UK/EU Investment Management Update (May 2024)

1. UK — MiFID II (Investment Research) 

2. UK — Enforcement (Unlawful Investment Schemes)

3. UK — Enforcement (Consultation on Transparency in Investigations) 

4. UK — Securitisation Regulations

5. UK — Non-Bank Financial Institutions

6. UK — Artificial Intelligence and Digital Regulation

7. UK — ESG

8. UK — Financial Crime

9. UK — Agreement With Switzerland

10. EU — AIFMD

11. EU — EMIR

12. EU — ESG

13. EU — IFR

14. EU — AML

15. EU — ELTIF Regulation

1. UK — MiFID II (Investment Research) 

FCA publishes consultation paper on payment optionality for investment research

On 10 April 2024, the FCA published a consultation paper on payment optionality for investment research (CP24/7).

The consultation follows HM Treasury’s publication of the Investment Research Review (IRR) (discussed in our Sidley Update of August 2023). The IRR had set out a series of recommendations to improve the investment research market. In CP24/7, the FCA has responded to recommendation 2 in the IRR, on creating an option for paying for research using a bundled payment for trade execution and research.

Currently, firms can pay for investment research using either of the following methods:

• payment for research from a firm’s own resources or
• payment for research from a research payment account for specific clients.

Now the FCA is proposing a third option, which would allow the “bundling” of payments for third-party research and execution services, subject to meeting certain requirements.

The proposed requirements are for firms to establish:

• a formal policy on use of the approach;
• a budget for the amount of third-party research to be purchased;
• ongoing assessments of research value and price;
• an approach to the allocation of costs across their clients;
• a structure for the allocation of payments across research providers;
• operational procedures for the administration of accounts to purchase research; and
• disclosures to clients on the firm’s approach to bundled payments, their most significant research providers, and costs incurred.

The FCA has stated that its proposed changes should apply to fund managers (including alternative investment fund managers, or AIFMs). This will require further changes to be made to Chapter 18 of the Conduct of Business sourcebook (COBS 18).

The consultation is open until 5 June 2024. If the FCA chooses to proceed, it would aim to publish any rules or guidance in a policy statement in the first half of 2024. The FCA intends to consult on changes to COBS 18 in the course of 2024.

2. UK — Enforcement (Unlawful Investment Schemes) 

FCA secures court order to recover investor funds linked to unlawful investment schemes

On 4 April 2024, the FCA published a press release regarding a High Court consent order it received, allowing it to obtain £1.6m from a firm and its sole director for promoting two allegedly unlawful investment schemes.

This order forms part of FCA civil proceedings against Argento Wealth Limited (AWL) and its sole director, Daniel Willis.

The FCA allegations are that AWL unlawfully:

• took approximately £2.8m as deposits under loan agreements and/or as part of an unauthorised collective investment scheme; and
• arranged investments in EMB Fund Limited totalling about US$9m, which breached the restrictions on financial promotion.

The FCA notes that AWL is not, and never has been, an FCA authorised firm, and it alleges that Willis was knowingly concerned in the unlawful activity.

FCA brings criminal proceedings against individual for operating unlawful investment scheme

On 23 April 2024, the FCA published a press release announcing that it has launched criminal proceedings against an individual for one count of breaching the Financial Services and Markets Act 2000 (FSMA) and two counts of fraud.

The FCA alleges that the defendant, Lee Steven Maggs, operated an unauthorised investment scheme called “Kube Trading” which received around £2.67m from investors between 1 March 2019 and 22 January 2021. Specifically, it alleges that the scheme involved trading contracts for differences in foreign exchange (a regulated activity under FSMA).

The FCA also alleges that Maggs defrauded investors by misrepresenting how the scheme was operated and over the handling of investor funds.

The case serves as a reminder of the potentially severe consequences of carrying on regulated activities in the UK without being authorised or exempt. Breaching this requirement is a criminal offence, which carries a maximum sentence of two years’ imprisonment.

3. UK — Enforcement (Consultation on Transparency in Investigations) 

FCA response to House of Lords on enforcement consultation

On 25 April 2024, the FCA published a letter to the House of Lords Financial Services Regulation Committee (the Committee) regarding its consultation on transparency of enforcement cases. See our Sidley Update of March 2024 for further discussion of that consultation.

