Explanatory Memorandum to COM(2021)722 - Amendment of Regulation (EU) 2015/760 as regards fund rules and requirements pertaining to i.a. the authorisation, investment policies of European long-term investment funds - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2021)722 - Amendment of Regulation (EU) 2015/760 as regards fund rules and requirements pertaining to i.a. the authorisation, ... |
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| source | COM(2021)722  |
| date | 25-11-2021 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (the ‘ELTIF Regulation’) is a European framework for alternative investment funds (AIFs) that invest in long-term investments, such as social and transport infrastructure projects, real estate and SMEs. The ELTIF Regulation establishes uniform rules on the authorisation, investment policies and operating conditions and marketing of ELTIFs.
The ELTIF regulatory framework is intended to facilitate long-term investments in these types of assets by institutional and retail investors and provide an alternative, non-bank source of finance to the real economy. Such long-term finance can support the development of the European Union’s economy along the path of smart, sustainable and inclusive growth.
Since the publication of the first Capital Markets Union (CMU) action plan in 2015, a number of actions have been taken to develop more long-term sources of funding in the EU 1 . However, it has become apparent that further policy interventions are necessary to ensure that more investments are channelled to businesses in need of capital and to long-term investment projects, particularly during the recovery from the COVID-19 pandemic.
This review aims to increase the uptake of ELTIFs across the EU for the benefit of the European economy and investors. This, in turn, would support the continued development of the Capital Markets Union (CMU), which also aims to facilitate EU companies’ access to more stable, sustainable and diverse long-term financing.
Europe needs to promote more smart, sustainable and inclusive growth that creates jobs and enhance its global competitiveness. This priority was further supported by the Commission’s Mid-Term Review of the CMU action plan 2 , which determined that the EU has been suffering from a chronic lack of long-term financing for SMEs when compared to other major economies. Furthermore, the Commission’s revised CMU action plan 3 explicitly recognised the need to further support investment vehicles that channel financing to long-term investment projects 4 . In the action plan, the Commission committed to review the legislative framework for ELTIFs 5 .
This action to develop ELTIFs is also consistent with the ambition set out in the European Green Deal and more specifically in the sustainable finance strategy 6 , to address sustainability goals and climate neutrality objectives through the contribution of all economic stakeholders, particularly those having a role in the long-term financing strategies. This initiative is also an opportunity to ensure that ELTIFs’ investment strategies and reporting activities are aligned with the EU’s climate and environmental goals 7 .
Since the adoption of the original ELTIF legal framework in April 2015, only 57 ELTIFs (as of October 2021) have been launched with a relatively small amount of net assets under management (total assets under management are estimated at approximately EUR 2.4 billion in 2021). Such authorised ELTIFs are domiciled in only four Member States (Luxembourg, France, Italy and Spain), and the other Member States had no domestic ELTIFs.
While the ELTIF is still a relatively new framework, the available market data indicates that the market’s development has not scaled up as expected, particularly given the Commission’s objective of promoting long-term finance in the Union.
Certain characteristics of the above description of the ELTIF market (i.e. low number of funds, small net asset size, few jurisdictions in which ELTIFs are domiciled, portfolio composition largely skewed towards a certain eligible investment category) demonstrate the concentrated nature of the market both geographically and in terms of investment type.
Compared to alternative investment funds (AIF), the ELTIF framework has certain advantages. First, it is a fully harmonised European label for financial products, which allows for an EU-wide, passport-based distribution to both professional and retail investors. In comparison, AIFs under Directive 2011/61/EU on Alternative Investment Fund Managers (the AIFMD) can only be marketed to professional investors, while the marketing of AIFs to retail investors is subject to national rules. The ELTIF rules can also provide the capacity, in some instances, to withstand market volatility due to their closed-ended nature and long-term orientation, and in certain cases may imply preferential national tax treatments for ELTIF investors depending on the applicable national tax laws. ELTIFs can also represent a safer pathway for investors interested in private equity investments but present a lower risk profile than pure private equity funds.
