knowledge 1 March 2024 |

Attention fund managers! Key regulatory developments that you should be aware of

1. Adoption of AIFMD II

On 26 February 2024, the Council of the EU announced (here) that it has adopted the proposal known as “AIFMD II” (adopted text here) that amends the Alternative Investment Fund Managers Directive¹ (“AIFMD”) and the UCITS Directive² as regards delegation arrangements, liquidity risk management, supervisory reporting and the provision of depositary and custody services.  The European Parliament adopted the proposal on 7 February 2024 (see here).  One of the most significant enhancements under AIFMD II is the introduction of a pan-European loan origination regime for alternative investment funds (“AIFs”).

The Directive introduces targeted amendments to AIFMD and consequential amendments to the UCITS Directive.  Following its formal approval by the EU co-legislators, AIFMD II will be published in the Official Journal of the EU, whereupon it will enter into force 20 days later.  It is expected that EU Member States will transpose AIFMD II in the main from 2026, with the majority of provisions required to be transposed by 24 months after the date of entry into force.³

2. Entry into Application of ELTIF 2.0

On 10 January 2024, Regulation (EU) 2023/606 (here), or “ELTIF 2.0”, came into application, following its entry into force last year.  The amending Regulation introduces a number of targeted amendments to the regulatory framework for European long-term investment funds (“ELTIFs”), first introduced in 2015 by the initial ELTIF Regulation⁴.

ELTIFs are EU AIFs managed by alternative investment fund managers (“AIFMs”) that invest in long-term investments, such as social and transport infrastructure projects, real estate, and SMEs.  ELTIFs are the only type of EU-based funds that can be distributed on a cross-border basis to both professional and retail investors.

In January 2024, the Central Bank of Ireland confirmed that it will have an authorisation regime for ELTIFs available in early March and a new ELTIF chapter will be added to the Central Bank’s AIF Rulebook to reflect the process for authorisation under the new ELTIF regime.  Industry has been working successfully with the Central Bank to ensure that Ireland will be an attractive fund domicile for managers who wish to establish ELTIFs.  

For a detailed overview of ELTIF 2.0, see our briefing here.

3. RTS under ELTIF 2.0

On 19 December 2023, the European Securities and Markets Authority (“ESMA”) published (here) finalised draft regulatory technical standards (“RTS”) under ELTIF 2.0, addressing the following:

• the criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purpose;
• the circumstances in which the life of an ELTIF is considered compatible with the life-cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF;
• the circumstances for the use of the matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors;
• the criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets; and
• costs disclosure.

The main focus of the RTS, as expected, is the liquidity provisions since a key element of the likely success of the new ELTIF regime is the ability to offer liquidity to investors (which was not permitted under ELTIF 1.0).  The initial feedback from Industry is that the RTS, in their current form, will restrict the take-up of the new ELTIF regime.  Of particular concern is the minimum notice periods for redemptions and the corresponding minimum percentage of UCITS-eligible liquid assets that an ELTIF must hold.

ESMA has submitted the draft RTS to the European Commission for endorsement.  It was initially anticipated that application of the Level 2 RTS would coincide with the entry into application of ELTIF 2.0 (see above).  However, the European Commission is now expected to make a decision as to whether or not to endorse ESMA’s draft RTS within three months of receipt (this period may be extended by one additional month).   Given the initial reaction from Industry, it is not certain that the Commission will adopt the draft RTS in their current form without amendment.

4. Draft RTS on Notification of Cross-Border Activities by AIFMs, UCITS Funds and UCITS ManCos

On 15 December 2023, the European Commission adopted the following draft legislation supplementing AIFMD and the UCITS Directive as regards notification to national competent authorities, by AIFMs and UCITS management companies (“UCITS ManCos”), of their cross-border activities:

• a draft Delegated Regulation (here) supplementing AIFMD with regard to RTS specifying the information to be notified in relation to the cross-border activities of AIFMs;
• a draft Delegated Regulation (here) supplementing the UCITS Directive with regard to RTS specifying the information to be notified in relation to the cross-border activities of UCITS funds and UCITS ManCos;
• a draft Implementing Regulation (here) laying down ITS for the application of AIFMD with regard to the form and content of the information to be notified in respect of the cross-border activities of AIFMs and the exchange of information between competent authorities on cross-border notification letters; and
• a draft Implementing Regulation (here) laying down ITS for the application of the UCITS Directive with regard to the form and content of the information to be notified in respect of the cross-border activities of UCITS funds and UCITS ManCos, and the exchange of information between competent authorities on cross-border notification letters.

