Discover our analysis of the latest developments in the AIFMD II legislative process regarding delegation.

We provide a practical explanation of changes, amendments and additions proposed for the revised AIFMD. The analysis is made from three angles: the European Commission Proposal of 21 November 2021, the European Parliament Draft report of 16 May 2022 and the European Council Position of 17 June 2022.

European Commission proposed directive – Delegation

The Commission proposal includes clarifications and additions, particularly in cases of delegation where an AIFM delegates more portfolio management or risk management functions to entities located in third countries than it retains.

The Commission proposal clarifies the application of the delegation requirements (article 20 of the current AIFMD) to all functions listed in appendix I and the ancillary services permitted under article 6(4).

Where an AIFM delegates more portfolio management or risk management functions to entities located in third countries than it retains, the regulatory authorities shall, on an annual basis, notify ESMA of all such delegations). Delegation notifications shall include the following information (note that this entire point is deleted from the European Parliament draft report):

  • Information on the AIFM and the AIF concerned.
  • Information on the delegate, specifying the delegate's domicile and whether it is a regulated entity or not.
  • A description of the delegated portfolio management and risk management functions.
  • A description of the retained portfolio management and risk management functions.
  • Any other information necessary to analyse the delegation arrangements.
  • A description of the regulatory authorities' supervisory activities, including desk-based reviews and on-site inspections and the results of such actions.
  • Any details on cooperation between the regulatory authority of the AIFM and that of the delegate.

ESMA should draw up draft regulatory technical standards to determine the content of delegation notifications and standard forms, templates and procedures for the transmission of delegation notifications in a language customary in the financial sector. Powers are delegated to the European Commission to adopt the RTS.

ESMA shall provide regular reports, at least every two years, analysing market practice regarding delegation to entities located in third countries and compliance with articles 7 (application for authorisation) and 20 (delegation).

ESMA shall conduct a peer review analysis and provide a report on supervisory practices relating to delegation with a particular focus on preventing the creation of letterbox entities at least every two years.

European Parliament draft report – Delegation

The European Parliament draft report has modified the Commission proposal by removing the reporting by national regulators to ESMA of situations in which an AIFM delegates more portfolio management or risk management functions than it retains. The second point of the delegation section in the  Commission proposal is completely deleted in the European Parliament draft report, including the reference to draft RTS to be drawn up by ESMA and adopted by the Commission in relation to delegation notifications and their transmission.

Regarding reports analysing market practice regarding delegation to entities in third countries, the European Parliament draft report specifies only one report 12 months before the five-year review by the European Commission of the functioning of the rules laid down in the AIFMD and experience acquired in applying them.

If the marketing function is performed by one or multiple distributors not acting on behalf of the AIFM, under an agreement between the AIFM and these distributors, this function shall not be considered to constitute delegation subject to the delegation provisions of the AIFMD. The provisions relating to delegation (article 20 of the AIFMD) should not apply to such arrangements. This exemption is not included in the Commission proposal.

The Council position – Delegation

Before the review by the European Commission of the functioning of the rules laid down in the AIFMD and experience acquired in applying them, ESMA shall provide a report analysing market practice regarding delegation and compliance with articles 7 (AIFM authorisation) and 20 (delegation of AIFM functions), based, inter alia, on data reported to regulatory authorities in accordance with point (d) of article 24(2) and on the exercise of its supervisory convergence powers. The difference between the Council position and the Commission proposal as well as the European Parliament draft report on this point is the absence of a time period stipulated for ESMA to provide such a report in the Council position.

Article 20 relating to delegation is also amended by the Council position, including the same amendments as those in the Commission proposal. However, the following addition in the Council position does not appear in the Commission proposal:

Where the marketing function is performed by one or multiple distributors that are acting on their own behalf and that market the AIF under Directive 2014/65/EU (MiFID II) or through insurance-based investment products in accordance with Directive 2016/97/EU (Insurance Distribution Directive), this should not be considered delegation subject to the requirements laid down in the above paragraphs irrespective of any distribution agreement between the AIFM and the distributor. This addition is broader than that included in the European Parliament draft report, since the performance of the marketing function would not be considered delegation irrespective of the existence of a distribution agreement between the distributors and the AIFM.

The Council position does not refer to a peer review of the application of the delegation regime, focusing on measures to prevent AIFMs that delegate portfolio management or risk management functions to independent entities in third countries from becoming letter-box entities. There is no new article 38a referred to in the Commission proposal.

Next steps in the legislative process

The legislation is currently at the committee stage in the European Parliament, and the Committee on Economic and Monetary Affairs will vote on its position for negotiations. The Council must also publish its negotiation mandate. The trialogue negotiations will begin once these positions have been adopted. The provisional agreement resulting from the trialogue must then be voted on by both Parliament and Council.

The amendments and additions provided by the Commission proposal, the European Parliament draft report, and the Council position should lead to the strengthening and growth of the European alternative investment fund sector. They should help to make capital more accessible in Europe. The level 2 legislation should also provide additional clarity. We expect AIFMD II to come into force in 2025.

Discover our AIFMD II timeline and analysis for the latest developments in the AIFMD II legislative process: https://www.cs-avocats.lu/publications/aifmd-ii-latest-developments/

This timeline also covers the following areas: liquidity management tools, loan origination, distribution and national private placement regimes, depositaries, activities and services performed by AIFMs and investor protection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.