Wigge & Partners’s Funds and Investment News 2/2022 has been published – the latest regulatory changes and market research in the funds and investment sector.

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

The Committee on Economic and Monetary Affairs has published a draft proposal on AIFMD II

The Committee on Economic and Monetary Affairs of the European Parliament has published a proposal for a revised Alternative Investment Fund Manager Directive 2011/61/EU (“AIFMD”). The proposal includes, e.g., inclusion of certain semi-professional investors in the definition of professional investors, a definition of loan origination and new requirements for delegation arrangements.

The definition of “professional investor” is proposed to include an investor that has committed to invest at least EUR 100 000 and that has stated that it is aware of the risks with the investment; and an investor that is a member, employee, agent of the manager or an affiliate of the manager and has sufficient knowledge about the AIF concerned.

Further, a definition of “loan origination” has been introduced and means the granting of loans by an AIF as the original lender. In order to not include loan participating funds, a definition on “shareholder loans” has also been introduced. The latter means loans granted by an AIF to an undertaking in which it holds directly or indirectly at least 5% of the capital or voting rights, where the loan cannot be sold to third parties independently of the capital instruments held by the AIF in the same undertaking.

Furthermore, the revised AIFMD includes new requirements relating to delegation arrangements. The AIFMD shall acknowledge the diversity of distribution arrangements and distinguish between arrangements whereby a distributor operates on behalf of an AIFM, which should be considered to be a delegation arrangement, and arrangements whereby a distributor acts on its own behalf, in which case the provisions regarding delegation should not apply.

The proposal is now subject to negotiations by European Parliament and European Council in order to agree on a final version. Once the final agreement is published, the member states will have 24 months to implement the revised AIFMD.

Find the proposal here (in English).

The SFSA amends its regulation due to the Cross-Border Directive
Due to the implementation of the Cross-Border Directive 2019/1160, the Swedish Financial Supervisory Authority (“SFSA”) has amended FFFS 2013:10 on AIF managers and FFFS 2013:9 on UCITS.

The amendments introduce additional requirements for EES-based authorized AIF managers and UCITS management companies, e.g., that they are required to publish information on their website if they intend to cease marketing of their fund in Sweden. Further, Swedish authorized AIF managers shall notify the SFSA of pre-marketing and ensure that pre-marketing is adequately documented. The pre-marketing documentation shall include the name of (or other designation) to the person to whom the pre-marketing was directed, the date for such pre-marketing and how the AIF manager has ensured that the pre-marketing is not considered authorized marketing. The new regulations also include requirements to provide information on functions in Sweden for AIFs marketed to non-professional investors.

The amendments entered into force on 7 June 2022.

Find the SFSA’s announcement on the SFSA’s website and the amended regulations here (FFFS 2013:9) and here (2013:10) (all in Swedish).

ESMA consults on the notification process for cross-border marketing
ESMA is consulting fund managers, investors, relevant associations and other relevant stakeholders on the information and templates to be provided by, e.g., AIF managers or UCITS management companies when they inform regulators of their cross-border marketing and management activities under the UCITS Directive and the AIFMD.

The closing date for responses to the consultation is 9 September 2022.

Find the consultation paper on ESMA’s website (in English).

ESMA reminds fund managers of their obligations to investors due to the war in Ukraine

On 16 May, ESMA issued a public statement regarding the implications of Russia’s invasion of Ukraine on investment fund portfolios. It concerns particularly authorized AIF managers, EuVECA managers, EuSEF managers and UCITS management companies and aims to promote investor protection and convergence through high level guidance on:

• The appropriate action in case of exposures to Russian, Belarusian and Ukrainian assets, given valuation and liquidity uncertainties.
• The process fund managers should follow when evaluating these assets.
• Whether it may be considered to use side pockets or similar arrangements to segregate these assets.

Furthermore, ESMA states that it will continue to monitor the situation and, where necessary, supplement the guidance provided or provide additional guidance on other issues that might arise.

Find the statement on ESMA’s website (in English).

