Q2 2026 - European Regulatory Update for Funds

The second quarter of 2026 saw continued regulatory developments across the UK and the EU. In this update, we recap a selection of the principal changes of relevance to European private fund managers, and to non-European managers marketing into Europe:

EU Updates:

1. AIFMD 2
2. Retail Investment Strategy
3. Market Integration Package
4. SFDR 2.0
5. MiFID II change to research rules
6. ESMA Common Supervisory Action on AIFM Compliance

UK Updates:

1. SMCR Amendment

EU Update - AIFMD 2

The transposition deadline for Directive (EU) 2024/927 ("AIFMD II") passed on 16 April 2026, with member states required to apply the new rules from that date. However, implementation progress has varied, with an implementation date still unclear in a number of jurisdictions (including France, where transposition has been subject to significant delays). For firms with touchpoints in multiple jurisdictions, this may result in an uneven rollout of regulatory requirements, while attention should also be paid to gold-plating discrepancies as and when national rules come into force.

Notwithstanding jurisdictional variations in implementation, firms should now be turning their attention to "Day 2" items:

• Ongoing monitoring / horizon scanning
  • Continue to monitor national developments (including for any gold-plating in Member States which are delayed with their implementation). We also anticipate further national developments with respect to cross-border lending, with certain Member States revising local banking monopoly laws to facilitate lending by EU AIFs.
    
    
  • Watch out for ESMA's consultation on the Regulatory Technical Standards ("RTS") and Implementing Technical Standards on the new Annex IV reporting template, which have the potential to significantly increase the regulatory reporting burden of AIFMs. These measures are due to be finalized by April 2027, though the industry continues to await sight of drafts.
    
    
  • The adoption of "non-essential" regulatory measures have been delayed until after 1 October 2027. This includes Level 2 RTS on the conditions for loan-originating AIFs to operate as open-ended funds. Affected firms will need to await further developments, while remaining abreast of uncertainty / divergence between Member States.

• Periodic disclosures
  • Consider adopting appropriate information gathering and record keeping procedures on a go-forward basis in preparation for enhanced periodic reporting requirements to investors, applying from next year, including in relation to fees, charges and expenses, any parent undertaking, subsidiary or special purpose vehicle utilized in relation to the AIF's investments, and (for AIFs that engage in loan-origination) the composition of the originated loan portfolio. It remains to be seen how the market will interpret these new periodic reporting requirements.

EU Update - Retail Investment Strategy inches forward

In Q2 2026, the package of measures known as the Retail Investment Strategy ("RIS") continued to inch forward, with a final deal being reached in the European Council on the text.

By way of reminder, the RIS comprises (a) an Omnibus Directive amending various sectoral Directives (including AIFMD and MiFID) and (ii) a Regulation amending the PRIIPs Regulation, each intended to significantly overhaul the EU legal framework for retail investment. Please see our Q4 2025 update for further information on the expected implications of the RIS.

The next stage in the legislative process is for the European Parliament to vote on the text, whose approval is far from guaranteed.

EU Update - Market Integration Package Proposal

On 11 June 2026, the European Parliament ECON Committee Rapporteurs published their draft reports on the European Commission's Market Integration Package ("MIP") (see Q4 2025 update). The substantive proposed amendments were set out in the draft report on the so-called "Master Directive" which would amend, amongst others, AIFMD and MiFID II. The Rapporteur's key proposed amendments relevant to private fund managers include:

• Intra-group delegation carve-out removed. The Commission's proposed exemption of intra-group arrangements from full delegation requirements has been deleted.
  
  
• Direct ESMA supervision. EU groups of management companies and AIFMs with aggregate Union-wide NAV above EUR 150 billion and a cross-border presence would be subject to direct ESMA authorisation and supervision. Groups between EUR 50-150 billion would face at least annual ESMA reviews with binding decision-making powers. ESMA's direct supervisory powers would also extend to depositaries.
  
  
• NPPR restrictions tightened. NPPR would not be available where the relevant third country (the domicile of either the AIF or the AIFM) appears on Annex I or Annex II of the EU list of non-cooperative tax jurisdictions (expanded from Annex I only), or on the EU AML/CFT high-risk list.
  
  
• Macroprudential liquidity tools. NCAs would have new powers to impose minimum notice periods, holding periods and redemption frequency limits on open-ended AIFs.
  
  
• Macroprudential leverage limits. NCAs would be empowered to impose leverage limits on AIFs where leverage may contribute to systemic risk.
  
  
• Variable remuneration cap. A 1:1 cap on variable-to-fixed remuneration for AIFM staff, with NCAs permitted to set a lower maximum. Variable pay assessments would also need to integrate sustainability and climate-related risk criteria.

These amendments are a draft report only and remain subject to ECON Committee vote, European Parliament plenary adoption and trilogue negotiations with the European Council, where resistance to certain proposals may be anticipated. Fried Frank will publish an update on the eventual committee report and other progress in due course.

EU Update - SFDR 2.0 Update

Readers will recall that on 20 November 2025, the European Commission proposed a set of amendments to the Sustainable Finance Disclosure Regulation ("SFDR") following a review and evaluation of the SFDR regime as required by the original act passed in 2019 (such proposal, the "Proposal"). The Proposal seeks to address certain shortcomings in the functioning of the SFDR framework identified by this evaluation, as well as to simplify, streamline and reduce the burden of sustainability-related disclosures and requirements on market participants without undermining agreed policy objectives. Please refer to our client alert "SFDR 2.0 - The Legislative Process Begins" for more detail on the Proposal.

The legislative process has since been continuing behind the scenes and has gathered pace in Q2 2026.