Based on the evaluation of the functioning of the ELTIF legal framework and stakeholder feedback, the advantages of ELTIFs are diminished by the restrictive fund rules and barriers to entry for retail investors, the combined effect of which reduce the utility, effectiveness and attractiveness of the ELTIF legal framework for managers and investors. These restrictions are the key drivers of the ELTIFs’ failure to scale up significantly and reach their full potential to channel investments to the real economy.
In this connection, the review of the ELTIF regulatory framework seeks to accelerate the acceptance and improve the attractiveness of ELTIFs as a ‘go to’ fund structure for long-term investments. To make this framework more appealing, the forthcoming proposal will make targeted changes in the fund rules. This especially means broadening the scope of eligible assets and investments, allowing more flexible fund rules that include the facilitation of fund-of-fund strategies, and reducing the unjustified barriers preventing retail investors from accessing ELTIFs, in particular the EUR 10 000 initial investment requirement and the maximum 10 % aggregate threshold requirement for those retail investors whose financial portfolios are below EUR 500 000.
Furthermore, the proposal aims to make the ELTIF structure more attractive by easing selected fund rules for ELTIFs distributed solely to professional investors. The review of the ELTIF legal framework also introduces an optional liquidity window mechanism to provide extra liquidity to ELTIF investors and newly subscribing investors without requiring a drawdown from the capital of ELTIFs. The proposal also seeks to ensure appropriate investor protection safeguards are in place.
• Consistency with existing policy provisions in the policy area
The Commission’s revised CMU action plan explicitly recognised the need to support investment vehicles that channel financing to long-term investment projects. In the action plan, the Commission committed to review the legal framework for ELTIFs.
The ELTIF legal framework is also closely linked to the AIFMD since the AIFMD forms the legal framework governing the management and marketing of alternative investment funds (AIFs) in the Union. By definition, ELTIFs are EU AIFs that are managed by alternative investment fund managers (AIFMs) authorised in accordance with the AIFMD. As a result, the rules applicable to ELTIF managers are set out in and governed by the AIFMD. Given the inter-linkages of the ELTIF Regulation with the AIFMD framework, it is also important to note that in addition to this ELTIF review, the Commission is also reviewing the AIFMD. Both proposals have been adopted on the same date.
• Consistency with other Union policies
The review of the ELTIF framework has strong links with the CMU, the European Green Deal, the European Energy Union, the Digital Single Market and other Union policy initiatives.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Article 114(1) TFEU serves as the legal basis for a Regulation creating uniform provisions aimed at the functioning of the internal market. Prudential product rules establish the limits of the risks linked to investment funds that are targeting long-term assets. As such, they do not regulate access to asset management activities but govern the way such activities are carried out, in order to ensure investor protection and financial stability. They underpin the correct functioning of the internal market.
In pursuit of the objective of internal market integrity, the proposed legislative measure will create a regulatory framework for ELTIFs to ensure that such funds are subject to consistent rules across the EU and that they are identifiable as such by investors throughout the EU. The target of the proposed Regulation is to create a robust, yet flexible, set of rules that specifically correspond to the long-term nature of the investments in question. The proposed rules should also ensure a level playing field between different long-term investment fund managers. This legislative proposal, therefore, harmonises the operating conditions for all relevant players in the investment fund market, for the benefit of all investors and for the smooth functioning of the single market in financial services.
The legal basis for the review of Regulation (EU) 2015/760 is laid down in Article 37. It stipulates that once the review referred to in Article 37(1) evaluating the functioning of the ELTIF regulatory framework has been completed and after ESMA has been consulted, the Commission is required to submit to the European Parliament and to the Council a report assessing the contribution of this Regulation and of ELTIFs to the completion of the Capital Markets Union and to the achievement of the objectives set out in the ELTIF Regulation. The report is to be accompanied, where appropriate, by a legislative proposal.
