Prepared by Fabrizio Cascinelli, Anna Di Vilio and Antonio Rossi
One year after the adoption of the Capital markets union (“CMU”) 2020 action plan, the European Commission (“EC”) on 25 November 2021 started delivering on its commitments, adopting a set of legislative proposals designed to contribute to achieving the CMU objectives.
With specific respect to the asset management industry, the mentioned package of legislative proposals (the “CMU package”) includes:
- a legislative proposal amending Directive 2011/61/EU on alternative investment fund managers (“AIFMD”) and Directive 2009/65/EC governing undertakings for collective investment in transferable securities (“UCITS Directive”);
- a legislative proposal to review Regulation (EU) 2015/760 on European long-term investment funds (“ELTIFs” and “ELTIF Regulation”).
AIFMD and UCITS review
With respect to the review of the AIFMD and of the UCITS Directive, below is a non-exhaustive list of the main impacts the proposal would have on the legal framework currently in force.
- Originating loans and servicing of securitization special purpose entities: the mentioned services would be included in the list of services/activities AIFMs are authorized to carry out, granting therefore the possibility for alternative investment funds (“AIFs”) to extend loans in the entire EU, including cross-border.
- Harmonization of rules applicable to AIFMs managing loan-originating funds: AIFMs managing AIFs that engage in lending activities, including purchasing loans on the secondary market, would be required, among other things, to implement effective policies, procedures and processes for the granting of loans, assessing credit risk and administering and monitoring credit portfolios. In addition, specific rules are envisaged in order to limit potential conflicts of interests (prohibition to receive loans for certain AIFM-related subjects), to avert situations in which loans are only originated with the purpose of selling them (risk retention requirements) and to avoid maturity mismatches (requirement to adopt a closed-ended structure where the AIF originates loans to a significant extent, i.e. 60% of its net asset value).
- Ancillary services: the list of ancillary services AIFMs are authorized to provide in addition to collective investment management would be extended to include the activities of benchmark administration and credit servicing.
- Delegation: among the amendments introduced, the UCITS framework would be aligned with AIFMD by providing that UCITS management companies are to justify the entire delegation structure based on objective reasons. In addition, from a supervisory perspective, new rules would be introduced governing information exchanges between supervisors, convergence measures (ESMA peer reviews) and new tasks entrusted to ESMA in case of the delegation to non-EU entities.
- Depositary services: the envisaged new rules would allow national competent authorities to permit AIFMs or AIFs to appoint depositaries located in another EU Member State; in addition, specific provisions would be introduced to include Central Securities Depositories (“CSDs”) in the AIFMD and UCITS custody chain as delegates of the depositary when providing competing custody services. It is worth mentioning that depositaries would be relieved from the requirement to perform ex-ante customer due diligence on CSDs.
- New Liquidity Management Tools (“LMTs”) in addition to suspension of redemptions: a minimum harmonized set of rules on LMTs would be introduced for open-ended AIFs and UCITS with the aim of enabling AIFMs and UCITS management companies to address redemption pressures under stressed market conditions and better protect investors. Such tools would include, among others, redemption gates, notice periods, redemption fees, redemption in kind and side pockets.
- Technical and human resources: AIFMs/UCITS management companies would be required to provide more details on such aspects in the context of the authorization procedure.
The review of the ELTIFs framework focused, among other things, on the following areas:
- Suitability assessment and easier access of retail investors to ELTIFs:the new rules would foster the access of retail investors to ELTIFs through a combination of amendments mainly consisting of:
- analignment of the suitability assessment referred to under the ELTIF Regulation to the provisions set out under MiFID II, removing the existing partial duplication;
- repeal of the EUR 10,000 minimum investment threshold for retail investors, of the 10% aggregate threshold for retail investors whose financial portfolios are below EUR 500,000 as well as of the requirement to provide the retail investor with an “appropriate investment advice”.
