Fund Management: A Global Regulatory Overview

The last year or so has been a regulatory roller coaster ride for fund managers in the United States (US), with the private fund advisor rules proposed by the US Securities and Exchange Commission (SEC) threatening significant new compliance obligations only for them to be struck down on appeal. Also, with the advent of the Trump administration, the SEC’s climate rule seems to have been killed off for good.

In Europe, meanwhile, the environment has been calmer, with no revolutionary moments. Instead, regulators have built on existing regulation and long planned legislation has come into force.

This article flags some of the main recent regulatory developments in Europe and the US as they affect fund managers and advisors.

Regulatory Developments

AIFMD II:  AIFMD II came into force in the EU on 15 April 2024, amending the Alternative Investment Fund Managers Directive (AIFMD) as well as UCITS legislation. It must be implemented into the national law of EU member states by 16 April 2026.

The AIFMD continues to apply, as amended, to EU alternative investment fund managers (AIFMs) with limited application to non-EU AIFMs. Whilst the UK transposed the AIFMD into national law, it has no plans to amend the AIFMD and so AIFMD II does not apply in the UK.

Key legislative changes introduced by AIFMD II include:

• A specific regime for loan originating AIFs and, more generally, for loan origination activities by or on behalf of AIFs. This regime does not apply to non-EU AIFMs, although some of the changes discussed below (eg regarding disclosures and marketing) do affect non-EU AIFMs.
• Rules regarding liquidity risk management where AIFMs managing open-ended AIFs may access the necessary tools for liquidity risk management in exceptional circumstances. In addition to being able to suspend redemptions, AIFMs must choose at least one other liquidity management tool from options that include redemption gates, redemption fees, anti-dilution levies, redemptions in kind, and side pockets.
• An AIFM must, where relevant, make additional disclosures to investors before they invest, and periodic and Annex IV (transparency) reporting has been extended.
• EU AIFMs that delegate portfolio management or risk management functions will be subject to enhanced reporting obligations and must provide substantial information to their regulator regarding delegates and delegated activities as part of their regular reporting.
• The list of authorised ancillary services EU AIFMs can provide has been extended to include benchmark administration and credit servicing. AIFMD II clarifies 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.
• For an alternative investment fund (AIF) to be marketed in the EU by a non-EU AIFM under national private placement rules (NPPRs), neither the AIF nor its AIFM may have its registered office in a high-risk third country in accordance with the EU’s Fourth Anti-Money Laundering Directive.

No amendments were made relating to ending NPPRs. This means that there is no plan to activate sections of the AIFMD that allow for non-EU AIFMs in jurisdictions approved by the EU to use the AIFMD passport to market funds to professional investors across the EU.

Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF): In the US last summer, the Financial Crimes Enforcement Network (FinCEN) issued a final rule to add “investment adviser” to the definition of “financial institution” under the regulations implementing the Bank Secrecy Act (BSA). The final rule defines the term “investment adviser” to include, with some limited exceptions, certain SEC registered investment advisers (RIAs) and exempt reporting advisers (ERAs). 

Investment advisers that are covered by the final rule will be required to (i) develop and implement an AML/ CTT program; (ii) file suspicious activity reports; (iii) record originator and beneficiary information for certain transactions; (iv) respond to Section 314(a) requests under the USA PATRIOT Act; and (v) implement special due diligence measures for correspondent and private banking accounts. The compliance date for the new rule is 1 January 2026.

In the EU, two key AML and CTF legislative reforms consist of:

• The creation of a new EU AML and CTF authority to combat money laundering and terrorist financing: the Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA). AMLA will be a central authority co-ordinating all national AML and CTF supervisors (not just those in the financial services sector) with a view to improving the effectiveness and consistency of AML and CTF supervision and enforcement. AMLA will not replace national AML and CTF supervisors, but will have direct supervisory powers over certain high-risk financial institutions.
• A new EU Single AML and CTF Rulebook that is directly applicable across the EU. Having a framework of directly applicable provisions, it is designed to produce a greater level of harmonisation and convergence in the application of AML and CTF rules across the EU.

These changes will be made under two Regulations and the Sixth Money Laundering Directive (AMLD6).

