Amendment to ZISIF and AIFMD II

The most significant regulatory change for the investment fund sector in the last decade is coming. The amendment to the Czech Act on Investment Companies and Investment Funds (ZISIF), which implements the European AIFMD II directive, fundamentally changes the way funds operate, manage risks, and provide loans. This article is your practical guide, clearly explaining what you need to do to ensure compliance, mitigate risks, and take advantage of new opportunities.

Need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "JUDr. Jakub Dohnal, Ph.D., LL.M.", an expert on the subject.

A new era of regulation is here: What does the amendment to ZISIF and AIFMD II bring?

The European market for alternative investment funds is undergoing a fundamental transformation. The AIFMD II directive, which will be fully transposed into Czech law by an amendment to the ZISIF Act effective April 16, 2026, is not just another administrative regulation. It is a strategic revision of the rules aimed at harmonizing the functioning of funds across the EU, strengthening investor protection, and ensuring the stability of the financial system.

These changes are not random. They are a response to the dynamic growth of the alternative investment market and an effort by regulators to prevent the risks that have manifested themselves during market crises in the past. For Czech fund managers and investment companies, this means the need to adapt to new standards in key areas: lending, liquidity management, delegation of activities, and use of depositary services.

The new legislation represents a shift in the very philosophy of alternative investment supervision. It recognizes that this sector is no longer a marginal issue, but a key part of the financial ecosystem that provides significant capital for the real economy. With this recognition comes a higher level of responsibility and stricter requirements for governance, transparency, and resilience.

For Czech managers, this means that they find themselves on a level European playing field, where the same rules and expectations apply. This brings challenges in the form of the need to implement new processes, but at the same time opens the door to new opportunities for those who can adapt quickly and effectively. At ARROWS, we see this change as an opportunity and are ready to help you not only meet your new obligations, but also use them to strengthen your competitiveness. For an immediate solution to your situation, write to us at office@arws.cz.

A revolution for credit funds: New rules for Loan-Originating Funds

One of the most affected areas is lending. The amendment to ZISIF introduces a completely new, comprehensive regulatory framework for funds that focus on lending, known as loan-originating funds (LOFs). The aim is to unify the previously fragmented practice and set clear boundaries for this rapidly growing part of the market.

What is a "loan-originating AIF"?

The new rules apply to any alternative investment fund (AIF) that is involved in lending in any way. Particularly strict requirements apply to so-called "loan-originating AIFs." This is considered to be a fund whose main investment strategy is to provide loans, or where the nominal value of the loans it provides represents at least 50% of its net asset value (NAV).

The definition is deliberately broad and includes not only direct lending, but also indirect forms, such as through a third party or a special purpose vehicle (SPV), if the fund or its manager was involved in structuring the loan. If your funds finance other entities in any way, it is necessary to analyze whether you fall under the new, stricter regime. The lawyers at ARROWS can help you with this analysis. Contact us at office@arws.cz.

Key obligations and limits for credit funds

The amendment introduces several fundamental restrictions that will dramatically affect the business models of many funds:

• Leverage limits: A fixed ceiling on the use of leverage is introduced. For open-ended funds, leverage may not exceed 175% of NAV, while for closed-ended funds, the limit is set at 300% of NAV.
• Diversification and risk concentration: A new rule applies whereby a loan granted to a single borrower may not exceed 20% of the fund's capital if the borrower is a financial institution, another AIF, or a collective investment fund (UCITS).
• Prohibition of the "originate-to-distribute" strategy: It is expressly prohibited to grant loans for the sole purpose of subsequently selling them to third parties. Funds must now hold an economic interest of 5% of the nominal value of each loan granted, which they subsequently sell.
• Operational requirements: Managers must establish and maintain effective internal guidelines and processes for assessing credit risk, valuing and monitoring the entire credit portfolio. Furthermore, there is a strict prohibition on granting loans to related parties, such as the fund manager itself, its employees or the depositary.