The European Council has adopted the amended regulation regarding ELTIF
The European Council has adopted the proposal from the European Commission regarding the amendment of Regulation (EU) 2015/760 on European long-term investment funds (the “ELTIF Regulation”). ELTIFs are the only type of AIF-funds dedicated to long-term investments which can be distributed on a cross-border basis to both professional and non-professional investors. However, since its adoption, only a limited number of ELTIFs have been launched, and only in four EU-member states (France, Italy, Luxembourg and Spain), due to significant constraints in the distribution process and stringent rules on portfolio composition. The proposal facilitates marketing AIFs to non-professional investors across the EU and includes, e.g., the following amendments:

• Removal of the minimum investment threshold of EUR 10 000 as well as the 10% exposure threshold for non-professional investors whose financial portfolios are below EUR 500 000.
• Amendment in order to align the ELTIF Regulation with the Markets in Financial Instruments Directive (2014/65/EU) (“MiFID II”) with regards to the suitability framework.
• Amendments on eligible assets and the portfolio composition, e.g., right to also make investments in AIFs other than EuVECA, EuSEF or other ELTIF funds, provided that those ELTIFs, EuVECAs, EuSEFs¸ UCITS and other AIFs invest in ELTIF eligible investments.

The next step is for the European Council to enter into negotiations with the European Parliament in order to agree on the final version.

Find the proposal here and further information on the European Council’s website (both in English).

The Swedish Investment Fund Association (Sw. Fondbolagens förening) has published guidelines for PRIIPs

The Swedish Investment Fund Association has published its guidelines to assist fund managers when preparing documentation to be compliant with Regulation (EU) No 1286/2014 on key information documents for packaged retail Investment and insurance-based products. The Swedish Investment Fund Association notes that the key information document (“KID”) for packaged retail investment and insurance-based products (“PRIIPs”) differs from the key investor information document (“KIID”) under the Regulation (EU) No 583/2010 implementing Directive 2009/65/EC. The KIIDs are used by UCITS management companies to provide investors with better disclosure and easier understanding of their products; a KID is used the same way for AIF managers regarding products available to certain non-professional investors. The PRIIP KIDs shall, however, enable comparisons between several different products, not just comparisons between funds. The Swedish Investment Fund Association’s view on the PRIIPs KID is that the benefits the regulation brings in terms of comparability come at a price in the form of a reduced degree of detail and those standard terms shall be used instead of terms that Swedish fund investors are more familiar with.

Find the guidelines on the Swedish Investment Fund Association’s website (in Swedish).

The Swedish Investment Fund Association has published updated marketing guidelines
The Swedish Investment Fund Association and the Swedish Consumer Agency (Sw. Konsumentverket) has agreed on a new “industry standard” regarding fund marketing, by which the Swedish Investment Fund Association has amended its guidelines regarding fund marketing and information. The guidelines shall apply to marketing of UCITS and special funds (Sw. specialfonder).

The amendments include adaptations to the new ESMA guidelines regarding fund marketing, such as requirements on the identification on marketing communications and the description of risks and rewards of purchasing units or shares. The amendments also make social media marketing easier by allowing for some information, that otherwise would need to be provided in full, to be provided through a link to the fund’s website.

Find the guidelines in Swedish and in English.

Sustainability

The European Commission has adopted the proposal on a delegated act to the SFDR
On 6 April, the European Commission published a delegated regulation with technical standards to be used by financial market participants when disclosing sustainability-related information (the “Delegated Regulation”) under the Sustainable Finance Disclosures Regulation (EU) 2019/2088 (“SFDR”).

The Delegated Regulation is applicable for financial market participants as defined in the SFDR (the “Financial Market Participants”), meaning that the Delegated Regulation is applicable on, e.g., AIF managers and UCITS management companies. The rules encompass the promotion of environmental or social characteristics (Article 8 SFDR) and sustainable investment objectives (Article 9 SFDR). The regulation sets requirements relating to e.g.:

• Website sections on statements on principal adverse impacts of investment decisions on sustainability factors respective no consideration of such adverse impacts.
• The content and presentation of the information to be disclosed in, e.g., a fund’s documentation (i.e., prospectus, periodic report, website, Article 23-disclosures etc.), in order to ensure compliance with SFDR and the Taxonomy.
• Information to be published when a fund applies exclusion strategies.
• In relation to funds that promote environmental or social characteristics, only the criteria for the selection of the underlying assets that are binding on the investment decision-making process should be disclosed on the website (i.e. a criteria that the fund manager may ignore or override shall not be disclosed).

The Delegated Regulation is applicable from 1 January 2023.

Find the Delegated Regulation on the European Commission’s website (in English).

