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 Management
New proposal regarding taxation of carried interest
On January 28, 2025, the Ministry of Finance received a report with a proposal as regards the taxation of carried interest income. The taxation of carry has been unpredictable for years, with the main question being if, and to what extent, carry income shall be taxed as capital gains or as employment income.
Key proposals include:
- Applying modified 3:12 tax rules for carry income from AIFs.
- Excluding the external ownership rule.
- Prolonging the qualification period (karensperioden) from 5 to 10 years.
- Limiting the inclusion of employee compensation in subsidiaries when calculating the wage base (löneunderlaget).
- Raising the cap up to which carried interest is taxed as employment income tax, from SEK 7 million to SEK 12 million.
Although the proposal clarifies the carry taxation for many Swedish GPs to some extent, it remains to be seen how carried interest in structures that are not AIFs (such as investment companies) will be taxed and how carry income from other sources (e.g. limited partnership interests) would be taxed. The new legislation is proposed to enter into force on January 1, 2026.
Find the proposal here.
ESMA invites comments on standards for open-ended loan credit funds
ESMA has published a consultation paper on draft regulatory technical standards on open-ended loan originating AIFs under the AIFMD.
The amendment to AIFMD in early 2024 (AIFMD II) provided a specific regime for loan-origination activities by credit funds and other funds originating loans. AIFMD II defines ‘loan-originating AIFs’ to distinguish between credit funds that undertake loan origination as their principal activity and other AIFs that originate loans but not as part of their principal business. AIFMD II further provides that loan-originating funds must by default be closed-ended unless the AIFM is able to demonstrate to their respective national competent authorities that specific conditions are met to allow a loan-originating fund to be open-ended, most importantly, that the liquidity management system of the AIF is compatible with its investment strategy and redemption policy.
The requirements include:
- Sound liquidity management system,
- the availability of liquid assets,
- stress testing,
- ongoing liquidity monitoring,
- an appropriate redemption policy.
These rules are yet to be implemented into Swedish national law. ESMA’s regulatory technical standards aim to provide a harmonised implementing framework for the said requirements and enable the national competent authorities to decide on a case-to-case basis. However, they also seem to provide discretion to the national competent authorities to interpret the requirements for appropriate liquidity management by AIFs that wish to qualify as open-ended and thus leave room for conflicting interpretations being adopted by different EU jurisdictions.
The text of the proposal is available here. ESMA has requested comments from stakeholders by March 12, 2025. The standards are likely to come into effect in 2026.
ESMA is collecting data on costs linked to investments in AIFs and UCITs
ESMA has launched a data collection exercise together with national competent authorities on costs linked with investments in AIFs and UCITs.
The process is two phased involving:
- Information from manufacturers to provide an indication on the different costs charged for the management of the investment funds.
- Information from distributors to provide details on the fees paid directly by investors to distributors.
This initiative’s aim is to increase transparency on pricing of investment funds and to boost competition in the market.
The data collected will form part of an enhanced ESMA market report (2025) on costs and performance of EU retail investment products.
Find the article by ESMA here.
Strengthening the Competitiveness of the Swedish Fund Market
On December 15, 2023, the Swedish government announced a review of the fund legislation to enhance the competitiveness and resilience of the Swedish fund market. The review aims to create a regulatory framework that enables Swedish market participants to compete on equal terms with their EU counterparts. This includes analyzing the introduction of legal structures for variable capital funds in Sweden.
The review will also explore the conditions for establishing European Long-Term Investment Funds (“Eltif”) in Sweden and consider a transparent fund structure for institutional investors to avoid foreign withholding tax on dividends. Additionally, it will assess the rules governing the frequency of fund share sales and the payout time for investors.
The report will also contain the proposed implementation of AIFMD II. The report is due on April 30, 2025.
Find the Swedish government’s announcement here.
ESMA Releases New Q&A on AIFMs
ESMA has released new questions and answers regarding whether AIFMs are allowed to delegate portfolio management or risk management to non-supervised entities established outside the EU, and whether they are permitted to hold clients’ money.
ESMA clarified that AIFMs are not allowed to delegate portfolio or risk management to non-supervised entities established outside the EU. According to Article 20(1)(d) of the AIFMD, such delegation requires cooperation between the national competent authorities of the AIFM’s home Member State and the supervisory authority of the third-country entity. This cooperation must meet the minimum conditions set out in Article 78(3) of Commission Delegated Regulation (EU) No 231/2013.
Furthermore, AIFMs are not permitted to hold clients’ money. Article 6(4)(b)(ii) of the AIFMD allows AIFMs to provide safekeeping services for shares or units of collective investment undertakings but does not extend this to clients’ money. This provision remains unchanged even with the legislative amendments introduced by Directive 2024/927/EU.
The answers provided by ESMA are intended to clarify existing provisions in the legislation and do not introduce any new requirements or extend the rights and obligations of the concerned operators and authorities.
Find the Q&A by ESMA here and here.
Sustainability
EU’s new Regulation on Green Bonds come into effect
EU’s new Regulation (EU) 2023/2631 on European Green Bonds (EuGBS) which was published in November 2023, has come into effect on December 21, 2024. The EuGBS introduces a voluntary standard for bonds that have environmentally sustainable objectives.
