Explanatory Memorandum to COM(2013)462 - European Long-term Investment Funds - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2013)462 - European Long-term Investment Funds. |
|---|---|
| source | COM(2013)462  |
| date | 26-06-2013 |
Long-term investment is the provision of long-lived capital in order to finance tangible assets (such as energy, transport and communication infrastructures, industrial and service facilities, housing and climate change and eco-innovation technologies) as well as intangible assets (such as education and research and development) that boost innovation and competitiveness. Many of these investments have wider public benefits, since they generate greater returns for society as a whole by supporting essential services and improving living standards. This proposal intends to help increase the pool of capital available for long term investment in tomorrow’s economy of the European Union with a view to finance transition to the smart, sustainable and inclusive growth. This will be done by creating a new form of fund vehicle, EU Long Term Investment Funds or ELTIFs. ELTIFs, by virtue of the asset classes that they are allowed to invest in, are expected to be able to provide investors with long term, stable returns. Eligible assets would be qualified as forming part of ‘alternative investments’ – asset classes that fall outside the traditional definition of listed shares and bonds. While alternative investments comprise real estate, venture capital, private equity, hedge funds, non-listed companies, distressed securities and commodities, ELTIFs would only focus on alternative investments that fall within a defined category of long-term asset classes whose successful development requires investors’ long-term commitment. Therefore, real estate, unlisted companies or infrastructure projects would be eligible while commodities would not be.
There is a clear need therefore to ensure that barriers to investment with a long term perspective are tackled at the European Union level. This is particularly the case for assets such as infrastructure projects that depend on long term commitments. These assets depend, in part, on what is often called patient capital. This kind of investment may not be able to be redeemed for a number of years but are invested in such a way as to be able to provide stable and predictable returns. Infrastructure projects, investments in human capital, or operating concessions would fit this description. Capital invested in this long term, patient manner benefits the real economy by providing predictable and sustained flows of finance to firms and creates employment.
Investors such as insurance companies and pension funds with long term liabilities have expressed an appetite for investing in longer-term investment assets. At the same time they have pointed to the absence of readily available pooling mechanisms, such as investment funds, to facilitate access to these types of investments. As a result such investment opportunities are restricted to a few very large investors, such as large pension funds or insurance undertakings, able to raise and commit sufficient capital by virtue of their own resources. This, in turn, acts as a barrier to smaller investors such as local pension plans, municipalities, the pension schemes run by the liberal professions or corporate pension plans who might otherwise benefit from diversifying their investments into such assets. The absence of these investor groups, in turn, deprives the real economy from accessing deeper pools of capital-backed financing. Last, but not least, also individual retail investors faced with a future liability (home purchases, education or the financing of major renovations) might benefit from the yield or regular returns offered by long-term investment funds.
The large-scale and long-term capital commitments required for operating efficient investment pools for long-term assets have hitherto been hampered by regulatory fragmentation among Member States. Where funds and incentives do exist on a national level they are not coherent with comparable initiatives in other Member States. This prevents the scale of pooling of capital and investment expertise that creates economies of scale for funds and therefore benefits investors. On the other hand, the majority of Member States have no fund models or equivalent incentives that address long-term asset classes. In the absence of a cross-border fund vehicle, investors in these markets are excluded from investing in long-term asset classes.
The end result is that there is no readily available mechanism to channel funds that are to be committed for long periods of time to real economy projects in need of such financing. This acts as a brake on the development of long term investing. Expertise amongst investment professionals is not developed because of lack of demand. Economies of scale that lead to a reduction of the costs of operating a long-term investment fund fail to materialise.
In addition, large-scale infrastructure or industrial engineering projects may require having access to capital pools that are not always available when capital is raised in a single Member State only. Large-scale projects also may involve businesses based in a number of different Member States. Any funding mechanism has to deal with this problem of fragmentation and facilitate investors and projects in a variety of European Union countries.
There is, therefore, the need to facilitate a funding vehicle that is designed specifically to address these problems. To maximise the efficiency of any funding mechanism it needs to be able to have access to investors across the Union. The importance of tackling these issues was set out already in the Single Market Act II (SMA II).[1] One of its twelve key objectives is to boost long-term investment in the real economy. In order to achieve this goal, the SMA II proposed developing a new set of EU rules facilitating cross-border capital raising of the capital necessary to operate cost-efficient investment funds that target long term investments opportunities.
The wider context of this work has been set out in the European Commission's Green Paper, the Long-Term Financing of the European Economy,[2] outlining supply and demand-side issues across all financing structures. The Green Paper also confirmed the need for measures on investment funds, as outlined in this proposal, whilst concentrating on the context of the wider need to revive funding of the real economy by improving the mixture and overall resilience of different funding sources. In this the new ELTIF can contribute to increasing non-bank finance available to businesses, to complement access to bank financing.
