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Directive (EU) 2024/927 of the European Parliament and of the Council of 13 March 2024 amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds (Text with EEA relevance)

Directive (EU) 2024/927 of the European Parliament and of the Councilof 13 March 2024amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and loan origination by alternative investment funds(Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,Having regard to the Treaty on the Functioning of the European Union, and in particular Article 53(1) thereof,Having regard to the proposal from the European Commission,After transmission of the draft legislative act to the national parliaments,Acting in accordance with the ordinary legislative procedurePosition of the European Parliament of 7 February 2024 (not yet published in the Official Journal) and decision of the Council of 26 February 2024.,Whereas:(1)In accordance with Directive 2011/61/EU of the European Parliament and of the CouncilDirective 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ L 174, 1.7.2011, p. 1)., 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 (AIFs), ensuring a high level of investor protection and protecting financial stability have, for the most part, been met. However, in its review the Commission also concluded that there is a need to harmonise the rules for the managers of alternative investment funds (AIFMs) managing AIFs which originate loans, as well as a need to clarify the standards applicable to AIFMs that delegate their functions to third parties, to ensure equal treatment of entities providing custody services ("custodians"), to improve cross-border access to depositary services, to optimise supervisory data collection and to facilitate the use of liquidity management tools across the Union. Therefore, amendments are necessary to address those needs in order to improve the functioning of Directive 2011/61/EU.(2)A robust delegation regime, the equal treatment of custodians, coherent supervisory reporting, in particular through the removal of duplications and redundant requirements, and a harmonised approach to the use of liquidity management tools are equally necessary for the management of undertakings for collective investment in transferable securities (UCITS). Therefore, it is also appropriate to amend Directive 2009/65/EC of the European Parliament and of the CouncilDirective 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32)., which lays down rules regarding the authorisation and operation of UCITS and their management companies in the areas of delegation, asset safekeeping, supervisory reporting and liquidity risk management.(3)The Union market for AIFs reached EUR 6,8 trillion in net asset value at the end of 2022. Professional investors account for approximately 86 % of the net asset value of AIFs managed or marketed by authorised AIFMs and by sub-threshold AIFMs, i.e., the AIFMs referred to in Article 3(2) of Directive 2011/61/EU, in the Union. The Union market for AIFs provides over EUR 250 billion to Union businesses in private credit, and Union investors are responsible for 30 % of the global capital allocated to the whole industry. The size of the aggregated Union market for AIFs has continued to expand, increasing by over 15 % between 2020 and 2022, and AIFs accounted for one third of the fund industry of the European Economic Area at the end of 2020. Nonetheless, there is still room for the industry to grow by providing institutional investors with greater choice and enhancing the competitiveness of the capital markets union.(4)To increase the efficiency of the activities of AIFMs, the list of ancillary services set out in Article 6(4) of Directive 2011/61/EU should be extended to include the tasks carried out by an administrator in accordance with Regulation (EU) 2016/1011 of the European Parliament and of the CouncilRegulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (OJ L 171, 29.6.2016, p. 1). ("administration of benchmarks") and credit servicing activities in accordance with Directive (EU) 2021/2167 of the European Parliament and of the CouncilDirective (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU (OJ L 438, 8.12.2021, p. 1).. For the sake of completeness, it should be clarified that, when undertaking the tasks carried out by such an administrator or when providing credit servicing activities, the AIFM should be subject to Regulation (EU) 2016/1011 and Directive (EU) 2021/2167 respectively.(5)In order to enhance legal certainty, it should be clarified that the management of AIFs can also comprise the activities of originating loans on behalf of an AIF and of servicing securitisation special purpose entities.(6)In order to enhance legal certainty for AIFMs and UCITS management companies regarding the services they can provide to third parties, it should be clarified that AIFMs and UCITS management companies are allowed to perform for the benefit of third parties the same functions and activities that they already perform in relation to the AIFs and UCITS they manage, provided that any potential conflict of interest created by the provision of that function or activity to third parties is appropriately managed. Such functions and activities include, for example, corporate services such as human resources and information technology (IT), as well as IT services for portfolio management and risk management. That possibility would also support the international competitiveness of EU AIFMs and UCITS management companies by enabling economies of scale and would help diversify revenue sources.(7)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 CouncilDirective 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014, p. 349).. With regard to assets which are not financial instruments, AIFMs should be required to comply with the requirements of Directive 2011/61/EU.(8)To ensure the uniform application of the requirements laid down in Directive 2011/61/EU regarding the necessary human resources of AIFMs, it is necessary to clarify that, at the time of the application for authorisation, an AIFM should provide the competent authorities with information about the human and technical resources that it employs to carry out its functions and, where applicable, to supervise its delegates. At least two natural persons who, on a full-time basis, either are employed by the AIFM or are executive members or members of the governing body of the AIFM, and who are domiciled, in the sense of having their habitual residence, in the Union, should be appointed to conduct the business of the AIFM. Regardless of that statutory minimum, more resources might be necessary depending on the size and complexity of the AIFM and the AIFs it manages.