Issuers of bonds that wish to use the designation ‘European Green Bond’ or ‘EuGB’ for bonds that are made available to EU investors must apply the following key criteria:
- Prospectus. Issuers must publish a prospectus under the EU Prospectus Regulation.
- Taxonomy. Revenues from European green bonds are required to be invested in projects that are aligned with the EU Taxonomy Regulation for environmentally sustainable activities, provided that the relevant sector is covered by the Taxonomy Regulation. For sectors not covered and for certain very specific activities, the EuGBS provides a flexibility pocket to allocate up to 15% in environmentally sustainable activity or activities in context of international support.
- Disclosures. Pre-issuance and post issuance documents are also required to be prepared which include European green bond factsheet and CapEx plan (if applicable) [pre-issuance] and annual allocation report and impact report [post-issuance].
- External Review. To provide investors with a cost-effective access to reliable information the issuers are required to appoint independent EU regulated external reviewers. The bonds will be reviewed by external reviewers to ensure compliance with the rules and taxonomy criteria. The external reviews will also be based on a specific template found in the EuGBS. The external reviewers must meet a number of requirements and be registered with the ESMA. ESMA is responsible for the supervision of the external reviewers. The first reviewers have been registered with ESMA. The list can be found here.
- Compliance. The respective national competent authorities that review the prospectus for the green bonds will be responsible for supervising the issuers compliance with the EuGBS.
EuGB designations are voluntary and co-exist with other international sustainable finance initiatives like the ICMA Green Bond Principles. Further, issuers of bonds that are marketed with a broad commitment to invest in environmentally sustainable activities but are not aligned with the EU Taxonomy Regulation may voluntarily opt-in to a number of the EuGBS disclosure requirements. We view the EuGBS as a step in the right direction to facilitate the European green bond market, increase transparency and confidence in the green bonds market, reduce the risks of greenwashing and to align with EU’s overall climate and environmental goals.
The text of the EuGBS is available here.
ESMA Q&As on application of Guidelines on funds’ names
ESMA had earlier in 2024 published Guidelines on the use of ESG or sustainability-related terms in funds’ names (Guidelines). These Guidelines have been implemented by SFSA and are therefore applicable to Swedish UCITs and AIFs since November 21, 2024 (with six months grace period for existing funds). ESMA Q&As provide further details on specific aspects of practical application of the Guidelines.
The Q&A shed light on the below key concepts:
- Green bonds. Funds using transition, social, governance, environmental or impact-related terms in their names, have to, among other requirements, apply the exclusions as per the supplemented Paris aligned benchmarks. The Q&A explains that investment restrictions related to the exclusion of companies do not apply to investments in European green bonds. For other green bonds, fund managers may use a look-through approach to assess whether the activities financed are relevant for the exclusions.
- Controversial Weapons. One of the exclusions under the Paris aligned Benchmarks as mentioned in pt.1 above are companies involved in any activities related to controversial weapons. The Q&A specifies that the reference for the exclusion related to controversial weapons should be the one referred to in the Sustainable Finance Disclosure Regulation (SFDR) principal adverse impact indicator 1 i.e. exposure to controversial weapons (antipersonnel mines, cluster munitions, chemical weapons and biological weapons).
- Meaningfully investing in sustainable investments. As per the Guidelines, funds using sustainability-related terms in their names are required to commit to investing a ‘meaningful’ proportion in ‘sustainable investments’. The Q&A highlight that 50% is a minimum level and that national competent authorities may require a higher proportion for such funds. The SFSA has clarified that it believes that funds with sustainability-related terms in their names should primarily invest only in sustainable investments. However, SFSA will make assessment based on the circumstances of the individual case.
The Q&A is available here.
Proposals for categorisation scheme under SFDR
The EU Platform on Sustainable Finance (‘Platform’, an advisory body to the EU Commission) has published its proposals for categorisation of products under the SFDR. The EU Commission is expected to publish a proposal for a review of the SFDR in 2025.
The Platform recommends categorising products under SFDR with the following sustainability strategies:
- Sustainable. Contributions through EU Taxonomy Regulation-aligned investments or sustainable investments with no significant harmful activities or assets based on a more concise definition consistent with the EU Taxonomy Regulation.
- Transition. Investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock‑ins, per the EU Commission’s recommendations on facilitating financing for the transition to a sustainable economy (which may or may not be aligned with EU Taxonomy Regulation).
- ESG collection. Excluding significantly harmful investments / activities, investing in assets with better environmental and/or social criteria or applying various sustainability features.
The Platform further recommends that all other products should be identified as unclassified products. This includes products that do not have sustainability specifications, products with sustainability specifications which do not meet the criteria for the other categories, and products which the manager chooses not to qualify because of client preference. Although products in this group will not be required to fulfil minimum criteria concerning their sustainability features, they will need to describe how they consider sustainability risks under the existing requirement under the SFDR. The Platform proposes that these products will also report data on EU Taxonomy Regulation alignment, greenhouse gas emissions and human rights due diligence. These products are also required to carry a disclaimer that they are unclassified.
We note that the categorisation proposal is directed at products for retail investors. The Platform’s proposal has specified that managers with institutional-only investor funds may chose not to use a categorisation if their investors do not prefer a categorisation or because the managers wish to form a product with another specialised strategy. It is therefore unclear whether institutional-only investor funds which choose not to use a categorisation will be required to classify as unclassified or not.
The Platform’s briefing note is available here.
