As reported in our April e-zine, the European Parliament has adopted a number of changes to the European Commission's proposal for a Regulation on European Long-Term Investment Funds (ELTIF Regulation). The European Fund and Asset Management Association (EFAMA), the European Private Equity and Venture Capital Association (EVCA) and the Federation of European Securities Exchanges (FESE), have welcomed these changes.
The favourable reaction of each association focusses on the following areas:
- The introduction of a flexible regime as to the lifetime of an ELTIF
- The inclusion as eligible investments of listed small and medium-sized enterprises up to 1 billion EUR market capitalisation
- The creation of separate professional and retail ELTIFs giving professional ELTIF managers the ability to disapply the provisions that are appropriate for retail investors. In addition, the identification of a third category of semi-professional investors reflects the market needs of investors that currently have a greater interest in investing in long-term projects
- Maintenance of the “retail passport” for ELTIFs
It is the view of each association, however, that the right of investors in “retail ELTIFs” to redeem their shares prior to the end of the ELTIF’s lifetime, should be left to the discretion of the ELTIF manager who should be provided with a list of available redemption policy tools provided full disclosure is made to the ELTIF investors. The recognition by the European Parliament of the need to include redemption rights in the legislative text is a positive step which, it is hoped, will lead to a balanced redemption rights policy by the end of the legislative process.
Presidency Compromise Proposals
Following the adoption by the EU parliament of amendments to the ELTIF Regulation, the Council of the EU published a compromise proposal, the details of which were covered in our April e-zine. Over the course of this month, the Council of the EU has published two revisions of its compromise proposal (the latest dated 27 May 2014) on the ELTIF Regulation. The following changes have been made since the initial compromise proposal:
- ELTIFs should be permitted to invest in SMEs listed on regulated markets or on multilateral trading facilities
- An ELTIF should not loan money it has borrowed from a third party.
- A description of the application process for authorisation of internally-managed ELTIFs appears in the revised compromise proposal.
- The revised compromise proposal does not contain a limit on the loans that may be granted to a qualifying portfolio undertaking.
- The revised compromise proposal allows for investment in any type of AIF, and not just European venture capital funds, other ELTIFs and European social entrepreneurship funds.
- The information to be included in an ELTIF’s periodical reports has been extended to a disclosure of the market value of its listed shares or units alongside the net asset value per share or unit and an explanation of any significant difference between the two.
- Under the revised compromise proposal the information to be included in an ELTIF’s KID would be significantly reduced.
- The revised compromise proposal contains stringent requirements concerning the marketing of an ELTIF to retail investors. The manager of an ELTIF would need to establish and employ a specific internal process for the assessment of that ELTIF before it is marketed or distributed to retail investors. In addition, when directly offering an ELTIF to retail investors the ELTIF manager would be required to obtain information regarding the retail investor’s knowledge and experience in the investment field relevant to the ELTIF, the retail investor’s financial situation and his/her investment objectives.
- A retail investor would be required to invest a minimum of €20,000 and state in writing that he/she is aware of the risk associated with the envisaged commitment or investment.
- The depository of an ELTIF marketed to retail investors would not be able to discharge itself of liability in the case of a loss of financial instruments held in custody by a third party. Accordingly, liability of the depository in those circumstances could not be excluded or limited by agreement.
The new European Parliament is expected to resume examination of the ELTIF Regulation in the third quarter of 2014. In any event, we will keep you informed of developments.