The FCA’s letter is in response to a letter dated 18 April 2024 from the Committee to the FCA containing criticisms of the proposal and asking for further information. As well as setting out further detail on its rationale, the FCA’s response contained a number of informative data points:

• Current investigations – As of 31 March 2024, the FCA had 500 investigations under way: 336 into individuals and 164 into firms (of which 79 were into unregulated firms and 85 into regulated or listed firms).
• Investigation outcomes – Of the 153 investigations that were closed in 2023/24, 67% were closed with no further action, 19% were closed with FCA enforcement action taken, and 14% were closed with some other form of action (e.g., action by the FCA Supervision team, a compliance advisory letter, or being dealt with by another agency).
• Investigation length – Investigations closed in 2023/24 took, on average, 43 months from the FCA decision to open an enforcement investigation to closure.
• International comparison – By way of comparison, while some regulators (such as the Monetary Authority of Singapore and ASIC in Australia) have policies based on public interest disclosure, others take a “privacy first” approach. The latter type includes the AMF in France, FINMA in Switzerland, and the U.S. Securities and Exchange Commission.

The consultation closes on 30 April 2024, and, after it has considered the responses, the FCA plans a further round of discussion and engagement to ensure it has understood all points raised.

4. UK — Securitisation Regulations

HM Treasury publishes draft Securitisation (Amendment) Regulations 2024

On 22 April 2024, HM Treasury published the Securitisation (Amendment) Regulations 2024 (the Amendment Regulations) along with an accompanying explanatory memorandum. The Amendment Regulations amend the Securitisation Regulations 2024, discussed in our Sidley Update of March 2024.

Among other things, the Amendment Regulations include a restriction on the establishment of Securitisation Special Purpose Entities (SSPEs) in high-risk jurisdictions. This will specifically state that an institutional investor must not invest in a securitisation carried out by means of an SSPE that is established in a high-risk jurisdiction. For these purposes, “high-risk jurisdictions” are those listed by the Financial Action Task Force.

The Amendment Regulations also include an express reference to 1 November 2024 as the main commencement day of the Securitisation Regulations 2024.

FCA publishes policy statement on rules relating to securitisation

On 30 April 2024, the FCA published its policy statement on rules relating to securitisation (PS24/4). This policy statement follows consultation paper CP23/17 (on which see our Sidley Update of September 2023). It forms part of the UK post-Brexit initiative for firm-facing provisions of the UK Securitisation Regulation (UK SR) to be set out in the FCA and Prudential Regulation Authority (PRA) rulebooks.

Among others, the policy statement will be relevant to authorised firms acting in securitisation markets as institutional investors or manufacturers (i.e., original lender, originator, sponsor, and/or SSPE of securitisations) as well as to unauthorised entities acting as manufacturers of securitisations subject to the UK SR.

The policy statement makes a number of changes to the original proposals from CP23/17. For instance, these include changes regarding the concept of “pricing” in relation to due diligence requirements for institutional investors, clarification of the approach to delegation of due diligence requirements, and due diligence requirements in relation to Asset-Backed Commercial Paper.

The policy statement considers the issue of delegating due diligence to non-UK AIFMs, as follows:

• Due diligence delegation. The policy statement clarifies that institutional investors will not be able to delegate the responsibility for compliance with the due diligence requirements to non-UK AIFMs, as non-UK AIFMs will no longer fall within the definition of an “institutional investor” (as set out in the consultation paper CP23/17). The FCA recognises that this may have implications for some existing delegation arrangements, but it anticipates that the implementation period should give sufficient time for market participants to address the consequences.
• Transitional provisions. In its consultation, the FCA did not identify the need for transitional provisions beyond those set out in the (then) draft Securitisation Regulations 2023 statutory instrument. Having assessed the feedback, the FCA now considers that market participants should be able to rely on the position that existed at the time the relevant securitisation was issued.
  
  However, an exception has been added so that the position regarding the transfer of responsibility under Article 5(5) of the UK SR is not preserved in circumstances where FCA-authorised institutional investors delegate due diligence to non-UK AIFMs. The FCA anticipates that the implementation period should give sufficient time for market participants to find a new managing party or to shift the responsibility for compliance with the due diligence requirement back to the UK institutional investor.

Subject to the Treasury’s revoking the UK SR and related technical standards, the rules will apply to firms from 1 November 2024.

The FCA and PRA plan to consult on further changes to their securitisation rules in Q4 2024/Q1 2025, but the FCA notes that timings on these additional workstreams may change.

5. UK — Non-Bank Financial Institutions

Bank of England speech on private equity and financial stability

On 22 April 2024, the Bank of England published a speech by Nathanaël Benjamin, its Executive Director for Financial Stability Strategy and Risk.

