In a letter dated 18 August 2020 to the European Commission, ESMA sets out its recommendations for changes that could be made to the Alternative Investment Fund Managers Directive (AIFMD) framework as part of the Commission’s review of the AIFMD. ESMA recommends changes in 19 areas including harmonising the AIFMD and UCITS regimes; delegation and substance; liquidity management tools; leverage; the AIFMD reporting regime and data use; and the harmonisation of supervision of cross-border entities. Many of ESMA’s recommendations would also require consideration of changes to the UCITS regulatory framework.

While it should be noted that the Commission is under no obligation to take up ESMA’s recommendations, some of ESMA’s proposed changes could result in significant changes to the AIFMD and UCITS Directive regimes if taken forward. We highlight below some of the key points raised in the letter for fund managers and sub-managers.


Given the European regulator’s focus on increased harmonisation across financial services, it is unsurprising to see ESMA highlight increased AIFMD and UCITS harmonisation among its recommendations. ESMA’s proposed changes include aligning the AIFMD and UCITS Directive risk management, liquidity management and delegation requirements, which may result in more granular Level 2 provisions applying to UCITS. On liquidity management in particular, ESMA recommends that the Commission incorporate into the AIFMD all of the liquidity management tools in the ESRB’s 2017 Recommendation on liquidity and leverage risks in investment funds – and to further include those tools in the UCITS Directive, which may well be in response to a number of high profile UCITS liquidity failings in recent years.

ESMA also highlights the need for greater homogenisation of investment funds data, and recommends moving towards a more harmonised UCITS and AIFMD reporting framework, whilst allowing for tailoring to the characteristics of UCITS funds.

The application of AIFMD/UCITS and/or MiFID rules to business services

ESMA recommends that the Commission consider further clarifications on the application and scope of the AIFMD, UCITS Directive and MiFID II rules, in order to reduce legal uncertainty and harmonise divergent Member State views. This recommendation reflects:

  • the divergent interpretations that certain Member States have adopted in relation to AIFMD and UCITS Directive provisions on the scope of permissible MiFID activities, resulting in a broader / more flexible approach being adopted in some Member States than in others;
  • legal uncertainties as to the precise application of MiFID and/or AIFMD/UCITS Directive requirements in some cases, e.g. in relation to discretionary portfolio management or investment advice on assets that do not qualify as ‘financial instruments’ for MiFID purposes (such as real estate); and
  • the differing views held by individual Member States on which rules apply where investment management functions for an AIF/UCITS are performed on a delegated basis.

ESMA also calls for greater regulatory consistency and a level playing field between AIFMD/UCITS Directive and MiFID in order to ensure that entities providing similar types of services, such as marketing, are subject to similar regulatory standards.

Finally, in calling for greater regulatory consistency, ESMA notes that references in Article 6(6) of AIFMD and 6(4) of the UCITS Directive, which require AIFMs or UCITS ManCos with MiFID top-up permissions to comply with certain obligations under MiFID, refer to obligations under the MiFID I framework that have not been updated to reflect new obligations introduced by MiFID II. This means that, although the references should be read over to MiFID II in accordance with the MiFID II correlation table, certain new obligations that were introduced or revised in MiFID II do not apply to AIFMs and UCITS management companies when carrying on MiFID business – including, notably, transaction reporting under Article 26 of the Markets in Financial Instruments Regulation (MiFIR).

Delegation arrangements

ESMA highlights the potential for increased operational and supervisory risks arising from extensive use of delegation arrangements, in particular where collective portfolio management is delegated in large part or in its entirety to non-EU entities. These extensive delegation arrangements, which are expected to further increase after the expiration of the Brexit transition period, may result in a situation where the majority of human and technical resources needed for the day-to-day operations are maintained by several third parties or even a single third party, potentially outside of the EU, resulting in the majority of staff being employed by an entity other than the AIFM or UCITS ManCo and management fees being paid to delegates.  ESMA calls for further legislative clarifications under both the AIFMD and UCITS Directive on the maximum extent of delegation to ensure:

  • supervisory convergence; and
  • that authorised AIFMs and UCITS management companies maintain sufficient substance in the EU, possibly including quantitative criteria or a list of core or critical functions that must always be performed internally and may not be delegated to third parties.

ESMA also recommends that legislative amendments should ensure that the management of AIFs and UCITS is subject to the regulatory standards set out in the AIFMD and UCITS Directive frameworks, irrespective of the regulatory license or location of the delegate. ESMA further raises concerns about seconded staff, particularly where those seconded staff remain in their usual offices but do not undertake work on a delegated basis.

Reverse solicitation

ESMA recommends that the Commission undertake work to achieve greater clarity on the definition of reverse solicitation, which has been the subject of diverging interpretations among Member States since the application of the AIFMD, recognising that the evaluation clause under the Regulation on Facilitating Cross-border Distribution of Collective Investment Undertakings ((EU) 2019/1156) requires the Commission to submit a report on reverse solicitation by August 2021 but nevertheless exhorting the Commission to “seize the opportunity” and address divergent practices.

Going forward

It is clear that, consistent with the general direction of European regulatory travel, ESMA seeks to further harmonise the AIFMD and UCITS Directive regimes and to reduce divergent interpretation among Member States. If taken forward, ESMA’s proposals would likely to involve further Level 2 granularity for both the AIFMD and, more particularly, the UCITS Directive frameworks. Further harmonisation may in some cases reduce the duplicative burden on many fund managers managing both AIFs and UCITS; indeed, one of ESMA’s stated aims is to “exploit the synergies”, avoid unnecessary duplications or burdens on supervised entities, and reduce the need for ad-hoc data requests. ESMA’s push to achieve a greater level of consistency between the approach of individual Member States to marketing may also resolve some of the issues that managers face in navigating the patchwork of regulatory frameworks that have developed over time across the EU, although there is of course the potential that in some jurisdictions any regulatory alignment could lead to more restrictive approach. It will also be welcome news to the industry that ESMA has not recommended further harmonisation of national private placement regimes, although its call for greater regulatory consistency in relation to marketing may give cause for some concern.

On the other hand, while it would not be surprising to see the Commission seek to close the gap in transaction reporting requirements, operationally this may prove to be challenging for AIFMs and UCITS ManCos, which will need to ensure that their processes and procedures are able to accurately identify trading activity corresponding to their MiFID business activities.

Regarding delegation, ESMA is plainly concerned about the extent of delegation arrangements resulting in portfolio management occurring outside of the EU, and its proposals seek to tighten requirements regulatory consistency and substance. Any effort to bring non-EU entities engaged in sub-management activities for UCITS ManCos or EU AIFMs within the EU regulatory perimeter would clearly be problematic from a supervisory scope perspective, and would likely result in strong pushback from the industry. However, we may in the future see stronger regulatory safeguards around the need for UCITS ManCos and AIFMs to “police” that their sub-managers are fully compliant with the terms the UCITS Directive and AIFMD respectively.


Caitlin McErlane advises asset managers, banks, major corporates, exchanges, clearing houses and payment institutions on navigating UK and EU financial services regulation. She has particular experience in advising clients on operating in compliance with ongoing regulatory developments, including MiFID II, EMIR, the Investment Firms Regulation, ESG reforms, AIFMD and the Market Abuse Regulation.


Kim is a Knowledge Lawyer within the Financial Services Regulatory group at Baker McKenzie. Her expertise covers both contentious and non-contentious regulatory matters across a wide range of sectors. She is particularly interested in issues relating to investigations and enforcement, vulnerable customers, regulatory reform and change, and the impact of Brexit on financial services regulation.