Wigge & Partners nyhetsbrev om de senaste regulatoriska ändringarna och marknadsundersökningarna inom fond- och investeringssektorn har publicerats.
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.
Changes to the regulatory framework during 2022 have begun at a rapid pace. The Swedish government has proposed to amend the Swedish AIFM Act (Sw. Lag (2013:561) om förvaltare av alternativa investeringsfonder) and the UCITS Act (Sw. Lag (2004:46) om värdepappersfonder) due to Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings (the “Cross-Border Regulation”) and Directive (EU) 2019/1160 with regard to cross-border distribution of collective investment undertakings (the “Cross-Border Directive”). The Swedish Financial Supervisory Authority (“SFSA”) has published amendments to its regulations due to the Cross-Border Directive; the amendments to the Swedish Securities Market Act (Sw. Lag (2007:528) om värdepappersmarknaden) has entered into force; ESMA has published a list on information on national laws and regulations on fund marketing; and the SFSA has published amendments and proposed amendments to its regulations regarding remuneration to or from third parties.
The Swedish government has published a proposal to amend the AIFM Act and the UCITS Act due to the Cross-Border Regulation and the Cross-Border Directive. The AIFM Act is proposed to include regulations regarding pre-marketing.
The amended rules are applicable on authorised AIF managers and UCITS management companies with regards to marketing of funds. 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 previously 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 shares and to provide investors information regarding such functions.
The SFSA has also published amendments to its regulations FFFS 2013:9 and FFFS 2013:10 due to the implementation of the Cross-Border Directive. The amendments introduce additional requirements for UCITS management companies and EES-based authorised AIF managers, e.g. that they are required to publish information on their website if they intend to cease their marketing in Sweden. Further, Swedish authorised AIF managers shall notify the SFSA of pre-marketing as well as the method for how such pre-marketing shall be notified and documented. The documentation shall include the name of or other affiliation to the person 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 authorised marketing.
The legislative amendments are proposed to enter into force on the 1st of 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. The SFSA regulation amendments are proposed to take effect on 1st of June 2022.
ESMA has published a list of applicable national laws, regulations and administrative provisions regarding marketing requirements for AIF managers and UCITS management companies. The list includes an overview of the laws, regulation and administrative provisions and hyperlinks to each member state’s financial supervisory authority.
Find the list here.
The SFSA has, due to new rules in MiFID II, amended following regulations: (i) FFFS 2017:2 (investment services and activities), (ii) FFFS 2013:9 (UCITS) and (iii) 2013:10 (AIF managers).
The amended regulations regard remuneration to or from third parties in connection with research services on small and middle capitilisation issuers and are applicable on entities that provide investment services as defined in MiFID II (e.g. investment firms, credit institutions, AIF managers and UCITS management companies providing investment services) and AIF managers and UCITS management companies providing other advice relating to the fund interests. Research services from third parties may be received, without it being considered rumuneration or benefits, (i) if the firm has entered into a contract with a third party and where the fee for receiving such research is disclosed, (ii) if the firm notifies its clients of such fees, and (iii) if the company that is being researched is valued less than EUR 1 billion at the time for the research. The purpose of the amendment is to allow for more research on small and middle capitalisation issuers to help such issuers connect with investors. That research increases the visibility of issuers and thus ensures a sufficient level of investment and liquidity.
The new regulations are applicable from 8th of March 2022.
Find more on the SFSA's website.
The Swedish government proposal to amend the Swedish Securities Market Act (Sw. Lag (2007:528) om värdepappersmarknaden), due to amendments to MiFID II, has entered into force on the 28th of February 2022. The amendments are applicable to MiFID-investment service providers (e.g. investment firms, AIF managers and UCITS management companies providing certain investment services) relating to the switching of financial instruments as well as a relief from providing information on fees and periodic reporting relating to the professional clients. The amendments relating to switching of instruments and periodic reporting are also applicable to AIF managers and UCITS management companies providing other advice than such investment advice aforementioned in relation to the fund interests.