Benjamin began by highlighting the growth of private equity markets, emphasising its positive effects (such as the diversification of financing sources for UK corporates). However, noting that this growth must happen safely and sustainably, he described the associated risks the Bank of England Financial Policy Committee (FPC) is considering.

The considerations identified are as follows:

• Increased funding costs. Highly leveraged companies backed by private equity face difficulties in the current environment of higher interest rates. There is a risk that “amend and extend” or “payment in kind” agreements give false comfort to companies, increasing their credit losses in future. This highlights the importance of both high-quality risk management as debt is extended, and sponsors injecting equity.
• Lack of exit opportunities. Private equity exit activity has decreased significantly. New types of leverage have developed in response to this (such as secondaries funds, continuation funds, and net asset value financing), but these give rise to concerns around the growth of “leverage on leverage.”
• Opacity. Given that private asset valuations are not marked-to-market, in a stress scenario sponsors may need to sell portfolio companies at steep and unnecessary discounts (to meet debt repayments or demands for dividends).
• Interconnectedness. First, the vulnerabilities described above can affect systemic institutions, making it important for banks, sponsors, and investors to have robust risk management frameworks. Second, in a stress scenario, behaviours of sponsors, banks, and investors may interact, leading to the potential for spillovers between private and public markets. Third, in a stress scenario, UK corporates that rely on private markets for financing could be less able to access the financing they need. This could lead to cutbacks in investment and employment.

Benjamin noted that the FPC is examining the impact of these risks on UK corporates and the rest of the financial system and possible consequences in times of stress. It will publish a further assessment of these risks in its June 2024 Financial Stability Report.

6. UK — Artificial Intelligence and Digital Regulation

On 22 April 2024, the FCA published a speech by Nikhil Rathi, FCA Chief Executive, delivered at the Digital Regulation Cooperation Forum (DRCF).

The DRCF is made up of four UK regulators: the Competition and Markets Authority (CMA), the Office of Communications (Ofcom), the Information Commissioner’s Office (ICO), and the FCA.

As Chair of the DRCF and Chief Executive of the FCA, Rathi discusses the FCA’s work in relation to the DRCF’s priorities. This included a number of regulatory announcements on digital regulation.

• AI and Digital Hub launch – Rathi confirmed the launch of the DRCF AI and Digital Hub (announced by press release the same day), which is a new multi-agency informal advice service, offering access to all four regulators forming the DRCF.
• Regulation tied to innovation – The speech also discussed the importance of helping firms to test and refine ideas in a risk-free, controlled environment and noted a number of FCA initiatives in this area.
• Boosting transparency and accountability – The FCA is consulting on whether to adopt a looser public interest test for announcement of enforcement investigations. See our Sidley Update of March 2024 for further discussion of the consultation. On this, Rathi noted similarities to the approach taken by certain other DRCF regulators (namely Ofcom and the CMA).
• Response to input on Big Tech – Rathi noted the FCA response (published that day) to its call for input on the competition implications from the data asymmetry between Big Tech and financial services firms.
• Response to AI paper and the FCA’s internal use of AI – Rathi mentioned the FCA update (published the same day) outlining its approach to AI. This follows the publication of the UK government response to its consultation on AI regulation and initial guidance for regulators on implementing the UK AI regulatory principles.

Additionally, Rathi referenced discussions at the FSB and the International Organization of Securities Commissions on AI’s increasing prevalence in wholesale financial markets. He notes in particular that the wholesale markets are already seeing amplified volatility, including in commodities markets where benchmark prices of core commodities are set.

7. UK — ESG

FCA consultation on extending the Sustainability Disclosure Requirements to portfolio management

On 23 April 2024, the FCA published its consultation (CP24/8) on extending the SDR and investment labels regime to firms providing portfolio management services.

For these purposes, “portfolio management service” is defined as a service provided to a client which comprises either:

• managing investments or
• private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement, the predominant purpose of which is investment in unlisted securities.

The FCA proposes to extend its SDR and investment labels regime to all forms of portfolio management services, including where the relevant agreements or arrangements are model portfolios, customised portfolios, and/or bespoke portfolio management services (tailored to the clients’ needs and preferences).

As the SDR and labelling regime has been developed primarily for retail investors, the proposals to extend the regime are primarily aimed at wealth management services for individuals and model portfolios for retail investors. The labelling regime will apply on an opt-in basis to firms offering portfolio management services to professional clients. Such firms will not be subject to the naming and marketing requirements and associated disclosures.

