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. Hopefully our summary is relevant to both managers, investors and institutions navigating the world of funds.

Fund Managers 

The regulatory framework for fund managers has progressed during the last months of 2021. The Swedish government has proposed amendments to the Alternative Investment Fund Managers Act (2013:561) (“AIFM Act”, Sw. Lag om förvaltare av alternativa investeringsfonder) and the Swedish UCITS Act (2004:46) (“UCITS Act”, Sw. Lag om värdepappersfonder) due to the Cross-Border Regulation (the Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings), and hereto the Swedish Financial Supervisory Authority (“SFSA”) has decided to comply with the Guidelines on marketing communications (34-45-1272). Further, the European Commission has proposed amendments to the Alternative Investment Fund Manager Directive (2011/61/EU) (“AIFMD”), the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EG) (“UCITSD”) and the European Long-Term Investment Funds Regulation ((EU) 2015/760) (“ELTIFR”). Furthermore, the implementation of the Delegated Regulation (C(2016)03999) amending Regulation (EU) 2017/653 on regulatory technical standards for PRIIPS KIDs (“PRIIPS Delegated Regulation”) and the UCITS transition period of PRIIPS Regulation (Regulation (EU) No 1286/2014) has once more been prolonged.

Swedish transposition of the Cross-border Directive continues
The Swedish government has published a proposal to amend the AIFM Act and the UCITS Act due to the Cross-Border Regulation. The AIFM Act is proposed to include regulations regarding pre-marketing. An authorised AIF manager shall notify the SFSA when it intends to pre-market its AIF to professional investors in a member state where it has not notified the marketing of the AIF. The proposal also includes cross-border marketing de-notification requirements for authorised AIF managers and UCITS management companies.

Furthermore, the proposal includes requirements for AIF managers, that market their funds to non-professional investors, and for UCITS management companies to offer additional functions to investors, such as a possibility to process orders for subscription and redemption of its shares and to provide investors information regarding such functions.

The proposal is submitted to the Council on Legislation (Sw. Lagrådet) that will scrutinize the proposal. The amendments are proposed to enter into force the 1 April 2022, and amendments with respect to third country AIF managers and third country AIFs shall enter into force on such day the government decides.

Find more information on the Government Offices' website.

SFSA complies with ESMA Guidelines on marketing communications under the Cross-Border Regulation
The SFSA has decided to comply with the Guidelines on marketing communications under the Cross-Border Regulation (the Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings).

The Guidelines apply to UCITS management companies, AIF managers, EuVECA managers and EuSEF managers and covers all marketing communication addressed to investors or potential investors. Such managers shall take the Guidelines into account when describing, e.g. risk and reward as well as past performance or expected future performance and the marketing communication shall contain a disclaimer.

The Guidelines apply as of 2 February 2022.

Find the Guidelines here in English and in Swedish.

Find more information on SFSA's website.

The European Commission proposed amendments to the AIFMD and the UCITS Directive
The European Commission has adopted a proposal to amend the AIFMD and UCITSD.

The proposal includes e.g. the following amendments:

• A right for authorised AIF managers to provide benchmark administration in accordance with Regulation (EU) 2016/1011 and credit servicing under the forthcoming EU credit servicers legislation as additional ancillary services.
• A right for authorised AIF managers to provide loan origination services and servicing securitisation special purpose entities. The proposal also includes additional requirements for AIF managers that engage in loan granting activities by e.g. implementing effective policies, procedures, and processes for the granting of credit, for assessing the credit risk and for administrating and monitoring their credit portfolio.
• That an AIF may appoint a depositary in another member state than the member state where the AIF is established.
• Requirements with respect to liquidity management tools to assist fund managers to mitigate their liquidity risks in stressed scenarios. It is therefore proposed that AIF managers that manage open-ended AIFs and UCITS management companies be required to choose one of the listed liquidity management tools, i.e., suspension of redemptions and subscriptions, redemption gates, notice periods, “redemption fees”, swing pricing, anti-dilution levies, redemptions in kind or side pockets in addition to being able to manage redemptions. Hereto, AIFMD Article 23 and UCITS prospectus – regarding disclosure to investors – is supplemented to include disclosure with regards to such liquidity management tools and the fees associated with these.
• That all delegated functions and services for authorised AIF managers and UCITS management companies shall be subject to the delegation requirements. This means that the AIF manager shall comply with the conditions in Article 20 AIFMD when outsourcing functions stipulated in Annex I of the AIFMD and the ancillary services in Article 6(4) AIFMD; accordingly, the UCITS management company shall comply with the conditions in Article 13 UCITSD when outsourcing functions stipulated in Annex II of the UCITSD and the ancillary services in Article 6(3) of UCITSD.
• That at least two senior managers should be employed or conduct the business of an authorised AIF manager/UCITS management company on a full-time basis.

