Changes from report parliamentary committee draft to plenary report

DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

on the proposal for a directive of the European Parliament and of the Council amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds

(COM(2021)0721 – C90439/2021 – 2021/0376(COD))

Changed(Ordinary legislative procedure: first reading)reading)The European Parliament,

RemovedThe European Parliament,

– having regard to the Commission proposal to Parliament and the Council (COM(2021)0721),

Changed– having regard to Article 294(2) and Article 11453(1) of the Treaty on the Functioning of the European Union, pursuant to which the Commission submitted the proposal to Parliament (C90439/2021),

Removed– having regard to Article 294(3) of the Treaty on the Functioning of the European Union,

– having regard to the opinion of the Committee on Legal Affairs on the use of delegated acts,

Changed– having regard to RulesArticle 59,294(3) 40of andthe 41Treaty ofon itsthe RulesFunctioning of Procedure,the European Union,

Changed– having regard to the reportopinion of the CommitteeEuropean onCentral EconomicBank andof Monetary3 AffairsOctober (A90000/2022),2022,

Added– having regard to Rules 59 and 41 of its Rules of Procedure,

Added– having regard to the report of the Committee on Economic and Monetary Affairs (A9-0020/2023),

▸4 unchanged paragraphs

1. Adopts its position at first reading hereinafter set out;

2. Approves its statement annexed to this resolution;

3. Calls on the Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal;

4. Instructs its President to forward its position to the Council, the Commission and the national parliaments.

Change 1

RemovedRecital 3: (3) To increase the efficiency of AIFM activities, the list of authorised ancillary services set out in Article 6(4) of Directive 2011/61/EU should be extended to include benchmark administration governed by Regulation (EU) 2016/1011 of the European Parliament and of the Council27 and credit servicing governed by Directive 2021/…./EU of the European Parliament and of the Council28 and any other ancillary service which is not regulated as an investment service under Directive 2014/65/EU, which represents a continuation of the services already undertaken by the AIFM or a use of internal competences, and which does not create conflicts of interest that could not be managed by additional rules.

AddedAMENDMENTS BY THE EUROPEAN PARLIAMENT*

RemovedRecital 4: (4) To ensure legal certainty, it should be clarified that AIFMs providing ancillary services involving financial instruments are subject to the rules laid down in Directive 2014/65/EU of the European Parliament and of the Council29 . With regard to other assets, which are not financial instruments, AIFMs should be required to comply with the requirements of Directive 2011/61/EU.

Addedto the Commission proposal

RemovedRecital 6: deleted

Added---------------------------------------------------------

RemovedRecital 7: deleted / (deleted)

AddedDIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

RemovedRecital 7 a (new): (7a) The marketing of AIFs is not always conducted by the AIFM directly but by one or several distributors either on behalf of the AIFM or on their own behalf. There could also be cases where an independent financial advisor markets a fund without the AIFM’s knowledge. Most fund distributors are subject to regulatory requirements pursuant to Directive 2014/65/EU or Directive 2016/97/EU, which define the scope and extent of their responsibilities towards their own clients. Directive 2011/61/EU should therefore acknowledge the diversity of distribution arrangements and distinguish between arrangements whereby a distributor operates on behalf of the AIFM, which should be considered to be a delegation arrangement, and arrangements whereby a distributor acts on its own behalf, in which case the provisions of that Directive regarding delegation should not apply.

Addedamending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds

RemovedRecital 9: (9) Investment funds providing loans can be a source of alternative financing for the real economy. Indeed, such funds can provide critical funding for Union small and medium-sized enterprises for which traditional lending sources are more difficult to access. Moreover, the value of private credit should be recognised in promoting investor confidence in the Union market. However, diverging national regulatory approaches hinder the establishment of an efficient internal market for loan-originating AIFs by promoting regulatory arbitrage and varying levels of investor protection. Common rules should therefore be laid down to establish an efficient internal market for loan-originating AIFs, to ensure a uniform level of investor protection in the Union, to make it possible for AIFs to develop their activities by originating loans in all Member States of the Union and to facilitate the access to finance by EU companies, a key objective of the Capital Markets Union (‘CMU’).31 However, given the fast-growing private credit market, it is necessary to address the potential micro risks and macro prudential risks that loan originating AIFs could pose and spread to the broader financial system. The rules applicable to AIFMs managing loan-originating funds should be harmonised in order to improve risk management across the financial market and increase transparency for investors. However, it should be recalled that Directive 2011/61/EU does not regulate specific investment products.

Added(Text with EEA relevance)

RemovedRecital 12: (12) In order to limit conflicts of interest, AIFMs and their staff should not receive loans from loan-originating AIFs that they manage. Similarly, the AIF’s depositary and its staff or the AIFM’s delegate and its staff or entities within the same group as the AIFM and their staff should be prohibited from receiving loans from the associated AIFs.