Cryptoassets: The EU Markets in Cryptoassets Regulation (MiCA) came into force in June 2023. It fully applied in member states from 31 December 2024. MiCA establishes a broad EU legal framework for cryptoassets that were not previously covered by existing EU financial services legislation and introduces specific rules for stablecoins, which are divided into asset-referenced tokens (ARTs) and electronic money (e-money) tokens (EMTs). MiCA will be directly relevant to EU based CASPs involved with funds, and so at least have indirect impact on managers of cryptoasset funds.

Broadly speaking, MiCA introduced requirements for cryptoasset issuers and cryptoasset service providers (CASPs) (ie cryptoasset wallet providers, exchanges and platforms), relating to:

• Transparency and disclosure for the issuance, offer to the public, and admission to trading of cryptoassets.
• Authorisation of CASPs and issuers of ARTs (unless they are already authorised under existing financial services legislation).
• Supervision of CASPs, issuers of ARTs, and issuers of EMTs.
• The operation, organisation and governance of issuers of ARTs, issuers of EMTs, and CASPs.
• Consumer protection in the issuance, offer to the public, and trading, exchange and custody of cryptoassets.
• Prevention of market abuse to ensure the integrity of cryptoasset market.

DORA: The EU Digital Operational Resilience Act (DORA) is now fully in force and addresses a critical gap in EU financial regulation. Prior to DORA, financial institutions primarily managed operational risks by allocating capital to cover potential losses. With the introduction of DORA, financial institutions (including EU fund managers) are now required to follow stringent guidelines for safeguarding against ICT-related incidents. These include measures for protection, detection, containment, recovery, and repair. DORA explicitly targets ICT risks, introducing clear rules for ICT risk management, incident reporting, operational resilience testing, and oversight of ICT third-party risks.

ESG Funds: At the end of February, the European Commission published its Omnibus Simplification Package of sustainability rules. The Package aims to simplify the compliance requirements imposed by the EU Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD). Key elements of the Package include amendments to scoping thresholds for CSRD and delays to some of the effective dates for both CSRD and CSDDD. Nevertheless, implementing these proposals will take time, not least given that EU member states do not agree on the extent of reforms, which is likely to lead to considerable delay in adopting legislative texts. Disagreement may reflect concerns over regulatory uncertainty and potential setbacks in sustainability efforts. Although not directly applicable to most fund managers, the CSRD and CSDDD do affect investee companies and therefore fund managers’ own due diligence and compliance with sustainable finance regulations.

In that context, in May the European Commission published a Call for Evidence on its review of the Sustainable Finance Disclosure Regulation (SFDR). Among the issues flagged by the Commission, one of the most fundamental is whether Article 6, 8 (“light green”) and 9 (“dark green”) products should be replaced with a more precise product categorisation system, or whether they could form the basis of these new categories. If new categories are developed, this would be aligned with the approach taken by the United Kingdom Financial Conduct Authority (FCA) for the UK’s Sustainability Disclosure Requirements (SDR).

In the US, the SEC has taken a critical step toward dialling back the Climate-Related Disclosures for Issuers Rule (Climate Rule), which was promulgated under the Biden-Harris administration and immediately challenged in litigation. In February, SEC Acting Chair Mark Uyeda directed SEC staff to request the relevant court not to schedule oral arguments on the challenge to the Climate Rule until the Commission decides whether to continue defending it. Also in June, the SEC issued a notice that it was withdrawing several proposed rulemakings initiated under the prior administration. Among these was its 2022 proposal entitled ‘Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices.’ This proposal would have required registered investment advisers, certain exempt advisers, registered investment companies, and business development companies to provide additional information on the role of ESG factors in their investment decisions.

In the UK, HM Treasury published a response to its ESG ratings regulation and invited comments on its draft implementing legislation. The FCA will work on the detail of the regulation and an effective date for the final regulation is not expected for another four years. HM Treasury has also published a consultation to determine the appetite for, and the usefulness of, a UK-specific taxonomy.

The FCA published a consultation at the end of 2024 suggesting revisions to the UK SDR and investment labels regime. The FCA stated earlier this year that it would further delay its work on the extension of the SDR and investment labels regime to portfolio managers, and it is not clear from when that extension will begin to apply.

Outlook

In the US, in the short to medium term, we can expect a relaxing of regulation in line with the Trump administration’s philosophy. In Europe, although the instinct to regulate remains, there are indications that reforms may be needed in a volatile geopolitical environment.