(9)Some Member States have requirements in national law or industry standards concerning the degree of independence of one or more members of the governing body of an AIFM or of the management body of a UCITS management company or of an investment company. It is appropriate to encourage AIFMs managing AIFs marketed to retail investors and UCITS management companies and investment companies to appoint as a member of their governing body or management body at least one independent or non-executive director, where possible under national law or under the industry standards of the home Member State of the AIFM, UCITS management company or investment company, in order to protect the interests of the AIFs and UCITS and of the investors in the AIFs that the AIFM manages or in the UCITS. In making that appointment, the AIFM, UCITS management company or investment company needs to ensure that that director is independent in character and in judgement and has sufficient expertise and experience to be able to assess whether the AIFM, UCITS management company or investment company is managing the AIFs or UCITS in the best interests of investors.(10)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. In particular, there could be cases where an independent financial advisor markets an AIF without the AIFM’s knowledge. Most fund distributors are subject to regulatory requirements pursuant to Directive 2014/65/EU or Directive (EU) 2016/97 of the European Parliament and of the CouncilDirective (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (OJ L 26, 2.2.2016, p. 19). 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, on the one hand, arrangements whereby a distributor acts on behalf of the AIFM, which should be considered to be delegation arrangements, and, on the other hand, arrangements whereby a distributor acts on its own behalf when it markets the AIF under Directive 2014/65/EU or through life-insurance based investment products in accordance with Directive (EU) 2016/97, in which case the provisions of Directive 2011/61/EU regarding delegation should not apply, irrespective of any distribution agreement between the AIFM and the distributor.(11)Delegation can allow for the efficient management of investment portfolios and for sourcing the necessary expertise in a particular geographic market or asset class. However, it is important that supervisors have updated information on the main elements of delegation arrangements. To develop a reliable overview of delegation activities in the Union, AIFMs should regularly provide competent authorities with information on delegation arrangements which involve the delegation of collective or discretionary portfolio management functions or of risk management functions. AIFMs should therefore, in respect of each AIF they manage, report information on the delegates, a list and description of the delegated activities, the amount and percentage of the assets of the managed AIFs that are subject to delegation arrangements concerning the portfolio management function, a description of how the AIFM oversees, monitors and controls the delegate, information on the sub-delegation arrangements and the date of commencement and expiry of the delegation and sub-delegation arrangements. For the sake of clarity, it should be specified that the data collected on the amount and percentage of the assets of the managed AIFs that are subject to delegation arrangements concerning the portfolio management function are for the purpose of providing a greater overview of the operation of delegation, and are not on their own an evidential indicator for determining the adequacy of substance or risk management arrangements, or the effectiveness of oversight or control arrangements at the level of the manager. Such information should be communicated to the competent authorities as part of the supervisory reporting regime governed by Directive 2011/61/EU.(12)To ensure the uniform application of Directive 2011/61/EU, it should be clarified that the delegation rules laid down therein apply to all functions listed in Annex I to that Directive and to the list of ancillary services set out in Article 6(4) of that Directive.(13)Investment funds providing loans can be a source of alternative financing for the real economy. Such funds can provide critical funding for Union small and medium-sized enterprises, for which traditional lending sources are more difficult to access. However, diverging national regulatory approaches can give rise to regulatory arbitrage and varying levels of investor protection, thereby hindering the establishment of an efficient internal market for loan origination by AIFs. Directive 2011/61/EU should recognise the right of AIFs to originate loans. Common rules should also be laid down to establish an efficient internal market for loan origination by 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 and to facilitate access to finance by Union companies, a key objective of the capital markets union as set out in the Commission’s communication of 24 September 2020 entitled "A Capital Markets Union for people and businesses – new action plan". However, given the fast-growing private credit market, it is necessary to address the potential micro-prudential and macro-prudential risks that loan origination by AIFs could pose and spread to the broader financial system. The rules applicable to AIFMs managing AIFs which originate loans should be harmonised in order to improve risk management across the financial market and increase transparency for investors. For the sake of clarity, the provisions laid down in this Directive that are applicable to AIFMs that manage AIFs that originate loans should not prevent Member States from laying down national product frameworks that define certain categories of AIFs with more restrictive rules.(14)Loan origination is not always conducted directly by the AIF. There can be cases where an AIF grants a loan indirectly through a third party or special purpose vehicle that grants the loan for or on behalf of the AIF, or for or on behalf of the AIFM in respect of the AIF, prior to gaining exposure to the loan. In order to avoid circumvention of Directive 2011/61/EU, where that AIF or AIFM is involved in structuring the loan, or defining or pre-agreeing its characteristics, such cases should be considered to be loan-originating activities and should be subject to that Directive.(15)AIFs granting loans to consumers are subject to the requirements of other instruments of Union law applicable to consumer lending, including Directive 2008/48/EC of the European Parliament and of the CouncilDirective 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC (OJ L 133, 22.5.2008, p. 66). and Directive (EU) 2021/2167. Those instruments of Union law provide for the basic protection of borrowers at Union level. However, and for overriding reasons of public interest, Member States should be able to prohibit loan origination by AIFs to consumers in their territory.