The proposed timing is as follows:

• 2 December 2024 – Labelling and naming and marketing requirements (and associated consumer-facing and pre-contractual disclosures) come into force.
• 2 December 2025 – Firms required to start producing ongoing product-level disclosures, and firms with assets under management (AUM) greater than £50 billion to produce entity-level disclosures.
• 2 December 2026 – Firms with AUM greater than £5 billion to produce entity-level disclosures.

The consultation closes on 14 June 2024, and the FCA plans to publish its final rules in the second half of 2024.

For further detail on the SDR and investment labels regime, please see our Sidley Update Final Rules on UK Sustainability Disclosure Requirements and Investment Labels - Key Takeaways for Asset Managers.

FCA final guidance on anti-greenwashing rule

On 23 April 2024, the FCA published its finalised non-handbook guidance on the anti-greenwashing rule (FG24/3).

The anti-greenwashing rule was introduced by the FCA policy statement on SDR and investment labels. It requires that sustainability-related claims about a firm’s products and services must be fair, clear, and not misleading.

The rule is intended to complement and be consistent with existing rules and expectations but gives the FCA an explicit basis on which to (i) challenge firms if it considers they are making misleading sustainability‑related claims about their products or services and (ii) if appropriate, take further action.

Pursuant to FG24/3, the FCA’s expectations are that sustainability references should be:

• correct and capable of being substantiated;
• clear and presented in a way that can be understood;
• complete (i.e., should not omit or hide important information and should consider the full life cycle of the product or service); and
• fair and meaningful in their comparisons to other products or services.

In following the guidance, a firm may take account of the nature of its audience. For example, a communication to a professional client or an eligible counterparty may not need to include the same information, or be presented in the same way, as a communication addressed to a retail client.

The anti-greenwashing rule applies to all UK authorised firms from 31 May 2024, and the FCA is bringing this guidance into force at the same time.

8. UK — Financial Crime

FCA consultation on Financial Crime Guide updates

On 25 April 2024, the FCA published a consultation on updates to its Financial Crime Guide (CP24/9) (the Guide). The FCA’s work in this area is part of a collective effort in the UK to reduce financial crime in accordance with the national Economic Crime Plan 2 (2023 to 2026) and Fraud Strategy.

The consultation is relevant to all FCA financial crime supervised firms and firms supervised under the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), including cryptoasset businesses.

The FCA is proposing changes to the following areas:

• Sanctions. Following Russia’s illegal invasion of Ukraine in 2022, the FCA has conducted extensive assessments of firms’ sanctions systems and controls. It proposes to update this section to reflect what the FCA and firms have learned.
• Proliferation Financing (PF). The guidance is being updated to ensure that PF is explicitly referenced throughout the Guide where appropriate and to highlight a 2022 update to the MLRs that requires firms to carry out PF risk assessments.
• Transaction Monitoring. The FCA proposes to set out key guidance for firms on how to implement and monitor transaction monitoring systems and support responsible innovation and new approaches, such as use of AI.
• Cryptoassets. Cryptoasset businesses registered under the MLRs have been subject to FCA supervision for AML purposes since June 2020. The FCA proposes to explicitly state that cryptoasset businesses should consult the Guide.
• Consumer Duty. The FCA proposes to make clear that firms should consider whether their systems and controls are proportionate and consistent with their obligations under the Duty.
• Consequential Changes. The FCA is looking to make consequential changes to the Guide, including refreshed case studies drawing from more recent FCA enforcement notices.

The consultation is open until 27 June 2024. Following receipt of feedback, the FCA will publish an amended text of the Guide in a policy statement.

9. UK — Agreement With Switzerland

UK House of Lords report on UK-Switzerland Berne Financial Services Agreement

On 29 April 2024, the International Agreements Committee of the UK House of Lords (the IAC) published a report on the Berne Financial Services Agreement (the Agreement). See our Sidley Update of January 2024 for further detail on the Agreement.

Noting that it is designed to be a “living Agreement,” the report encourages scoping exercises to contribute to the consideration of the expansion of its scope, as provided for in the Agreement. It flags in particular the areas of sustainable finance and new financial market infrastructures and calls on the government to continue to engage with industry on appropriate expansions.

More widely, the IAC considers that it should remain the UK’s objective to pursue similar agreements with markets such as the EU, U.S., and Japan. It also calls on the UK Government to make full use of the recently established memorandum of understanding on financial services cooperation with the EU (on which see our Sidley Update of June 2023).