• Subsidiarity
In accordance with the ELTIF Regulation, ELTIFs are explicitly recognised as a conduit for supporting and completing the CMU by providing a source of long-term funding for the real economy that is accessible to retail investors. The objectives of the ELTIF Regulation, namely to ensure uniform requirements on the investments and operating conditions for ELTIFs, while taking full account of the safety and reliability of ELTIFs for ELTIF managers, investors and various stakeholders, cannot be sufficiently achieved by the Member States acting alone.
As a result, the objectives of the ELTIF Regulation can be better achieved at Union level due to their scale and effects. The Union has the right to adopt measures in accordance with the principle of subsidiarity. In accordance with the principle of proportionality in Article 5 of the Treaty on European Union, the ELTIF Regulation does not go beyond what is necessary to achieve those objectives.
• Proportionality
As regards proportionality, the proposal strikes the appropriate balance between the public interest at stake and the cost-efficiency of the measure. The proposed rules seek to create a common product label for which there is strong public interest and which would lay down a foundation for a common, competitive and cost-efficient market for ELTIFs across the Union. The requirements imposed on the different parties concerned have been carefully calibrated. Whenever possible, requirements have been crafted as minimum standards and regulatory requirements have been tailored to avoid unnecessarily disrupting existing business models. In particular, the proposed Regulation has combined parameters suitable for long-term investments and specific investor groups, by taking into full account the safety and trust considerations relating to any designation of ELTIFs.
The proposal therefore does not go beyond what is necessary to achieve a common legal framework for ELTIFs. But at the same time it addresses the regulatory issues which would affect the label’s reliability.
• Choice of the instrument
The current proposal is an amendment of the existing EU Regulation. A regulation is considered the most appropriate legal instrument to introduce uniform requirements that will deal, among others, with the scope of eligible assets, the portfolio composition, diversification rules, redemption policy, as well as rules on the authorisation of the funds intending to engage in long-term investments. The objective of these product rules is to ensure the ELTIFs work in a more efficient way.
3. RESULTS OF EX POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex post evaluations/fitness checks of existing legislation
As of October 2021, only 57 ELTIFs were authorised. For that reason, it is important that the ELTIF review addresses the range of issues identified by stakeholders to encourage greater market take-up of these funds.
The current sub-scale nature of the ELTIF market also exhibits significant unlocked potential in the legal framework with a view to effectively contributing to the real economy and the development of the CMU.
More information on the problems identified in the proposal is provided in the impact assessment on the functioning of the ELTIF framework annexed to this proposal.
• Stakeholder consultations
In June 2020, the High Level Forum (HLF) on the Capital Markets Union (CMU) published its final report 8 with 17 recommendations on removing barriers in the EU’s capital markets, including a recommendation on reviewing the ELTIF Regulation. According to the report, a review of the ELTIF regulatory framework with targeted amendments could accelerate the uptake by investors with a long-term investment horizon and increase the flow of long-term financing to the real economy 9 .
To understand the main reasons behind the slow uptake in ELTIFs across the Union and gather stakeholder suggestions for an improved functioning of the ELTIF regulatory framework, the Commission collected and analysed available evidence from a public consultation, bilateral engagement with a wide range of stakeholders and obtained feedback and a review of industry research papers. Overall, the ELTIF public consultation attracted 54 formal responses.
In addition, the impact assessment has incorporated and taken into account the feedback from different stakeholder groups, including fund managers, investor representatives, national competent authorities and the wider public (including citizens).
Based on industry consultations, fund managers seem to broadly agree (there are slight differences depending on the specialisation, jurisdiction of domicile and specific investment strategy pursued) that the key deficiencies of ELTIFs lie in the limited scope of eligible assets and investments, as well as the tangible barriers investors face in accessing ELTIFs.
There is broad consensus among the national competent authorities (NCAs) on the key topics that need to be revised (i.e. eligible assets, numeric thresholds, conflict of interest provisions, etc.). This consensus has been reflected in the European Securities and Markets Authority’s (ESMA) technical advice, which very closely coincides with the policy proposals set out in the impact assessment. NCAs have so far broadly supported the objective of ensuring consistency between the frameworks by eliminating gaps, overlaps and inconsistencies.