AddedTHE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

RemovedRecital 13: (13) Directive 2011/61/EU should recognise the right of AIFs to originate loans and trade those loans on the secondary market. However, AIFs should not follow an originate-to-distribute investment strategy, namely an investment strategy under which loans are originated with the sole purpose of selling them.

AddedHaving regard to the Treaty on the Functioning of the European Union, and in particular Article 53(1) thereof,

RemovedRecital 14: (14) Long-term, illiquid loans held by an AIF might create liquidity mismatches if the AIFs open-ended structure allows investors to redeem their fund units or shares on a frequent basis. Therefore, where an AIFM is not able to demonstrate to the competent authorities of its home Member State that the AIF has liquidity robustness, it is necessary to mitigate risks related to maturity transformation by imposing a closed-ended structure for AIFs originating loans because close-ended funds would not be vulnerable to redemption demands and could hold originated loans to maturity. In order to ensure consistent criteria for the determination by competent authorities of whether an AIF has demonstrated liquidity robustness for those purposes, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 of the Treaty on the Functioning of the European Union(TFEU) in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council1a to establish those criteria. Those regulatory technical standards should be adopted on the basis of a draft developed by ESMA. / 1a Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC(OJ L 331, 15.12.2010, p. 84).

AddedHaving regard to the proposal from the European Commission,

RemovedRecital 17: (17) In preparation for the future changes to the supervisory reporting obligations the scope of the data that can be required from AIFMs should be widened by removing the limitations, which focus on major trades and exposures or counterparties and by adding other categories of data to be supplied to competent authorities. If ESMA determines that a full portfolio disclosure to supervisors on a periodic basis is warranted, the provisions of Directive 2011/61/EU should accommodate the necessary broadening of the reporting scope.

AddedAfter transmission of the draft legislative act to the national parliaments,

RemovedRecital 21: (21) To enable managers of open-ended AIFs based in any Member State to deal with redemption pressures under stressed market conditions, they should be required to choose at least one LMT from the harmonised list set out in the Annex, in addition to the possibility to suspend redemptions. When an AIFM takes a decision to activate or deactivate certain LMTs in situations of liquidity stress, it should notify the supervisory authorities. This would allow supervisory authorities to better handle potential spill-overs of liquidity tensions into the wider market.

AddedHaving regard to the opinion of the European Economic and Social Committee,

RemovedRecital 23: (23) In order to ensure consistent harmonisation in the area of liquidity risk management by the managers of open-ended funds, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 of the Treaty on the Functioning of the European Union (TFEU) in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council42 to specify the process for choosing and using LMTs to facilitate market and supervisory convergence. Those regulatory technical standards should be adopted on the basis of a draft developed by ESMA. Those standards should recognise that the primary responsibility for liquidity risk management remains with the AIFM.

AddedActing in accordance with the ordinary legislative procedure,

RemovedRecital 24: (24) To ensure investor protection where there are financial stability risks, in exceptional circumstances and after consulting the manager concerned, the competent authorities should be able to request that a manager of an open-ended fund activate or deactivate the appropriate LMT.

AddedWhereas:

RemovedRecital 28: (28) To support supervisory convergence in the area of delegation ESMA should conduct a peer review on the supervisory practices with a particular focus on preventing the creation of letter-box entities. ESMA’s analysis of the peer review will feed into the review of the measures adopted in this Directive and inform the European Parliament, the Council and the Commission of any additional measures that may be needed to support the effectiveness of the delegation regimes laid down in Directive 2011/61/EU.

Added(1) In accordance with Article 69 of Directive 2011/61/EU of the European Parliament and of the Council, the Commission has reviewed the application and the scope of that Directive and concluded that the objectives of integrating the Union market for alternative investment funds (‘AIF’), ensuring a high level of investor protection and protecting financial stability have mostly been met. However, in that review the Commission also concluded that there is a need to harmonise rules for the managers of alternative investment funds (‘AIFMs’) managing loan-originating AIFs, to clarify standards applicable to AIFMs that delegate their functions to third parties, to ensure equal treatment of custodians, to improve cross-border access to depositary services, to optimise supervisory data collection and to facilitate the use of liquidity management tools (LMTs) across the Union. Therefore, amendments are necessary to address those regulatory gaps to improve the functioning of Directive 2011/61/EU.

RemovedRecital 28 a (new): (28a) The marketing of UCITS is not always conducted by the management company directly but by one or several distributors either on behalf of the management company or on their own behalf. There could also be cases where an independent financial advisor markets a fund without the management company’s knowledge. Most fund distributors are subject to regulatory requirements pursuant to Directive 2014/65/EU or Directive 2016/97/EU, which define the scope and extent of their responsibilities towards their own clients. Directive 2009/65/EC should therefore acknowledge the diversity of distribution arrangements and distinguish between arrangements whereby a distributor operates on behalf of the management company, which should be considered to be a delegation arrangement, and arrangements whereby a distributor acts on its own behalf, in which case the provisions of that Directive regarding delegation should not apply.