Currently, EU investment fund markets are dominated by funds operating under the UCITS (Undertakings in Collective Investments in Transferable Securities) Directive, first introduced in 1985. UCITS assets under management have now reached €6,697 billion.[3] The UCITS Directive contains a set of product rules which are used by investment funds available to retail investors, but is focused on transferable securities for the purposes of ensuring adequate liquidity is available to support redemptions on demand. As a result, UCITS are not able to contribute to the funding of patient capital commitments to infrastructure and other projects. While the UCITS initiative does not necessarily mean the creation of ELTIF will attract similar levels of investor interest, given the value that highly liquid funds have for many retail investors, its success show that EU-wide initiatives can have a strong impact in developing a market and building investor confidence.
The creation of the European Venture Capital Funds (EuVECA) and the European Social Entrepreneurship Funds (EuSEF) will, along the ELTIFs, help to contribute to the financing of the European economy. But the EuVECA and EuSEF schemes target a very specific niche of the EU economy: start ups financed by venture capital and businesses specialising in achieving social impact.
The proposal on ELTIFs follows a broader approach than EuVECA and EuSEF. It intends to target a broad range of long-term asset classes and it intends to create an investment fund that can also be sold to retail investors. This raises the need for three core features: specific product rules covering eligible assets and their diversification; a high degree of competence for those who are allowed to manage and market ELTIFs and alignment between the ELTIFs investment horizon and the redemption expectations of its investors.
The aim is that the new ELTIF framework is to create a second retail passport that follows the tried-and-tested UCITS approach on product specifications and risk spreading. There is considerable investor interest in having an opportunity to invest in long-term asset classes that either appreciate over their life cycle (small or midsized companies) or that produce regular income throughout the holding period (infrastructure assets). Especially pension plans run by municipalities, boroughs, small and large companies or the liberal professions want such a vehicle. Due to the fact that such a long-term asset funds do not exist in many Member States, investors in those States are shut out from this investment opportunity. A cross-border passport will remedy that situation.
To accommodate these investor needs, the ELTIF will be able to invest in all kind of assets that are not traded on regulated markets. These assets are illiquid and, for that reason alone, require a fund to make a long term commitment when purchasing them. The same is true for those who invest in such a fund. Assets that are not traded on a secondary market and whose owners would require considerable time in finding a purchaser would comprise the following: Investments in infrastructure projects, such as in the field of transport, energy or education; Investments in unlisted companies, in practice mainly SMEs; investments in real estate assets, such as buildings or direct purchase of an infrastructure asset
Therefore, the mere fact that an asset is not traded on a regulated market will qualify it as a long-term asset. These assets are illiquid simply on account of the fact that, without a public trading venue, you will not find readily available buyers for your asset. Also, these assets are often quite idiosyncratic and will only be attractive for buyers who can conduct their own due diligence and are specialist in the relevant field. For example, once an ELTIF invest in a project company, it anticipates that there will be no immediately identifiable buyer of this stake for a considerable period of time.
In light of their intrinsic lack of liquidity, the ELTIF proposal refrains from prescribing pre-determined holding periods. In light of the high level of due diligence that an investment in a long-term asset requires, it does not appear prudent policy to prescribe minimum holding periods. This is because each investment decision will be different and the ELTIF managers are best placed to decide how long they want to remain invested in the asset in order to generate the promised return. This is a big difference for UCITS managers who follow macroeconomic developments or the daily fluctuations on a stock exchange.
It also appears necessary to provide for managerial flexibility with respect to the precise time frame in which a portfolio of long-term assets has to be assembled. This is why the proposal allows for a five year period in which the long-term asset portfolio can be build up. In addition, the proposal allows the manager to invest up to 30% of the ELTIF's capital in liquid securities. This liquidity buffer has been conceived to allow the ELTIF to manage the cash flow that arises while the long-term portfolio is being constituted. It also allows the manager to place surplus cash that is achieved between investments – that is when a long-term asset is sold in order to be replaced by another.
To create investor trust and legal certainty, especially but not only for retail investors targeted by ELTIFs, the proposed scheme requires a set of robust yet flexible product rules. Product rules represent the most appropriate way of helping to meet the long term funding needs identified and to provide ELTIFs with a predictable product profile. Once authorised, ELTIFs will be available to be marketed to professional as well as retail investors in other Member States.
ELTIF provide opportunities for investors to diversify their investment portfolios. The assets the proposed ELTIF may invest in are alternative investments and therefore very different in nature to the more traditional listed shares and securities held by many investors. While the strict diversification rules contained in the UCITS framework might make it costly or even impossible to operate an ELTIF, the latter would still benefit from a reasonable level of asset diversification.
