On 15 April 2024, Directive 2024/927/EU amending AIFMD (2011/61/EU) ("AIFMD I") and the UCITS Directive (2009/65/EC) ("UCITS Directive"), entered into force ("AIFMD II"). AIFMD II deals with delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds. The entry into force of AIFMD II marks a significant milestone for the European asset management industry.
In this the fifth publication of our advisory series, we examine the key changes introduced under AIFMD II to the UCITS Directive.
We have listed the other advisories in this series below and please also refer to our other AIFMD II publications "AIFMD II – A closer look", "AIFMD II: Timeline to Implementation".
Governance and reporting obligations
AIFMD II seeks to better align the reporting obligations and delegation requirements imposed on both UCITS management companies and alternative investment fund managers ("AIFM") under their respective legislative frameworks.
Accordingly, new reporting obligations are to be introduced for UCITS management companies, whereby reporting will be required to national competent authorities ("NCAs") of the home member state of the UCITS in respect of each UCITS managed, of the following:
- regular reporting of information on the instruments in which it is trading, on markets of which it is a member or where it actively trades, and on the exposures and assets of the UCITS (akin to Annex IV reporting under AIFMD I)1;
- arrangements for managing the liquidity of the UCITS, including the current selection of liquidity management tools, and any activation or deactivation thereof;
- the current risk profile;
- the results of stress testing performed;
- information regarding delegation arrangements concerning portfolio management or risk management functions; and
- a list of EEA member states in which the units of the UCITS are actually marketed by the UCITS management company or by a distributor.
By 16 April 2026, the European Securities and Markets Authority ("ESMA") is to submit to the European Commission (the "Commission") a report regarding:
(i) the development of the integrated collection of supervisory data, focusing on the reduction of areas of duplication and inconsistencies between the reporting frameworks in the asset-management sector and other sectors of the financial industry; and
(ii) improving data standardisation and efficient sharing and use of data already reported in any European Union ("EU") reporting framework by any relevant NCA, at an EU or national level.
By 16 April 2027, ESMA has been charged with producing and sharing, draft regulatory technical standards ("RTS") with the Commission, to set out the detail on the foregoing reporting obligations.
This will include details on the frequency and timing of reporting. ESMA is also due to draft implementing technical standards ("ITS") to specify the format and data standards for the reporting and methods of submitting such reports. ESMA is obliged to take into consideration other reporting requirements to which management companies are subject, international developments and standards, and the findings of the report referred to above.
A UCITS management company will be responsible for ensuring that the performance of functions and the provision of services by a delegate comply with the UCITS Directive (irrespective of the regulatory status or location of any delegate or sub-delegate). The UCITS management company must also be able to justify to its home member state NCA, its entire delegation structure and to provide objective reasons for the delegation of functions. The prospectus of a UCITS must list the services and functions which the UCITS management company has been allowed to delegate.
Where marketing is carried out by a distributor acting on its own behalf and not on behalf of a UCITS management company, such marketing activity will not be considered to be a delegation arrangement between the UCITS management company and the distributor for the purpose of AIFMD II, irrespective of whether there is a distribution agreement in place between the parties.
Potential third party conflicts of interest
Where a UCITS management company manages or intends to manage a UCITS at the initiative of a third party, including where the UCITS uses the name of the third party or where that third party is appointed as a delegate of the UCITS, the management company must provide detailed explanations and evidence to its home state NCA as to how it will avoid conflicts of interests and, when they cannot be avoided, ensure that the UCITS it manages is fairly treated. The evidence must include the reasonable steps it has taken to prevent conflicts of interest from arising from the relationship with the third party, or if they cannot be prevented, how it will identify, manage, monitor, and where applicable, disclose, such conflicts of interest.
Liquidity management tools ("LMTs")
A UCITS will be required to select at least two appropriate LMTs from the following list2, after carrying out an assessment on the suitability of the LMTs, bearing in mind the investment strategy, liquidity profile and redemption policy of the relevant fund:
- the use of suspensions of subscriptions, repurchases and redemptions;
- a redemption gate;
- an extension of notice periods;
- a redemption fee;
- swing pricing;
- dual pricing;
- an anti-dilution levy;
- redemption in kind3; and
- side pockets.
Only one LMT needs to be selected for a UCITS authorised as a money market fund.
UCITS management companies will be required to implement detailed policies and procedures to cover the activation and deactivation of any selected LMTs and the operational and administrative arrangements for the use of such LMTs.
