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AIFMs which are fully authorised under AIFMD are subject to detailed rules regarding operating conditions (including with respect to conduct of business, managing conflicts of interest, risk management and liquidity management) and with respect to their internal organisation.
The AIFMD contains a broad set of general principles (in Article 12) that an authorised AIFM must comply with, including the requirement to act honestly and fairly and in the best interests of the relevant AIF (or its investors) and the integrity of the market when conducting its business activities and to take all reasonable steps to avoid conflicts of interests and treat all investors fairly (which entails that no investor in an AIF may get preferential treatment unless disclosed in the AIF’s rules or instrument of incorporation).
Chapter III of the Level 2 Regulations provides a much greater level of detail in respect of the procedures, policies and internal structures (for example separation of personnel carrying out risk functions with the operating units of the AIFM) an authorised AIFM will need to introduce / maintain to comply with the above general principles. The Level 2 Regulations stipulate the frequency with which an authorised AIFM must review such procedures and policies and when the senior management of an authorised AIFM should be involved in such decision making. The Level 2 Regulations also contain lists of the factors that an authorised AIFM must take into account when carrying out certain functions as well as detailing the specific information that must be recorded for various transactions.
Some key points to note are as follows:
The following sections provide an overview of the topics covered in AIFMD and the Level 2 Regulations.
An authorised AIFM must take all reasonable steps to identify conflicts of interest between (i) the AIFM itself, including the AIFM’s managers, employees and persons linked to it by control, and the AIF it manages (or the investors in the AIF), (ii) two AIFs that it manages (or investors in the AIFs), (iii) an AIF that it manages (or investors in the AIF) and another client of the AIFM, (iv) the AIF (or investors in the AIF) and a UCITS managed by the AIFM (or investors in the UCITS) and (v) two of the AIFM’s clients.
An authorised AIFM must maintain and operate organisational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent conflicts from adversely affecting the interests of the AIF and the investors in it. Authorised AIFMs must segregate, within their own operating environment, tasks and responsibilities that may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest.
Where arrangements are not sufficient to ensure, with reasonable confidence, that the risk of damage to investors will be prevented, an authorised AIFM must clearly disclose the conflicts to the investors before undertaking business on their behalf, and develop appropriate policies and procedures. The Level 2 Regulations specify that an authorised AIFM must have and maintain a written conflicts of interest policy, which must identify the circumstances which constitute or may give rise to a conflict of interest as well as procedures to be followed to prevent, manage and monitor such conflicts. An authorised AIFM will need to ensure that the persons engaged in business activities involving a risk of conflict of interest have a degree of independence which is appropriate to the size and activities of the AIFM and its group, and the materiality of the risk of damage to the AIF and its investors, including with respect to the manner in which such persons are supervised, remunerated and influenced. Authorised AIFMs are required to record the types of activities in which a conflict of interest has arisen or may arise, and the senior management of an authorised AIFM is required to review such records frequently and at least once a year.
Additional requirements with respect to conflicts of interest will apply under AIFMD II which are particularly relevant to “host AIFMs”:
The AIFM should outline the reasonable steps it has taken to prevent conflicts of interest related to its relationship with the third party. When prevention of conflicts of interest is not possible, the AIFM must explain how it identifies, manages, monitors, and, where applicable, discloses these conflicts to prevent them from adversely impacting the interests of the AIF and its investors.
The provisions dealing with conflicts of interest are contained in Chapter III, Section 2 of the Level 2 Regulations. The topics covered are:
AIFMD requires the risk management function of an authorised AIFM to be functionally and hierarchically separate from the operating units and portfolio management functions. An authorised AIFM must have adequate risk management systems in place which must be reviewed at least annually.
An AIFM should at least:
In addition, AIFMD II will require that, for loan originating activities, an AIFM must implement effective policies, procedures and processes for the granting of loans (subject to certain exceptions). Please refer to the “Loan Origination” page for further information.
The Level 2 Regulations state that each authorised AIFM must have a permanent risk management function which must implement effective risk management policies and procedures in order to identify, manage and monitor on an ongoing basis all risks relevant to each AIF’s investment strategy to which each AIF is or may be exposed. Each authorised AIFM is required to have an adequate and documented risk management policy. An authorised AIFM is required to periodically, and at least annually, review and update its policy and systems and to carry out additional reviews if required as a result of internal and external events or if there are material changes to the investment strategy of an AIF managed by the AIFM. Further, an authorised AIFM must establish and implement quantitative or qualitative risk limits (if an AIFM elects to only provide qualitative risk limits it must be able to justify this approach) for each AIF it manages, which must cover at least the following risks: market, credit, liquidity, counterparty and operational.
The provisions dealing with Risk Management contained in Chapter III, Section 3 of the Level 2 Regulations. The topics covered are:
For each AIF it manages (other than an unleveraged closed-ended AIF) an authorised AIFM must employ an appropriate liquidity management system and adopt procedures which enable it to monitor the liquidity risk of the AIF and to ensure the liquidity profile of the AIF’s investments complies with its underlying obligations.