This diversification benefit applies equally to retail as well as it does to institutional or sophisticated investors such as high net worth individuals. The strong product rules proposed and the investor protection they create are designed to make ELTIF suitable for retail investors.
Due to their lack of liquidity and due to the fact that participations in long term asset classes targeted by an ELTIF are not listed on a regulated market, all long-term assets that an ELTIF is allowed to invest in fall within the category of ‘alternative investments’ (see the description of alternative investments above). It is therefore necessary that ELTIFs will be managed by undertakings that are duly authorised under the AIFMD to manage and market alternative investments.
Therefore, the proposed ELTIF framework will build on the managerial authorisation in the AIFM Directive, which lays down the general rules for alternative investment fund managers who manage and market their funds to professional investors. Specific LTIF product rules will be added so that ELTIFs can be easily identified by both professional and retail investors who are interested in the yield and return profiles associated with investments in long-term assets.
The proposed ELTIF framework builds on the cross-border provisions in the AIFMD, adding to the 'European' passport for marketing professional investors a 'European' passport for marketing to retail investors across the EU with regard to ELTIFs. As ELTIFs can be sold to retail consumers, there is an increased consumer protection need, for example the stricter ELTIF rules prohibiting investment in assets that may create a conflict of interest, transparency rules requiring the publication of a key information document and specific marketing conditions.
In light of the above, for an ELTIF to be authorised its manager must also be authorised under the AIFMD. The majority of assets an ELTIF invests in must be by definition be assets that need to be held for a long duration. Over-concentration in a single asset or undertaking creates risks for investors that can prove to be very difficult to manage. To mitigate this risk an ELTIF will have to comply with diversification rules. Moreover, limits are proposed on the use of derivatives in relation to ELTIF assets as well as a cap on borrowing.
The assets an ELTIF invests in will by their very nature be illiquid. That is to say, they will not be available to be bought and sold very easily. There may be no reliable secondary market for long-term assets, a fact which could render their valuation and sale more difficult. The illiquid nature of the assets is not of itself a problem and the ELTIF proposal is designed to create a funding vehicle suited to this kind of assets. The requirements of the AIFMD also address these issues, for example, in relation to valuation and the requirement that managers have appropriate valuation policies and mechanisms in place.
The illiquid nature of the assets could make it difficult for funds to meet a redemption requests made by investors before an asset or project invested in reaches its expected maturity. A need to maintain liquid assets to meet redemption requests would also divert money away from the primary purpose of ELTIFs - to invest in long-term assets. Further, options to redeem early, i.e., before the end of the fund’s investment lifecycle, would raise the need to dispose of assets to meet early redemption requests. There is a danger these assets may have to be sold at fire sale prices well below what the fund manager may believe the asset should be worth in an un-forced sale. Such a sale could also reduce any income steam being paid to other investors who remain invested in the ELTIF. ELTIFs will therefore not offer early redemption to investors. This approach will remove the potential conflicts of interests between exiting and remaining investors.
The ELTIF combined with the AIFMD will provide a strong management and product framework designed to give investors the confidence that their investments are being prudently, competently and honestly managed. The fact that redemptions will not be allowed during the life of the investments selected will have to be clearly indicated as to avoid mis-placed expectations about the liquidity of the fund. Widening ELTIF to retail investors will also ensure that the widest possible capital pool is made available.
In addition, the illiquidity premium associated with an investment in a long-term asset can only be reaped if the manager of an ELTIF is at liberty to engage in projects for a significant period of time without facing constant redemption pressure. As pointed out in the impact assessment, the illiquidity premium inherent in investing in long term assets requires holding periods of between 10 and 20 years. For example, the annualised real estate performance of 12.71% beat the S&P 500 (equity index) at 10.94% and the typical bond index at 7.70% when assessed over a period of 14 years. Likewise, the favourable performance of venture capital funds in the US - annualised returns of 16.5% vs. the S&P 500 at 11.2% - can only be achieved when choosing an investment horizon of 20 years.
The positive returns of an investment in long-term assets should also be assessed against the risks that they carry. As with traditional investments in stocks and bonds, the risk to lose the entire capital is naturally present. But what distinguishes the long-term assets from transferable securities dealt with on a regulated market is their illiquidity risk. Contrary to stocks and bonds which can normally be easily sold on a regulated market, long-term assets do not benefit from liquid secondary markets and it often requires months or years to be able to sell such an asset. This is why the draft proposal requires that the chosen lifecycle of an ELTIF has to be sufficiently long to accommodate the diligent choice and long-term engagement with a chosen project, company or real asset.
In these circumstances, the future fund passport has to be accompanied by a sufficient degree of managerial flexibility in choosing assets and determining the timeframe in which they are held prior to divestiture. This explains why the approach in the draft proposal does not prescribe fixed time periods for holding investment assets or for the duration of the ELTIF itself.
