Asset management and investment funds

Sustainable finance developments

During the first semester of 2023, several pieces of legislation and other guidance documents related to sustainable finance in the asset management industry have been published by national and European authorities.

Amongst these are:

  • the EU Commission's June 2023 sustainable finance package;
  • the EU Commission FAQ on the interpretation and implementation of  Taxonomy Regulation and SFDR;
  • the ESAs' consultation on the review of the SFDR RTS;
  • the RTS on nuclear energy and fossil gas investment disclosures under SFDR;
  • the CSSF update of its FAQ on SFDR;
  • the CSSF SFDR data collection exercises;
  • the CSSF's supervisory priorities in the area of sustainable finance;
  • the new ESMA Guidelines on MiFID II suitability requirements; and
  • the ESMA's final report on the new MiFID II Guidelines on product governance rule.

Each of these documents are detailed in the article " Sustainable finance developments" published on our website.

ESMA Q&As on UCITS and AIFM Directives: update

ESMA has recently updated its Q&As on the application of (i) the UCITS Directive ( ESMA34-43-392) and (ii) the AIFMD ( ESMA34-32-352).

1. The Q&A on the application of the UCITS Directive was updated to deal with the following topics:

  • permitted activities of UCITS management companies; and
  • de-notification requirements if there are no investors in a host Member State.

2. The Q&A on the application of the AIFMD was updated to deal with the following topics:

  • notion of "substantive direct or indirect holding" in the context of sub-threshold/registered AIFMs;
  • pre-marketing activities by non-EU AIFMs;
  • pre-marketing conducted by an EU AIFM or by a third party on behalf of an authorised EU AIFM;
  • pre-marketing by registered AIFMs not qualifying as EuSEF managers or EuVECA managers;
  • de-notification requirements if there are no investors in a host Member State;
  • permitted activities of AIFMs; and
  • calculation of leverage of AIFs acquiring real estate assets indirectly through non-listed companies.

ESMA report on valuation of UCITS and open-ended AIFs

On 24 May 2023, ESMA published its final report on the 2022 Common Supervisory Action (" CSA") on valuation of UCITS and open-ended AIFs (" ESMA Final Report").

As a reminder, the aim of the CSA launched in 2022 was to assess compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets (e.g. unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans).

The various actions and assessments carried out in the framework of the CSA on valuation were intended to lead to greater convergence in the approach of National Competent Authorities ("NCAs") to the supervision of valuation-related issues.

The ESMA Final Report finds room for improvement in the following areas:

  • appropriateness of valuation policies and procedures;
  • valuation under stressedbroader scope of eligible assets with the inclusion, for instance, of listed companies with a market capitalization of up to EUR 1.5 billion, FinTech companies, simple, transparent and standardised securitisations ("STS") and green bonds; market conditions;
  • independence of the valuation function and use of third-party valuers;
  • early detection mechanisms for valuation errors and compensation to investors.

The ESMA Final Report includes a section focusing on private equity and real estate potential valuation issues.

Following the publication of this report, the CSSF is likely to publish its own feedback report on the CSA on valuation and to specify the supervisory actions it intends to initiate based on ESMA's conclusions. However, in the meantime, UCITS management companies and alternative investment fund managers ("AIFMs") could already start looking at their own valuation policies and procedures in light of ESMA's key findings and identify any action which may need to be taken in order to align them with ESMA's expectations.

ELTIF II

On 20 March 2023, Regulation (EU) 2023/606 ("ELTIF II") amending the initial ELTIF Regulation (EU) 2015/760 ("ELTIF I) was published in the OJEU.

ELTIF II removes the barriers to the success of European long-term investment funds (E" LTIFs") under ELTIF I. In particular, ELTIF II introduces the following amendments:

  • broader scope of eligible assets with the inclusion, for instance, of listed companies with a market capitalization of up to EUR 1.5 billion, FinTech companies, simple, transparent and standardised securitisations ("STS") and green bonds;
  • broader definition of what constitutes a "real asset", which is now simply "an asset that has an intrinsic value due to its substance and properties", thus increasing significantly the type of real assets in which an ELTIF can invest;
  • possibility to adopt a fund-of-fund strategy or to set up a master-feeder structure;
  • more flexible portfolio composition with a larger portion of liquid assets and less strict diversification rules;
  • exemption of the diversification and concentration rule requirements for ELTIFs marketed to professional investors only;
  • clarification that ELTIFs can invest the majority of their assets in investments located in third countries;
  • possibility to conduct minority co-investments through intermediary entities, including special purpose vehicles, securitisation or aggregator vehicles, and holding companies;
  • removal for retail investors of both the minimum investment amount of EUR 10,000 and the limit of investments in ELTIFs to 10% of their portfolio;
  • while the suitability test for retail investors is still required, there is no longer an obligation to provide investment advice, and with the possibility for a retail investor to bypass a negative conclusion to that test by giving express consent to proceed with the transaction; and
  • a MIFID II license is no longer required for Alternative Investment Fund Managers ("AIFMs") that market themselves the ELTIFs which they manage to retail investors (without investment advice).

ELTIF II will become applicable on 10 January 2024. Specific provisions are provided for ELTIFs authorised before 10 January 2024 ("Existing ELTIFs"), in particular:

  • Existing ELTIFs benefit from a grandfathering period and have until 11 January 2029 to comply with ELTIF II, unless they do not raise additional capital, in which case they shall be deemed to comply with the revised regulation.
  • Existing ELTIFs may also choose to become subject to ELTIF II after 10 January 2024 (opt-in), in which case they must notify their national competent authority. Although there is no official CSSF position yet, ELTIFs newly authorised prior to 10 January 2024 should already disclose their intention to opt-in after 10 January 2024 and hence the rules that will apply after such date, in order to protect the interests of investors and for the sake of transparency.

ESMA published draft regulatory technical standards (RTS) for consultation on 23 May 2023. These RTS bring further guidance on the provisions relating to the redemption of units or shares of ELTIFs. The consultation is open until 24 August 2023 ( ESMA34-1300023242-124).

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