The EU Commission’s proposal is now under review, once it is adopted by the European Council and the European Parliament, member states will need to implement the adopted amendments within 24 months following their entry into force.

Find more information on the European Commission’s website.

The Delegated Regulation (C(2016)03999) to amend PRIIPS KID technical standards and PRIIPS KID UCITS exemption has been postponed
The European Parliament has decided to postpone the implementation of the PRIIPS Delegated Regulation and prolong the UCITS transition period of PRIIPS Regulation (Regulation (EU) No 1286/2014) until 1 January 2023 – from previously proposed 1 July 2022.

The requirements are applicable to entities within the scope of PRIIPS, such as AIFs open for non-professional investors (including semi-professional investors), UCITS, insurance-based investment products and other investment vehicles where the amount repayable to the non-professional investor is subject to fluctuations because of exposure to reference values or to the performance of the underlying assets as well as their distributors.

The amendments in the PRIIPS Delegated Regulation include e.g. customized requirements for UCITS and AIFs, fund-of-funds, feeder funds as well as requirements with respect to methodologies underpinning the calculation of appropriate performance scenarios and a revised presentation of these scenarios as well as revised summary cost indicators and changes to the content and presentation of information on the costs of PRIIPS.

The European Parliament stressed that retail investors in PRIIPS interested in acquiring units of UCITS, should not receive, from 1 January 2023, both documents for the same product.

Find the press release on the European Parliament’s website. 

Find the PRIIPS Delegated Regulation on the European Commission’s website.

The European Commission proposed amendments to the ELTIF Regulation
The European Commission has adopted a proposal to amend ELTIFR. 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 retail investors whose financial portfolios are below EUR 500 000.
• Amendment in order to align the ELTIFR 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 make investments also in other funds than EuVECA, EuSEF or other ELTIF funds, provided that those funds invest in ELTIF eligible investments.
• Right to invest in real assets with a value of at least EUR 1 000 000. The definition of “real asset” has been revised to mean any assets that have intrinsic value due to their substance and properties.

The EU Commission’s proposal is now under review, once it is adopted by the European Council and the European Parliament, the amendments to the ELTIF Regulation will become applicable 6 months after the publication in the Official Journal of the EU.

The proposal can be found on the European Commission’s website.

Sustainability  

During the quarter, legislative measures and reports with regards to sustainability has been published/conducted both on a European level and on a domestic level. The Delegated Regulation (EU) 2021/2139 supplementing the Regulation on the establishment of a framework to facilitate sustainable investment (EU Regulation 2020/852) (“Taxonomy”) has been adopted. EBA, ESMA and EIOPA has published a draft Regulatory Technical Standards (“RTS”) regarding taxonomy related disclosures under the Sustainable Finance Disclosure Regulation (EU Regulation 2019/2088) (“SFDR”) and the Swedish government has proposed a new legislation with regards to the Taxonomy. The European Fund and Asset Management Association (“EFAMA”) has published a report on the European fund market with regards to the SFDR where Sweden ranks highest with regards to domestic market share of Article 8 funds. The SFSA has reviewed the Swedish fund managers sustainability information and stressed that that it will conduct further investigation on how fund managers are implementing the SFDR.  

