We did it, so you don’t have to. Here is a compilation of the latest regulatory changes and market research in the funds and investment sector. Our intention is to provide a summary relevant to both managers, investors and institutions navigating the world of funds.

Fund Managers

Retailization of private equity – ELTIF 2.0 enters into force 10 January 2024

As we wrote about in our Q1 newsletter, the amendments to Regulation (EU) 2015/60 on European long-term investments funds (“ELTIF”), more commonly known as ELTIF 2.0, are well on their way and will start applying from 10 January 2024. The amendments will allow ELTIFs to invest in a wider range of assets pursuant to more flexible investment and diversification rules, while at the same time lowering the barriers to entry for retail investors.

Following the publication of ELTIF 2.0, we have seen a significant increase in interest from managers looking to widen their product range. We have also seen an uptick in the amount of ELTIF registrations, likely due to managers looking to get a head-start as ELTIFs registered before 10 January 2024 will be able to opt in and benefit from the new rules immediately when they become applicable.

Some highlights in ELTIF 2.0 include:

1. Broader scope of permissible investments and eligible assets, including a higher threshold for market capitalization, a broader definition of “real assets”, and the possibility to invest in standardized securitisations, non-EU qualifying portfolio undertakings, green bonds and fintech companies.
2. Facilitation of retail investor access through the removal of the minimum net worth requirement as well as the previous EUR 10,000 entry ticket, and through alignment of the ELTIF suitability test with Directive (EU) 2014/65 on markets in financial instruments (“MiFID II”).
3. More flexible investment and diversification rules, enabling investments in fund-of-funds & master-feeder structures, the utilization of increased leverage and a widening of the general diversification requirements.
4. Possibility for ELTIFs to allow redemption before the end of the life of the ELTIF due to, e.g., the abolishment of the mandatory lock-up during the ramp-up period and shortening of the lock-up period, as well as more manageable liquidity management requirements.

ELTIFs were originally introduced in 2015 with a view of creating funds for long-term investments to complement the banks’ funding of infrastructure projects and SMEs. However, the regulations were considered too strict by many and, to this day, relatively few ELTIFs have been registered. This may now change as many have welcomed ELTIF 2.0 as a more suitable framework than the original.

Find the full amending regulation here.

The European Commission proposes new rules to protect and empower retail investors in the EU

In the beginning of the summer, the European Commission published a package of amendment proposals as part of their newly adopted retail investment strategy (“RIS”), aimed at empowering retail investors and fostering their participation in capital markets. The package consists of an amending directive and an amending regulation which revises the existing rules set out in sector-specific legislation pertaining to retails investors.

One of the more significant proposals concern MiFID II, and consists of a widening of the professional client definition and the opt-in procedure therein.

Pursuant to the requirements in MiFID II, typically only large institutions or investments firms qualify as professional clients. However, other undertakings also qualify if they meet two out of three size criteria, which have been proposed to be lowered as follows:

• Balance sheet total of EUR 10,000,000 (down from EUR 20,000,000).
• Net turnover of EUR 20,000,000 (down from EUR 40,000,000).
• Own funds of EUR 1,000,000 (down from EUR 2,000,000).

Further, certain clients, both legal entities and natural persons such as high net-worth individuals, may opt-in to being treated as professional clients if they meet at least two of the following criteria:

• An average of 10 significant transactions per quarter over the previous four quarters.
• A portfolio exceeding EUR 500,000.
• At least one year of professional experience within the financial sector.

The European Commission is now proposing to lower the portfolio size criteria to a three-year average of EUR 250,000 and introduce a fourth criteria relating to relevant education or training: “the client can provide the firm with proof of a recognized education or training that evidences his/her understanding of the relevant transactions or services envisaged and his/her ability to evaluate adequately the risks”.

We believe these proposals are welcomed by many actors in the financial sector, both providers and investors, but it remains to see if the Council of the European Union and the European Parliament share this view.

Find the European Commission’s publication about RIS and their other proposals here.

Sustainability

ESMA announces its focus on digital and sustainability transitions for 2024

The European Securities and Markets Authority (“ESMA”) recently published its work programme for 2024, describing how ESMA will work to implement its strategic priorities, fulfill its legislative mandates and build on the activities executed in 2023.

In 2024, one of ESMA’s main goals is to enhance the regulatory framework related to the digital and sustainability transitions. Some highlighted measures include:

• Analysing the drivers of greenwashing and developing tools to enable national supervisors to best adress the risk thereof.
• Developing monitoring indicators on ESG markets products.
• Developing technical standards, guidelines and reports under Regulation (EU) 2022/2554 on digital operational resilience for the financial sector and the recently adopted Regulation (EU) 2023/1114 on markets in crypto-assets (“MiCA”).
• Furthering the regulatory framework for crypto asset service providers and market integrity requirements applicable to crypto-assets markets.

Find ESMA’s announcement of the work programme for 2024 here.

Invest Europe make its ESG reporting guidelines publicly available

Invest Europe recently made its ESG reporting guidelines available for the public, previously being available only to their members. The guidelines include several tools and regulatory overviews to help understand and navigate the investment side of the ESG landscape. The guidelines also include a template for reporting to investors, which, from our experience, has been a standard requirement for many larger institutional investors since their inception.