The amendments include reliefs regarding information requirements that should be provided to clients.With regards to professional investors, the amendments permit investment service providers to e.g. only provide professional investors with information regarding costs and fees for the provided service if such service is deemed investment advice or portfolio management (Chapter 9, Section 15 of the Securities Market Act), and firms do not have to provide professional investors with regular reporting regarding services provided to the client – if the professional investor does not request such reporting (Chapter 9, Section 27 of the Securities Market Act). Furthermore, the amended law includes a new information obligation in connection with investment advice that involves switching of financial instruments. When providing such investment advice, the firm shall inform the client whether or not the benefits of the switching of financial instruments are greater than the costs involved in such switch.
Find the proposal on the Government Offices’s website.
Following the recent boom in investments in private equity funds, SEC deems it necessary to enhance the regulation regarding private fund advisors. The proposed rules and amendments under the Investment Advisers Act of 1940 include e.g. requirements for private fund advisors to provide quarterly statements detailing information about fund performance, fees, and expenses, as well as prohibiting certain types of preferential treatment and a requirement to disclose all other types of preferential treatment to current or prospective investors. In addition, the proposal will prohibit private fund advisors from seeking reimbursement, indemnification, exculpation or limiting their liability for advisor misconduct, reducing advisor clawback due to certain taxes, charging fees or expenses related to an investment on a non-pro rata basis and borrowing from a private fund client. Furthermore, registered advisors will be required to document their annual review of their compliance policies and procedures in writing.
For private fund investors, the proposal would incur a higher level of transparency and more clarification on e.g. fund expenses or establishment expenses. Preferential treatment through side letters will also be affected by the proposal, as certain preferential treatments will be prohibited and more information regarding different types of preferential treatment could be disclosed to prospective investors.
Public comments can be made on this proposal until 11th of April 2022. There is not a proscribed timeline related to when final rules shall be released.
Find more on the SEC's website.
The European Commission, ESMA, European Supervisory Authorities (the “ESAs”) and the SFSA have been active in the sustainability sphere. The ESAs have issued an updated joint supervisory statement on the application of the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (the “SFDR”); the European Commission has adopted a supplemented delegated regulation to the Regulation (EU) 2020/852 (the “Taxonomy”) setting out technical screening criteria for the energy sector; the SFSA and ESMA has announced that a review of sustainability is a prioritized area during 2022; the Platform on Sustainable Finance has published its final report on social taxonomy; SFSA has issued a reminder to include sustainability in the periodic reports; Invest Europe has announced that they will set a ESG reporting standard during the year; and ESMA is consulting on the review of MiFID II suitability guidelines.
The application of the SFDR has commenced in March 2021 but the application of the Regulatory Technical Standards (the “RTS”) is expected to commence 1st of January 2023. The ESAs and the SFSA recommend that market participants (e.g. fund managers) use the interim period from 10th of March 2021 until 1st of January 2023 to prepare for the application of the forthcoming RTS while also applying the relevant measures of SFDR and the Taxonomy according to the relevant application dates outlined in the supervisory statement. The draft RTS can be used as a reference during the interim period.
The ESAs clarify that the supervisory expectation for disclosures under Article 5 and 6 of the Taxonomy during the interim period is that financial market participants should provide an explicit quantification, through the numerical disclosure of the percentage, of the extent to which the underlying investments of the financial product are Taxonomy-aligned. In addition, while estimates should not be used, where information is not readily available from investee companies’ public disclosures, financial market participants may rely on equivalent information regarding Taxonomy-alignment obtained directly from investee companies or from third party providers. The joint supervisory statement also contains a time schedule relating to application of the different requirements under the SFDR and the Taxonomy.
The SFSA and ESMA have announced its respective priorities for 2022, and each supervisory includes that one prioritization shall be to review the sustainability descriptions in the financial sector to ensure that a financial product’s chosen sustainability level corresponds to the actual sustainability of the financial product. This will be aimed at the prevention of potential “greenwashing” within the financial sector. The concern from the supervisory authorities is that the growing demand from investors for sustainable investments combined with a fast-evolving market and legislative measures inherent time delay creates room for misalignment between demands for investments that have an impact and investing opportunities marketed as sustainable. ESMA and the national competent authorities see greenwashing as a problem that needs to be addressed and recognize the need to tackle greenwashing without delay.
The International Organization of Securities Commission (“Iosco”) shall also prioritize sustainability issues, and for the year 2022 Iosco aims to establish a unified global standard for sustainability reporting in an attempt to counteract greenwashing.
