AIFMD & UCITS

Background & Overview

The Alternative Investment Fund Managers Directive (AIFMD) 2011/61/EU, which regulates the management of Alternative Investment Funds (AIFs), was published in the Official Journal of the European Union in July 2011. An AIF is defined in the Directive as any collective investment funds that do not fall under the scope of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, such as hedge funds, retail investment funds, and real estate. In June 2020, the European Commission submitted a report to the European Parliament and the Council which outlined that although there had been significant growth in the AIF market since 2011, it was determined that the legal structure of the AIFMD required improvement to further enhance investor protection, and to establish differences between retail and professional investors. A review of the AIFMD was finalised in 2023, with reforms to delegation, liquidity management, fund naming and costs for AIFs.

It is a requirement for all AIFMs to attain a license from the relevant National Supervisor and adhere to the AIFMD’s supplementing Regulation 231/2013/EU – The Alternative Investment Fund Manager Regulation (AIFMR). The reviewed Directive will now be transposed into EU Member States local legislation by mid-2025 and is also supplemented by regulatory guidance from individual National Competent Authorities (NCAs) and the European Securities and Markets Authority (ESMA).

Overview

Since the first UCITS Directive was published, further iterations have been adopted by the European Commission, with the most recent Directive (UCITS V) aligning broad aspects of UCITS regulation, with the Alternative Investment Fund Managers Directive (AIFMD). AIFMD applies to funds which are not registered under the UCITS framework, such as hedge funds. UCITS V strengthens the rules around eligible entities that act as a depositary, and only central banks, credit institutions and regulated investment firms that have the appropriate infrastructure and capital will be eligible to provide safekeeping services of assets. The framework also allows for assets to be protected in the event of insolvency and aims to provide greater transparency for investors. A review of UCITS was finalised in 2023, with reforms to delegation, liquidity management, fund naming and costs for AIFs. The reviewed Directive will now be transposed into EU Member States local legislation by mid-2025.

Independent from the 2023 Review of UCITS, the European Commission mandated level 2 technical advice to ESMA, notably requesting to reassess the eligible assets available to UCITS funds including with regards to efficient portfolio management (EPM) techniques.