ESMA is due to develop draft RTS to specify the characteristics of the LMTs set out in Annex IIA of AIFMD II and submit them to the Commission by 16 April 2025. ESMA is also due to develop guidelines on the selection and calibration of LMTs by UCITS for liquidity risk management and for mitigating financial stability risks by that date. The draft guidelines emphasise appropriate disclosure of available LMTs in the fund documentation, and/or periodic reports.
A detailed overview of the proposals contained in ESMA's consultations on the draft RTS and draft guidelines on LMTs is outlined in the second part of our series.
Other provisions
Additional UCITS management company ancillary services
In addition to the management of UCITS, UCITS management companies will be permitted to provide a number of additional ancillary services. The new permitted services include:
- the non-core services of:
- reception and transmission of orders in relation to financial instruments; and
- any other function or activity which is already provided by the UCITS management company in relation to a UCITS that it manages, or in relation to services that it provides in accordance with its non-core services, provided that any potential conflict of interest created by the provision of that function or activity to other parties is appropriately managed4; and
- the administration of benchmarks, apart from such benchmarks which are used in the UCITS that they manage.
Costs and Fees
Underscoring the ongoing regulatory focus on costs and fees, ESMA is also mandated under AIFMD II to submit a report to the European Parliament, the Council of the EU and the Commission assessing the costs charged by UCITS and UCITS management companies to the investors. The report will explain the reasons for the level of those costs and for any differences between them, including differences resulting from the nature of the UCITS concerned. The report will also analyse the appropriateness and effectiveness of the criteria set out in the ESMA convergence tools on the supervision of costs. The report is due to be submitted by 16 October 2025.
Naming rules
With the aim of ensuring uniform application of the rules relating to the name of the UCITS (or an alternative investment fund ("AIF")), to underline the name of the fund as a key part of the pre-contractual documentation and subject to equal standards of fairness and transparency, ESMA has been mandated to develop guidelines to specify the circumstances in which the name of a fund is unfair, unclear or misleading, by 16 April 2026. The guidelines will take account of sectoral legislation setting standards for fund names or the marketing of funds which will have precedence over the guidelines developed by ESMA.
Timing considerations
As outlined above, AIFMD II entered into force on 15 April 2024 and except for the supervisory reporting measures, will need to be transposed by EU member states into their national law by 16 April 2026, at the latest. Transposition into national law in Ireland and other EU member states can, in theory, be implemented earlier than the above deadline.
The provisions relating to the regular reporting to NCAs are to be applied by EU member states from 16 April 2027 and by that date ESMA is required to develop RTS and ITS, as noted above. ESMA shall not however introduce any additional reporting requirements.
Against the backdrop of ESMA's eagerly awaited review of the UCITS Eligible Assets Directive (as summarised here), the targeted changes to the UCITS Directive under AIFMD II will further modernise the UCITS regulatory regime, while additionally resulting in greater uniformity of the rulebook that applies to AIFMs and UCITS management companies.
Our AIFMD II advisory series so far..
This is the fifth and final element of our 101 advisory series, examining key changes for the asset management industry introduced by AIFMD II.
The first part of our advisory series focused on the key changes for managers pursuing loan origination strategies, in light of the new harmonised framework for loan originating activities of AIFs across the EU. The second part of our series focused on the new legal framework under AIFMD II in relation to the use of liquidity management tools. The third part of our advisory series focused on the key changes introduced in respect of delegation, authorisation and regulatory reporting, highlighting the changes applicable to AIFMs. The fourth part of our series focused on the key changes in respect of depositary and third country rules.
[1] Where necessary for the effective monitoring of systemic risk, the competent authorities of the UCITS home member state may require additional information on a periodic or ad hoc basis.
[2] Annex IIA of AIFMD II
[3] Redemption in kind is only available to meet redemptions requested by professional investors and if the redemption in kind corresponds to a pro rata share of the assets held by the UCITS.
The redemption in kind need not correspond to a pro rata share of the assets held by the UCITS, where:
- the UCITS is solely marketed to professional investors; or
- if the aim of the UCITS’ investment policy is to replicate the composition of a certain stock or debt securities index and that UCITS is an exchange-traded fund.
[4] Recital 6 to AIFMD II is informative in this regard, noting that such functions and activities include, for example, corporate services such as human resources and information technology (IT), as well as IT services for portfolio management and risk management. Such provision is intended to support the international competitiveness of EU UCITS management companies by enabling economies of scale and to help diversify revenue sources.