- Broadening the scope of eligible assets and investments: in this context, among other things, reference to “European” long-term projects to be financed would be deleted, so that eligible assets could be located outside the EU, subject to specific conditions. Also, the definition of “real assets” would be amended and broadened and ELTIFs would be allowed to invest in EU AIFs managed by an EU AIFM and UCITS in addition to ELTIFs, EuVECAs and EuSEFs subject to certain conditions. The aim of broadening the investible universe of ELTIF would also be pursued by:
- reducing the minimum investment value in direct or indirect holdings of real assets from EUR 10mln to EUR 1mln;
- allowing minority co-investments in investment opportunities;
- in relation to the criteria to be met in order to be qualified as qualifying portfolio undertaking, raising the market capitalization threshold for undertakings listed on a regulated market or on a multilateral trading facility from EUR 500mln to EUR 1bn (threshold solely applied at the time of the initial investment).
- Portfolio composition and diversification for retail ELTIFs and professional only ELTIFs:the envisaged rules would lower the threshold for eligible investment assets of ELTIFs from 70% to 60% (enabling managers to benefit from more flexibility in the execution of their investment strategies). In addition, certain investment thresholds set forth under the ELTIF Regulation would be doubled, including, on a non-exhaustive basis, the thresholds for investments in/loans granted to single qualifying portfolio undertakings (from 10% to 20%), for investments in single real assets (from 10% to 20%), for investments in a single ELTIF, EuVECA, EuSEF, UCITS or EU AIF managed by an EU AIFM (from 10% to 20%). On the other hand, such investment thresholds would not apply where ELTIFs are marketed solely to professional investors. Also, the concentration limit for investment in the units/shares of a single ELTIF, EuVECA, EuSEF, UCITS or EU AIF managed by an EU AIFM would be raised from 25% to 30% for retail AIFs. On the other hand, also concentration limits would not apply where ELTIFs are marketed solely to professional investors.
- Increased leverage limits: the new envisaged rules would, among other things, enable ELTIFs that can be marketed to retail investors to increase their leverage from 30% to 50% while ELTIFs marketed only to professional investors would be allowed to leverage up to 100% of the value of the capital of the ELTIF.
- Liquidity window mechanism for redemptions: the new rules would allow ELTIF managers to provide under the fund rules/instruments of incorporation new liquidity window mechanisms before the end of the life of the ELTIF subject to specific conditions.
- Cross-border activities: the obligation for the ELTIF manager to set up local facilities in each Member State where it intends to market ELTIFs would be repealed.
- Streamlined authorization process: the relevant provisions would be modified in order to clarify the separation between the authorization of the ELTIF and that of the AIFM. It would also be clarified that the authorization of an ELTIF is not subject to: (i) the physical presence of the AIFM registered office in the ELTIF home Member State; (ii) the pursue or delegation of any activity in the ELTIF home Member State by the AIFM.
Although some of the proposals described above had already been implemented at a national level in Italy, the CMU package represents a new harmonization milestone in the asset management industry the national legislators, supervisory authorities and market players will have to deal with.
The CMU package adopted by the EC will be subject to an 8-week feedback period (ending in January 2022). Then, the relevant contributions will be summarized by the EC and will feed the legislative debate in front of the European Parliament and the Council of the EU.
Finally, new developments can be expected from an Italian perspective, since the review of AIFMD had been indicated as a necessary pre-requisite for the approval of amendments to the secondary legal framework aimed at allowing a wider range of retail customers to access Italian reserved AIFs (reference is made to the public consultation launched by the Ministry of Economy and Finance for the review of Ministerial Decree 30/2015 and ended in July 2020).
 The CMU package also includes: (i) a legislative proposal to establish a European Single Access Point (ESAP) to financial and sustainability-related information on companies and financial products to make, among other things, investment opportunities more visible to both EU and international investors; and (ii) a legislative proposal to review the Markets in Financial Instruments Regulation (MiFIR) with the aim of enhancing market transparency across EU stock exchanges and other trading venues.
 The mentioned conditions require that: a) such funds invest in eligible investments pursuant to the ELTIF Regulation; and b) such funds have not invested more than 10% of their assets in any other collective investment undertaking.
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