5. CBI Asset Valuation Review

On 14 December 2023, the Central Bank of Ireland (the “CBI”) published an industry letter (here) highlighting the key findings of its asset valuation review that was undertaken as part of ESMA’s common supervisory action. The CBI’s letter was directed to Irish fund management companies (UCITS management companies and AIFMs) which have responsibility for valuation of assets.  The letter sets out the CBI’s key findings and the actions that it requires of firms following publication of the industry letter. Firms are required to conduct a review, by Q2 2024, of their asset valuation frameworks to ensure that they continue to be fit for purpose and adhere to all relevant legislative requirements, including expectations outlined in the CBI’s letter.

6. CBI to commission Review of F&P Regime following IFSAT Decision

On 14 February 2024, the CBI issued a public statement (here) announcing that it has decided to commission an independent review of its fitness and probity (“F&P”) regime, following a decision by the Irish Financial Services Appeals Tribunal (“IFSAT”) in AB v. Central Bank of Ireland (available here), which identified “fundamental procedural flaws” in relation to the CBI’s handling of specific applications to perform pre-approval controlled functions (“PCFs”).

According to the IFSAT decision, which concerned applications for PCF positions brought by an investment fund, the procedures adopted by the CBI at various stages of the approval process failed to comply with requirements of natural and constitutional justice. Those included the necessity for fair notice, the duty to give reasons, and observance of the principle of audi alterem partem. In the light of IFSAT’s findings, it has remitted the specific matter to the CBI for reconsideration.

In its public statement (linked above), the CBI confirms that it will reassess those particular applications, as well as commission a wider review of the approval process under the F&P regime. The outcome of that independent review will be published in due course.

7. ESMA Guidelines on Funds’ Names using ESG or Sustainability-Related Terms

On 14 December 2023, ESMA published an update (here) on its proposed guidelines (initial draft guidelines here) on funds’ names using ESG or sustainability-related terms.  ESMA’s guidelines seek to ensure that ESG and sustainability-related terms in funds’ names should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy document.

Following its consultation on the draft guidelines (linked above), ESMA has agreed certain amendments to its proposed guidelines in respect of:

• modified thresholds for sustainable investments;
• a new category for transition-related terms;
• separation of “E” from “S” and “G” terms; and
• measurability of social and environmental impact.

ESMA’s guidelines are expected to be approved and published in Q2 2024, shortly after the entry into force of AIFMD II (see above).  ESMA postponed adoption of the guidelines, to allow it to consider new mandates included in the text of AIFMD II, now adopted by the European Parliament and the Council of the EU.  In particular, AIFMD II contains a new mandate for ESMA to develop guidelines specifying the circumstances in which the name of an AIF or UCITS fund is “unclear, unfair, or misleading”.

ESMA’s guidelines will apply three months after the date of their publication in all EU official languages.  Managers of new funds would be expected to comply with the guidelines in respect of those funds from the date of application.  Managers of funds existing before the date of application would be expected to comply with the guidelines in relation to those funds from six months after the date of application.

On a related note, on 2 October 2023, ESMA published a risk analysis report (here) on ESG-related names and claims in the EU fund industry.  According to ESMA, the results show that funds increasingly use ESG-related language in their names, and that investors consistently prefer funds with ESG-related words in their names.  According to ESMA, the use of ESG language by funds in their names is strongly correlated with disclosures under the Sustainable Finance Disclosures Regulation⁵ (“SFDR”).

8. European Sustainability Reporting Standards

On 7 February 2024, the Council of the EU and the European Parliament announced via press release (here) that they have reached a provisional agreement delaying the date of adoption of the sector-specific European Sustainability Reporting Standards (“ESRS”), for use by companies subject to the Corporate Sustainability Reporting Directive⁶ (“CSRD”), by two years, from 30 June 2024 to 30 June 2026.

The ESRS aim to help investors understand the sustainability impact of the companies in which they invest.  Delegated Regulation (EU) 2023/2772 (here), containing the first set of ESRS, was published in the EU’s Official Journal on 22 December 2023; those ESRS apply in respect of financial years beginning on or after 1 January 2024.  There are currently twelve ESRS, covering the full spectrum of sustainability concerns, and comprising two cross-cutting standards and ten topical standards.

According to the co-legislators, the delay in the adoption of the sector-specific ESRS will allow in-scope entities to focus on ensuring compliance with the first set of general ESRS (above).  The provisional agreement suggests the European Commission intends to publish the eight sector-specific ESRS as soon as those standards are ready, to facilitate preparations for the revised date of application.

