Introduction
On 19 July 2024, the European Commission ("EC") adopted Level 2 regulatory technical standards ("RTS") that will supplement Regulation (EU) 2015/760 as amended by Regulation (EU) 2023/606 (the "ELTIF Regulation") which governs the European Long Term Asset Fund ("ELTIF").
The EC's RTS prescribe additional rules regarding key aspects of an ELTIF, including an ELTIF's use of derivatives; the requirements for an ELTIF’s redemption policy, and liquidity management tools; the circumstances for the matching of transfer requests of units or shares of an ELTIF; the criteria for the disposal of ELTIF assets; and an ELTIF's costs disclosures.
Background
The ELTIF Regulations provided that the European Securities and Markets Authority ("ESMA") must develop draft RTS in the areas outlined above.
We posted a blog in May 2024, following the publication by ESMA of its final draft of the RTS. As we noted then, the EC could either adopt ESMA's draft RTS with amendments or reject them entirely.
The EC has generally decided to adopt ESMA's proposals, but we have highlighted below some key areas where the final rules diverge from the RTS ESMA sent to the EC to consider.
EC's amendments to ESMA's RTS
Minimum holding periods
Under the EC's RTS, minimum holding periods (i.e. a period during which investors' capital is initially locked up in the fund) will be optional. In ESMA's view, the setting of minimum holding periods was one of the "key aspects of the redemption policy of the ELTIF" and therefore should have been mandatory for all ELTIFs. As the EC disagreed, managers will now have discretion as to whether they implement a minimum holding period or not.
Maximum percentage of an ELTIF's liquid assets that can be used to meet redemption requests
Under Article 18(2)(d) of the ELTIF Regulation, only a certain percentage of an ELTIF’s liquid assets can be used to meet redemption requests from investors.
ESMA had proposed that this maximum percentage should be determined by the manager of the ELTIF on the basis of: i) the length of the notice period for redemptions; and ii) the minimum percentage of liquid assets in the ELTIF's total portfolio. The higher the percentage of liquid assets held by the fund in total, and the longer the notice periods required before redemptions, the greater the percentage of those liquid assets that could be redeemed by investors at any one time.
The EC's final rules retain this option for setting the maximum percentage of liquid assets which can be redeemed. However, ELTIF managers will also be able to calibrate this percentage based on the ELTIF's redemption frequency, without reference to the fund's overall holding of liquid assets. ELTIFs with longer redemption notice periods, and less frequent redemptions, will be able to offer larger portions of their total liquid asset holdings to investors to redeem.
This dual track creates options which will need be closely considered by prospective ELTIF managers. For example, under option 1, investors in an ELTIF which allows for quarterly redemptions, with a 3-month notice period, can redeem up to 33.3% of the fund's liquid assets. Under option 2, investors in an ELTIF with the same quarterly redemption frequency can redeem up to 50% of the fund's liquid assets, provided that at least 20% of the fund's total portfolio comprises liquid assets.
An ELTIF's total redeemable 'liquid assets' for these purposes are calculated as the sum of the ELTIF's UCITS-eligible assets and the ELTIF's expected cashflow over 12 months. Expected cash flows do not, however, include the possibility that the ELTIF can raise capital through new subscriptions.
Notification of material changes to information regarding redemptions
Before an ELTIF is authorised it must provide certain information to its regulator about its redemption policy and liquidity management tools.
ESMA had proposed that any material change to this information would need to be submitted to the fund's home regulator at least one month in advance of the implementation of such change.
The EC has kept this pre-notification requirement, but only for specific elements of an ELTIF's redemption policy, including the frequency of redemptions, the fund's available liquidity management tools and the approach used by the manager to determine the maximum percentage of the ELTIF’s liquid assets that can be used to meet redemption requests from investors.
The EC has also made clear that where a regulator does not respond within 20 calendar days to such a change notification, it shall be deemed to have agreed to such change.
Requirement to justify short redemption notice periods to home regulator
ESMA had proposed that ELTIFs with a redemption notice period of less than 6 months would need to justify the appropriateness of the notice period to their regulator. Under the EC's final rules, this requirement will only be triggered where the ELTIF's proposed notice period for redemptions is less than 3 months.
Next steps
Both the European Parliament and European Council now have three months to scrutinise the EC's RTS, with an option to extend this review period by an extra three months. The RTS are therefore expected to enter into force sometime in Q4 2024 or January 2025.
Please contact your usual HSF contacts should you have any questions or would like further detail on ELTIFs.
Key contacts
Key contacts
Hudson Heffer
Associate, London
Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.