The new regulations will improve the framework for Alternative Investment Fund Managers (AIFMs) and “plain-vanilla” European Union (EU) investment funds, as defined by the Undertakings for Collective Investments in Transferable Securities regulatory framework (UCITS).

The AIFMs framework in detail

The new CMU framework will strengthen the regulation and supervision of AIFMs, by establishing conditions to prevent them from becoming “letter-box entities”. This will be reached via:

• Requiring the maintenance of essential expertise and resources at the AIFM level to effectively supervise delegated tasks and manage associated risks.
• Ensuring that the AIFM possesses the necessary authority to make key decisions falling under senior management responsibility and to implement general investment policy and strategies.
• Compelling the AIFM to retain contractual rights enabling inquiry, inspection, access, or instructions to delegates.
• Restricting the delegation of investment management functions to a level that does not substantially exceed those performed by the AIFM itself.
• Defining qualitative assessment requirements for the extent of any delegation of managed AIFs, considering factors such as asset types, risk profiles, and investment strategies.

The UCITS framework in detail

The new regulation set will also encourage the establishment of straightforward investment funds within the EU in the form of UCITS, and streamline the regulations governing these undertakings to promote investment in Europe. The Council also endorses the establishment, as proposed by the European Commission, of an EU framework for loan-originating funds, which extend credit to companies. This framework is supplemented with several requirements aimed at mitigating risks to financial stability and ensuring an appropriate level of investor protection.

Furthermore, the Council clarifies rules regarding outsourcing and the delegation of specific functions by fund managers to third parties, while enhancing supervisory cooperation in this domain. It also introduces new reporting requirements on delegation arrangements to improve monitoring and supervision of the EU regulatory framework application. Precise reporting obligations on outsourcing will reduce the potential for establishing letterbox companies.

Additionally, key issues related to the framework were addressed for the provision of cross-border services by depositaries, introduces new reporting obligations for UCITS to enhance risk monitoring, and implements new transparency rules to bolster investor protection.