FAQ – Legal tips on credit funds

• What exactly does it mean for a fund to "provide loans"?
• The definition is very broad. It includes not only the direct provision of credit, where the fund is the original lender, but also situations where the fund or its manager is involved in structuring, negotiating, or approving the characteristics of a loan that is formally provided by a third party. If you need to assess your specific situation, our lawyers are ready to help you – write to office@arws.cz.
• Do leverage limits also apply to existing loans?
• Yes, but with a transition period. Funds established before April 15, 2024, have until April 16, 2029, to adapt to the new rules. However, if they increase their capital after the effective date of the amendment, they must comply with the new rules earlier. For a detailed legal opinion on your situation, please contact us at office@arws.cz.

While these new rules may seem restrictive, their main purpose is to create a unified and transparent market for private lending in the EU. The harmonization of rules opens the door to a so-called "credit passport," which will make it easier for Czech funds to provide loans across member states. To successfully take advantage of this opportunity, it is essential to have a partner who understands not only Czech but also European legislation. Thanks to our ARROWS International network, we deal with cases with an international element on a daily basis and are ready to support your expansion.

 

Risks and sanctions	How ARROWS can help
Exceeding leverage limits leading to intervention by the Czech National Bank and forced corrective measures.	We will conduct a legal audit of your structure and set up internal processes to ensure compliance with the new limits.
Violation of diversification rules (20% limit) and concentration risk, which can lead to sanctions and loss of investor confidence.	We will review your fund's statutes and investment policy to ensure compliance with risk concentration limits. For an immediate solution to your situation, write to us at office@arws.cz.
Insufficient risk retention (5%) and allegations of an unauthorized "originate-to-distribute" strategy, with fines of up to CZK 150 million.	We will prepare complete documentation and risk management guidelines for you that demonstrate compliance with risk retention requirements.
Ineffective credit risk management system that will not pass the CNB audit.	We will develop and help implement internal guidelines for loan approval, monitoring, and management. Contact us at office@arws.cz for a customized legal solution.

Are you prepared for a crisis? Mandatory liquidity management tools (LMTs)

Another fundamental change introduced by AIFMD II is the mandatory implementation of liquidity management tools (LMTs) for all open-ended alternative investment funds. The aim is to ensure that funds can withstand extraordinary market situations, such as mass redemption requests, without having to sell their assets at a loss.

Managers of open-ended funds will now be required to select at least two from a list of nine harmonized tools that best match their fund's investment strategy, liquidity profile, and redemption policy. These tools must then be described in detail in the fund's articles of association or other founding documents. It is therefore not an option, but an obligation to be prepared.

List of 9 liquidity management tools

The legislation defines the following tools from which managers must choose:

Suspension of issuance and redemption of shares:

Temporary and complete suspension of all transactions. This is an extreme tool for exceptional situations.

Redemption gates:

Setting a maximum percentage of the fund's assets that can be redeemed in a given period. Requests exceeding this limit are carried over to the next period.

Extension of the redemption period: Investors must give longer notice of their intention to redeem shares, which gives the manager time to secure liquidity.

Redemption fee:

A fee paid by the departing investor to the fund's assets, thereby compensating other investors for the costs associated with the sale of assets.

Swing pricing:

A mechanism that adjusts the net asset value (NAV) of a fund up or down depending on whether purchases or sales prevail, so that transaction costs are borne by the investors who cause them.

Dual pricing:

The fund sets two prices – a higher price for buying and a lower price for selling shares. The difference covers transaction costs.

Anti-dilution levy:

A fee paid to the fund upon purchase or sale that compensates for the impact of large transactions on the value of other investors' assets.

Redemption in kind:

Instead of cash, the investor receives a proportionate share of the fund's portfolio assets upon redemption. This instrument can generally only be used for professional investors.

Side pocket:

Illiquid or problematic assets are separated into a separate part of the fund, while the rest of the portfolio continues to operate as normal.

