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
U.S. appeals court vacates the SEC’s private fund adviser rules
On 5 June 2024, the U.S. Fifth Circuit Court of Appeals published its opinion in National Association of Private Fund Managers et al. v. the Securities and Exchange Commission (the “SEC”), vacating all of the SEC’s new and amended private fund adviser rules under the Investment Advisers Act of 1940 (which we wrote about in our Q3 2023 newsletter (find the link here[ML1] )).
The Court found that the SEC, in adopting the rules, exceeded its statutory authority. The effect of this is that the rules shall not enter into effect and that advisers for private funds shall not have to comply with the rules, unless the SEC successfully takes further action. However, it should be noted that many of the issues that the rules sought to address are likely to stay on SEC’s radar and, as such, remain relevant in their supervision of the U.S. private funds market.
Find the Fifth Circuit Court of Appeals’ decision here.
ILPA launches project to update its quarterly reporting standards in accordance with new SEC rules
The Institutional Limited Partners Association (“ILPA”) has launched a project to update its quarterly reporting standards through a collaborative effort that includes ILPA members, GPs, service providers and other industry bodies.
The project is rooted in the new requirements on private fund advisers which were introduced by the SEC, as mentioned above, but also aims to increase alignment between LPs and GPs as well as transparency by improving existing ILPA templates and creating a framework for capturing performance metrics and the corresponding contributions/distributions.
ILPA launched an open consultation just a few days before the Fifth Circuit Court of Appeals’ ruling and has since paused it. However, ILPA has followed up with a statement saying that their work will continue despite the ruling and that they will provide additional updates regarding changes to the approach and timeline, with the originally communicated deadline being to implement the new standards for Q1 2025.
Find ILPA’s press release on the project and statements relating thereto here.
AIFMD II published in the Official Journal
The process which we have written about many times before has now been settled. On 26 February 2024, the Council of the EU adopted Directive (EU) 2024/927 amending both Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”) and Directive 2009/65/EC on undertakings for collective investment in transferable securities (“AIFMD II”), and it has since been published in the Official Journal of the EU.
Here are some of the key changes that AIFMD II will bring:
- New requirements for managers to provide for the activation of liquidity management tools, in order to ensure that managers can deal with significant outflows in times of financial turbulence.
- A new framework for loan-originating funds with several requirements to alleviate risks to financial stability and to ensure sufficient investor protection.
- Enhanced rules for outsourcing to enable managers to better tap the best resources from market specialists, subject to reinforced supervision and preserving market integrity.
- Improved data sharing and cooperation between authorities.
- New measures to identify undue costs that could be charged to funds and, hence, their investors.
- Preventing possibly misleading names to better protect investors.
The member states have until 16 April 2026 to implement the changes under AIFMD II.
Find AIFMD II here (in both English and Swedish).
ESMA steps up its monitoring of AIFs, open-ended real estate funds in particular
ESMA, the EU’s financial markets regulator and supervisor, has published its annual report on the EU AIF market and an analysis on the risks posed by leveraged AIFs in the EU.
ESMA’s findings include that:
- AIFs account for 36% of the EU fund industry.
- Overall, there are signs of potential liquidity mismatch, as liquidity offered to investors is generally greater than liquidity of assets, especially for real estate funds and fund of funds.
- Real estate funds face multiple risks related to leverage, valuation discrepancies, market footprint and liquidity mismatches.
- Risk profiles of real estate funds vary greatly, with Germany and France upping their supervisory focus, and the Central Bank of Ireland having activated leverage limits for the first time in the EU.
ESMA will assess if there is a need to issue any advice to the member states’ national competent authorities to address the identified financial stability risks.
Find ESMA’s report on the EU AIFs market here and its analysis on the risks posed by leveraged AIFs in the EU here.
Delegated legislation on cross-border notifications under AIFMD published in the Official Journal
On 25 March 2024, Commission Delegated Regulation (EU) 2024/912 (the “Delegated Regulation”) was published in the Official Journal of the EU.