10. EU — AIFMD

ESMA technical advice on LDI fund investment restrictions in Ireland and Luxembourg

On 29 April 2024, the European Securities and Markets Authority (ESMA) issued its advice to the Central Bank of Ireland (CBI) and the Commission de Surveillance du Secteur Financier (CSSF) on investment restrictions for GBP liability-driven investment (LDI) funds to ensure their resilience.

Previously, the CBI and the CSSF had notified ESMA of their intention to introduce investment restrictions on AIFMs established in Ireland and Luxembourg (respectively) that manage GBP LDI funds. The CBI and CSSF proposed requiring such funds to be able to resist a rise in GBP yields of at least 300 basis points.

Under Article 25(3) of the AIFMD, ESMA must provide advice to the CSSF and CBI to assess whether the conditions for acting appear to be met and whether the proposed measures are appropriate. In delivering this advice, it concluded that the conditions for taking actions under the AIFMD are met and the measures proposed by the CBI and the CSSF are justified and should contribute to improving the resilience of GBP LDI funds. ESMA also encouraged both regulators to monitor the evolution of the GBP LDI funds and to assess the necessity to recalibrate the yield buffer. Finally, ESMA noted that it expects other competent authorities of AIFMs managing GBP LDI funds to adopt similar measures.

The measure applies from 29 April 2024, with a three-month transitional period for existing GBP LDI funds to comply.

11. EU — EMIR

ESMA follow-up report on EMIR data quality peer review

On 11 April 2024, ESMA published a report following its 2019 peer review into supervisory actions aiming at enhancing the quality of data reported under EMIR.

The peer review assessed five national competent authorities (NCAs) (Cyprus, Germany, France, Ireland, and the Netherlands) as well as ESMA in its role as supervisor of trade repositories. The peer review presented a mixed picture of the supervisory practices of the five NCAs and noted that the five NCAs were at very different stages of their supervisory journey regarding the supervision of EMIR data quality.

This new report shows that supervisory practices have improved significantly since the 2019 peer review. Measures taken by the five NCAs included:

• rolling out data quality dashboards,
• undertaking more granular data quality checks, and
• increasingly using EMIR data as part of day-to-day supervision.

Three NCAs (Germany, France, and Ireland) have also taken enforcement action against counterparties in relation to data quality issues.

Notwithstanding the above, the report notes that further work is needed. It highlights data quality as a key area of attention and recommends NCAs use appropriate tools (including enforcement, when needed) to ensure regulatory compliance.

12. EU — ESG

European Parliament adopts Directive postponing adoption of ESRS for certain sectors and third-country undertakings

On 10 April 2024, the European Parliament confirmed its agreement with EU governments on postponing the adoption of European Sustainability Reporting Standards (ESRS) for certain companies.

The postponement applies to (i) sector-specific reporting standards for EU companies and (ii) general reporting standards for non-EU companies. These standards will not be adopted until 30 June 2026.

However, the new rules do not affect the reporting timelines agreed under the Corporate Sustainability Reporting Directive (CSRD). EU companies must still report as planned in line with the first set of ESRS adopted by the Commission in July 2023. For further detail on the first set of ESRS, see our Sidley Update EU Adopts First Set of European Sustainability Reporting Standards — Critical Considerations for Companies in Scope of CSRD.

The stated aim of this postponement is to rationalise reporting obligations for companies and reduce related administrative burden while providing more time to the European Financial Reporting Advisory Group for the development of the reporting standards.

European Parliament adopts proposed regulation on ESG ratings

On 24 April 2024, the European Parliament adopted the new regulation on ESG ratings. For more detail and commentary on the regulation, see our Sidley Update Implications of the European Commission’s June 2023 Sustainable Finance Package.

The adopted regulation includes a number of measures to address a lack of transparency in the current ESG ratings market, such as these:

• Segmenting ESG ratings. The rules require that separate environmental, social, and governance ratings should be provided, rather than a single metric that aggregates all three. For ratings that cover the environmental factor, information also needs to be provided on whether that rating takes into account alignment with the Paris Agreement and any other relevant international agreements.
• Double materiality. Rating agencies will be required to explicitly disclose whether (i) the delivered rating addresses both material financial risk to the rated entity and the material impact of the rated entity on environmental, social, and governance factors or (ii) the delivered rating takes into account only one of these. It is intended that this will encourage ESG raters to address the material impact of the rated entity on the environment and society more than is currently the case.

The regulation will apply 18 months after its entry into force.

