We did it, so you don’t have to. Here is a compilation of the latest regulatory changes and market research in the funds and investment sector. Our intention is to provide a summary relevant to both managers, investors and institutions navigating the world of funds.
Fund Managers
ESMA updates its guidance on the definition of advice in a supervisory briefing
The European Securities and Markets Authority (“ESMA”), the EU’s financial markets regulator and supervisor, has published a supervisory briefing on the definition of advice under MiFID II. The document is intented for use by the national competent supervisory authorities in their supervisory activities and shall also provide guidance to firms.
The supervisory briefing covers:
the provision of personal recommendations and whether other forms of information could constitute investment advice;guidance on when recommendations will be viewed as based on a view of a person’s circumstances;perimeter issues around the definition of personal recommendation; andissues around the form of communication, including use of social media posts.
Find ESMA’s supervisory briefing here (in English).
ESMA has published an overview report on the requirements on marketing according to the regulation on cross-border distribution of funds in all EU member states
ESMA has published an overview report on the marketing requirements under the regulation on cross-border distribution of funds in all EU member states. The report includes an analysis of the impact of national laws, regulations and laws and regulations governing marketing communications, as well as information from national competent authorities.
Find ESMA’s report here (in English).
ESMA has published proposal on technical standards for the ELTIF Regulation
On 23 May 2023, ESMA published a Consultation Paper on draft regulatory technical standards (“RTS”) supplementing the amended Regulation (EU) 2015/760 on European long-term investment funds (the “ELTIF Regulation”). Responses were due by 24 August 2023, and the RTS are expected to be finalised by the time the amended ELTIF Regulation comes into force on 10 January 2024. The consultation follows the review of the ELTIF Regulation finalised in March 2023.
The revised ELTIF Regulation provides that ESMA shall develop draft regulatory technical standards to determine the:
criteria for establishing the circumstances in which the use of financial derivative instruments solely serves as hedging purpose;circumstances in which the life of a European long-term investment fund (“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;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;criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets; andcosts disclosure.
ESMA will consider the feedback it received to this consultation in Q3/Q4 2023 and expects to publish a final report and submit the draft technical standards to the European Commission for endorsement by 10 January 2024.
Find the draft regulatory technical standards here (in English).
Sustainability
The European Commission’s response on the interpretation of Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector
The European Commission has published a series of answers on the interpretation of Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (“SFDR”), reaffirming the transparency objective of the regulation.
Among other, the European commission provides respons on the interpretation on the following topics:
the definition on sustainable investment;financial products that have a reduction in carbon emissions as their objective;principal Adverse Impacts (PAI) at financial product-level; andprincipal Adverse Impacts (PAI) threshold at entity-level.
Find the European Commission´s respons here (in English).
Joint Consultation Paper on the Review of SFDR Delegated Regulation regarding PAI and financial product disclosures
The European Commission has mandated the Joint Committee of the the three European Supervisory Authorities (the European Banking Authority (“EBA”), the European Insurance and Occupational Pensions Authority (“EIOPA”) and ESMA) (the “ESAs”) to review and revise the Regulatory Technical Standards laid down in the Commission Delegated Regulation (EU) 2022/1288 supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to RTS specifying the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’, specifying the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in precontractual documents, on websites and in periodic reports (hereinafter “SFDR Delegated Regulation”).
The purpose of the review is to broaden the disclosure framework and address some technical issues that have emerged since the SFDR was originally agreed, which concern sustainability indicators in relation to principal adverse impacts (“PAI”) as, and to propose amendments to RTS on pre-contractual and periodic documents and on website product disclosures for financial products, in order to include greenhouse gas (GHG) emissions reduction targets, including intermediary targets and milestones and actions pursued.
The proposed amendments include:
extending the list of universal social indicators for the disclosure of the PAI of investment decisions on the environment and society, such as earnings from non-cooperative tax jurisdictions or interference in the formation of trade unions;refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies, formulae for calculation as well as the presentation of the share of information derived directly from investee companies, sovereigns, supranationals or real estate assets;adding product disclosures regarding decarbonisation targets, including intermediate targets, the level of ambition and how the target will be achieved; andimproving the disclosures on how sustainable investments ‘do not significantly harm’ the environment and society.
The deadline for comments on the Consultation Paper was 4 July 2023. After the ESAs have considered the comments received, the ESAs plan to prepare a final report and submit it to the European Commission by the end of October 2023.
Wigge & Partners has published a response to the consultation paper. In the response, Wigge & Partners concludes that the proposed amendments to the delegated act fail to fulfil the requirements of the enabling powers in the SFDR, since the amendments do not take the various types of financial products, their characteristics, and the differences between them, into account.