The European Commission’s platform on Sustainable Finance has published its final report where it proposes a structure for a social taxonomy within the present EU legislative environment containing the existing and proposed taxonomy initiatives, the proposed corporate sustainability reporting directive, SFDR, and the sustainable corporate-governance initiative.
This proposal aims to implement the framework for the implementation of social values that would define social investments as has already been done with environmental investments. The proposal further aims to be implemented through the current existing EU legislations, such as the Taxonomy and SFDR. This means that companies that have to apply the Taxonomy and SFDR may have to consider future proposals of social investments.
The proposed structure of the social taxonomy consists of three objectives each addressing a group of stakeholders in the social taxonomy: (a) decent work, (b) adequate living standards and wellbeing for end-users and (c) inclusive and sustainable communities and societies. The structural aspects effecting these objectives in the suggested structure of the social taxonomy are (1) the development of social objectives, (2) types of substantial contributions, (3) the “do no significant harm” criteria and (4) minimum safeguards. For each objective, a set of sub-objectives are proposed. As the objectives covers a wide range of topics, the requirement for sub-objectives are necessary to fulfill the proposed objectives. As an example, the European Commission’s platform states that e.g. social dialogue, living wages, health and safety for workers would be sub-objectives to the objective promoting decent work.
The next steps for developing a social taxonomy are – according to the report – to clarify the minimum safeguards according to the scoping note, conduct a study on the impacts of a social taxonomy considering different options for application and designs, work out a rationale for prioritising objectives and sub-objectives, prioritise objectives according to the rationale and define substantial contribution and DNSH criteria for the first objective(s) and sectors.
Find the report on the European Commission’s website.
The application of SFDR with respect to periodic reports has commenced on 1st of January 2022.
Swedish UCITS management companies and authorised AIF managers marketing AIFs to non-professional investors already prior to SFDR had periodic sustainability disclosure requirements under national law that, subject to a transition period, have been removed due to SFDR. The SFSA has issued a reminder that UCITS management companies and AIF managers shall continue to disclose sustainability information in any annual reports made prior to 1st of January 2023 also under the prior national requirements.
Please find more on the SFSA's website.
ESMA has released a consultation paper on a draft to update the ESMA guidelines from 2018 (ESMA35-43-869) regarding certain aspects of the MiFID II suitability requirements. These guidelines are being reviewed following the changes to the Commission Delegated Regulation (EU) 2021/1253 amending Delegated Regulation (EU) 2017/565 (the MiFID II Delegated Regulation) to integrate sustainability factors, risk and preferences into operating requirements and conditions for investment firms. The draft guidelines strive to ensure consistency with all other EU legislation on this topic e.g. the Taxonomy Regulation, SFDR and their respective implementation measures.
These guidelines will apply to all entities providing investment advice and portfolio management where a suitability assessment is required under MiFID II. These guidelines principally address situations where services are provided to retail clients. They should also apply, to the extent they are relevant, when services are provided to professional clients. The proposed guidelines include e.g. that information on the sustainability preferences of the client should include all aspects mentioned in the definition of sustainability preferences and should be sufficiently granular to allow for a matching of the client’s sustainability preferences with the sustainability-related features of financial instruments as well as how such information could be gathered on an natural and unbiased approach. In order to help clients understand the concept of “sustainability preferences” and the choices to be made in this context, firms should explain the term and the distinction between the different elements of the definition of sustainability preferences under a) to c) (environmentally sustainable investments under the Taxonomy, sustainable investments under SFDR and consideration of principal adverse impacts) and also between these products and products without such sustainability features in a clear manner, avoiding technical language. Investment service providers should also explain what environmental, social and governance aspects mean.
Whether the fund makes sustainable investments under SFDR and/or the Taxonomy as well as consideration of principal adverse impacts will impact whether the fund will well be in the scope of the three classes of sustainability preferences and hence, the distribution of the fund.
The deadline for submission of feedback ends on 27th of April 2022. ESMA expects to publish a final report and final guidelines in the third quarter of 2022.
Find the consultation on ESMA's website.
Invest Europe, the association of investors in the private equity, venture capital and infrastructure sectors announces that it will develop a standard for how private equity and venture capital firms should report on ESG issues. This is caused by the increased range of ESG-related regulatory reporting such as the SFDR in parallel with commercial and non-commercial privately lead reporting initiatives. Invest Europe goal is that its standard will provide transparency, clarity and harmony to the ESG reporting space in order for European private equity and venture capital managers to deliver actual ESG results.
