Brussels, 20 July 2023
EU Parliament release:
On Thursday Parliament and member state negotiators struck a deal on updated rules for hedge fund and retail fund managers.
The updates will strengthen investor protection, improve company’s access to finance from sources other than banks, better tackle greenwashing, and help complete the customs market union by limiting national approaches, when it comes to the marketing of alternative investment funds (AIFs).
Two key pieces of legislation were amended under the stewardship of Isabel Benjumea (EPP, ES), for the European Parliament. The Alternative Investment Fund Managers Directive (AIFMD and commonly known as the hedge funds directive) and the Directive relating to undertakings for collective investment in transferable securities (UCITSD), which governs mutual funds suitable for retail investors.
Reacting to the deal, Ms Benjumea said, “We are paving the way towards a significant advancement towards the completion of the Capital Markets Union, with stronger and more ambitious regulation in this industry to compete with counterparts in the United States and Asia. While our European markets have grown significantly in recent years, there is still much room for improvement and growth. The provisional political agreement on these two directives aligns with that objective”.
Completing the Capital Markets Union
The updated legislation also contributes to the agenda of completing the capital markets union in that it removes provisions which allowed member states to adopt their own rules, leading to discrepancies across the EU. For example, MEPs insisted and secured that the rules on funds that make loans should apply differently for funds that part-own the companies in question – so-called shareholder loans. This will ensure a uniform exemption across the EU. MEPs also secured harmonised rules regarding the notifications to be made concerning the use of liquidity management tools.
Better protection for investors
The updates improve protection of investor interests by ensuring that the investment fund managers, which delegate their functions to third parties, adhere to the same high standards applicable across the Union. There will also be more information automatically provided at the time of a fund manager’s authorisation about the delegation arrangements they intend to put in place.
The rules will also facilitate liquidity risk management by managers of open-ended alternative investment funds and retail funds, requiring them generally to have at least two liquidity management tools to cover situations when liquidity issues arise (such as when many investors wish to redeem their investments at the same time).
Addressing greenwashing
The updates also seek to fight ‘greenwashing’ and ensure that investors are not misled into investing into funds that pretend to be ‘green’ but are not so. ESMA is tasked to produce guidelines on when the names of funds could be unfair, unclear or misleading to the investor.
Improving access to finance
The new rules introduce common minimal rules regarding direct lending by AIFs to companies. These rules will allow loan-originating funds to operate cross-border and ensure that they can be an alternative source of funding for companies in addition to bank lending. The updates foster growth and competitiveness of loan industry in Europe to have a better market with clear-targeted rules.
Background
The Alternative Investment Funds Manager Directive (AIFMD) was first adopted in 2011 to establish a regulatory framework covering the activities of the AIF sector. It was designed as part of the policy response to the global financial crisis with a view to increasing the regulation and supervision of the financial industry.
While the AIFMD framework is considered to broadly be working well, some targeted changes were considered necessary to better integrate the market for alternative investment funds, ensure investor protection and better monitor risks to financial stability posed by AIFs.
Further information
Source – EU Parliament
EU Council release:
Provisional agreement reached on alternative investment fund managers directive and plain-vanilla EU investment funds
Today, negotiators from the Council and the European Parliament reached a provisional agreement on new rules to improve European capital markets and strengthen investor protection in the EU. The provisional agreement reviews the alternative investment fund managers directive, which governs managers of hedge funds, private equity funds, private debt funds, real estate funds and other alternative investment funds in the Union. It also modernises the rules in the framework for undertakings for collective investment in transferable securities (UCITS), i.e. plain-vanilla EU-harmonised retail investment funds such as unit trusts and investment companies.
Negotiators agreed to enhance the integration of asset management markets in Europe and to modernise the framework for key regulatory aspects.
Under the provisional agreement, negotiators decided to enhance the availability of liquidity management tools, with new requirements for managers to provide for the activation of these instruments. This will help ensure that fund managers are well equipped to deal with significant outflows in times of financial turbulence.
The Parliament and the Council also reached a provisional agreement on an EU framework for funds originating loans, i.e. funds that provide credit to companies, supplemented with several requirements to alleviate risks to financial stability and to ensure an appropriate level of investor protection.
Negotiators also agreed on enhanced rules for delegation by investment managers to third parties: this will enable them to better tap the best resources from market specialists, subject to reinforced supervision and preserving market integrity.
Other key components of the agreement include enhanced data sharing and cooperation between authorities, and new measures to identify undue costs that could be charged to funds, and hence their investors, as well as on preventing possible misleading names to better protect investors.
Next steps
The agreement reached today is provisional as it still needs to be confirmed by the Council and the Parliament before it can be formally adopted.
Background
The alternative investment fund managers directive and plain-vanilla EU investment funds (UCITS, or undertakings for collective investment in transferable securities) are part of the capital markets union package which the Commission presented on 25 November 2021. The capital markets union is the EU’s initiative to create a truly single market for capital across the EU. It aims to get investment and savings flowing across all member states for the benefit of citizens, businesses, and investors.
The Council agreed its position (general approach) on the proposal on 17 June 2022. Negotiations with the European Parliament started on 8 March 2023 and ended in the provisional agreement reached today.
- Capital Markets Union: Council agrees its position on updated rules for hedge funds, private debt funds, and other alternative investment funds (press release, 17 June 2022)
- Capital markets union (background information)
Source – EU Council