The Economic and Monetary Affairs committee of the European Parliament published a draft report on the Proposal on 28 April 2026 and a further revised version of the report, reflecting the ongoing discussions within the Parliament, on 10 June 2026. The Parliament's report is expected to be put to committee vote this month with a plenary vote to finalise the report expected to take place in Q3 2026.

The Council, in the meantime, has agreed its negotiating position on the Proposal and published this on 24 June 2026. Whilst broadly welcoming the amendments in the Proposal, the Council's mandate makes targeted updates to certain elements of that draft. Of particular importance to managers and sponsors will be the re-introduction of the "opt-out" for managers of AIFs offered exclusively to professional investors from the categorisation requirements in the Proposal as well as the pushing back of the effective date of the updated regime from 18 months to 24 months from the entry into force of the amending regulation. The professional investor AIF "opt-out" was seen in an earlier draft of the Proposal which had been leaked, but did not feature in the Commission's final version published 20 November 2025.

Based on the current timeline, it is expected that trilogue negotiations between the Commission, the Parliament and the Council will commence in Q4 2026.

For the moment, sponsors and market participants should continue to comply with the SFDR regime as it currently stands and to monitor the legislative process. Whilst consideration could be given to how any new product categorisation regime under SFDR 2.0 might impact new products, the trilogue negotiations may yet lead to substantial changes to the proposed amendments in the Proposal.

EU Update - MiFID II change to research rules in June 2026

We wrote in our Q3 2024 - European Regulatory Update for Funds about changes to the UK Financial Conduct Authority ("FCA") rules on funding investment research, at least in part unwinding rules introduced at a European level in the update to the Markets in Financial Instruments Directive ("MiFID II").

In Europe, the regulators have for some time been debating changes to these MiFID II requirements and on 3 June 2026, RTS were published in the Official Journal which, in the same vein as the FCA's changes, unwind some of the MIFID II requirements-whilst adding some new operational and disclosure requirements. The RTS come into force on 21 June 2026.

EU Update - ESMA Common Supervisory Action on AIFM Compliance

In May 2026, the European Securities and Markets Authority ("ESMA") published the findings of its 2025 Common Supervisory Action ("CSA"), conducted with all EEA national competent authorities ("NCAs"), assessing compliance and internal audit functions within AIFMs against the requirements of the AIFMD Level 2 Regulation (Commission Delegated Regulation (EU) 231/2013).

While most NCAs rated overall compliance as satisfactory and reported no regulatory breaches, the CSA did identify some recurring areas for improvement which were more pronounced in particular EEA Member States.

Key findings include:

Compliance function

• Policies and procedures were not always regularly reviewed or updated, consistently followed or supported by appropriate follow-up measures. Larger entities, or those within a larger financial group, often relied on group-level policies which, although detailed, were insufficiently tailored to the local regulatory environment.
  
  
• Resourcing of the compliance function was broadly considered adequate (in terms of size and technical expertise), although a few NCAs identified resource shortages, particularly in larger firms or where compliance staff split their time across functions.
  
  
• Where compliance tasks were entrusted to third parties, internal resources sometimes fell well below 1 FTE, raising supervisory concerns.
  
  
• Compliance monitoring programs sometimes lacked sufficient granularity, with themes formulated at a high level, and internal reports in some cases contained missing elements or relied on oral rather than written reporting.
  
  
• Third-party compliance arrangements attracted scrutiny for weak oversight.

Internal audit function

• Some entities maintained no internal audit function at all, citing proportionality-relying instead on board-level or group arrangements.
  
  
• Where third parties were used for internal audit, NCAs found missing or incomplete audit charters, handbooks and plans.

The CSA serves as a helpful reminder of the importance of ensuring that the compliance and internal audit functions within an AIFM have the necessary resources, even accounting for the principle of proportionality.

An annex to the report includes detailed examples of good and poor practices to which AIFMs may wish to refer as this CSA may well serve as a benchmark for future supervisory expectations on the part of NCAs.

UK Update - SMCR Amendment

In April 2026, the FCA published a policy statement setting out the first phase of reforms to the Senior Managers and Certification Regime ("SM&CR"), following the consultation published in July 2025 (see our Q3 2025 client alert). These changes apply to all firms already subject to the SM&CR, including solo-regulated firms, dual-regulated firms and third-country branches, and have been developed jointly with the Prudential Regulation Authority ("PRA").

The changes aim to reduce day-to-day administrative burdens for firms and include the following:

• Criminal records checks for senior manager candidates now remain valid for six months instead of three and are no longer required for internal or intra-group moves.
  
  
• Changes to the 12-week rule (which allows a firm to temporarily appoint someone to a senior management function to cover a temporary or reasonably unforeseen vacancy). Firms will now have 12 weeks to submit a Senior Management Function application-rather than to submit and receive approval-and the candidate may continue acting in the role until the FCA determines the application. The Senior Manager Conduct Rules apply during the determination period.
  
  
• Firms have been given up to six months to notify changes to Statements of Responsibilities and Management Responsibilities Maps (where applicable), and solo-regulated firms need only submit the latest version if multiple changes were made in that period.
  
  
• In respect of Certified Persons: certification can now be carried out digitally and incorporated into annual appraisal cycles; the time to update most Directory information has been extended from seven to twenty working days; and the expected timeframe for providing regulatory references has been shortened from six to four weeks to speed up recruitment.
  
  
• The FCA has also expanded its Handbook guidance in respect of the following areas: the SMF7 (Group entity senior manager) and SMF18 (Other overall responsibility) functions; the allocation and splitting of Prescribed Responsibilities; and the Conduct Rules.

Most of these changes took effect on 24 April 2026. A second, broader phase of reform is expected to be consulted on later this year, subject to legislative changes by HM Treasury.

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