It supplements AIFMD and is aimed at bolstering reporting standards for AIFMs operating within the EU. The Delegated Regulation applies to both registered and authorised AIFMs commencing cross-border activities and specifies regulatory technical standards for reporting on such activities, mandating comprehensive notifications to ensure clarity and completeness in reporting. In short, this will impose additional obligations on AIFMs with the aim of facilitating regulatory compliance across jurisdictions.
The Delegated Regulation will apply as of 25 June 2024.
Find the Delegated Regulation under AIFMD here (in both English and Swedish).
The Delegated Regulation is complemented by an implementing regulation, which can be found here (in both English and Swedish).
The Swedish Security Service publishes memorandum on security-sensitive activities
The Swedish Security Service has published a memorandum clarifying what kind of activities can be regarded as security-sensitive activities under the Swedish Protective Security Act (2018:585) (Sw. säkerhetsskyddslagen). This is useful in determining whether an investment is within the scope of the Swedish Screening of Foreign Direct Investments Act (2023:560) (Sw. lagen om granskning av utländska direktinvesteringar), and the Swedish Financial Supervisory Authority (the “SFSA”) has encouraged all financial undertakings within security-sensitive activities to read the memo.
Under the Swedish Protective Security Act, anyone who conducts security-sensitive activities, a so-called operator, is responsible for investigating whether the activities it carries out are security-sensitive and for documenting the organisation’s need for security protection. The operator is also responsible for planning and implementing proportional security measures. Furthermore, the operator must notify the relevant supervisory authority without delay that it conducts security-sensitive activities.
Find the Swedish Security Service’s memorandum here (in Swedish).
The ESAs publish updated Q&A regarding the PRIIPS Regulation
The three European supervisory authorities (together, the “ESAs”) have updated their Q&A on the key information document that several providers of investment products, including fund managers, have to provide to retail investors under Regulation (EU) 1286/2014 on key information documents for packaged retail and insurance-based investment products (the “PRIIPS Regulation”). The updated Q&A contains several clarifications regarding key terms and how certain metrics should be measured and presented to investors.
Find the ESAs’ updated Q&A regarding the PRIIPS Regulation here.
The SFSA presents its supervision priorities for 2024
The SFSA has presented its supervision priorities for 2024 based on their yearly analysis of where the largest risks are in the financial market. The chosen areas will be given extra priority in the SFSA’s supervision during the year.
The SFSA’s supervision priorities for 2024 consist of:
- Reviewing that the financial companies are doing what they should to protect themselves from being used for criminal purposes.
- Reviewing that consumers are being offered good and correct services on the financial market.
- Reviewing that the financial sector can deliver essential services in an uncertain environment.
- Monitoring how the financial sector copes with a changed economic environment with higher interest rates and lower growth.
Find the SFSA’s supervision priorities here.
Sustainability
The SFSA publishes report on sustainability within the Swedish financial market, urging for the market to step it up
The SFSA wants the financial market to step up its sustainability work. Following up on the SFSA’s roadmap for sustainable finance from 2022, the SFSA has published a sustainability report where it highlights three focus areas companies need to continue to work with:
- Time to act on the current rules. Many sustainability rules have entered into force lately and, although the SFSA notes that many companies have strived to adapt their operations thereafter, there is still room for improvement.
- Continue to integrate sustainability. Companies need to become better at detecting and integrating sustainability risks, and a prerequisite for this is the availability of the right competence in sustainability issues at the board level, among senior management and in other relevant functions within the organisation. As climate and environmental risks are expected to increase going forward, there is also a need for forward-looking tools, for example transition plans and scenario analyses, and for these to be integrated into operations as soon as possible.
- Counteract illegal financial flows. As many of the bigger banks become better at preventative measures, the SFSA sees signs of criminals seeking to exploit other parts of the financial system. This results in a heightened responsibility for companies to prevent their operations from being exploited for money laundering or terrorist financing, which the SFSA also has presented as a supervisory priority for 2024 (see more above).
Find the SFSA’s sustainability report here (in Swedish).
New EU criminal law directive for environmental protection
On 30 April 2024, Directive (EU) 2024/1203 on the protection of the environment through criminal law and replacing Directives 2008/99/EC and 2009/123/EC (the “ECD”) was published in the Official Journal of the EU. The ECD will improve the investigation and prosecution of environmental crime offences by harmonizing minimum rules on criminal offences and penalties. The ECD only applies to offences committed within the EU but member states may extend the jurisdiction to include offences committed outside of their territory.