FAQ – Legal tips for liquidity management

• Does my closed-end fund also have to implement LMTs?
• No, this obligation applies exclusively to open-ended alternative investment funds, i.e., those that allow investors to request the redemption of their shares before the fund is liquidated. Do you need to assess whether your fund falls into this category? Feel free to contact our office – office@arws.cz.

• Can I combine any two instruments?
• Most instruments can be combined. However, there is one exception – it is not possible to choose swing pricing and dual pricing as two main instruments at the same time, as they perform a very similar function. Choosing the right combination is a strategic decision. For legal advice that will protect your fund, please contact us at office@arws.cz.

The choice and implementation of LMTs is not a mere formality. It is a fundamental strategic decision that will affect the resilience of the fund and investor confidence. Properly set tools protect the value of assets for all investors and show that the fund manager is thinking ahead. At ARROWS, we will help you analyze your strategy and select a combination of LMTs that will not only comply with the letter of the law but also become your competitive advantage.

Risks and sanctions	How ARROWS can help
Missing or inappropriately selected LMTs in the fund's statutes, which may lead to an inability to cope with redemption pressure and intervention by the CNB.	We analyze your investment strategy and help you select and correctly implement the most suitable LMTs in the fund's statutes. Want to know what your legal options are? Write to office@arws.cz.
Incorrect activation/deactivation of LMTs and failure to notify the regulator, leading to sanctions and damage to reputation.	We will develop detailed internal guidelines and procedures for activating, deactivating, and reporting LMTs that will protect you from fines.
Disputes with investors over unfair use of LMTs, which can result in costly litigation.	We will ensure that your documentation and procedures are legally watertight, minimizing the risk of future disputes. If necessary, we will represent you in court. Do you need representation? Write to office@arws.cz.
Damage to the fund due to the forced sale of assets below market value due to the absence of functional LMTs.	Our legal consultations will help you set up mechanisms that protect the value of the fund's assets even in unstable market conditions. Do not hesitate to contact our office – office@arws.cz.

Other key changes you need to know about

The amendment to ZISIF and AIFMD II also brings a number of other significant changes that will affect the day-to-day operations of investment companies and funds. Here is an overview of the most important ones.

Outsourcing under scrutiny

The rules for delegating (outsourcing) key activities, such as portfolio management or risk management, are becoming significantly stricter. The aim is to prevent the creation of so-called "letter-box entities," i.e., management companies that delegate all essential activities to other entities and retain only minimal functions and responsibilities for themselves.

Managers will now have to report all delegated activities to the regulator in greater detail and demonstrate that they retain sufficient professional and technical capacity to effectively supervise and control the delegate. It is high time to review your existing outsourcing contracts. At ARROWS, we will ensure that they are revised and amended to fully comply with the new requirements. Contact us at office@arws.cz.

European passport for depositaries

One of the positive changes is the introduction of the so-called European passport for depositaries. It will now be possible for a foreign bank from another EU member state to be the depositary of a Czech fund, even without a branch in the Czech Republic, provided it obtains approval from the CNB. This change may significantly increase competition in the Czech market, where the number of depositaries is limited, and potentially lead to lower costs and better services.

However, this flexibility also entails higher due diligence requirements when selecting a foreign partner. The combination of stricter rules for delegation and the opening of the depositary market requires a sophisticated, pan-European approach to the selection of key suppliers. ARROWS can offer you a unique service of cross-border legal review of potential depositaries and delegates, thanks to our international network ARROWS International.

Broadening horizons and simplifying administration

The amendment also brings some simplifications and new business opportunities. Investment companies will now be able to perform other activities, such as managing non-performing loans, administering benchmarks, or managing special purpose vehicles in securitization. At the same time, some redundant administrative obligations are being abolished, such as the minimum capital requirement for investment funds or the obligation to establish a committee of experts for real estate valuation.

International reach? With ARROWS International, you're covered

The implementation of AIFMD II definitively confirms that the investment fund market is pan-European. The new rules create a level playing field, which is a huge opportunity for Czech funds that want to reach foreign investors, provide loans abroad, or use the services of top European partners.

