantial parts of their portfolio management function may not have enough substance to retain oversight over the key AIFM activities (so-called "letterbox entities") are largely unchanged and are addressed through increasing the resource requirements for AIFMs and through new delegation rules (set out below).

    EEA AIFMs will be required to have at least two full-time people in the EEA with the necessary skills and expertise to oversee the retained and delegated functions. Applications for authorisation will need to provide more information concerning the individuals who are "effectively conducting the business" of the AIFM, including: a detailed description of their role, title and level of seniority; a description of their reporting lines and responsibilities in the AIFM and outside the AIFM; an overview of the time allocated to each responsibility; and a description of the technical and human resources that support their activities and which are to be used by the AIFM for monitoring and controlling the delegate (see below for more on delegation and distribution).


    There will not be a prohibition or significant restriction on delegation, including delegation outside the EEA.  The delegation rules will apply to all functions listed in Annex I to AIFMD and to the ancillary services referred to in Article 6(4) of AIFMD and apply "irrespective of the regulatory status or location of any delegate or subdelegate". 

    The initial proposal stated that ESMA should receive annual notifications from competent authorities of delegation arrangements where an AIFM delegates more risk or portfolio management to third country entities than it retains. This has not been kept, with the recitals to the final text stating that the data on the amount and percentage of the AUM subject to delegation arrangements concerning portfolio management functions are meant to give an overview of workings of delegation and is not to be used on its own to determine the adequacy of substance or risk management/the effectiveness of oversight or control arrangements.

    The final text contains a detailed set of information that will need to be reported in respect to delegations:

    • For each delegate, the legal name and relevant identifier; the jurisdiction of establishment, and where relevant, its supervisory authority.

    • A detailed description of the human and technical resources employed by the AIFM for performing day-to-day portfolio or risk management tasks within the AIFM, and  monitoring the delegated activity.

    • In respect of each of the AIFs managed/intended to be managed, a brief description of the delegated portfolio management functions, including whether the delegation amounts to a partial or full delegation, and a brief description of the delegated risk management functions, including whether each delegation amounts to a partial or full delegation.

    • A description of periodic due diligence measures to be carried out by the AIFM for monitoring the delegated activity.

    Ongoing reporting obligations to competent authorities under article 24 will now require certain information regarding delegation arrangements concerning portfolio management or risk management functions.

    Permitted activities

    At present AIFMs can only perform the AIFM management and ancillary activities set out in AIFMD as well as certain MiFID activities and UCITS management activities. AIFMD II introduces additional services that an AIFM will be able to provide, including: originating loans on behalf of an AIF; the servicing of securitisation special purpose entities; benchmark administration; and credit servicing.


    The final text maintains the original proposals to relax the rules requiring AIFs to appoint a depositary in the AIF's home Member State by allowing, in some circumstances, a depositary in another jurisdiction to be selected. The recitals provide that this will only be possible following approval from the competent authority and where certain conditions are fulfilled (the competent authorities are to make this assessment on a case-by-case basis). The conditions include that the aggregate amount in the national depositary market of the home Member State of the AIF of assets safeguarded on behalf of EU AIFs does not exceed EUR 50 billion or the equivalent in any other currency and that the third country where the depositary is established is not identified as a high-risk third country under MLD4 or on the EU list of non-cooperative tax jurisdictions.

    The final text also includes new requirements where the competent authorities of the AIF/AIFM are different from those of the depositary in relation to the sharing of information.

    The final text retains the proposal that the provision of services by a central securities depository acting in the capacity of an "issuer CSD" is not to be considered a delegation of the depositary’s custody functions but the provision of services by a central securities depository acting in the capacity of an "investor CSD" will be considered a delegation of the depositary’s custody functions.

    Investor Definition

    There were attempts to increase the definition of profession investor to include: "persons who commit to investing a minimum of EUR 100 000 and state in writing, in a separate document from the contract to be concluded for the commitment to invest, that they are aware of the risks associated with the envisaged commitment or investment" or "persons who are a member of senior staff, portfolio manager, director, officer, agent or employee of the manager or of an affiliate of the manager and has sufficient knowledge about the AIF concerned."

    These proposals did not make the final text and the professional investor definition is unchanged in practice.


    The Final Text states that a distinction should be made between arrangements under which a distributor acts on behalf of the AIFM (which should be deemed a delegation arrangement) and arrangements whereby a distributor acts on its own behalf when it markets the AIF (where AIFMD delegation provisions should not apply, regardless of any distribution agreement between the AIFM and the distributor).

    Changes to marketing rules under NPPRs

    The "Article 42" route has left considerable discretion to individual jurisdictions to determine if and under what circumstances they will allow funds to be marketed locally. One common requirement however is that neither fund or nor manager is established or listed as a Non-Cooperative Country and Territory by FATF.

    The final text maintains the initial proposal to amend this provision to require that the third country where the non-EU AIF is established is not identified as a high-risk third country pursuant to Article 9(2) of MLD4 (which itself is undergoing amendments which could impact this requirements further). It also maintains the proposal that the third country where the non-EU AIF is established would need to have signed an agreement with the home Member State of the authorised AIFM and with other Member States in which the units or shares of the non-EU AIF are intended to be marketed, fully complying with the standards laid down in the OECD Model Tax Convention on Income and on Capital and ensuring an effective exchange of information in tax matters (including any multilateral tax agreements), and they must not be on the EU list of non-cooperative jurisdictions for tax purpose.

    If these rules applied today, no Cayman Island fund would be able to be offered in the EEA. However, it is widely expected the Cayman Islands will make steps to address the EU's perceived deficiencies before AIFMD II becomes effective.

    Reporting and disclosures

    Disclosures to investors required under article 23 will now include a description of the AIF’s liquidity risk management, including the redemption rights, both in normal and in exceptional circumstances, of existing redemption arrangements with investors, and of the possibility and conditions for using liquidity management tools selected; and the composition of the originated loan portfolio. AIFMs are also required to disclose a list of fees and charges that will be applied in connection with the operation of the AIF and that will be borne by the AIFM or its affiliates.

    As proposed, AIFMs will be required to regularly report to their home Member State competent authorities on all markets, instruments and exposures. The final text provides that information to be disclosed will include the identifiers to connect the data provided on assets, AIFs and AIFMs to other supervisory or publicly available data sources. This is an expansion to current Annex IV reporting, where AIFMs are required to report on the principal markets and instruments in which they trade, provide information on the main instruments in which they are trading and on the principal exposures and the most important concentrations of each AIF managed.

    It's not all coming into force all at once: Transitional provisions

    The final text includes a number of transitional provisions in respect of AIFMs managing AIFs that originate loans and that have been constituted before the date of entry into force of AIFMD II. These include requirements relating to: being closed-ended, concentration limits, diversification and leverage rules. The transitional provisions will need careful review. There are also exemptions for AIFs from certain requirements in respect of loans originated before the entry into force of AIFMD II.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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