Selected representatives of investors (e.g. representatives of retail investors, representatives of institutional investors acting in real assets space and representatives of insurance and pension funds associations) have advocated similar targeted improvements to the ELTIF framework.
Several responses to the open public consultation were provided outside the formal submission channels, and some submissions were made after the deadline. Several of these submissions (or ex post consultations) were made by representatives of ELTIF managers.
More information on the stakeholder consultation is provided in Annex 2 of the impact assessment on the functioning of the ELTIF framework, which is annexed to this proposal.
• Collection and use of expertise
The open public consultation on the ELTIF review was an opportunity for all stakeholders (the general public, Member States, ESMA, NCAs, financial institutions, asset managers, investors, etc.) to give their views on the risks and opportunities related to the review of the ELTIF framework and the need for action. It also presented a range of possible solutions to address the issues raised by stakeholders.
This impact assessment is based primarily on stakeholder consultations and additional desk research by the Commission. In line with the general principles of the Better Regulation guidelines on the need for evidence-based impact assessments, the Commission collected evidence through several sources.
In addition to the sources mentioned above, the Commission has undertaken a series of consultations with: (i) the Expert Group of the European Securities Committee (EGESC) on 27 November 2020 and 19 July 2021; (ii) the ESMA Investment Management Standing Committee, along with continued liaising with NCAs; (iii) the stakeholder colloquium on European long-term investment funds (ELTIFs) entitled ‘ELTIF - Challenges and Opportunities in 2020’ held on 4 February 2020; (iv) an ELTIF workshop organised by the French Asset Management Association on 7 December 2020; (v) an ELTIF workshop organised by the Alternative Investment Management Association on 2 February 2021 on the regulatory experience of the functioning of U.S. business development corporations (BDCs) and their similarities with ELTIFs; and (vi) an ELTIF workshop organised by EuropeInvest with representatives of the private equity industry on 27 May 2021.
• Impact assessment
The draft impact assessment report was submitted to the Regulatory Scrutiny Board (RSB) on 11 June 2021. The RSB hearing was held on 7 July 2021. Based on the additional information provided ahead of the hearing, the RSB issued a positive opinion, subject to recommendations on better defining and analysing the options and performing additional analysis on the data and closer monitoring. In order to address the Board’s comments, the Commission incorporated into the impact assessment additional information and analysis, including on the recent uptake of ELTIFs.
The summary sheet of the impact assessment and the RSB’s positive opinion are attached to this proposal.
• Regulatory fitness and simplification
The initiative aims, in part, to reduce regulatory costs for ELTIF managers and ELTIFs associated with restrictive fund rules and to remove the hurdles investors face in accessing ELTIFs.
Overall, the proposed amendments to the ELTIF Regulation are expected to introduce additional flexibility and alleviate the burden on fund managers who provide products tailored to the needs of professional clients. At the same time, removing the hurdles investors face in accessing ELTIFs (while maintaining current protections for investors) will reduce administrative burdens and make ELTIFs more attractive for asset managers and investors alike.
However, precisely quantifying how much the preferred options would reduce regulatory costs would prove challenging due to several factors. Given the limited size of the ELTIF universe and the confidential nature of data on fund-related costs, the Commission would have to make a set of assumptions and extrapolate the possible effects the proposed measures would have on cost reductions by relying on a set of quantitative and qualitative assessments of the proposed measures.
Also, the ELTIF is a voluntary framework. Asset managers have no obligation to choose the ELTIF as a fund structure. Instead, asset managers can choose to ‘opt in’ in establishing an ELTIF. They are free to establish the fund as a standard AIF under the AIFMD or any alternative national fund structure, or they can structure their long-term investments through other means (such as private equity investments). Given those substitution and distributional effects, it would prove challenging to authoritatively substantiate any potential or implied cost savings of preferred policy options with a sufficient level of robustness.