Further, Wigge & Partners emphasized that the European supervisory authorities are required by law to apply the principle of better regulation. There is a risk that the delegated regulation may be annulled if the enabling powers in the SFDR are not respected.
Find the ESAs Consultation Paper here (in English). Find Wigge & Partners response here (in English).
ESMA and NCAs to assess disclosures and integration of sustainability risks in the investment fund sector
ESMA has launched a common supervisory action (“CSA”) with national competent supervisory authorities (“NCAs”) on sustainability-related disclosures and the integration of sustainability risks.
The goal is to assess the compliance of supervised asset managers with the relevant provisions in the SFDR, the Taxonomy Regulation and relevant implementing measures, including the relevant provision in the UCITS and AIFMD implementing acts on the integration of sustainability risks.
The main ojectives of the activity is:
to assess whether market participants adhere to applicable rules and standards in practice;to gather further information on greenwashing risks in the investment management sector; andto identify further relevant supervisory and regulatory intervention to address the issue.
The CSA will take place in 2023 and until Q3 2024, and the NCAs will undertake their supervisory activities and share knowledge and experiences through ESMA to foster convergence in how they supervise sustainability-related disclosures and sustainability risk integration in asset managers.
Find ESMA’s press release here (in English).
The three ESAs have each published progress reports on greenwashing in the financial sector
The ESAs has published Progress Reports on Greenwashing in the financial sector. In these reports the ESAs – EBA, EIOPA and ESMA respectively – put forward a common high-level understanding of greenwashing applicable to market participants across their respective areas of responsability – banking, insurance and pensions and financial markets.
The ESAs understand greenwashing as a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants. The ESAs also highlight that sustainability-related misleading claims can occur and spread either intentionally or unintentionally and in relation to entities and products that are either within or outside the remit of the EU regulatory framework.
The ESMA Progress Report helps to better understand greenwashing in the financial markets and provides market participants and regulators with a shared reference point in dealing with greenwashing.
In ESMAs report, they assesses which areas of the sustainable investment value chain are more exposed to the risk of greenwashing. The findings show that misleading claims may relate to all key aspects of the sustainability profile of a product or an entity – from governance aspects to sustainability strategy, targets and metrics or claims about impact. The report also provides sector-specific assessments for key sectors under ESMA’s supervision such as issuers, investment managers, benchmark administrators and investment service providers.
To mitigate greenwashing risks, market participants across the sustainable investment value chain have to live up to their responsibility to make substantiated claims and communicate on sustainability in a balanced manner.
The ESAs will publish final greenwashing reports in May 2024 and will consider final recommendations, including on possible changes to the EU regulatory framework.
Find ESMAs Progress Report here (in English).
Market and market research
ILPA has released new guidance on continuation funds.
The Institutional Limited Partners Association (“ILPA”) has published new guidance on continuation funds. Continuation funds, i.e. the establishment of new vehicles by the GP in order to hold on to an asset, have become increasingly popular. The new ILPA guidance calls for GPs to pursue processes and deal structures that maximize alignment and LP engagement.
Here are some of the key takeaways.
Conflicts of Interests. GPs should bring all conflicts of interests for vote at LPAC level, irrespective of whether or not the conflicts are pre-cleared in the LPA.Due timing. LPs should have the option to roll over or sell, and should get at least 20 business days or 30 calendar days to make such decision.Status quo offer. There shall be no increase of management fee or carried interest (and no decrease of preferred return hurdle) for roll over vehicles, and side letters should apply for new vehicles.Alignment. All carried interest from exiting LPs should be rolled over to the new vehicle.
Find ILPA’s new guidance in full here (in English).
AML
Publication of the Wolfsberg ABC Guidance
The Wolfsberg Group, a non-governmental association of twelve global banks which aims to develop frameworks and guidance for the management of financial crime risks, has published its updated Anti-Bribery and Corruption Compliance Programme Guidance. This document updates the 2017 version and it is designed to promote a culture of ethical business practices and compliance with ABC legal and regulatory requirements.
The Guidance is a risk-based approach for the adequate development and implementation of compliance programmes to prevent, detect, and report acts of Bribery and Corruption and identifies areas of elevated risk.
The Guidance incorporates learnings from enforcement actions since 2017 with updates to the red flags section and expands the section on customer and transaction corruption risks. The document includes the need for financial institutions’ programmes to be continuously evolving, and a new section on identifying, reporting, and mitigating emerging bribery and corruption risks. Finally, the guidance has been aligned to current and evolving legal regulatory expectations with additional guidance for post-acquisition due diligence, the inclusion of guidance for financial institutions to include a holistic risk assessment and management as part of their control frameworks.
Find the Anti-Bribery and Corruption Compliance Programme Guidance here (in English).
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Wigge & Partners’ Funds & Investments Team
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