(16)To support the professional management of AIFs and to mitigate risks to financial stability, AIFMs that manage AIFs that engage in loan origination, regardless of whether those AIFs meet the definition of loan-originating AIFs, should have effective policies, procedures and processes for the granting of loans. They should also implement effective policies, procedures and processes for assessing credit risk and administering and monitoring their credit portfolio where the AIFs that they manage engage in loan origination, including where those AIFs gain exposure to loans through third parties. Those policies, procedures and processes should be proportionate to the extent of the loan origination and should be reviewed regularly.(17)To contain the risk of interconnectedness among loan-originating AIFs and other financial market participants, AIFMs of those AIFs should, where a borrower is a financial institution, be required to diversify their risk and subject their exposure to specific limits.(18)To ensure the stability and integrity of the financial system and to introduce proportionate safeguards, loan-originating AIFs should be subject to a leverage limit that varies depending on whether they are of an open-ended or closed-ended type. The risk to financial stability is greater for open-ended AIFs, which can be subject to high levels of redemptions. In line with the objective of preserving financial stability, the leverage limit should not depend on whether a loan-originating AIF is marketed to professional and retail investors or only to professional investors. The commitment method provides a comprehensive and robust framework for calculating leverage in accordance with international standards, and in particular for taking into account the synthetic leverage created by derivatives. Those leverage limits should not prevent the competent authorities of the home Member State of the AIFM from imposing stricter leverage limits where it is deemed necessary in order to ensure the stability and integrity of the financial system.(19)In order to limit conflicts of interest, AIFMs and their staff should not receive loans from any AIFs that they manage. Similarly, the AIF’s depositary and the depositary’s delegate, the AIFM’s delegate and its staff, and entities within the same group as the AIFM, should be prohibited from receiving loans from the AIF concerned.(20)To avert moral hazard and maintain the general credit quality of loans originated by AIFs, such loans should be subject to risk retention requirements when transferred to third parties. With the same objective, AIFMs should be prohibited from managing an AIF that originates loans with the sole purpose of selling them to third parties ("originate-to-distribute strategy"), regardless of whether that AIF meets the definition of a loan-originating AIF. Loans should be granted for the sole purpose of investing the capital raised by the AIF in accordance with its investment strategy and regulatory constraints. However, the AIFM should be able to implement that investment strategy in the best interests of the AIF’s investors. That means that derogations from the risk retention rules are necessary and should cover cases where the retention of part of the loan is not compatible with the implementation of the AIF’s investment strategy or with the regulatory requirements, including product requirements, imposed on the AIF and its AIFM. Those cases include situations where retaining part of the loan would result in the AIF exceeding its investment or diversification limits or breaching regulatory requirements, such as restrictive measures adopted under Article 215 of the Treaty on the Functioning of the European Union (TFEU), or where the AIF is entering liquidation, or where the borrower’s situation has changed, for example in the event of merger or of default of the borrower if the AIF’s investment strategy is not to manage distressed assets, or where the AIF’s asset allocation is changed, resulting in the AIF no longer pursuing exposure to a specific sector or to a specific asset class. An AIFM should, at the request of the competent authorities of its home Member State, justify its decision to make use of such a derogation from the risk retention rules, and should be required to comply on an ongoing basis with the overarching principle of a prohibition on originate-to-distribute strategies.(21)Long-term, illiquid loans held by an AIF could create liquidity mismatches if the AIF’s open-ended structure allows investors to redeem their units or shares frequently. It is therefore necessary to mitigate the risks related to maturity transformation by imposing a closed-ended structure for loan-originating AIFs. It should however be possible for loan-originating AIFs to operate as open-ended provided that certain requirements are fulfilled, including a liquidity management system that minimises liquidity mismatches, ensures the fair treatment of investors and is under the supervision of the competent authorities of the home Member State of the AIFM. In order to ensure consistent criteria for the determination by the competent authorities of whether a loan-originating AIF can maintain an open-ended structure, the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the CouncilRegulation (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). should develop draft regulatory technical standards to establish those criteria, taking due account of the nature, liquidity profile and exposures of loan-originating AIFs.(22)It should be clarified that where an AIF which originates loans, or an AIFM, in relation to the lending activities of AIFs that it manages, is subject to the requirements laid down in Directive 2011/61/EU and to the requirements laid down in Regulations (EU) No 345/2013Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds (OJ L 115, 25.4.2013, p. 1)., (EU) No 346/2013Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European social entrepreneurship funds (OJ L 115, 25.4.2013, p. 18). and (EU) 2015/760Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (OJ L 123, 19.5.2015, p. 98). of the European Parliament and of the Council, the specific product requirements laid down in Chapter II of Regulation (EU) No 345/2013, Chapter II of Regulation (EU) No 346/2013 and Regulation (EU) 2015/760 should take precedence over the more general rules set out in Directive 2011/61/EU.(23)Due to the potentially illiquid and long-term nature of the assets of AIFs that originate loans, AIFMs might experience difficulty in complying with changes to regulatory requirements introduced during the lifecycle of the AIFs that they manage without affecting the trust and confidence of their investors. It is therefore necessary to apply transitional provisions to certain requirements for AIFs constituted before the adoption of this Directive. However, such AIFs and AIFMs should also be able to choose to be subject to those rules provided that the competent authorities of the home Member State of the AIFM are notified accordingly. In addition, the rules applicable to loan origination and to loan-originating AIFs, with the exception of leverage and investment limits and the obligation for loan-originating AIFs to operate as closed-ended, should only apply in respect of loans originated after the entry into force of this Directive.