The guidelines were originally drafted with the input of more than 50 industry practitioners in various jurisdictions, from both the investor and manager side, with the intention of further codifiying and harmonizing ESG reporting. We believe the guidelines, and the template in particular, will be very useful for investors looking for more assessable and comparable sustainability data, and for managers looking for a more streamlined and standardized reporting approach.

Find Invest Europe’s ESG reporting guidelines here.

The European Commission launches consultation on the implementation of SFDR

The European Commission has launched a consultation on the implementation of the Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”) aimed at gathering information from a wide range of stakeholders, including financial practitioners, non-governmental organisations, national competent authorities, as well as professional and retail investors, on their experiences with the implementation of SFDR. The consultation aims to provide the European Commission with an understanding of any potential shortcomings, including in its interaction with the other parts of the European framework for sustainable finance, and exploring possible options to improve the framework.

The topics covered by the consultation include the current requirements of SFDR, the interaction with other sustainable finance legislation, potential changes to the disclosure requirements for financial market participants, and the potential establishment of a categorisation system for financial products. Some highlighted queries in the consultation include feedback on introducing sustainability-related disclosure requirements for all financial products offered in the EU, even if those products have not made any sustainability claims, and responders view on the merits of developing a more precise EU-level product categorisation system based on precise criteria.

Stakeholders are required to respond to the consultation by 15 December 2023.

Find more about the consultation here.

Market and market research

Record asset under management for the European private equity and venture capital industry

Despite uncertain markets, Invest Europe reports that the European private equity and venture capital industry is growing steadily. At the end of end 2022, the industry had a record EUR 1,004 billion of assets under management, more than a doubling since 2016.

Invest Europe also highlights that although successor funds from established managers account for around 89% of the dry powder in the European industry, 1,690 new first-time funds have entered the market since 2013, making up around 18% of the assets under management in the industry.

Find Invest Europe’s press release and full report on the developments in the industry here.

The SEC introduces stricter obligations for private fund advisers

In the end of August, the Securities and Exchange Commission (the “SEC”) adopted new and amended rules under the Investment Advisers Act of 1940 that will significantly impact the scope of reporting, disclosure and other obligations imposed on U.S. investment advisers for private funds (“Fund Advisers”). Although the rules will apply only in an U.S. context, expressly exempting offshore advisers for offshore funds, they will benefit everyone investing in U.S. funds and are likely to have an influence also on European funds. Some highlights include:

• Quarterly statements. Fund Advisers shall distribute quarterly reports within 45 days for the first three quarters and within 90 days of the end of the fiscal year. Quarterly reports shall include (i) a table detailing all compensation paid to the Fund Adviser and its affiliates during the reporting period, (ii) a table detailing all compensation paid by portfolio companies to the Fund Adviser, (iii) expense calculations, including the calculation methodology and references to organizational documentation for each fund expense, and (iv) standardized performance information, varying depending on whether fund is liquid or illiquid.
• Fund costs. Regulatory and compliance costs relating to the Fund Adviser may only be charged to the fund if disclosed within 45 days of the quarter end. However, costs relating to regulatory investigations of the Fund Adviser may not be charged without the written consent of the fund’s investors, and costs relating to regulatory sanctions are prohibited from being charged to the fund whatsoever.
• Side letters. Fund Advisers shall provide written disclosure to all investors regarding all forms of preferential treatment, including disclosures in advance of material economic terms to prospective investors and annual notice of any preferential treatment granted since the prior notice. Further, Fund Advisers are prohibited from providing preferential redemptions rights (unless required by law) or access to information regarding portfolio holdings or exposures if the Fund Adviser reasonably expects such rights to have a material negative effect on other investors.
• Adviser-led secondaries. In connection with adviser-led secondary transactions, the Fund Adviser is required to provide the investors with (i) a fairness or valuation opinion from an independent opinion provider, and (ii) a written summary of any material business relationships the Fund Adviser has had with the provider of the opinion during the preceding two years.

The rules will enter into force on 13 November 2023 with a transition period of 12 to 18 months depending on the Fund Adviser’s assets under management, and with varying levels of applicability depending on whether the Fund Adviser or the fund is registered with the SEC.

Find the SEC’s adopting release in full here.

AML

EBA publishes its fourth opinion on ML/TF risks across the EU

The European Banking Authority (“EBA”) has published its fourth opinion on the risks of money laundering and terrorist financing (“ML/TF”) affecting the European Union’s financial sector (the “Opinion”).

The Opinion is published against the background of a changed risk landscape, which has an impact on institutions’ compliance with regulations against ML/TF and competent authorities’ approaches to supervision. The changed risk landscape includes geopolitical events and legislative developments, such as the publication of MiCA and proposed amendments of Directive (EU) 2015/849 on the prevention of use of the financial system for the purposes of ML/TF, and emerging risks such as corruption, and the laundering of proceeds from both environmental crime and cybercrime.

Some of the ML/TF risks identified in the Opinion include risks associated with crypto assets, innovative financial services, the identification of beneficial owners and terrorist financing.

Find the Opinion here.