European Parliament adopts CS3D

On 24 April 2024, the European Parliament adopted the Corporate Sustainability Due Diligence Directive (CS3D). 

The next step is for CS3D to be formally endorsed by the Council of the European Union, signed, and published in the EU Official Journal. It will enter into force 20 days later, and member states will have two years to transpose the new rules into their national laws.

13. EU — IFR

EBA final report on application of group capital test for investment firm groups

On 11 April 2024, the European Banking Authority (EBA) published its final guidelines on the application of the group capital test for investment firm groups (the Guidelines).

For EU MiFID investment firms, Regulation (EU) 2019/2033 (the IFR) sets out rules on prudential consolidation of investment firm groups in the EU. As prudential consolidation may be overly burdensome and disproportionate for some investment groups, Article 8 of the IFR provides an alternative approach: the group capital test (GCT).

The purpose of the Guidelines is to set harmonised criteria to address the diversity in application of the GCT across the EU.

In particular, they:

• identify criteria to assist competent authorities in assessing the simplicity of the group structure and the significance of the risk posed to clients and the market;
• envisage a simplified assessment of the criteria for groups that include only small and non-interconnected investment firms;
• include quantitative criteria (such as detailing the number of undertakings and levels within a group);
• include qualitative criteria (i.e., clarifying that simple capital ties and a clear ownership structure should be in place); and
• provide a methodology to guide competent authorities in the assessment of the adequacy of the own funds requirement of third-country undertakings of EU groups.

The Guidelines will apply from 1 January 2025.

14. EU — AML

European Parliament adopts new AML laws

On 24 April 2024, the European Parliament announced that it had adopted the new Anti-Money Laundering and Countering the Financing of Terrorism package, comprising (i) the sixth AML directive, (ii) the EU “single rulebook” regulation, and (iii) the Anti-Money Laundering Authority (AMLA) regulation.

The new laws:

• establish a “legitimate interest” basis for certain persons (such as journalists, media professionals, civil society organisations, competent authorities, and supervisory bodies) to have immediate, unfiltered, direct, and free access to beneficial ownership information held in national registries and interconnected at EU level;
• give Financial Intelligence Units (FIUs) more powers to analyse and detect money laundering and terrorist financing cases as well as to suspend suspicious transactions;
• include enhanced due diligence measures and checks on customers’ identity;
• will, from 2029, require top-tier professional football clubs involved in high-value financial transactions with investors or sponsors to verify their customers’ identities, monitor transactions, and report any suspicious transactions to FIUs;
• contain (i) enhanced vigilance provisions regarding ultra-rich individuals (i.e., those whose total wealth is at least €50,000,000 excluding their main residence); (ii) an EU-wide limit of €10,000 on cash payments (except between private individuals in a non-professional context); and (iii) measures to ensure financial sanctions compliance and avoid circumvention of sanctions; and
• establish the AMLA (on which our Sidley Update of January 2024 contains further detail).

The next step is for the laws to be formally adopted by the Council of the European Union before publication in the EU’s Official Journal.

15. EU — ELTIF Regulation

ESMA Opinion on ELTIF Regulation RTS

On 19 April 2024, ESMA published an Opinion on regulatory standards under the ELTIF Regulation. See our Sidley Update of April 2023 for further detail on the revised ELTIF Regulation.

The ELTIF Regulation requires ESMA to develop draft regulatory technical standards (RTS) to determine:

• the circumstances in which the life of a European long-term investment fund (ELTIF) is considered compatible with the lifecycles of each of the individual assets (as well as different features of the redemption policy of the ELTIF) and
• the costs disclosure.

By way of background, ESMA had published its final report on the draft RTS on 19 December 2023. In response to this, the European Commission invited ESMA to submit a new draft with certain amendments. The Commission’s analysis of the draft RTS was that it did not “sufficiently cater for the individual characteristics of different ELTIFs” and that “… it is necessary to take a more proportionate approach to the drafting of the RTS, in particular with regard to the calibration of the requirements relating to redemptions and liquidity management tools.” This recent opinion is intended to address the European Commission’s letter.

Issues discussed in the Opinion include material changes, the minimum notice period for redemptions, liquidity management tools, redemption gates, valuation, disclosure of the redemption policy, and the cost disclosure requirements.

In terms of next steps, the European Commission may adopt ESMA’s RTS with the amendments it considers relevant or reject it. Then the European Parliament and the Council will have a period of three months in which they may object to the RTS adopted by the Commission.