Memo #
32907

New Date and Time: European Consultation on ELTIFs: Member Call on 30 November 2020 at 11:00 am ET/4:00 pm GMT
| Print

[32907]

November 11, 2020 TO: ICI Members
ICI Global Members
Global Operations Advisory Committee
ICI Global Atlantic Chapter
ICI Global EU Capital Markets Union Task Force
ICI Global Regulated Funds Committee
International Compliance Advisory Committee SUBJECTS: International/Global
MiFID, EMIR, AIFMD, UCITS V RE: New Date and Time: European Consultation on ELTIFs: Member Call on 30 November 2020 at 11:00 am ET/4:00 pm GMT

 

On 19 October 2020, the European Commission (“the Commission”) published[1] a consultation[2] on potential changes to the European Long Term Investment Fund (ELTIF) Regulation.[3] ICI Global intends to respond to the consultation, advocating for policy changes that are of broader relevance to the development of EU investment fund policy, including the development of the Capital Markets Union (CMU) and UCITS. The Commission is accepting responses to the consultation submitted by 19 January 2021 via an online questionnaire.

We will hold a member call via Zoom to discuss the consultation on Monday 30 November 2020 at 11:00 am ET/4:00 pm GMT. Connection details for the member call are below.

Link: https://ici-org.zoom.us/j/8451715029?pwd=WnNCaTZYWWxIanpBTWc1OW5xUFRyQT09 Meeting ID: 845 171 5029 Passcode: 935735 Local dial-in numbers: https://ici-org.zoom.us/u/ao3n0Fwqv

Background

The ELTIF Regulation is a pan-European framework for Alternative Investment Funds (AIFs) that invest in longer term real economy investments such as infrastructural projects, real estate, listed and unlisted SMEs. Since the 2015 adoption of the framework, just under 30 ELTIFs have been launched with total AuM of less than EUR2bn.[4] The Commission is required to review[5] various aspects of the ELTIF Regulation and the CMU High-Level Forum[6] has recommended changes to the framework with the objective of reducing barriers to investment by investors, particularly retail investors, and broadening the scope of eligible assets and investments.[7] The Commission has included an action to “review the legislative framework for European long-term investment funds with a view to channelling more long-term financing to companies and infrastructure projects, in particular those contributing to the objective of smart, sustainable and inclusive growth” in its most recent CMU action plan.[8]

ELTIF Regulation Consultation

The consultation is split into a short questionnaire, containing 5 questions. A long questionnaire contains 37 questions split over 10 sections as set out below.

Short Questionnaire

Introductory Questions

The Commission asks respondents to specify (on a 1-5 scale) to what extent they agree with various statements regarding the overall ELTIF framework, including whether (Question 1):

  • it has been successful in achieving its objective of raising and channelling capital towards European long-term investments in the real economy;
  • the scope of the ELTIF authorisation is appropriate;
  • the costs of launching and operating an ELTIF, and the regulatory and administrative burdens are appropriate;
  • it is relevant to the needs and challenges in EU asset management;
  • it is consistent with the objectives of the CMU;
  • it has brought added value to investors in and the financing of long-term projects;
  • the investor protection framework is appropriate.

The Commission also asks respondents to indicate (on a 1-5 scale) which of the following areas and provisions where the functioning of the ELTIF regime could be improved through policy actions (Question 2):

