On 25 May 2022, the Council reviewed and validated the Commission’s proposal amending Regulation (EU) 2015/760 on European long-term investment funds (ELTIF), following which the Economic and Monetary Committee of the EU parliament adopted its own position on the proposal on 20 June 2022. See our previous Newsflash for more information and background.
Priorities
In its press release, the Council underlines the following three priorities:
- Channel more financing to SMEs and long-term projects, including by removing existing constraints on the portfolio composition of ELTIFs, especially for those distributed solely to professional investors;
- Enhance the role of retail investors by making ELTIFs more attractive to them, and by lifting the barriers to entry which did not take into account the profile and objectives of each investor;
- Maintain high investor protection standards and provide retail investors with all the relevant information so that they can make informed decisions.
Proposed changes of the Council
Most of the modifications concern the wording, a few material changes are worth highlighting nevertheless:
- It is specified that certain assets are excluded from the scope of “real assets”, i.e. works of art, manuscripts, wine stocks, jewellery, and other assets which do not in themselves represent long-term investments in the real economy;
- The Council clarified that, when the ELTIF adopts fund of funds or master-feeder strategies, its assets and cash borrowing positions should be combined with those of the collective investment undertakings in which the ELTIF has invested to assess whether the composition, diversification and cash borrowing rules are respected (look-through approach);
- The Council clarified that both level 1 and level 2 MiFID assessments should be carried out when targeting retail investors, regardless of the distribution channel;
- A written notice must be sent to retail investors when an ELTIF is marketed to them in case their suitability assessment is negative or where their investment in the ELTIF exceeds 10% of their investment portfolio value (the retail investors can however still proceed with the investment provided they give explicit consent);
- The cash borrowing limit for institutional ELTIFs is increased from 30% to 50% of the ELTIF capital;
- ESMA is tasked with developing draft Regulatory Technical Standards (RTS) regarding the use of Liquidity Management Tools (LMTs) and concerning the newly introduced partial matching mechanism by the ELTIF;
- The Council introduced a grandfathering clause of maximum 5 years after the entry into force of the new Regulation.
Position of the Committee on Economic and Monetary Affairs (ECON) of the parliament
After considering the proposed changes of the Council, the ECON adopted its position on the proposal and added a few amendments of its own:
- The ECON created a new subset of green ELTIFs, which may only invest in eligible investments in the sense of the ELTIF Regulation. At least 37% of their aggregate investments must be made in environmentally sustainable economic activities. Green ELTIFs must also comply with either Article 8 or of Article 9 of Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (the “SFDR”), meaning that they must either promote ESG or have as their objective sustainable investments;
- New requirements for the prospectus were added but some of the more general Product Oversight and Governance requirements were removed;
- A new one year cap on the redemption requests made by investors has been introduced;
- There is an additional mandatory disclosure of the ELTIF where less than 70% of the assets are located in the European Union.
Next steps
Since the European Parliament and the council have adopted their respective positions on the proposal, the trilogues (inter-institutional negotiations) are ready to start.