The key takeaways include:
- Expanded number of criminal offences from 9 to 20.
- New offences include illegal recycling of polluting components, timber trafficking and serious breaches of legislation on chemicals.
- Sanctions include an obligation to compensate for damages, withdrawal of permits or authorisations and environmental restoration.
- Penalties for the most serious offences include individual prison sentences of at least 10 years and company fines of at least 5% of total worldwide turnover or 40 million EUR.
The ECD entered into force on 20 May 2024 and the member states have until 21 May 2026 to implement it.
Find the ECD here.
ESMA publishes guidelines on the use of ESG or sustainability terms in funds’ names
Following up on ESMA’s 2022 supervisory briefing on sustainability risks and disclosures, ESMA has now published guidelines on the use of ESG or sustainability-related terms in funds’ names. In short, the guidelines list the criteria funds should be fulfilling when using certain terms in their names.
The key takeaways include:
- Funds using transition, social, or governance-related terms (e.g., ”improving”, ”progress”, ”evolution” and ”transformation”) should (i) have at least 80% of its investments meeting environmental or social characteristics or sustainable investment objectives, and (ii) exclude companies in activities related to controversial weapons, cultivation and production of tobacco, or which are in violation of the OECD Guidelines for Multinational Enterprises.
- Funds using environmental or impact-related terms (e.g., “ESG” and “SRI”) should (i) have at least 80% of its investments meeting environmental or social characteristics or sustainable investment objectives, and (ii) make investments with the intention to generate positive, measurable social and environmental impact alongside a financial return.
- Funds using sustainability-related terms (e.g., “sustainable”) should have at least 80% of its investments meeting environmental or social characteristics or sustainable investment objectives.
The guidelines will start applying three months after being published in all EU languages. Within this time, the supervisory authority in each member state shall have communicated their stance on the guidelines. If the SFSA decides to comply with the guidelines, which we believe they will, the guidelines will immediately start applying in relation to Swedish funds, with a 6-month grace period for already existing funds.
Find ESMA’s guidelines on funds’ names using ESG or sustainability-related terms here.
CS3D has been adopted
The Directive on Corporate Sustainability Due Diligence (“CS3D”) has been adopted by the Council of the EU as of 24 May 2024. While AIFs and UCITS are excluded from the scope of CS3D, their manager or management company may be considered in-scope entities if they reach the rather sizeable numbers on employees and turnover.
The adopted text is significantly reduced from the original draft. Originally, CS3D would have impacted companies with 500 employees and a turnover of EUR 150 million. Those numbers have been raised to 1,000 employees and a turnover of EUR 450 million. Furthermore, the widely debated articles in the draft regulating directors’ duties and basing variable remuneration on directors’ contributions to sustainability have both been removed.
CS3D establishes a corporate due diligence duty, which in short includes identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners. In addition, CS3D sets out an obligation for in-scope companies to implement a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement.
CS3D will enter into force 20 days after publication in the Official Journal of the EU, after which date the member states will have two years to implement CS3D.
Find the text of CS3D here.
The ESAs to run voluntary dry run exercise to prepare industry for the next stage of DORA implementation
The ESAs have in May launched a voluntary dry run exercise on the reporting of information registers under the coming Regulation (EU) 2022/2554 on digital operational resilience for the financial sector (“DORA”). DORA starts applying on 17 January 2025 and cover several actors in the financial sector, including AIFMs with AuMs that exceed the EUR 100 or 500 million thresholds.
When DORA starts applying, financial entities, including the above-mentioned AIFMs, will have to maintain registers of information regarding their use of information and communication technology third-party providers. In the dry run exercise, this information will be collected from participating financial entities through their competent authorities and serve as preparation ahead of the implementation of the reporting requirements under DORA.
Find the ESA’s press release regarding the dry run here and the text of DORA here.