The technical screening criteria for the Taxonomy have been adopted
On 9 December, the European Council adopted the Delegated Regulation (EU) 2021/2139 supplementing the Taxonomy. The Delegated Regulation (EU) 2021/2139 establishes the technical screening criteria for determining the conditions under which a specific economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, respectively, and to establish, for each relevant environmental objective laid down in Article 9 of the Taxonomy, technical screening criteria for determining whether that economic activity causes no significant harm to one or more of those environmental objectives.
The technical screening criteria sets sector-specific requirements for different business sectors, e.g., forestry, environmental protection and restoration activities, manufacturing, energy, water supply, sewerage, waste management and remediation, transport, construction and real estate activities, information and communication, and professional, scientific and technical activities.

The Delegated Regulation is applicable directly in each member state as from 1 January 2022.

Find the delegated regulation in English and in Swedish.

Final proposal with draft RTS regarding Taxonomy related disclosure under the SFDR has been published and the application has been delayed
The European Supervisory Authorities (“ESA”) has published a draft RTS for publication in accordance with the SFDR and the Taxonomy. The RTS is applicable to financial market participants, e.g. fund managers providing Article 8 or Article 9 funds, i.e. “light green” or “dark green” funds.

The RTS sets detailed requirements for the information to be disclosed pursuant to SFDR and aims to establish a single rulebook for sustainability information according to SFDR and the Taxonomy. ESAs propose to treat the Article 9 SFDR products with an environmental objective as a subset of a larger Article 9 SFDR category, and Article 8 SFDR products which make sustainable investments with an environmental objective a subset of a larger Article 8 SFDR category of products. Such products, i.e. funds committed to making sustainable investments with an environmental objective, shall disclose the environmental objectives to which the fund contributes and show how and to what extent the fund’s investments are aligned with the Taxonomy in their pre-contractual and periodic disclosures. Funds that have committed to making one or more sustainable investments shall also include an explanation of how the indicators for adverse impacts in Table 1 of Annex I of the RTS and any relevant indicators in Tables 2 and 3 of Annex I, are taken into account.

The Commission has informed the European Parliament and the Council that the draft RTS could not be adopted by the Commission within the three-month period.

The application of the RTS has been deferred to 1 January 2023 - from previously proposed 1 July 2022.

Find more information on the draft RTS on EBA’s website.

Find more information on the deferred application on SFSA's website.

New Swedish legislation with regards to the Taxonomy
The Swedish government has proposed a new legislation to amend current legislation with regards to the Taxonomy. The proposal supplements the AIFM Act, the UCITS Act and the Securities Market Act (2007:528, Sw. Lag om värdepappersmarknaden) with references to Article 5-7 in the Taxonomy – pre-contractual disclosures and disclosures in periodic reports. Further, the proposal includes that the SFSA may charge fund managers fees with regards to the Taxonomy.

The legislation is proposed to be applicable from 1 January 2022.

Find the proposed legislation on the Government Offices’ website.

Sweden has the highest domestic market share of Article 8 funds
EFAMA has reviewed the assets under management of funds using the SFDR framework. The review concluded that 22% of the European fund market were so-called Article 8 funds and 2% were Article 9 funds. Luxemburg was the domicile for most of the Article 8 and 9 funds, followed by France and Netherlands. However, in terms of domestic market share of Article 8 funds, Sweden ranked first with 92% of the funds being Article 8 funds – second was Belgium with 50% and third was Netherlands with 48%. EFAMA explains that the difference between countries may also differentiate due to regulatory differences in the interpretation of the SFDR – Sweden has, in line with the European Commission’s own interpretation, a less strict interpretation of what is meant by “promote” in Article 8 of SFDR.

Find more information here.

