Sweeping Changes to Investment Fund Rules: AIFs and UCITS Face Enhanced Liquidity and Governance Standards

Following the European Council’s approval on 26 February 2024, the amended directive, encompassing changes to Directives 2011/61/EU and 2009/65/EC, is set to be published in the EU’s official Journal and will come into force 20 days thereafter. Member states are granted a 24-month window post-entry into force to transpose the rules into national legislation, which implies that during this period, obliged entities have a two-year timeframe to incorporate the directive’s provisions.

The amended directive introduces sweeping changes, placing a spotlight on critical areas such as Liquidity Management Tools, Loan Originating Funds, Delegation by Investment Managers to 3rd Parties, and a heightened emphasis on Environmental, Social, and Governance (ESG) integration.

Furthermore, the European Securities and Markets Authority (ESMA) is mandated to conduct in-depth reporting and analysis within specified timeframes, reflecting a comprehensive approach to enhancing regulatory frameworks, addressing potential risks, and promoting responsible investment practices across Alternative Investment Funds (AIFs) and undertakings for the collective investment in transferable securities (UCITS).


Liquidity Management Tools:

  • AIFMs of open-ended AIFs in any Member State are mandated to address redemption pressures during stressed market conditions.
  • AIFMs must select and incorporate at least two out of nine liquidity management tools from Annex V, which includes temporary suspension of redemptions and subscriptions, redemption gates with temporary restrictions on shareholder redemptions, specified notice periods for investor redemptions, charges on redemptions (redemption fees), swing pricing adjustments reflecting transaction costs, dual pricing, anti-dilution levies protecting investors from large inflow/outflow costs, redemptions in kind allowing transfer of securities instead of cash, and side pockets for separating illiquid investments from liquid assets within the investment fund, thus enhancing their ability to manage significant outflows in times of financial turbulence.

Loan Originating Funds:

  • To ensure financial system stability, loan-originating AIFs are subjected to a leverage limit.
  • A closed-ended structure is imposed to mitigate risks associated with long-term, illiquid loans, addressing potential liquidity mismatches.

Delegation by Investment Managers to 3rd Parties:

  • Enhanced rules govern delegation by investment managers to third parties.
  • AIFMs intending to delegate tasks must notify competent authorities before delegation arrangements take effect.
  • The liability of AIFMs towards clients, the AIF, and its investors remains unaffected by delegation, with emphasis on maintaining the AIFM’s role as the primary manager.

ESG Integration:

  • The directive introduces a new emphasis on Environmental, Social, and Governance (ESG) parameters.
  • AIFMs and UCITS management companies are required to integrate ESG criteria into governance and risk management rules supporting investment decisions.

Reporting and Analysis by ESMA:

  • Within 60 months of the directive’s entry into force, ESMA is mandated to provide a comprehensive report analyzing compliance with the directive’s substance requirements.
  • Within 18 months of entry into force, ESMA is tasked with submitting a report to the European Parliament, the Council, and the Commission, assessing the costs charged by AIFMs to investors, explaining the reasons for these costs, and highlighting any differences, including those arising from the nature of the AIFs in question.

These amendments collectively aim to enhance the regulatory framework for AIFs and UCITS, ensuring effective liquidity management, addressing potential risks associated with loan origination, and promoting responsible investment practices, including ESG considerations.

For any inquiries, do not hesitate to contact Eurofast experts at nicosia@eurofast.eu.

Demina Ekaterina Eurofast

Ekaterina Demina
Compliance Manager
Eurofast Nicosia