(24)To support market monitoring by the supervisory authorities, information gathering and sharing through supervisory reporting should be improved. Duplicative reporting requirements that exist under Union and national law, in particular Regulations (EU) No 600/2014Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, p. 84). and (EU) 2019/834Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (OJ L 141, 28.5.2019, p. 42). of the European Parliament and of the Council and Regulations (EU) No 1011/2012Regulation (EU) No 1011/2012 of the European Central Bank of 17 October 2012 concerning statistics on holdings of securities (OJ L 305, 1.11.2012, p. 6). and (EU) No 1073/2013Regulation (EU) No 1073/2013 of the European Central Bank of 18 October 2013 concerning statistics on the assets and liabilities of investment funds (OJ L 297, 7.11.2013, p. 73). of the European Central Bank, could be eliminated to improve efficiency and reduce administrative burdens for AIFMs. The European Supervisory Authority (European Banking Authority) (EBA) established by Regulation (EU) No 1093/2010 of the European Parliament and of the CouncilRegulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12)., the European Supervisory Authority (European Insurance and Occupational Pensions Authority) established by Regulation (EU) No 1094/2010 of the European Parliament and of the CouncilRegulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/79/EC (OJ L 331, 15.12.2010, p. 48)., ESMA (known collectively as "European Supervisory Authorities" or "ESAs") and the European Central Bank (ECB), with the support of competent authorities, where necessary, should assess the data needs of the different supervisory authorities so that the changes to the supervisory reporting template for AIFMs are effective.(25)To reduce duplicative reporting and related reporting burdens for AIFMs and to ensure an efficient reuse of data by authorities, data reported by AIFMs to competent authorities should be made available to other relevant competent authorities, the ESAs and the European Systemic Risk Board (ESRB), as set out in the Recommendation of the European Systemic Risk Board of 7 December 2017Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks in investment funds (ESRB/2017/6) (OJ C 151, 30.4.2018, p. 1)., whenever necessary for the purpose of carrying out their duties, as well as to the members of the European System of Central Banks (ESCB) for statistical purposes only.(26)In preparation for future changes to the supervisory reporting obligations, the scope of the data that can be required from AIFMs should be widened by removing limitations on that scope which focus on major trades and exposures or counterparties and by adding other categories of data to be supplied to the 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.(27)In order to ensure the consistent harmonisation of supervisory reporting obligations, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 to set out the contents, forms and procedures to standardise the supervisory reporting process by AIFMs, thus replacing the reporting template laid down in the delegated act adopted pursuant to Article 24 of Directive 2011/61/EU, as well as the reporting frequency and timing. As regards information to be reported on delegation arrangements, the regulatory technical standards should remain limited to setting out the appropriate level of standardisation of the information to be reported. The regulatory technical standards should not add any elements that are not provided for in Directive 2011/61/EU.(28)To standardise the supervisory reporting process, the Commission should be empowered to adopt implementing technical standards developed by ESMA as regards the format, data standards and methods and arrangements for reporting by AIFMs. The Commission should adopt those implementing technical standards by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1095/2010.(29)In order to ensure a more effective response to liquidity pressures in times of market stress and to better protect investors, rules should be laid down in Directive 2011/61/EU to implement the Recommendation of the ESRB of 7 December 2017.(30)To enable AIFMs of open-ended AIFs established in any Member State to deal with redemption pressures under stressed market conditions, AIFMs should be required to select and include in the AIF rules or instruments of incorporation at least two liquidity management tools from the harmonised list set out in Annex V, points 2 to 8, to Directive 2011/61/EU. By way of derogation, where an AIFM manages an AIF that is authorised as a money market fund in accordance with Regulation (EU) 2017/1131 of the European Parliament and of the CouncilRegulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (OJ L 169, 30.6.2017, p. 8)., the AIFM should be able to decide to select only one liquidity management tool from that list. Those liquidity management tools should be appropriate to the investment strategy, the liquidity profile and the redemption policy of the AIF. AIFMs should activate such liquidity management tools where necessary to safeguard the interests of the AIF’s investors. In addition, AIFMs of open-ended AIFs should always have the possibility of temporarily suspending subscriptions, repurchases and redemptions or of activating side pockets, in exceptional circumstances and where justified having regard to the interests of the AIF’s investors. Where an AIFM takes a decision to suspend subscriptions, repurchases and redemptions, it should without undue delay notify the competent authorities of its home Member State. Where an AIFM decides to activate or deactivate side pockets, it should notify the competent authorities of its home Member State within a reasonable timeframe prior to the activation or deactivation of that liquidity management tool. An AIFM should also notify the competent authorities of its home Member State where it activates or deactivates any other liquidity management tool in a manner that is not in the ordinary course of business as envisaged in the AIF rules or instruments of incorporation. That would allow supervisory authorities to better handle potential spill-overs of liquidity tensions into the wider market.(31)In particular, and to strengthen investor protection, it should be specified that the use of redemption in kind is not suitable for retail investors and should therefore only be activated to meet redemption requests of professional investors. At the same time, risks of inequality of treatment between redeeming investors and other unit-holders or shareholders should be addressed.