Finally, in the open public consultation the Commission explicitly asked stakeholders about the costs and burdens of certain provisions and requirements of the ELTIF legal framework. Nevertheless, despite various attempts to collect numeric information on the costs and cost savings of certain policy choices, little information was provided. This could partially be explained by the inherent limitations of the ELTIF legal framework mentioned above (limited fund sample, opaqueness of the sector, confidentiality constraints and the voluntary nature of the ELTIF framework). This, however, implicitly indicates that cost of compliance with ELTIF rules is not such a pain point for relevant stakeholders as their restrictive nature.
• Fundamental rights
The ELTIF Regulation respects the fundamental rights and observes the principles of the Charter of Fundamental Rights of the European Union. The ELTIF framework would be applied in accordance with those rights and principles, and the targeted amendments to the ELTIF Regulation would not have any consequences or adverse effects on the exercise of fundamental rights.
4. BUDGETARY IMPLICATIONS
5. OTHER ELEMENTS
• Detailed explanation of the specific provisions of the proposal
Article 1(2) reiterates the objective of the ELTIF legal framework to raise and channel capital towards long-term projects. The adherence of this framework to the Union’s objective of smart, sustainable and inclusive growth remains intact. However, the newly proposed wording of Article 1(2) no longer includes the reference to European long-term projects to strengthen the broader scope of eligible assets, which do not necessarily need to be located in the Union. Given the fact that the ELTIF framework explicitly allows the eligible assets and investments to be located in third countries, under the conditions set out in the ELTIF Regulation, it is important to ensure that ELTIF investment strategies can pursue a global investment mandate. This clarification would also ensure more clarity and legal certainty on the flexibility of ELTIFs in the geographic investment allocation. Such ‘thematic’ allocation strategies may include investments in environmental preservation or sustainability projects in third countries, research and development facilities or energy infrastructure, which have the potential of benefiting ELTIF investors and EU long-term growth and contribute to ELTIF’s objectives.
Article 2, point 6 includes a definition of ‘real asset’ that has been revised to mean any assets that have intrinsic value due to their substance and properties. The purpose of this revision is to broaden the scope of the real asset investment strategies that ELTIF managers can pursue. Such real assets may, but do not necessarily need to, provide cash flows or investment returns, such as social, communication, environment, energy or transport infrastructure, as well as education, health, welfare support or industrial facilities or installations. This simplified definition of ‘real assets’ also ensures that the broader scope of assets may include those assets that cannot be easily quantified, for instance, those based on a discounted cash flow or comparison valuation method. Furthermore, the broadened definition of ‘real assets’ implies that such assets include infrastructure, intellectual property, vessels, equipment, machinery, aircraft or rolling stock, and immovable property, including rights attached to or associated with real assets, such as water, forest and mineral rights. The enlarged scope of the ‘real assets’ definition also comprises investments in commercial property, education, counselling, research, sports or development facilities, or housing, such as senior residents or social housing. The scale of infrastructure projects may require that large amounts of capital remain invested for long periods of time. Such infrastructure projects may include public building infrastructure such as schools, hospitals or prisons, social infrastructure such as social housing, transport infrastructure such as roads, mass transit systems or airports, energy infrastructure such as energy grids, climate adaptation and mitigation projects, power plants or pipelines, water management infrastructure such as water supply systems, sewage or irrigation systems, communication infrastructure such as networks, and waste management infrastructure such as recycling or collection systems.
Article 2, point 14a provides a definition of simple, transparent and standardised securitisation by cross-reference to Article 2, point 1 of Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation.
Article 3(3) of the ELTIF Regulation is revised to ensure that the information on authorisations granted or withdrawn and any changes to the information about the ELTIFs is communicated by the competent authorities to ESMA on a monthly basis, rather than on a quarterly basis. In addition, subparagraph 2 of Article 3(3) specifies a more granular composition of the ELTIF public register, and should include additional data fields beyond the names of authorised ELTIFs, the ELTIF managers and the competent authorities of the ELTIFs. The purpose of this electronic central ELTIF register is to ensure a better visibility of the entire ELTIF investment universe and allow investors, in particular retail investors, to obtain and evaluate relevant information on the investment opportunities available in the Member State of those investors.