For more information on the ESRS, see our briefing here.

9. Delegated Acts under the EU Taxonomy Regulation

On 21 November 2023, two Delegated Regulations, issued under the EU Taxonomy Regulation⁷, were published in the EU’s Official Journal. The Delegated Regulations establish technical screening criteria under the EU taxonomy for sustainable activities in respect of:

1. determining the conditions under which certain economic activities qualify as contributing substantially to climate change mitigation or adaptation and for determining whether those activities cause no significant harm to any of the other environmental objectives (Delegated Regulation (EU) 2023/2485 (here)); and
2. determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, to the transition to a circular economy, to pollution prevention and control, or to the protection and restoration of biodiversity and ecosystems and for determining whether that economic activity causes no significant harm to any of the other environmental objectives (Delegated Regulation (EU) 2023/2486 (here)).

Both Delegated Regulations have since entered into force.

10. Guidance on the EU Taxonomy Regulation

On 21 December 2023, the European Commission published, as approved in principle, a draft Commission Notice (here) providing guidance on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act⁸ under Article 8 of the Taxonomy Regulation on the reporting of taxonomy-eligible and taxonomy-aligned economic activities and assets.

Through its guidance, the European Commission intends to facilitate stakeholder compliance in respect of regulatory requirements in a cost-effective manner, and to ensure the usability and comparability of the reported information.

The draft Commission Notice awaits formal adoption in all official EU languages.

In addition, on 20 October 2023, the following Commission Notices were published in the Official Journal of the EU, containing responses to FAQs relating to the Taxonomy Climate Delegated Act and the Disclosures Delegated Act under the Taxonomy Regulation:

• Commission Notice (C/2023/267) (here) on the interpretation and implementation of certain legal provisions of the EU Taxonomy Climate Delegated Act establishing technical screening criteria for economic activities that contribute substantially to climate change mitigation or climate change adaptation and do no significant harm to other environmental objectives; and
• Commission Notice (C/2023/305) (here) on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of the EU Taxonomy Regulation on the reporting of taxonomy-eligible and taxonomy-aligned economic activities and assets.

11. Consultation on Taxonomy-Aligning Benchmarks

On 13 December 2023, the EU Platform on Sustainable Finance published for feedback a report (here) which contains a proposal to introduce two new taxonomy-aligning benchmarks (“TABs”), to be called “EU TAB” and “EU TABex”.

According to the Platform on Sustainable Finance, the proposal is inspired by the success of the introduction of the EU Paris-Aligned Benchmarks (“PABs”). The report states that the proposed benchmarks’ main objectives are:

• to show how a significant level of comparability of TABs methodologies could be achieved while leaving benchmark administrators with an important level of flexibility in designing their methodologies;
• to provide investors with an appropriate tool to align their investment strategies with the EU taxonomy;
• to increase transparency as regards investors’ environmental impacts, specifically with regard to climate change, and the environmentally sustainable capital expenditures required for the energy transition; and
• to disincentivise greenwashing.

The call for evidence runs until 13 March 2024.

12. “SFDR 1.5” - Draft RTS on the Review of PAI and Financial Product Disclosures under SFDR

On 4 December 2023, the European Supervisory Authorities (the “ESAs”) published a final report (here) containing draft RTS on the review of principal adverse impacts (“PAI”) and financial product disclosures under Commission Delegated Regulation (EU) 2022/1288, which supplements the SFDR.

13. “SFDR 2.0” - Consultations on SFDR Implementation

On 14 September 2023, the European Commission launched a public consultation (here), as well as a targeted consultation (here), seeking detailed feedback on the implementation of the SFDR and most notably, feedback in relation to relation to a proposed pan-EU labelling regime, acknowledging that under SFDR, de facto labels have been created (i.e., Article 6 funds, Article 8 funds and Article 9 funds).

The SFDR, which has been in application since March 2021, sets out how financial intermediaries must communicate sustainability information to investors. It is designed to bring more transparency to the market and to enable investors to make informed choices.

Both consultations ran until 15 December 2023.  Overviews of responses received are available through the links above.

14. EMIR Enforcement Activity

On 28 November 2023, the CBI announced (here) that it had fined a UCITS fund €192,500 for breaching the reporting obligation under Article 9(1) of the European Market Infrastructure Regulation⁹  (“EMIR”), following the fund’s failure to report to a trade repository 200,640 derivative trades entered into in respect of one of its sub-funds.  The fine was imposed pursuant to Ireland’s European Union (European Markets Infrastructure) Regulations 2014 , as amended, which were made for the purposes of giving full effect to EMIR.