The European Commission has published answers to the ESAs questions regarding the application of the SFDR
On 25 May, the European Commission published the answers to the European supervisory authorities (EBA, ESMA and EIOPA, jointly the “ESAs”) questions relating to the implementation of SFDR. Some of the question raised by the ESAs and answered by the European Commission are:

• Financial Market Participants not subject to mandatory principal adverse impact disclosures at entity-level may consider principal adverse impacts in the case of specific products/funds.
• Financial Market Participants may only disclose alignment with the Regulation (EU) 2020/852 (“Taxonomy”) of their products when they have reliable data, otherwise they would risk infringing SFDR or the Taxonomy, incur liability, and/or void contracts under national law. Accordingly, if a Financial Market Participant is unable to collect the necessary data to make product-level Taxonomy-alignment disclosures it should indicate zero alignment.
• All Article 8 funds promoting environmentally sustainable characteristics shall publish taxonomy-alignment under Article 6 of the Taxonomy. It is irrelevant if a financial product commits to invest in economic activities that contribute to an environmental objective.
• Financial Market Participants may use estimated data for exceptional cases where Financial Market Participants cannot reasonably obtain the relevant information to reliably determine the alignment with the technical screening criteria established pursuant to the Taxonomy as far as economic activities carried out by undertakings that are not subject to the taxonomy-alignment disclosures are concerned.

Find the Commissions’ Q&A response here (in English).

The ESA has published clarifications on the ESAs’ draft RTS under SFDR
On 2 June, the ESAs published clarification on the draft regulatory technical standards with regard to the content, methodologies and presentation of disclosures pursuant to the SFDR.

The clarifications from the ESAs include the following:

• That best practice regarding SFDR do no significant harm (“DNSH”) disclosures could be to disclose DNSH for sustainable investments by extracting the indicators from Table 1 of Annex I, and any additional relevant indicators from Table 2 and 3 of Annex I of the regulatory technical standards and show the impact of the sustainable investments against those indicators, proving through appropriate values.
• With regard to the calculations to be made as part of the reporting on principal adverse impacts of investment decisions required by Article 4(1)–(5) SFDR, the ESAs consider that all investments, both direct and indirect (which includes investments in, e.g., funds and funds of funds), should be included in these calculations. This covers investments in assets such as equity and corporate bonds, sovereign debts, private equity, supranational entities, infrastructure, and real estate.
• An investment in a taxonomy-aligned economic activity (i.e., an activity that meets the DNSH under the Taxonomy) shall in order to qualify as a sustainable investment for the purposes of SFDR, also respect the DNSH principle as set out in Article 2(17) SFDR.

However, the ESAs note that the European Commission on 6 April adopted a delegated regulation to SFDR (find the link to the delegated regulation here), however this clarification by the ESAs only refers to the draft regulatory technical standards published by the ESAs.

Find the clarification from the ESAs here (in English).

ESMA has published a supervisory briefing regarding sustainability risks and disclosures in the area of investment management

ESMA has published a supervisory briefing to ensure convergence across EU in the supervision of investment funds with sustainability features. Though national authorities are not obliged to comply with the briefing, it is meant to establish common supervisory criteria for the authorities to effectively supervise investment funds and covers the following areas:

• Guidance for the supervision of fund documentation and marketing material, as well as guiding principles on the use sustainability-related terms in funds’ names.
• Guidance for convergent supervision of the integration of sustainability risks by AIF managers and UCITS managers.

The briefing includes guidance on supervision regarding the Taxonomy, SFDR and the delegated acts on sustainability risks but might be updated to include the SFDR RTS which enters into force on 1 January 2023.

ESMA notes that:

• A warning sign for supervisors should be the repeated use of the same or similar standard text across different funds.
• With regards to funds disclosing under Article 8 SFDR, disclosure of criteria for the selection of underlying assets should be limited to those criteria that are binding on the fund manager in the investment decision making process.
• “Non-binding” exclusion strategies include risks for greenwashing.
• National competent authorities could reasonably expect that products disclosing under Article 9 SFDR would disclose the principal adverse impacts of investment decisions referred to in Article 7 SFDR, even though it is not mandatory.
• The use of cross-references and hyperlinks should be limited to the ones required by the section “Where can the methodology used for the calculation of the designated index be found?” and “Where can I find more product specific information online?” in Annexes II and III of the SFDR Delegated Regulation.
• Any link to other information should be to the exact place where the relevant information may be found. Any hyperlinks should be maintained over time to ensure that investors do not find broken links where information is no longer available. It is advisable that the use of the term “sustainable” or “sustainability” should be used only by (1) funds disclosing under Article 9 SFDR, (2) funds disclosing under Article 8 SFDR which in part invest in economic activities that contribute to environmental or social objectives and (3) funds disclosing under Article 5 of the Taxonomy.