Article 5(1) and (3) of the ELTIF Regulation sets out a few changes that facilitate the authorisation of the ELTIF and streamline the separation of those provisions that address the authorisation of the ELTIF and that of the AIF manager (AIFM). In particular, Article 5(3) of the ELTIF Regulation is amended to clarify that the national competent authority responsible for authorising the ELTIF is solely responsible for the authorisation of an ELTIF and is not involved in the additional authorisation or ‘approval’ of the EU AIFM. In addition, it has been clarified that the authorisation of an ELTIF should not be subject either to a requirement that the ELTIF be managed by an AIFM having its registered office in the ELTIF home Member State or that the AIFM pursues or delegates any activities in the ELTIF home Member State.
Article 10(1) of the ELTIF Regulation is amended in several respects. First, point (iii) of Article 10(1)(a) is amended to ensure that ELTIFs may make minority co-investments in investment opportunities, which could attract more modest promotors of investment projects, rather than be required to invest via or in ‘majority owned’ subsidiaries. Point (d) is amended to facilitate the possibility of ELTIFs pursuing fund-of-funds investment strategies and investing in EU AIFs ‑ in addition to ELTIFs, EuVECAs and EuSEFs ‑ managed by EU AIFMs, provided those ELTIFs, EuVECAs, EuSEFs¸ UCITS and EU AIFs invest in eligible investments. This look-through approach should ensure prudence in fund-of-fund strategies while the assets of the respective ELTIF and other collective investment undertakings are to be combined for the purposes of the limits laid down in Articles 13 and 16(1).
Article 10(1)(e) of the ELTIF Regulation allows investments in real assets and ensures that such ELTIF’s investments are not solely limited to the forms of ownership via direct holdings or indirect holdings via qualifying portfolio undertakings of individual real assets. Under the revised provisions, ELTIFs can invest in real assets if the minimum investment value of such assets is at least EUR 1 000 000, and it is no longer required that real assets are owned directly or via ‘indirect holding via qualifying portfolio undertakings’. This change would make it possible to capture a broad range of potential real assets investment strategies. Lowering the threshold would also contribute to the flexibility of ELTIF managers, since it is a standard market practice for individual real assets of a large portfolio to have a value of far less than EUR 10 000 000. Portfolios which have been operational for some time would otherwise be particularly affected, given that the value of certain assets in the renewable energy space (such as solar panels or wind turbine blades) normally decreases over the time of its life span. Lowering the minimum value of individual real assets also seeks to ensure that asset managers are provided access to large portfolios irrespective of the values of the individual real assets forming these large portfolios and that a portfolio is more diversified and consequently has fewer risks.
Article 10(1)(f) has been amended to specify the scope of eligible securitisations, which comprise securitisations of four categories: residential loans that are either secured by one or more mortgages on residential immovable property (i.e. a residential mortgage-backed security); commercial loans that are secured by one or more mortgages on commercial immovable property; corporate loans (including loans granted to small and medium enterprises); and trade receivables or other underlying exposures that the originator considers to form a distinct asset type, provided that the proceeds from securitising these trade receivables or other underlying exposures are used for financing or refinancing long-term investments. These provisions would allow the size and scope of eligible assets for ELTIFs to be broadened, and, in turn, make the ELTIF regulatory framework more appealing for asset managers and investors.
Article 11(1) is amended to streamline the notion of a ‘qualifying portfolio undertaking’. Article 11(1)(b) is also amended to raise the market capitalisation threshold for listed qualifying portfolio undertakings from EUR 500 million to EUR 1 billion and ensure that the market capitalisation threshold is solely applied at the time of the initial investment.