(32)To be able to make an investment decision in line with their risk appetite and liquidity needs, investors should be informed of the conditions for the use of liquidity management tools.(33)In order to ensure consistent harmonisation in the area of liquidity risk management by AIFMs of open-ended funds and to facilitate market and supervisory convergence, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 to specify the characteristics of the liquidity management tools set out in Annex V to Directive 2011/61/EU, taking due account of the diversity of investment strategies and of underlying assets of AIFs. Those regulatory technical standards should be adopted on the basis of a draft developed by ESMA and should not restrict the ability of AIFMs to use any appropriate liquidity management tool for all asset classes, jurisdictions and market conditions. In order to ensure a uniform level of investor protection in the Union, ESMA should develop guidelines on the selection and calibration of liquidity management tools by AIFMs. Those guidelines should recognise that the primary responsibility for liquidity risk management remains with AIFMs.(34)Depositaries play an important role in safeguarding the interests of investors and should be able to perform their duties regardless of the type of the custodian that safekeeps the AIFs’ assets. Therefore, where they provide custody services to AIFs, it is necessary to include central securities depositories (CSDs) in the custody chain in order to ensure that, in all cases, there is a stable information flow between the custodian of an AIF’s asset and the depositary. To avoid unnecessary work, the depositaries should not perform ex ante due diligence where they intend to delegate custody to CSDs.(35)In order to improve supervisory cooperation and effectiveness, the competent authorities of the host Member State of an AIFM should be able to address a reasoned request to the competent authorities of the home Member State of that AIFM to take supervisory action against it.(36)To improve supervisory cooperation, ESMA should be able to request that a competent authority present a case before ESMA where that case has cross-border implications and might affect investor protection or financial stability. ESMA’s analyses of such cases would give other competent authorities a better understanding of the discussed issues, contribute to preventing similar instances in the future and protect the integrity of the market for AIFs.(37)To support supervisory convergence in the area of delegation, ESMA should receive more complete information on the application of this Directive, including in the area of appropriate oversight and control of delegation arrangements, in all Member States. To that end, it should draw on reporting obligations to competent authorities, and on the exercise in the area of delegation of its supervisory convergence powers, before the next reviews of Directives 2009/65/EC and 2011/61/EU take place. ESMA should provide a report that analyses market practices regarding delegation, and compliance with the rules on delegation, as well as substance requirements such as those relating to the human and technical resources that AIFMs, management companies and their delegates employ for the purpose of carrying out their functions.(38)Regulation (EU) 2019/2088 of the European Parliament and of the CouncilRegulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (OJ L 317, 9.12.2019, p. 1). lays down harmonised rules for financial market participants and financial advisers on transparency with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability-related information with regard to financial products. It is important to take a horizontal approach to transparency rules on sustainability for financial market participants and financial advisers. AIFs and UCITS can make an important contribution to the objectives of the capital markets union. The growth of the market for AIFs and UCITS also needs to be consistent with other objectives of the Union and should therefore be steered towards the promotion of sustainable growth. AIFMs and UCITS management companies should be able to demonstrate that they comply on an ongoing basis with their obligations under Regulation (EU) 2019/2088. Consequently, AIFMs and UCITS management companies should integrate environmental, social and governance (ESG) parameters into the governance and risk management rules used to support their investment decisions. AIFMs and UCITS management companies should also apply governance and risk management rules to their investment decisions and to their assessment of relevant risks, including environmental, social and governance risks. That is even more important where AIFMs and UCITS management companies make claims as to the sustainable investment policies of the AIFs and UCITS that they manage. Those investment decisions and risk assessments should be made in the best interests of the investors of the AIFs and UCITS. ESMA should update its guidelines on sound remuneration policies under Directives 2011/61/EU and 2009/65/EC as regards aligning incentives with ESG risks in remuneration policies.(39)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. In particular, there could be cases where an independent financial advisor markets a UCITS without the management company’s knowledge. Most fund distributors are subject to regulatory requirements pursuant to Directive 2014/65/EU or (EU) 2016/97, 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, on the one hand, arrangements whereby a distributor acts on behalf of the management company, which should be considered to be delegation arrangements, and, on the other hand, arrangements whereby a distributor acts on its own behalf when it markets the UCITS under Directive 2014/65/EU or through life-insurance based investment products in accordance with Directive (EU) 2016/97, in which case the provisions of Directive 2009/65/EC regarding delegation should not apply, irrespective of any distribution agreement between the management company and the distributor.(40)Some concentrated markets lack a competitive supply of depositary services. To address that shortage, which can lead to increased costs for AIFMs and a less efficient market for AIFs, Member States should be able to permit their competent authorities to allow the appointment of a depositary established in another Member State. That possibility should only be used when the conditions laid down in this Directive are fulfilled and with the prior approval of the competent authorities of the AIF. Since the decision to allow the appointment of a depositary established in another Member State should not be automatic, even when those conditions are fulfilled, the competent authorities should take that decision only after carrying out a case-by-case assessment of the lack of relevant depositary services in the home Member State of the AIF having regard to the investment strategy of that AIF.