Added(2) A robust delegation regime, an equal treatment of custodians, coherence of supervisory reporting through the removal of duplications and redundant requirements and a harmonised approach to the use of LMTs are equally necessary for the management of undertakings for collective investment in transferable securities (‘UCITS’). Therefore, it is appropriate to also amend Directive 2009/65/EC of the European Parliament and of the Council, which lays down rules regarding the authorisation and operation of UCITS, in the areas of delegation, asset safekeeping, supervisory reporting and liquidity risk management.

RemovedRecital 29: (29) Some concentrated markets lack a competitive supply of depositary services. To address this shortage of service providers that can lead to increased costs for AIFMs and a less efficient AIF market, competent authorities should be able to permit AIFMs or AIFs to procure depositary services located in other Member States while the Commission assesses, in the context of its review of Directive 2011/61/EU, whether it would be appropriate to propose measures to achieve a more integrated market. As part of that review, the Commission should carry out a comprehensive study on the potential benefits and risks of introducing a Union depositary passport, in particular in terms of reducing costs, allowing the choice of more competitive depositary services from other Member States and extending the choices available to managers.

Added(2a) The alternative asset industry collectively invests over EUR 1,5 trillion in Europe. Union institutional investors invest over EUR 370 billion in alternative assets managers. The Union alternative asset industry provides over EUR 250 billion to European businesses in private credit and European investors are responsible for 30 % of global capital allocated to the whole industry but there is still room to grow by providing European institutional investors with greater choice and enhancing the competitiveness of Europe’s capital markets.

RemovedRecital 31: (31) In order to better protect investors, the information flow from AIFMs to AIF investors should be increased. To allow an AIFs investors to better track the investment fund’s expenses, AIFMs should periodically report on all fees and charges that are directly or indirectly allocated to the AIF. AIFMs should also be required to report to investors on the portfolio composition of originated loans.

Added(2b) The size of EU AIFs has continued to expand, increasing by 8 % between 2019 and 2022, and AIFs accounted for one-third of the EEA30 fund industry at the end of 2020. Professional investors own most of the shares of AIFs, yet retail investor share is significant at 14 % of the net asset value (NAV).

RemovedRecital 38: deleted

Added(3) To increase the efficiency of AIFM activities, the list of authorised ancillary services set out in Article 6(4) of Directive 2011/61/EU should be extended to include benchmark administration governed by Regulation (EU) 2016/1011 of the European Parliament and of the Council and credit servicing governed by Directive 2021/…./EU of the European Parliament and of the Council.

RemovedRecital 39: deleted / (deleted)

Added(3a) In order to enhance legal certainty, it should be clarified that the management of AIFs also comprises the activities of originating loans on behalf of an AIF and servicing securitisation special purpose vehicles referred to in points 3 and 4 ofAnnex I of Directive 2011/61/EU.

RemovedRecital 42: (42) To enable UCITS management companies based in any Member State to deal with redemption pressures under stressed market conditions, they should be required to choose at least one LMT from the harmonised list set out in the Annex in addition to the possibility to suspend redemptions. When a management company takes a decision to activate or deactivate certain LMTs in situations of liquidity stress, it should notify the supervisory authorities. This would allow supervisory authorities to better handle potential spill-overs of liquidity tensions into the wider market.

Added(4) To ensure legal certainly it should be clarified that AIFMs providing ancillary services involving financial instruments are subject to the rules laid down in Directive 2014/65/EU of the European Parliament and of the Council. With regard to other assets, which are not financial instruments, AIFMs should be required to comply with the requirements of Directive 2011/61/EU.

RemovedRecital 44: (44) To ensure investor protection if there are financial stability risks, in exceptional circumstances and after consulting the management company concerned, the competent authorities should be able to request that a UCITS management company activates or deactivates the appropriate LMT.

Added(5) To ensure the uniform application of the requirements laid down in Articles 7 and 8 of Directive 2011/61/EU for the necessary human resources of AIFMs, it should be clarified that at the time of application for an authorisation, AIFMs should provide the competent authorities with information about the human and technical resources that the AIFM will employ to carry out its functions and, where applicable, to supervise delegates. At least two senior managers should be employed or conduct the business of the AIFM on a full-time or a full-time equivalent basis and be resident in the Union. To ensure that AIFMs comply with the requirements regarding conflict of interest and acting in the best interest of the AIFs and their investors, AIFMs should ensure that at least one member of their governing body is a non-executive director.

RemovedRecital 45: (45) In order to ensure consistent harmonisation in the area of liquidity risk management by the managers of UCITS, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 of the Treaty on the Functioning of the European Union (TFEU) in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council48 to specify the process for choosing and using LMTs to facilitate market and supervisory convergence. Those regulatory technical standards should be adopted on the basis of a draft developed by ESMA. Those standards should recognise that the primary responsibility for liquidity risk management remains with the UCITS manager.