Article 12 is amended in two respects. First, the scope of conflict of interest provisions in paragraph 1 includes the references to EU AIFs that can be managed by the ELTIF manager. Paragraph 2, in turn, explicitly seeks to ensure that the ELTIF managers and their affiliated entities that belong to the same group, and their staff may invest in that ELTIF and in the same asset. Such co-investments may be a necessary part of the co-investment strategies pursued by AIF managers and in some cases can represent a standard industry practice. Article 12(2) allows the co-investments by the manager and its affiliated entities that belong to the same group with that ELTIF manager, and their staff only in so far as the ELTIF manager has put in place organisational and administrative arrangements to identify, prevent, manage and monitor conflicts of interest and provided that such conflicts of interest are adequately disclosed. These additional requirements seek to provide necessary investor protection and market integrity safeguards.
Currently, Article 13 sets out that a minimum threshold for eligible assets and investments should be 70%. Furthermore, Article 13 sets out portfolio composition and diversification requirements. ELTIF diversification requirements are very granular and a default 10% investment requirement is put in place for investments in loans, for any single real asset, for other investment funds. To promote the attractiveness of ELTIFs to asset managers, the modification to Article 13(1) lowers the threshold for eligible investment assets of ELTIFs to 60%. Lowering this threshold would improve the liquidity profile of ELTIFs’ underlying portfolios and promote the flexibility of asset managers in executing their investment strategies.
Article 13(2) points (a) to (c) increases to 20% the maximum retail ELTIF exposures to instruments issued by, or loans granted to, any single qualifying portfolio undertaking. Furthermore, the 20% threshold has also been established for those ELTIFs that can be marketed to retail investors for investments in any single ELTIF, EuVECA, EuSEF, or EU AIF managed by an EU AIFM that are eligible for investment under Article 10(1) of the ELTIF Regulation. For those assets referred to in Article 9(1) point (b) that have been issued by any single body, the threshold has been doubled to 10%.
To cater for the calibration of the exposures of retail ELTIFs to simple, transparent and standardised securitisations, a new paragraph 3a sets out that the aggregate value of simple, transparent and standardised securitisations may not exceed 20% of the value of the capital of the ELTIF. The aggregate risk exposure to a counterparty of the ELTIF stemming from OTC derivative transactions, repurchase agreements, or reverse repurchase agreements should not exceed 10% of the value of the capital of the ELTIF. Article 13(5) is deleted, given the increased exposure limits of retail ELTIFs. Importantly, a new paragraph 8 of Article 13 specifies that the investment thresholds set in paragraphs 2 to 4 should not apply where ELTIFs are marketed solely to professional investors.
Article 15(1) specifies that an ELTIF may acquire no more than 30% of the units or shares of a single ELTIF, EuVECA, EuSEF, or of an EU AIF managed by an EU AIFM eligible under Article 10(1)(d). Paragraph 2 specifies that the concentration limits may not apply where ELTIFs are marketed solely to professional investors.
Article 16 seeks to enable ELTIFs that can be marketed to retail investors to increase their borrowing of cash up to 50% of the ELTIF threshold. By contrast, those ELTIFs marketed solely to professional investors would be permitted to leverage up to 100% of the value of the capital of the ELTIF. The proposal also seeks to provide additional flexibility in the currency-related rules and extends the possibility of ELTIFs to contract in a currency other than the base currency where such currency exposures have been hedged or where it can be otherwise demonstrated that the borrowing in another currency does not expose the ELTIF to material currency risks. The 30% encumbrance requirement in Article 16(1) point (e) is deleted, and it is clarified that the encumbering of assets is permitted where it is sought to implement the borrowing strategy. A new paragraph 1a of Article 16 introduces a clarification that those borrowing arrangements fully covered by investors’ capital commitments would not be considered to constitute borrowing. This provision would provide additional flexibility to asset managers in employing leverage. To cater for higher investor protection safeguards, the revised paragraph 2 of Article 16 requires ELTIF managers to provide a detailed presentation of the ELTIF borrowing strategy and limits. This requirement also seeks to oblige ELTIF managers to outline how exactly the borrowing would help implement the ELTIF strategy and mitigate borrowing, currency and duration risks.