At the relevant time of non-compliance (January 2018 to May 2020) the ICAV, acting in respect of the relevant sub-fund, was responsible for EMIR reporting in respect of the derivative contracts.  This changed in June 2020 under EMIR Refit (see below), when the reporting obligation switched to the relevant AIFM or the UCITS ManCo.

Notably, the case marks the first enforcement action taken by the CBI under the Irish EMIR Regulations, and the fine is the first monetary penalty imposed by the CBI on an investment fund.

For more information, see our briefing here.

15. New EMIR Reporting Requirements

Changes made to EMIR by EMIR Refit¹⁰  (see our briefings here and here) mandated the development of new technical standards regarding the information to be reported to trade repositories.  The revised standards, which were published by the European Commission in October 2022 (here), are to come into operation on 29 April 2024. 

While the changes do not change the responsibility for reporting, they will:

• significantly impact the substance and form of the required reports on a go-forward basis, with a considerable expansion of potential data field inputs;
• impose an obligation to re-report outstanding derivative contracts in accordance with the applicable new requirements within 180 calendar days of the changes taking effect – 26 October 2024;
• introduce an express requirement for the responsible reporting entity (the AIFM or the UCITS ManCo in the case of EU regulated funds) to notify relevant EMIR national competent authorities of certain types of material errors or omissions in its reporting.

Given the serious consequences of failing to comply with EMIR reporting obligations (as demonstrated by the CBI’s enforcement action, above), it is essential that in-scope entities are prepared for compliance or, as applicable, monitoring compliance, with new EMIR reporting requirements once they take effect.

The CBI has recently updated its EMIR webpage (here) in the light of the new requirements.

For more information, see our briefing here.

16. Modified Own Funds Requirements for UCITS ManCos and AIFMs

On 27 November 2023, the CBI published a feedback statement (here) to its consultation (CP152) on own funds requirements for UCITS ManCos and AIFMs authorised for discretionary portfolio management.

UCITS ManCos and AIFMs may be authorised under the UCITS Directive and AIFMD respectively to provide discretionary portfolio management services and additional non-core services.  However UCITS ManCos and AIFMs are not subject to own funds requirements at EU level related to the provision of such services.

In the interests of maintaining a level playing field with investment firms which are authorised to provide discretionary portfolio management and are subject to own funds requirements under the Investment Firms Regulations¹¹, the CBI was proposing to introduce bespoke own funds requirements for UCITS ManCos and AIFMs authorised to provide discretionary portfolio management and additional non-core services via CBI regulations.

Following the CBI’s consultation, the modified own funds requirements will apply to relevant UCITS ManCos and AIFMs, authorised on or before 27 November 2023, from 27 May 2024.  UCITS ManCos and AIFMs authorised after 27 November 2023 will be subject to the new requirements upon authorisation.

17. CBI Regulatory Guidance for Funds

On 27 November 2023, the CBI published the latest version of its AIF Rulebook (here), along with updated Q&A documentation on:

1. AIFMD (49th edition, here); and
2. UCITS (40th edition, here).

The CBI has also recently consulted (CP155, now closed) on its proposal to amend the AIF Rulebook to include a new ELTIF chapter.  The draft ELTIF chapter, set out in an annex to the consultation paper, contains six sections relating to: (i) ELTIF restrictions; (ii) supervisory requirements; (iii) prospectus requirements; (iv) general operational requirements; (v) annual and half-yearly reports; and (vi) the marketing of ELTIFs to retail investors.

As mentioned above, the new ELTIF chapter of the AIF Rulebook will be published in early March.

18. Funds Sector 2030: Department of Finance issues Progress Report

On 21 December 2023, the Minister for Finance published a progress report (here) in relation to its ongoing review of Ireland’s funds sector, Funds Sector 2030: A Framework for Open, Resilient and Developing Markets.

The progress report outlines the main trends, risks, challenges and opportunities facing the funds industry in Ireland in the period to 2030, as identified by respondents.  A wide array of insights, opinions and proposals were shared in the consultation responses and the Department of Finance Review Team is actively examining these in further detail.  The Department of Finance Review Team will consider further progress updates, consultations and industry events as it continues to progress in its work to report to the Minister for Finance by summer 2024.

Also contributed to by David O’Keeffe Ioiart