Each authorised AIFM must also conduct regular stress tests to assess the AIF’s liquidity risk and ensure that the AIF’s investment strategy, liquidity profile and redemption policy are consistent.
AIFMD II includes requirements applicable to AIFMs managing open-ended AIFs, imposing significant new obligations relating to the management of liquidity risk.
For the meaning of “open-ended AIF”, see the “Scope – Definition of AIF” page.
Suspension of subscription, repurchase and redemption; side pockets
An AIFM managing an open-ended AIF may, in the interest of AIF investors:
An AIFM shall only use a suspension of subscriptions, repurchases and redemptions or side pockets in exceptional cases where circumstances so require and where justified having regard to the interests of the AIF investors.
Additional liquidity management tools
In addition, when managing an open-ended AIF, an AIFM must select at least two appropriate liquidity management tools from the list below. This selection will occur after assessing the suitability of those tools in relation to the investment strategy, the liquidity profile, and the redemption policy of the AIF. The AIFM shall include these tools in the AIF's governing documents for possible use in the interest of the AIF’s investors. The available tools are as follows:
However, that selection may not include only the swing pricing and dual pricing tools.
If an AIF is authorised as a money market fund, its authorised AIFM may decide to select only one liquidity management tool from those listed above.
An AIFM may, in the interest of AIF investors, activate or deactivate the liquidity management tools it has selected and included in the AIF’s governing documents.
An AIFM shall implement detailed policies and procedures for the activation and deactivation of any selected liquidity management tool and the operational and administrative arrangements for the use of such tool, and shall communicate them to the competent authorities of the home Member State of the AIFM.
Redemptions in kind shall only be activated 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 AIF. The redemption in kind need not correspond to a pro rata share of the assets held by the AIF if that AIF is solely marketed to professional investors, or if the aim of that AIF’s investment policy is to replicate the composition of a certain stock or debt securities index and that AIF is an exchange-traded fund.
Notifying competent authorities when using liquidity management tools
An AIFM shall, without delay, notify the competent authorities of its home Member State whenever it activates or deactivates:
An AIFM shall, within a reasonable timeframe before it activates or deactivates side pockets, notify the competent authorities of its home Member State of such activation or deactivation.
The competent authorities of the AIFM's home Member State shall inform, without delay, the competent authorities of a host Member State of the AIFM, ESMA and, if there are potential risks to the stability and integrity of the financial system, the ESRB, of any such notifications received from the AIFM.
Requirements for loan-originating AIFs that maintain an open-ended structure
A “loan-originating AIF” may be open-ended provided that the AIFM that manages it is able to demonstrate to the competent authorities of the home Member State of the AIFM that the AIF’s liquidity risk management system is compatible with its investment strategy and redemption policy. Please refer to the “Loan Origination” page for further information.
Guidelines and Regulatory Technical Standards
By 16 April 2025, ESMA was required to:
ESMA published the draft RTS along with its final report on the guidelines on 15 April 2025. The draft RTS have been submitted to the European Commission for adoption. The Commission has three months to decide whether to adopt them (extendable by one month). ESMA will then adapt the guidelines to align with any amendments to the draft RTS made by the Commission.
The Level 2 Regulations provide that an authorised AIFM must document its liquidity management policies and procedures, which must be reviewed at least annually and include suitable escalation measures to address actual or anticipated liquidity shortages or other distressed situations of the AIF. The stress tests referred to above must be carried out under normal and exceptional liquidity conditions and should be conducted on the basis of reliable and up-to-date information in quantitative terms (where possible), simulate a shortage of liquidity of the assets in the AIF and atypical redemption requests (where appropriate) and account for valuation sensitivities under stressed conditions.
The provisions dealing with Liquidity Management contained in Chapter III, Section 4 of the Level 2 Regulations. The topics covered are:
Authorised AIFMs are required at all times to use adequate and appropriate human and technical resources that are necessary for the proper management of AIFs, in the near future including for the effective integration of sustainability risks. AIFMD also provides that an authorised AIFM must have sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing and adequate internal control mechanisms, including, in particular, rules for personal transactions by its employees or for the holding or management of investments in order to invest on its own account.
The Level 2 Regulations contain detailed provisions setting out the organisational requirements that an authorised AIFM must have in place. Generally, an authorised AIFM is required to establish, implement and maintain: (i) an organisational structure which allocates functions and ensures the relevant persons are aware of the procedures to be followed, (ii) decision-making procedures, (iii) internal control mechanisms, (iv) confidentiality procedures, (v) an adequate business continuity policy, (vi) accounting policies and valuation rules and (vii) orderly records of its business and internal organisation. When complying with these requirements, authorised AIFMs will in the near future also be required to take into account sustainability risks.
Authorised AIFMs are required to keep detailed records with respect to portfolio transactions and must also record information regarding subscription offers and redemption orders. Records of this nature must be retained by the AIFM for a period of at least five years.