The reporting standard will be developed and established by summer 2022.
Find more on Invest Europe's website.
The European Commission has adopted a supplemented delegated regulation to the Taxonomy. The delegated regulation stipulates the technical screening criteria for the energy sector. Specifically, the delegated regulation sets out conditions under the Taxonomy subject to which nuclear and gas activities can be added as transitional activities if they fulfill certain safety and environmental requirements. In addition, the delegated regulation introduces specific disclosure requirements related to business activities in the nuclear and gas sectors so that investors can identify which investment opportunities include nuclear and gas activities in the consideration of their investment.
Once translated to the official EU-languages, the delegated regulation shall be transmitted to the European Counsel and European Parliament for their scrutiny. If neither of the European Parliament nor the Council objects, the supplemented delegated regulation shall enter into force and apply as of 1st of January 2023.
Anti-Money Laundering, counter terrorist financing and sanctions
Due to the Russian invasion of Ukraine, the EU has decided to sanction Russia, extended the sanctions, include Belarus in the sanctions and as well clarified that the sanctions shall cover cryptocurrencies. The SFSA has also been given an extended mandate to grant exemptions for certain transactions that are absolutely necessary to ensure financial stability in Sweden or the EU. We recommend to ensure that systems and guidelines for compliance with sanctions are up to date.
Market Abuse regulations
The Administrative Court of Appeal has in a recent verdict concluded that (EU) No 596/2014 Market Abuse Regulation (“MAR”) shall be applicable on such date as when the application of shares or other financial instruments to be listed on a regulated marker or MTF-platform has been submitted such regulated market or MTF-platform. The application does not have to be complete for MAR to become applicable.
This has consequences e.g. for AIF managers whose representatives are appointed as directors of the board of a portfolio company or who otherwise receive information relating to such company that is in the process of listing securities issued by it. The AIF manager shall be aware that when the application has been sent to the market operator, MAR becomes applicable and, as such, rules governing insider information for the entity subject to the application become applicable.
ESMA has published a new statistical report detailing the growth of the AIF sector (which includes all types of AIFs, such as private equity, hedge funds, real estate etc.) within the European Economic Area during 2020. The size of the AIF market increased by 8% from EUR 5.5 trillion to EUR 5.9 trillion during 2020 with the largest sub-sector growth being private equity funds which experienced a 29% growth in aggregate net asset value compared to 2019. The report also concludes that the main risk facing the AIF sector is a mismatch between the liquidity of the fund’s assets and the redemption timeframe offered to investors, especially in real estate funds and funds-of-funds.
Investment services / MiFID
ESMA has published the final report on its Guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements.
Prior to providing non-advised services (i.e. investment services other than portfolio management and investment advice), investment service providers (e.g. investment firms, AIF managers and UCITS management companies providing such services) are, as a main rule, required to ask the client or potential client to provide information regarding his/her knowledge and experience relevant to the specific type of product or service offered or demanded, so as to enable the firm to assess whether the envisaged investment service or product is appropriate for the client. Execution-only is an exception from this main rule.
The purpose of the Guidelines is to enhance clarity and to foster convergence in the application of the appropriateness and execution-only requirements. The Guidelines cover several important aspects of the appropriateness process, spanning from the information to be provided to clients about the purpose of the appropriateness assessment, the arrangements necessary to understand clients and products, to the matching of clients with appropriate products and the effectiveness of warnings. Moreover, other related requirements are clarified, such as the execution-only exemption and record-keeping and controls. This framework is set out in Article 25(3) of MiFID II and in Articles 55 and 56 of the MiFID II Delegated Regulation (as regards the appropriateness requirement), as well as Article 25(4) of MiFID II and Article 57 of the MiFID II Delegated Regulation (as regards the ‘execution-only’ exemption).
The Guidelines will be translated into the official languages of the EU and published on ESMA’s website. The publication of the translations will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the Guidelines. The Guidelines will apply six months after the date of the publication on ESMA’s website in all EU official languages.
The information provided in this newsletter is for general information only and does not constitute any legal advice.
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