(41)As part of its review of Directive 2011/61/EU, the Commission should carry out an assessment of the functioning of the derogation allowing the appointment of a depositary established in another Member State and of the potential benefits and risks, including the impact on investor protection, on financial stability, on supervisory efficiency and on the availability of market choices, of amending the scope of that derogation, in line with the objectives of the capital markets union.(42)Opening up the possibility of appointing a depositary established in another Member State should be accompanied by increased supervisory reach. Therefore, the depositary should be required to cooperate not only with its competent authorities but also with the competent authorities of the AIF for which the depositary has been appointed and the competent authorities of the home Member State of the AIFM that manages the AIF, if those competent authorities are located in a different Member State than that of the depositary.(43)In order to better protect investors, the information flow from AIFMs to AIF investors should be increased. To allow AIF investors to better track the AIF’s expenses, AIFMs should identify fees, charges and expenses that are borne by the AIFM and that are subsequently directly or indirectly allocated to the AIF or to any of its investments. AIFMs should periodically report on all such fees, charges and expenses. AIFMs should also be required to report to investors on the composition of the originated loan portfolio.(44)To increase market transparency and employ effectively the available AIF market data, ESMA should be permitted to disclose the market data at its disposal in an aggregate or summary form and the confidentiality standard should therefore be relaxed to permit such data use.(45)The requirements for third-country entities with access to the internal market should be aligned to the standards laid down in Directive (EU) 2015/849 of the European Parliament and of the CouncilDirective (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ L 141, 5.6.2015, p. 73).. They should also be aligned to the standards set out in the common action undertaken by the Member States as regards non-cooperative jurisdictions for tax purposes, reflected in the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes. In particular, non-EU AIFs, non-EU AIFMs that are active in individual Member States and depositaries established in a third country should not be located in a high-risk third country pursuant to Directive (EU) 2015/849, nor in a third country that is deemed non-cooperative in tax matters, subject in certain cases to a grace period where a country is later identified as a high-risk third country pursuant to that Directive or is added to the EU list of non-cooperative jurisdictions for tax purposes. The requirements should also ensure the appropriate and effective exchange of information in tax matters in line with international standards such as those laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital.(46)Directive 2009/65/EC should ensure that the conditions for UCITS management companies are comparable to those for AIFMs, where there is no reason to maintain regulatory differences for UCITS and AIFMs. That would be the case for the delegation regime, the regulatory treatment of custodians, the supervisory reporting requirements, and the availability and use of liquidity management tools.(47)To ensure the uniform application of the substance requirements for UCITS management companies, it should be clarified that at the time of the application for authorisation, a management company should provide the competent authorities with information about the human and technical resources that it employs to carry out its functions and, where applicable, to supervise its delegates. At least two natural persons who, on a full-time basis, either are employed by the management company or are executive members or members of the management body of the management company, and who are domiciled, in the sense of having their habitual residence, in the Union, should be appointed to conduct the business of the management company. Regardless of that statutory minimum, more resources might be necessary depending on the size and complexity of the management company and the UCITS it manages.(48)To align the legal frameworks of Directives 2009/65/EC and 2011/61/EU with regard to delegation, UCITS management companies should be required to justify to the competent authorities the delegation of their functions and to provide objective reasons for the delegation.(49)Delegation can allow for the efficient management of investment portfolios and for sourcing the necessary expertise in a particular geographic market or asset class. However, it is important that supervisors have updated information on the main elements of delegation arrangements. To develop a reliable overview of delegation activities in the Union, management companies should regularly provide competent authorities with information on delegation arrangements which involve the delegation of collective or discretionary portfolio management functions or of risk management functions. Management companies should therefore, in respect of each UCITS they manage, report information on the delegates, a list and description of the delegated activities, the amount and percentage of the assets of the managed UCITS that are subject to delegation arrangements concerning the portfolio management function, a description of how the management company oversees, monitors and controls the delegate, information on the sub-delegation arrangements and the date of commencement and expiry of the delegation and sub-delegation arrangements. For the sake of clarity, it should be specified that the data collected on the amount and percentage of the assets of the managed UCITS that are subject to delegation arrangements concerning the portfolio management function are for the purpose of providing a greater overview of the operation of delegation, and are not on their own an evidential indicator for determining the adequacy of substance or risk management arrangements, or the effectiveness of oversight or control arrangements at the level of the manager. Such information should be communicated to the competent authorities as part of the supervisory reporting regime governed by Directive 2009/65/EC.(50)To ensure the uniform application of Directive 2009/65/EC, it should be clarified that the delegation rules laid down therein apply to all functions listed in Annex II to that Directive and to the list of ancillary services set out in Article 6(3) of that Directive.