No decision made on technical changes to the SFDR
The European Commission confirms that no new decision has been made regarding the ESAs proposal to amend the regulatory technical standards laid down in the Commission Delegated Regulation (EU) 2022/1288 supplementing the Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (the “SFDR”). It has not provided a timeline for adoption as the proposal is still being assessed.
The European Commission is currently carrying out a comprehensive assessment of the sustainable finance framework, looking at issues such as usability, legal certainty and how the SFDR can play its part in tackling greenwashing. The SFDR, which started applying in 2021, is a transparency framework applicable to AIFMs, UCITS managers and other financial market participants, setting out how financial market participants must disclose sustainability information.
Find the ESAs’ proposal here.
AML/CTF
Changes in the SFSA’s AML/CTF regulations
As of 26 March 2024, the SFSA has amended its regulations regarding measures against money laundering and terrorist financing (FFFS 2017:11) with the aim of increasing flexibility and simplifying the regulatory framework for small businesses and entrepreneurs associated with a generally low risk of money laundering and terrorist financing, as well as to bring the regulations in line with the EBA’s guidelines.
Here are some of the key changes:
- The requirement to appoint an AML/CTF officer (Sw. centralt funktionsansvarig) has been modified, allowing companies to opt out following a proportionality assessment.
- If a company chooses not to appoint an AML/CTF officer, the company’s procedures and guidelines must state how the responsibility for AML/CTF compliance is attributed within the company.
- Companies may now outsource almost all of the AML/CTF officer’s tasks to an external provider, whereas previously such functions had to be performed internally.
Find the changes in the SFSA’s regulations here (in Swedish).
Market and market research
EFAMA publishes report on 2023 fund market statistics
The European Fund and Management Association (“EFAMA”) has published its statistical release on trends in the European investment fund industry of 2023 as well as Q4 of 2023.
The key takeaways include:
- Net sales of AIFs reached EUR 135 billion.
- Multi-asset AIFs attracted EUR 66 billion in net new money, with German institutional funds registering solid net sales.
- Net assets of AIFs and UCITS increased by 8.3%, ending the year at EUR 20.7 trillion. Growth was mainly driven by increases in both bond and stock markets throughout 2023.
- Money market funds attracted the highest net inflows of 2023. UCITS MMFs attracted EUR 172 billion of net inflows.
Find EFAMA’s report here.
Invest Europe publishes new editions of its reports on ESG KPI and Private Equity Activity
Invest Europe has published the 2024 edition of its ESG KPI report as well as its Private Equity Activity report.
The ESG KPI report, surveying private equity and venture capital firms on their work for a more sustainable Europe, highlights the following:
- ESG processes. 78% of firms had ESG investment and portfolio management processes in place, including 90% of buyout firms, demonstrating evident and established industry-wide focus on ESG.
- Governance focus. Seven in ten portfolio companies had anti-bribery and corruption policies, as well as initiatives to manage cybersecurity risks.
- Higher female representation. Women held 38% of all jobs in private equity and venture capital, an increase of 3 percentage-points since 2021, and an average of 26% of board seats.
- Net zero emissions commitments. 12% of portfolio companies had net zero emissions commitments, with the figure being 20% for buyouts.
The Private Equity Activity report concludes that Europe sets its third-highest fundraising total ever in 2023 as private equity, growth and venture capital investments reach EUR 100 billion for the fourth year on record, placing the industry in line with the pre-pandemic highs. Further, the report shows continued strong demand for private equity from international long-term investors, with pension funds representing the greatest contributors to the asset class, making up 24% of the capital committed.
Find Invest Europe’s ESG KPI report here and the Private Equity Activity report here.
The SFSA publishes report on the integration of sustainability risks among investment firms, UCITS and AIFMs
The SFSA has published a report on the integration of sustainability risks in the corporate governance among investment firms, UCITS and AIFMs. The report shows that most alternative investment fund managers, investment firms and fund management companies have integrated sustainability into their policies and identified sustainability risks in their operations. Most companies also consider that they have expertise on sustainability, both on their boards and in their central functions.
However, the extent varies between companies, as do their knowledge and methods. The SFSA therefore urges companies to continue to focus on this area in order to ensure that they meet all the requirements of the regulatory framework.
Find the SFSA’s report here (in Swedish).