In 2017, the European Commission (EC) awarded a tender to KPMG to conduct a market study on the Alternative Investment Fund Managers Directive (AIFMD), analyzing whether the Directive was working as intended or if further reforms were required.1 In December 2018, KPMG released its findings in their Report on the Operation of the AIFMD, providing a detailed review into some of the areas where the regulation could be improved. The EC now has to decide on the path forward.
Key insights
- The KPMG report strongly advises that the EC introduce greater harmonization of AIFMD, amid industry concerns that aspects of the regulation are adding unnecessary costs to managers and preventing more widespread fund distribution
- The extensive leadership changes taking place in the EU in 2019 and ongoing Brexit negotiations suggest that ambitious reforms of AIFMD are unlikely to happen in the near term
AIFMD as a catalyst for harmonization
When a regulatory framework is being transposed across 28 different markets, adjustments and negotiations are to be expected. AIFMD is no exception. The KPMG report acknowledged that AIFMD had achieved some success in harmonizing the supervisory framework for funds inside the European Union (EU), but added that further calibrations were still required.2 The report highlighted some member states were imposing additional provisions on sub-threshold managers (i.e., firms with assets less than EUR 100 million or EUR 500 million un-leveraged) while others have introduced stricter reporting measures along with highly bespoke Annex IV submission processes.3
“Rules such as AIFMD have helped forge a more co-ordinated regulatory approach for fund managers, but it is clear that standardization is still a work in progress. If member states adapt or modify AIFMD's provisions, then it introduces additional legal and administrative costs for managers distributing in those markets. These regulatory nuances across EU markets can make it more complicated to sell products cross-border, which is may be why many AIFMD-regulated firms choose to only sell domestically,” said Wendy Phillis, Managing Director, Regulatory Solutions at RBC Investor & Treasury Services.
When a regulatory
framework is being
transposed across
28 different markets,
adjustments and
negotiations are to
be expected. AIFMD
is no exception.
Furthermore, KPMG's research revealed that a number of market participants believe some of Annex IV's contents overlap with other regulatory reporting requirements4 contained in legislation such as the European Market Infrastructure Regulation (EMIR), the second Markets in Financial Instruments Directive (MiFID II), the Securities Financing Transaction Regulation (SFTR), and the Packaged Retail and Insurance-based Investment Products (PRIIPs ) Regulation.5 “Duplication is a concern as it can add costs and create confusion within the asset management sector,” explained Phillis.
Leverage calculations require further finessing
The KPMG study also said more consistency was required between AIFMD and UCITS in terms of leverage calculation methodologies. However, the report advised the EC hold tight on tweaking any formulas until the International Organization of Securities Commissions (IOSCO) finalizes its own review into common leverage measures.6 “Fund managers, service providers, and industry bodies have repeatedly highlighted that leverage calculations under AIFMD are in need of reform, which we hope is on the EC's agenda,” commented Phillis.
Private placements remain popular among managers
Numerous AIFMD-regulated
fund managers do not
passport their products
on an EU-wide basis
but instead privately
place them in their
core markets
Numerous AIFMD-regulated fund managers do not passport their products on an EU-wide basis but instead privately place them in their core markets. It is a model that works well particularly for third-country managers running AIFs who may not have the resources or infrastructure to hire portfolio managers inside the EU. KPMG's survey found many interviewees strongly supported the continuation of the national private placement regime (NPPR)7 amid concerns that it could soon be allowed to expire. A handful of respondents also called for passporting to be made available to non-EU firms.8
Rapid change is unlikely
Some of the issues raised by KPMG, principally around asset segregation and inconsistencies concerning marketing, were acted upon by the EC prior to the report's publication, although its provisions as they relate to pre-marketing have attracted criticism.9 “Under the Capital Markets Union (CMU) initiative, the EC has also tried to make it easier for managers to distribute cross-border by aligning the regulatory fees charged by different member states,10 although its proposals were met with a mixed response,” said Phillis.
While the EC may implement some changes to AIFMD, either by amending the original directive through CMU or introducing an AIFMD II, there are clear roadblocks
While the EC may implement some changes to AIFMD, either by amending the original directive through CMU or introducing an AIFMD II, there are clear roadblocks. First, the EC continues to be preoccupied with ongoing Brexit negotiations and few expect there to be wholesale reform of any significant legislation until that situation is resolved. Equally significant is that elections in May 2019 will yield a new-look European Parliament, while the EC, European Council, and European Central Bank will all be under different leadership by the end of this year,11 which is also likely to delay changes to AIFMD.