SFSA has reviewed Swedish fund managers sustainability disclosures
The SFSA has published a memorandum where it mapped the UCITS management companies and AIF managers managing special funds (Sw. Förvaltare av specialfonder) through a survey that covered 69 fund managers and 785 funds. The survey showed that a substantial amount of the funds are categorized as Article 8 funds (73,9%), whereas 1,5% of the funds are Article 9 funds and 5,5% of the funds deem sustainability risks not to be relevant. The SFSA highlights that, as an effect of so many funds being Article 8 funds, fund managers need to adjust their disclosure to the investors so that it corresponds with the actual investment strategy for the fund; and respectively, when the funds contain a reference to “sustainability” – the fund shall have a corresponding investment strategy. Further, the SFSA urges fund managers to read the European Commission published answers to the questions posed by the Joint Committee of the European Supervisory Authorities on how SFDR should be interpreted and applied. Finally, the SFSA stressed that it will conduct further investigation on how fund managers are implementing the SFDR.

Find the memorandum on the SFSA website.

Anti-Money Laundering 

SFSA complies with EBA Guidelines on Risk Factors regarding Money Laundering and Terrorist Financing – except for account information services
The SFSA has notified EBA that it complies with the Guidelines on Risk Factors regarding Money Laundering (“ML”) and Terrorist Financing (“TF”) (EBA/GL/2021/02) except for account information service providers. The Guidelines were issued on 1 March 2021 and set out factors that firms should consider when assessing the ML/TF risk associated with a business relationship or occasional transaction. The Guidelines also set out how firms can adjust the extent of their Customer Due Diligence (“CDD”) measures in a way that is proportionate to the ML/TF risks they have identified. The Guidelines include e.g. a new section (guideline 1.6-1.10) to keep risk assessments up to date and stricter requirements on CDD (guideline 4). Firms shall according to guideline 4, in their policies and procedures, clearly set out who the customer is and identify the beneficial owner and what shall be constituted an occasional transaction taking into consideration factors such as the frequency or regularity with which the customer returns for occasional transactions and the extent to which the relationship is expected to have, or appears to have, an element of duration.

The Guidelines on Risk Factors regarding ML and TF shall apply to credit and financial institutions in accordance with AMLD (Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing), e.g. AIF managers and UCITS management companies. The SFSA underlines that the definition of the “customer” in Swedish legislation is broader than in the Guidelines.

The Guidelines are applicable as of 7 October 2021.

Find more information on the SFSA’s website.

Market research

Invest Europe publishes its report Private Equity Activity in H1 2021
Invest Europe has published a report on the Private Equity Activity in the first half of 2021. The private equity industry continues to report strong figures regarding investment into European companies – EUR 57.3 billion was invested under the first half of 2021 which is a 38% increase compared with the first half year of 2020. Divestments for the first half year of 2021 have also increased since the same period last year, an increase of 63% to EUR 16 billion. The funds raised had also increased by 5% to EUR 52 billion.

Find the whole report here.

Invest Europe & Arthur D. Little publishes its findings from a forward-looking market sentiment survey
Arthur D. Little has, together with Invest Europe, published a forward-looking report based on a market survey conducted during July and August 2021. The report highlights that both General Partners (“GP”) and Limited Partners (“LP”) have increased their attention to environmental, social and governance aspects. The report further indicates that both GPs and LPs expect a continuous demand for investments in private equity funds. As a result of high demands to invest in private equity and following the recovery from the pandemic, 60,8% of the GP respondents expect a higher multiple valuation on exit transactions for the coming 12 months.

Find the full report here.  

Investors

ILPA releases updated Due Diligence Questionnaire for investors
The Institutional Limited Partners Association (“ILPA”) issued and updated Due Diligence Questionnaire (“DDQ”). The DDQ may be used by investors during their due diligence, and it includes key issues or regards investors may have in the pre-investment phase. The update includes e.g. sections regarding key persons, co-investments, GP-led secondaries, credit facilities, data security/technology and a refined ESG section.

Find more information on the ILPA’s website.