  • General principles and definitions used in the ELTIF Regulation;
  • Market capitalisation threshold defining an SME equity or debt issuer;
  • Authorisation requirements;
  • Operational conditions;
  • Passportability of ELTIFs
  • Rules pertaining to eligible investments and the prohibition to undertake certain activities;
  • Clarification and/or practical guidance on the eligibility requirements notably in relation to investment in real assets;
  • Rules concerning qualifying portfolio undertakings;
  • Conflicts of interest related rules including the ban on co-investment;
  • Portfolio composition and diversification rules and their application;
  • Concentration limits;
  • Rules and limitations related to the borrowing of cash;
  • Redemption related rules and life-cycle of ELTIFs;
  • Rules concerning the disposal of ELTIF assets;
  • Transparency requirements;
  • Prospectus-related provisions;
  • Cost disclosure related rules;
  • Rules pertaining to the facilities available to investors for making subscriptions;
  • Requirements concerning the marketing and distribution of ELTIFs to investors;
  • Specific provisions concerning the depositary of an ELTIF marketed to retail investors;
  • Provisions and rules pertaining to the marketing of ELTIFs to retail investors;
  • Provisions integrating the EU Taxonomy for sustainable activities into the ELTIF framework;
  • Inconsistent or duplicative application of the ELTIF related requirements by Member States;
  • Issues arising from the supervisory practices within Member States;
  • Cross-border marketing related challenges;
  • Excessive reliance on distribution networks to market ELTIFs;
  • Excessive costs of setting up and operating ELTIFs;
  • Competition from existing national fund structures;
  • Taxation related issues;
  • Other aspects.

The Commission asks respondents to rate (on a 5 point scale) the following characteristics of the ELTIF framework based on how positive or negative their impact is (Question 3):

  • Broad scope of eligible assets under the ELTIF regime;
  • Long-term and illiquid nature of the investments of an ELTIF;
  • Operational conditions;
  • Transparency requirements;
  • Availability of ELTIFs to retail investors;
  • Requirements and safeguards for marketing of ELTIFs to retail investors;
  • Validity of an authorisation as an ELTIF for all Member States;
  • Other aspects.

The Commission asks respondents rate (on a 5 point scale) which of the following provisions and requirements pertaining to the eligibility of investments and investment assets set out in the ELTIF Regulation need to be updated to improve the functioning of the ELTIF framework (Question 4):

  • A minimum size eligibility requirement for real asset investments;
  • A condition for an exposure to real estate through a direct holding or indirect holding through qualifying portfolio undertaking of individual real assets;
  • Limitation on eligible investment assets to ELTIFs, EuVECAs and EuSEFs;
  • Inability to invest in a “financial undertaking”;
  • EUR 500mn threshold for investing in listed issuers;
  • Rules related to investments in third-country undertakings;
  • Other conditions and requirements related to eligible investment assets and qualifying portfolio undertakings.

The Commission asks respondents which of the following ELTIF Regulation provisions should be amended to improve the participation and access of retail investors to ELTIFs (Question 5):

  • Minimum entry ticket for retail investors and net worth requirements;
  • Suitability test;
  • Withdrawal period of two weeks;
  • Possibility to allow more frequent redemption requests for retail investors;
  • Procedures and arrangements to deal with retail investor complaints;
  • Provisions related to the marketing of ELTIFs;
  • Other provision and requirement related to retail investors.

Long Questionnaire

Scope of ELTIF Authorisation and Process

The Commission asks whether the scope of the ELTIF authorisation and operating conditions are appropriate (Q4) and whether the framework should be amended to enhance the use of the ELTIF passport (Q5).

Investment Universe, Eligible Assets and Qualifying Portfolio Undertakings

The Commission asks respondents to rate whether the following investments should be eligible under the revised ELTIF framework:

  • Investments in innovative technologies;
  • Investments in green, sustainable and/or climate related projects;
  • Investments in projects that classify as sustainable under the EU taxonomy for sustainable activities;
  • Post-COVID 19 recovery related projects;
  • Any financial assets with ling-term maturities;
  • Investments in digital assets and infrastructure;
  • Investments in social infrastructure and social cohesion;
  • Investments in energy infrastructure and energy efficiency;
  • Any real estate assets, including commercial and residential real estate without a perceived economic or social benefit under the Union’s energy, regional and cohesion policies;
  • The scope of the investment universe of ELTIFs and eligible assets as currently set out in the ELTIF Regulation be further expanded to other areas and asset classes;
  • The scope of the investment universe of ELTIFs and eligible assets as currently set out in the RLTIF regulation be more restricted or limited to a narrower set of assets/investments;
  • Other types of assets and investment targets, and/or other regulatory approaches should be pursued.