In such an environment, it is no longer enough to have a legal advisor who is only familiar with Czech law. You need a partner who is confident in the international context. The ARROWS law firm has a network built up over ten years, ARROWS International, thanks to which we deal with legal issues with an international element on a daily basis. Whether it's structuring a fund for cross-border distribution, negotiating contracts with a foreign depositary, or ensuring compliance with local regulations in other EU countries, we are ready to support you.

How can ARROWS help you with a smooth transition to the new legislation?

The new regulation is complex and its implementation will require careful preparation. At ARROWS, we have many years of experience with investment funds and financial regulation. Our portfolio includes more than 150 joint-stock companies and 250 limited liability companies for which we provide comprehensive legal services. We pride ourselves on speed, high quality, and a deep understanding of our clients' businesses.

Our team of experts is ready to provide you with comprehensive support, including:

• Legal analysis of the impact of the ZISIF and AIFMD II amendments on your specific business model.
• Drafting and revision of internal guidelines (for credit risk management, LMTs, outsourcing, AML).
• Preparation and modification of fund statutes and other key documentation that will protect you from sanctions.
• Representation in licensing proceedings and in all communication with the Czech National Bank.
• Professional training for your management and employees with a certificate of completion.
• Legal advice on expansion into foreign markets thanks to the ARROWS International network.

Don't leave the preparation to the last minute. The risks are too high and the opportunities too valuable. We would also be happy to hear your business ideas and, if interested, connect our clients if we see interesting business synergies. Contact our team of experts at office@arws.cz and ensure a smooth transition to the new regulations.

FAQ – Frequently asked legal questions about the ZISIF amendment and AIFMD II

What is the exact deadline by which I must bring my fund into compliance with the new rules?

The ZISIF amendment is expected to take effect on April 16, 2026.1 However, the law provides for transitional periods for the implementation of certain changes, which may vary. It is essential to start preparing as soon as possible. If you are working on a specific timetable for your fund, please contact us at office@arws.cz.

My fund only provides loans on an occasional basis; it is not its main strategy. Do the new rules for LOFs also apply to me?

Yes, some rules apply to any AIF that is involved in lending, even if it is not its main activity. This includes, for example, the obligation to have credit risk management processes in place or the prohibition on lending to related parties. Stricter rules, such as leverage limits, apply to funds where loans account for more than 50% of NAV.

I am a manager of a small fund pursuant to Section 15 of the ZISIF. How will these changes affect me?

Although the main changes in AIFMD II concern fully regulated entities, the amendment to ZISIF also introduces stricter rules for so-called sub-threshold managers under Section 15. These include, for example, the abolition of reporting certain data that does not arise from EU law, but at the same time the clarification of other obligations. It is important to follow the final wording of the law. For up-to-date information and consultations, please write to us at office@arws.cz.

What happens if I do not include mandatory liquidity management tools (LMTs) in the statute?

If you are the manager of an open-ended AIF, this constitutes a breach of a legal obligation. In such a case, the CNB may initiate administrative proceedings, impose corrective measures, and impose a substantial fine. In addition, in the event of a market downturn, you will not have the legal tools to protect the fund and its investors, which exposes you to the risk of lawsuits. To ensure that your documentation is compliant, please contact us at office@arws.cz.

Can I really choose a bank in Luxembourg, for example, as my depositary? What do I need to do?

Yes, the amendment allows this. However, the process requires the approval of the Czech National Bank, which will assess whether all regulatory requirements are met, including risk assessment and effective supervision. This process requires careful preparation of the application and related documentation. We will help you with the entire process, just write to us at office@arws.cz.

What are the most severe penalties for non-compliance with the new rules?

Penalties for violating ZISIF can be very severe. The CNB may impose a fine of up to CZK 150,000,000, revoke a license to operate, or, in the case of unlicensed entities, file a motion with the court for their dissolution. Do not underestimate the importance of preparation; legal consultation will protect you from the worst-case scenarios. For more information, contact us at office@arws.cz.

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