Chapter III, Section 6 of the Level 2 Regulations provides further detail on each of these requirements. The topics covered are:
See also the provisions in relation to delegation of functions by the AIFM, which are summarised here.
The rules applicable to investment by AIFs in securitisation positions apply differently depending on whether the relevant securities were issued on or after 1 January 2019. The Securitisation Regulation replaced the rules in AIFMD and the Level 2 Regulation with respect to investing in securitisation positions for securitisations the securities of which are issued on or after 1 January 2019).
For securitisations the securities of which are issued prior to 1 January 2019, the provisions in the Level 2 Regulations with respect to investments by AIFMs in securitisation positions continue to apply. The relevant articles are contained in Chapter III, Section 5 of the Level 2 Regulations. These provisions only apply to authorised AIFMs, and not to sub-threshold AIFMs and non-EU AIFMs which manage and/or market AIFs into the EU.
The topics covered are:
For securitisations the securities of which are issued on or after 1 January 2019, the Securitisation Regulation sets out certain verification, due diligence and on-going monitoring obligations which apply to AIFMs.
The verification and due diligence obligations applying to AIFMs under the Securitisation Regulation vary depending on the nature of the relevant originator, sponsor or original lender (including whether it is either a credit institution or an investment firm, and whether it is established in the EU). Generally, however, prior to holding a securitisation position, an AIFM must:
For so long as the AIFM holds the securitisation position, it must also:
Where an authorised AIFM is exposed to a securitisation that no longer meets the requirements of the Securitisation Regulation, it must take such corrective action (if appropriate) as is in the best interests of the investors in the relevant AIF.
Scope of Securitisation Requirements – non-EU AIFMs and small AIFMs
The Securitisation Regulation requirements are expressed apply to an AIFM that manages or markets AIFs in the EU.
On a literal reading, as well as full-scope authorised EU AIFMs, the requirements also apply to both non-EU AIFMs which only market AIFs in the EU under NPPR and small, sub-threshold AIFMs. There has been some uncertainty in the market as to whether this was intended. The Joint Committee of European Supervisory Agencies issued an opinion on 26 March 2021 in relation to the jurisdictional scope of the Securitisation Regulation, to the effect that the relevant legislation should be amended to make clear that due diligence requirements apply to non-EU AIFMs with respect to AIFs they manage and/or market in the Union (i.e. including under NPPR), and to identify how these requirements will be supervised and enforced. The ESAs did not provide a definitive opinion in relation to the application of these requirements to small AIFMs, except to advise that the position should be clarified in the legislation.
The Luxembourg AIFM Law replicates almost all the provisions of AIFMD, including the operating requirements (see art. 11 et seqq.). Further guidance is provided by the CSSF in the FAQ regarding the aforementioned law. Finally, the CSSF issued its Circular 18/698 on 23 August 2018, on the substance of Luxembourg management companies, which summarises in more detail its positions and expectations regarding the establishment, approval and running of Luxembourg management companies, including the operating conditions of AIFMs.
The Securitisation Regulation has been directly applicable in Luxembourg since 1 January 2019. In the practical context of securitisation, it should however be noted that many Luxembourg securitisation transactions do not fall in the scope of the Securitisation Regulation. The Luxembourg law of 22 March 2004 on securitisation is much broader than the Securitisation Regulation. It is neither limited to credit risk securitisations nor to transactions that involve the issuance of several tranches of securities. Against this background, Luxembourg law e.g. allows and is being used for the repackaging of other assets and asset classes, including the repackaging of AIFs, where investors subscribe for notes issued by a securitisation company and whose performance is linked to the underlying AIF(s). The latter transactions will often not fall within the scope of the Securitisation Regulation. Accordingly, when an AIF managed by a Luxembourg AIFM invests in securitisation positions which fall within the narrower scope of the Securitisation Regulation, then the rules outlined in this section apply – but these rules do not necessarily apply to an AIF with a Luxembourg AIFM when it invests in securitisations within the broader meaning of the Luxembourg law of 22 March 2004.
While AIFMD no longer binds the UK in its implementation, the provisions relating to operating conditions and organisational requirements in AIFMD have been implemented in different sections of the FCA Handbook, including in the Conduct of Business Sourcebook (COBS), the Principles for Businesses (PRIN), the Senior management Arrangements, Systems and Controls (SYSC), the Compensation rules (COMP) and the Investment Funds Sourcebook (FUND), in a manner which generally maintains the rules set out in AIFMD as implemented at the end of the Transition Period. The UK will diverge in its approach from that of the EU over time, whether as a result of changes to the existing rules, or not following future changes to AIFMD. In particular, the AIFMD II changes do not apply in the UK.
The provisions of the Securitisation Regulation were on-shored into UK law in a manner which generally maintains the verification and due diligence obligations applying to AIFMs set out in the Securitisation Regulation. However, whereas certain of the obligations under the Securitisation Regulation vary depending on whether the relevant originator, sponsor or original lender is established in the EU, certain of the obligations under the UK Securitisation Regulation vary depending on whether the relevant originator, sponsor or original lender is established in the UK.
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