The Commission also asks whether definitions related to the investment universe of ELTIFs and eligible assets used in the ELTIF Regulation (e.g., “long-term”, “capital”, “social benefit” etc.) should be revised to enhance the clarity and certainty around the application of the ELTIF regime (Question 7). Furthermore, the Commission asks whether the ELTIF framework is appropriate in respect of provisions related to investment in third countries (Question 8).

The Commission asks respondents to rate (on a 5 point scale) whether the following provisions and requirements related to the eligibility of investments and investment assets should be updated to improve the functioning of the ELTIF framework (Question 9):

  • A size requirement of at least EUR 10mn for eligible real asset investments;
  • A condition for an exposure to real estate through a direct holding or indirect holding through qualifying portfolio undertakings of individual real assets;
  • Limitation on eligible investment assets to units or shares of ELTIFs, EuVECAs and EuSEFs as opposed to other potential fund categories;
  • Inability to invest in a “financial undertaking”;
  • EUR 500mn market capitalisation threshold set out in the ELTIF Regulation for investing in listed issuers;
  • Rules related to investments in third-country undertakings;
  • Other conditions and requirements related to eligible investment assets and qualifying portfolio undertakings.

The Commission also asks respondents to provide their assessment of the adequacy and effectiveness of the ELTIF framework with respect to the execution of fund-of-fund investment strategies, real asset investment strategies and any restrictions on investments in other funds throughout the ELTIF’s life (Question 9.1)

Types of investor and Effective Investor Protection

The Commission asks respondents to describe key barriers to the development of the ELTIF market, whether regulatory or of another nature, if any, to institutional investments that reduce the attractiveness of ELTIFs for institutional investors (Question 10).

The Commission also asks respondents which of the following ELTIF Regulation provisions should be amended to improve the participation and access of retail investors to ELTIFs (Question 11):

  • The size of the initial minimum amount for retail investors, and net worth requirements;
  • The specific requirements concerning the distribution of ELTIFs to retail investors (suitability test);
  • Withdrawal period of two weeks;
  • Possibility to allow more frequent redemptions for retail investors;
  • Procedures and arrangements to deal with retail investors complaints;
  • Provisions related to the marketing of ELTIFs;
  • Other provisions and requirements related to retail investors.

The Commission asks which safeguards, if any, should be introduced to or removed from the ELTIF framework to ensure appropriate suitability assessment and effective investor protection, which considering the specific risk and liquidity profile of ELTIFs, including sustainability risks, investment time horizon and risk-adjusted performance (Question 12).

Conflicts of Interest

The Commission asks whether mandatory disclosures under the ELTIF framework are sufficient for investors to make informed investment decisions (Question 13) and which elements of these disclosures should be tailored to the specific type of investor (Question 14). Furthermore, the Commission asks whether ELTIF rules on conflicts of interest are appropriate and proportionate (Question 15).

Borrowing of Cash and Leverage

The Commission asks whether total allowed leverage for ELTIFs should be increased, decreased or maintained at the current level (Question 16), what the optimal maximum allowed net leverage for ELTIFs should be (Question 17), and whether regulation of leverage for ELTIFs marketed to retail investors should be different to that marketed solely to professional investors (Question 18).

The Commission asks whether the following constitute significant limitations to the operations and leverage strategy of ELTIFs: requirement to contract in the same currency as the assets to be acquired with borrowed cash; maturity related rules; and other limits on the borrowing of cash (Question 19).

The Commission also asks which regulatory safeguards are appropriate to ensure the effective management of liquidity, subscriptions and the financing of assets in the investment portfolio (Question 20).

Rules on portfolio composition and diversification

The Commission asks whether the rules on diversification should be changed and, if so, require greater or less diversification or afford more flexibility to ELTIF managers (Question 21). Furthermore, whether the minimum threshold of 70% of eligible assets is appropriate (Question 22).