The redemptions-related rules in Article 18(7) are amended to allow ESMA to develop draft regulatory technical standards which would further specify the circumstances for redemptions under limited circumstance in paragraph 2. Such redemptions could comprise cases where the minimum information to be provided to the competent authorities and the redemptions criteria and percentage for redemptions would enable ELTIFs to provide limited redemptions based on ELTIF’s expected cash flows and liabilities. In addition, ESMA would be required to develop draft regulatory technical standards specifying the information that ELTIFs need to disclose to investors.
Article 19 would enable, but not require, the ELTIF managers to include in the rules or instruments of incorporation of the ELTIF the possibility for an optional liquidity window mechanism. This secondary market liquidity mechanism is aimed at providing, before the end of the ELTIF’s life, full or partial matching of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with subscription requests by new investors. The matching of transfer and subscription requests can be done, provided several cumulative conditions are fulfilled. In particular, the manager of the ELTIF would have to have a defined policy for such an optional liquidity mechanism and specify in that policy the following information: the transfer process for both exiting and subscribing investors, the roles of the fund manager or the fund administrator, the applicable time window, the execution price, the conditions for the pro-ration, disclosure requirements and the applicable fees, costs and charges. It is critical that such an optional liquidity mechanism ensure fair treatment of investors and provide sufficient opportunity for the ELTIF manager to monitor the liquidity risk of the ELTIFs.
Article 21(1) modifies the provisions on disposing of ELTIF assets by requiring the ELTIF manager to inform the competent national authority of the orderly disposal of the assets for the redemption of investors. A separate request by the competent authority of the ELTIF would trigger an obligation for the ELTIF to submit to the competent authority an itemised schedule for the orderly disposal of the assets.
Article 26 requires that the manager of an ELTIF whose units or shares are intended to be marketed to retail investors put in place, in each Member State where ELTIFs are being marketed, facilities for making subscriptions, making payments to unit- or shareholders, repurchasing or redeeming units or shares and making available the information which the ELTIF and its manager are required to provide. These provisions on investor facilities are deleted to facilitate the marketing of ELTIFs, in particular cross-border marketing, in a manner compliant with the EU acquis. The deletion of Article 26 also seeks to ensure that the marketing of ELTIFs can take place without subjecting ELTIF managers to the requirement to put in place ‘facilities’, which are at times construed to imply physical facilities or separate IT, personnel-related or administrative arrangements or requirements.
Article 28(1) seeks to remove the partial duplication of suitability assessment referred to in the ELTIF Regulation and in the Directive on Markets in Financial Instruments (MiFID II). To that end, Article 28(1) and Article 30(1) cross-refer to the obligation of ELTIF managers and distributors, when directly offering or placing ELTIFs, to carry out the suitability assessment in line with the MiFID II provisions. This alignment of the ELTIF suitability test with that of MiFID II is important in the context of the proposed deletion of the first subparagraph of Article 30(3) which contains the EUR 10 000 initial minimum investment requirement and the 10% aggregate threshold for the financial portfolios of retail investors. The proposal seeks to remove these requirements, i.e. the minimum EUR 10 000 investment (the ‘entry ticket’) and the 10% exposure threshold for retail investors whose financial portfolios are below EUR 500 000. This is due to the fact that such requirements constitute unjustified barriers preventing retail investors from having access to ELTIFs and that such thresholds have proven, in most instances, to be burdensome, dissuasive and ineffective.
Article 30 i seeks to clarify the application of the equal treatment principle, as applied within the relevant class or classes of ELTIFs. Article 30(6) seeks to ensure that the two-week withdrawal period solely applies to retail investors and can only be effective during the 2 weeks following the effective date of the commitment or subscription agreement.
Article 37(1) is modified to expand the conditions of the new review of the ELTIF regulatory framework. Such a review could start within 5 years from the ELTIF Regulation’s entry into force and should cover a more comprehensive set of fund rules than those initially set out in Article 37. Comprehensive evaluation of the functioning of this Regulation will be conducted 5 years after it begins applying. The scope of the revised review clause is extended to cover the operation and application of the main fund rules and the impact these rules have on ELTIF managers and investors. The review of the ELTIF legal framework would require consultation of ESMA.