(51)In order to further align the rules on delegation applicable to AIFMs and UCITS and to achieve a more uniform application of Directives 2011/61/EU and 2009/65/EC, the power to adopt acts in accordance with Article 290 TFEU should be delegated to the Commission in respect of specifying the conditions for delegation from a UCITS management company to a third party and the conditions under which a UCITS management company can be deemed to be a letter-box entity and therefore can no longer be considered to be the manager of the UCITS. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement of 13 April 2016 on Better Law-MakingOJ L 123, 12.5.2016, p. 1.. In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States’ experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.(52)This Directive should implement the Recommendation of the ESRB of 7 December 2017 to harmonise liquidity management tools and their use by the managers of open-ended funds, which include UCITS, to enable a more effective response to liquidity pressures in times of market stress and better protection of investors.(53)To enable UCITS established in any Member State to deal with redemption pressures under stressed market conditions, they should be required to select and include in their rules or instruments of incorporation at least two liquidity management tools from the harmonised list set out in Annex IIA, points 2 to 8, to Directive 2009/65/EC. By way of derogation, a UCITS that is authorised as a money market fund in accordance with Regulation (EU) 2017/1131 should be able to decide to select only one liquidity management tool from that list. Those liquidity management tools should be appropriate to the investment strategy, the liquidity profile and the redemption policy of the UCITS. UCITS should activate such liquidity management tools where necessary to safeguard the interests of the UCITS’ investors. In addition, UCITS should always have the possibility of temporarily suspending subscriptions, repurchases and redemptions or of activating side pockets, in exceptional circumstances and where justified having regard to the interests of the UCITS’ investors. Where a UCITS takes a decision to suspend subscriptions, repurchases and redemptions, it should without undue delay notify the competent authorities of its home Member State. Where a UCITS decides to activate or deactivate side pockets, it should notify the competent authorities of its home Member State within a reasonable timeframe prior to the activation or deactivation of that liquidity management tool. The UCITS should also notify the competent authorities of its home Member State where it activates or deactivates any other liquidity management tool in a manner that is not in the ordinary course of business as envisaged in the fund rules or the instruments of incorporation of the UCITS. That would allow supervisory authorities to better handle potential spill-overs of liquidity tensions into the wider market.(54)In particular, and to strengthen investor protection, it should be specified that the use of redemption in kind is not suitable for retail investors and should therefore only be activated to meet redemption requests of professional investors. At the same time, risks of inequality of treatment between redeeming investors and other unit-holders should be addressed.(55)To be able to make an investment decision in line with their risk appetite and liquidity needs, UCITS investors should be informed of the conditions for the use of liquidity management tools.(56)In order to ensure consistent harmonisation in the area of liquidity risk management by UCITS and to facilitate market and supervisory convergence, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 to specify the characteristics of the liquidity management tools set out in Annex IIA to Directive 2009/65/EC, taking due account of the diversity of investment strategies and of underlying assets of UCITS. Those regulatory technical standards should be adopted on the basis of a draft developed by ESMA and should not restrict the ability of UCITS to use any appropriate liquidity management tool for all asset classes, jurisdictions and market conditions. In order to ensure a uniform level of investor protection in the Union, ESMA should develop guidelines on the selection and calibration of liquidity management tools by management companies. Those guidelines should recognise that the primary responsibility for liquidity risk management remains with UCITS.(57)To support market monitoring by the supervisory authorities, information gathering and sharing through supervisory reporting should be improved by subjecting UCITS to supervisory reporting obligations. Duplicative reporting requirements that exist under Union and national law, in particular Regulations (EU) No 600/2014 and (EU) 2019/834 and Regulations (EU) No 1011/2012 and (EU) No 1073/2013, could be eliminated to improve efficiency and reduce administrative burdens for management companies. The ESAs and the ECB, with the support of competent authorities, where necessary, should assess the data needs of the different supervisory authorities, so as to ensure that the information to be reported under the supervisory reporting template for UCITS is sufficient.(58)To reduce duplicative reporting and related reporting burdens for UCITS and to ensure an efficient reuse of data by authorities, data reported by UCITS to competent authorities should be made available to other relevant competent authorities, ESMA, the other ESAs and the ESRB, whenever necessary for the purpose of carrying out their duties, as well as to the members of the ESCB for statistical purposes only.(59)In order to ensure the consistent harmonisation of supervisory reporting obligations, power should be delegated to the Commission to adopt regulatory technical standards by means of delegated acts pursuant to Article 290 TFEU in accordance with Articles 10 to 14 and Article 15 of Regulation (EU) No 1095/2010 to set out the contents, forms and procedures to standardise the supervisory reporting process by management companies, as well as the reporting frequency and timing. As regards information to be reported on delegation arrangements, the regulatory technical standards should remain limited to setting out the appropriate level of standardisation of the information to be reported. Those regulatory technical standards should be adopted on the basis of a draft developed by ESMA. The regulatory technical standards should not add any elements that are not provided for in Directive 2009/65/EC.(60)To standardise the supervisory reporting process the Commission should be empowered to adopt implementing technical standards developed by ESMA as regards the format, data standards and methods and arrangements for reporting by management companies. The Commission should adopt those implementing technical standards by means of implementing acts pursuant to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1095/2010.