Redemption rules and life of ELTIFs

The Commission asks respondents for their “critical assessment” of the impact of redemption policy and life-cycle rules of ELTIFs (Question 23) including the following:

  • whether longer-term investments should be limited by maturity thresholds (Question 24);
  • the maximum portion of the portfolio that can be (if any) in short-term investments (Question 25);
  • whether “mid-term” redemptions (Question 26) and regular redemptions should be allowed (Question 27);
  • whether an alternative approach to redemption rules, portfolio composition etc. should be adopted during the ramp-up period in the ELTIF’s life-cycle (Question 28).

Secondary market and issuance of new units or shares

The Commission asks whether the following provisions of the ELTIF Regulation are clear and appropriate: those pertaining to the admission to the secondary market and the publication of “periodic reports” (Question 29) and whether there are limitations regarding the issuance of new units or shares at a price below their NAV without a prior offering of those units or shares at a price to existing investors (Question 30). Furthermore, the Commission asks if the provisions in the ELTIF framework related to the issuance of new units or shares should be amended and if so how (Question 31).

Marketing strategy for ELTIFs and distribution related aspects

The Commission asks what the key limitations are stemming from the ELTIF framework that reduce its attractiveness or the cross-border marketing and distribution of ELTIFs across the Union (Question 32) and whether a review of the ELTIF rules related to equal treatment of investors is warranted (Question 33) and should be clarified at share class or investor level (Question 34).

Miscellaneous

The Commission asks whether the effectiveness of the ELTIF framework is impaired by national legislation or market practices (Question 35) and whether national practices or local facility requirements for ELTIF managers or distributors require a local presence or otherwise which prevents cross-border marketing of ELTIFs (Question 36).

The Commission also asks whether any features of the ELTIF framework should be left to contractual arrangements (Question 37), which provisions should be amended to balance compliance costs and other burdens with effective supervision and investor protection (Question 38) and whether the ELTIF regime incentivises de minimis AIFMs[9] to market ELTIFs (Question 39).

In relation to taxation, the Commission asks whether any national regimes towards long-term investment funds are discriminatory or materially reduce the relative attractiveness of the ELTIF framework compared to other national fund vehicles (Question 40).

The Commission invites other comments on the ELTIF framework not covered in the rest of the consultation (Question 41).

Next Steps

The Commission is accepting responses to the consultation submitted by 19 January 2021. It will then consider the need for legislative amendments to the ELTIF Regulation and may propose draft legislation to take forward any reforms.

 

Giles Swan
Director of Global Funds Policy
ICI Global

 

endnotes

[1] https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12570-Long-Term-Investment-Funds-Review-of-EU-rules/public-consultation

[2] https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/2020-eltif-review-consultation-document_en.pdf

[3] Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds (“ELTIF Regulation”), available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015R0760

[4] European Inception Impact Assessment, Proposal for a Regulation amending Regulation (EU) 2015/760 on European long-term investment funds, available from https://assets.contentstack.io/v3/assets/blt3de4d56151f717f2/blt6291ca0617202e4c/5f6a094521ecf947895dbc67/EC_ELTIF_inception_impact_assessment.pdf

[5] Article 37, ELTIF Regulation

[6] https://ec.europa.eu/info/publications/cmu-high-level-forum_en

[7] See p37, “A New Vision for Europe’s Capital Markets, Final Report of the High Level Forum on the Capital Markets Union, 10 June 2020, available from https://ec.europa.eu/info/sites/info/files/business_economy_euro/growth_and_investment/documents/200610-cmu-high-level-forum-final-report_en.pdf

[8] Action 3, A Capital Markets Union for people and businesses-new action plan, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the committee of the regions, 24 September 2020, available from https://eur-lex.europa.eu/legal-content/en/TXT/?uri=COM:2020:590:FIN

[9] Under Article 3(2), AIFMD