The SFSA sees positively on the development of common principles and has stated that it will consider if there is any reason to change its previously taken positions.

Find ESMA’s supervisory briefing here (in English) and the SFSA’s statement here (in Swedish).

The SFSA to analyze sustainable funds
On 12 April, the SFSA announced that it will be doing an in-depth analysis of the information provided by managers subject to Article 9 SFDR, meaning managers of funds that have sustainable investments as their objective. This will include reviewing information brochures and fund provisions to assess whether the information provided meets the requirements set out for Article 9 funds for the purposes of the SFDR. The SFSA has pointed out that while it is important for consumers and investors to able to rely on the information that is available, the analysis might also provide a basis for further dialogue with the industry. The analysis is expected to be completed before the summer.

Find the full announcement on the SFSA’s website (in Swedish).

The Platform on Sustainable Finance has published a report on the Taxonomy objectives

On 30 March, the Platform on Sustainable Finance published a report with recommendations relating to the technical screening criteria for objectives 3–6 of the Taxonomy: transition to a circular economy, pollution prevention, sustainable use of water and marine resources, restoration of biodiversity and ecosystems. The purpose of the report is to advise the European Commission in its work to establish the legal framework for the technical screening criteria on environmental objectives. The European Commission is expected to draft a delegated act that take into regard the Platform’s recommendations.

The report contains technical screening criteria for approximately 60 economic activities and 12 sectors including sectors such as manufacturing, transport, agriculture, fishing and construction of buildings. The prioritization of sectors and economic activities has been based on an analysis of the magnitude of their impact and improvement potential. Several additional impactful activities, such as mining and quarrying, will be addressed in a later report.

Find the report here and the annex to the report here (both in English).

SFSA proposes new rules and implementation of the EU delegated regulation regarding sustainability factors

The application of the delegated regulation (EU) 2021/1255 as regards the sustainability risks and sustainability factors to be taken into account by AIF managers will commence shortly. The SFSA has also proposed sustainability related amendments to their regulations following changes to EU directives.

The delegated regulation 2021/1255 applies to authorized AIF managers, whereas the SFSA’s proposal is aimed at amending primarily their regulation regarding UCITS (FFFS 2013:9). The new rules include obligations for managers to:

• Consider or integrate sustainability risks in different parts of the operation and organization.
• Where the manager considers principal adverse impacts of investment decisions on sustainability factors as described in Article 4 SFDR, the managers shall take into such principal adverse impacts in its investment due diligence processes.
• Have sufficient resources and personnel with the expertise required to ingrate sustainability risks.
• Identify the types of conflicts of interest that may arise when sustainability risks are integrated into their processes, systems and internal controls and that could adversely affect the investor’s interest.

The delegated regulation 2021/1255 shall apply from 1 August 2022 and the SFSA’s amendments are proposed to enter into force on the same date.

Furthermore, the SFSA has proposed amendments to their regulations regarding investment services and activities (FFFS 2017:2) which is applicable to investment service providers. The amendments include that the investment service provider shall take into regard the end customers sustainability related objectives and that investment service providers shall provide distributors with sufficient information so that the distributor may take into regard to the end customers sustainability related objectives. The amendments to FFFS 2017:2 are proposed to enter into force on the 22 November 2022.

Find the delegated regulation 2021/1255 on EUR-Lex (in English) and the SFSA’s announcement as well as its proposed amendments in full on the SFSA’s website (in Swedish).

NordSIP has published two new handbooks
Nordic Sustainable Investment Platform (NordSIP) has recently published two handbooks regarding EU’s sustainable finance regulation and ESG integration, respectively. The handbooks contain insights from all of the finance industry’s actors, ranging from regulators to managers, on topics such as emission targets, greenwashing and sustainability in the current geopolitical situation.

Find the handbooks on NordSIP’s website (in English).

Market research

Invest Europe has published a report on private equity activity for 2021
2021 was a strong year for the European private equity sector, by which European private equity firms invested EUR 138 billion – a 51% increase from 2020. Further, EUR 118 billion of new capital was raised by private equity firms, which is the highest level seen to date. Growth investments had the strongest investment growth with 124% to EUR 35 billion, followed by venture capital investment (EUR 20 billion, an increase by 70%) and buyout funds (EUR 79 billion, an increase by 28%). The report by Invest Europe also highlights that fund of funds were the largest providers of capital in 2021, accounting for 23% of all funds raised, followed by pension funds (20% of funds raised) and family offices and private individuals (15% of funds raised).

Find the report on Invest Europe’s website (in English).