(61)To ensure investor protection, and in particular to ensure that in all cases there is a stable information flow between the custodian of the UCITS’ asset and the depositary, the depositary regime should be extended to include CSDs in the custody chain where they provide custody services to UCITS. To avoid unnecessary work, the depositaries should not perform ex ante due diligence where they intend to delegate custody to CSDs.(62)In order to improve supervisory cooperation and effectiveness, the competent authorities of the UCITS host Member State should be able to address a reasoned request to the competent authority of the UCITS home Member State to take supervisory action against that UCITS.(63)To improve supervisory cooperation, ESMA should be able to request that a competent authority present a case before ESMA where that case has cross-border implications and might affect investor protection or financial stability. ESMA’s analyses of such cases would give other competent authorities a better understanding of the discussed issues, contribute to preventing similar instances in the future and protect the integrity of the UCITS market.(64)Notwithstanding the secrecy rules applicable at present, information exchanges between competent authorities and tax authorities should be improved. Such exchanges should comply with national law, and, where the information originates in another Member State, it should only be disclosed with the express agreement of the competent authority which has disclosed it.(65)Directives 2011/61/EU and 2009/65/EC require AIFMs and UCITS management companies to act with due skill, care and diligence in the best interests of the investment funds they manage and of their investors. Member States should therefore require AIFMs and UCITS management companies to act honestly and fairly as regards the fees and costs charged to investors. In 2020, ESMA developed a supervisory briefing to promote convergence on the supervision of costs in AIFs and UCITS and to develop a set of criteria to support competent authorities in assessing the notion of undue costs and in supervising the obligation to prevent undue costs from being charged to investors. Those criteria are intended to provide guidance to competent authorities, while promoting supervisory convergence in the context of the capital markets union. However, due to the lack of a clear definition of undue costs, at present, divergent market and supervisory practices exist as to what industry and supervisors perceive as undue costs, and evidence has shown a disparity in the costs charged in different Member States and in the costs charged to retail investors as compared to professional investors. The proposed amendments to Directives 2011/61/EU and 2009/65/EC, in the context of the Union’s retail investment strategy, intend to tackle that issue, by requiring fund managers to establish a sound pricing process, which should comprise the identification, analysis and review of costs charged, directly or indirectly, to investment funds or their unit-holders, and by introducing a requirement to compensate investors where undue costs have been charged. ESMA should submit a report to the European Parliament, the Council and the Commission assessing the level of, reasons for, and differences in, the costs charged to retail investors, including differences resulting from the nature of the AIFs and UCITS concerned, and analysing whether the criteria set out in its supervisory briefing are to be complemented with regard to the notion of undue costs. In order to support the competent authorities in the supervision of costs, and ESMA in its analysis of cost-related issues, the competent authorities should collect cost data to be shared with ESMA on a one-time basis. That data collection would increase ESMA’s expertise in the area of cost reporting with a view to providing the European Parliament, the Council, the Commission and the competent authorities with technical advice on the collection of cost data in the context of the Union’s retail investment strategy. On the basis of that report, ESMA should carry out activities under Article 29 of Regulation (EU) No 1095/2010 to help develop a common understanding of the notion of undue costs.(66)The name of an AIF and of a UCITS is a distinctive element that influences investors’ choices and gives a first impression of the fund’s investment strategy and objectives. Although the name of an AIF and of a UCITS already forms part of the pre-contractual information provided to investors, it is useful to underline the importance of the name by specifically emphasising that it constitutes essential pre-contractual information in the key investor information and prospectus that should be provided to retail investors before they invest in that AIF and to investors before they invest in that UCITS. In accordance with Directive (EU) 2021/2261 of the European Parliament and of the CouncilDirective (EU) 2021/2261 of the European Parliament and of the Council of 15 December 2021 amending Directive 2009/65/EC as regards the use of key information documents by management companies of undertakings for collective investment in transferable securities (UCITS) (OJ L 455, 20.12.2021, p. 15)., as of 1 January 2023, UCITS marketed to retail investors are subject to the requirements of Regulation (EU) No 1286/2014 of the European Parliament and of the CouncilRegulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (OJ L 352, 9.12.2014, p. 1).. Since that date, the obligation of a UCITS management company or investment company to prepare a key investor information document has been replaced by the obligation to prepare a key information document in accordance with Regulation (EU) No 1286/2014. In addition, AIFMs managing AIFs that are marketed to retail investors are also subject to the requirements of that Regulation. Accordingly, where AIFs and UCITS are marketed to retail investors, AIFMs and UCITS are required to include in the key information document the name of the fund and to ensure that such information is accurate, fair and clear and does not convey a misleading or confusing message that would wrongly entice investors. It is therefore essential to emphasise that the name of an AIF or UCITS is considered as important as any other pre-contractual document and subject to equal standards of fairness and transparency. In order to ensure a high and uniform level of investor protection in the Union, ESMA should develop guidelines to specify situations where the name of an AIF or UCITS could be unfair, unclear or misleading to the investor. Sectoral legislation setting standards for fund names or marketing of funds takes precedence over those guidelines.(67)In carrying out its functions under Directives 2009/65/EC and 2011/61/EU, ESMA should take a risk-based approach.(68)On 9 August 2022, the ECB delivered an opinionOJ C 379, 3.10.2022, p. 1.,HAVE ADOPTED THIS DIRECTIVE:

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