The new ELTIF should therefore be flexible in its investment policies and holding periods. The aim is to attract a critical mass of managers who will offer the vehicle across borders thus attracting a critical mass of assets and investors. Therefore, the lifecycle of the fund should match the particular profile of the assets in which it will invest. This has implications on the redemption opportunities that such a fund can realistically offer. Experience with open-ended long-term funds in national markets shows that a fund cannot offer redemptions while it remains invested in long-term assets targeted by the proposal. Matching the lifecycle of the fund with that of its investment assets is the best possible approach to ensure that the managers have scope to invest in assets that require long-term commitments and thereby finance the economy. Offering redemption possibilities at an earlier stage invariably dilutes the long-term outlook of the fund; this would reduce its attractiveness for most of the pension plan investors who want a long-term and steady income instead of early redemption facilities.
This does not, however, imply that investors cannot redeem their investments prior to the end of the ELTIF's lifecycle. Many of the successful long-term funds that the Commission's impact assessment found at national level have been structured as listed entities. That allows investors to trade their shares or units in the fund on a secondary market. If long-term investing is really supposed to become attractive for smaller-scale investors or the retail community at large, secondary markets will be the principal venue in which you can buy into or leave the long term fund.
ELTIF will be investment products within the meaning of the Markets in Financial Instruments Directive (MiFID) and therefore subject to all the requirements of that directive in relation to marketing, selling and disclosure.
The proposed new ELTIF will be available for marketing to investors across the European Union. It is therefore important that investors have the confidence of knowing that the level of protection they will receive will be the same regardless of the origin of the fund manager.. For this reason, the legal instrument proposed is a Regulation since this is the most appropriate way of achieving consistent, clear and directly applicable rules throughout the Union.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATIONS
- The need for product rules
- The need for a high level of managerial competence
- The need to align investment and redemption horizons
- 2.1. Consultation with interested parties
- 2.2. Impact assessment
- 3.1. Legal basis and choice of the legal form
- 3.2. Subsidiarity and proportionality
- 3.3. Detailed explanations of the proposal
Since mid-2012 the European Commission has engaged in extensive consultations with representatives from a wide range of organisations. The consultations has taken the form of bilateral and multilateral meetings, a written public consultation on asset management issues including long term investment (LTI) and a follow up questionnaire which was circulated among interested parties. The Commission services received 65 responses relating to the LTI section. The follow up questionnaire resulted in 50 responses. Further bilateral discussions were held with fund managers operating in the infrastructure and long term markets, fund management associations and retail as well as institutional investor representatives.
In line with its policy on better regulation the Commission conducted an impact assessment of policy alternatives. These alternatives contained a wide range of policy options, ranging from taking no action, integrating long-term asset classes into the existing UCITS framework, to creating a fund vehicle for professional investors only, or a fund vehicle open to all investors, with or without redemption facilities.
All of these options were analysed against the general principles of increasing the capital flows available to long term financing for the European real economy and increasing the coherence of the single market. However, any new funding mechanism also needs to be framed with in such a way that the objective of creating economies of scale for fund managers and increase choice does not conflict with the need to inform and provide appropriate protection for all investor categories.
The selected option is to create a long-term investment fund vehicle open to both professional and retail investors. In line with the illiquid properties of long-term asset classes, there would be no redemption rights prior to the termination of the fund’s lifecycle. The characteristics of the proposed ELTIF would be to allow the widest range of investors to access ELTIFs. In this way, the potential pool of capital available to make such investments would be maximised. The ELTIFs would be subject to product rules designed to ensure sufficient diversification, address potential conflicts of interest, increase transparency as regards costs and limit the use of derivatives and leverage. These features are in place to provide investor protection for retail investors. By not providing redemption rights during the lifespan of the fund, more of its capital can be invested in assets that are illiquid. This absence of a redemption right also signals strongly to retail and professional investors the long term nature of the commitment.
The comments by the Impact Assessment Board set out in their opinion of 31 May 2013 have been taken into account. The problem description has been strengthened to give greater clarity on the size of the problem being addressed as well as the timing of the proposal. The description of the options has also been improved as has the analysis of the effectiveness of the preferred option. The Impact Assessment now also clarifies in greater detail the reasons why the proposal deviates from some of the views expressed by certain stakeholders during the consultation process. In particular, the reasoning was strengthened around the choice to exclude redemption rights, both from the perspective of investor protection, and from the perspective of the expected take-up of the new option by investors. While some retail investors may be less likely to invest in a fund without rights of redemption on demand, the risks attached to offering such rights could undermine the fund model, while the reduced efficiency of investments to ensure additional liquidity would reduce the impact of any additional retail demand.
Article 114 TFEU serves as the legal basis for a Regulation creating uniform provisions aimed at the functioning of the internal market. Prudential product rules establish the limits of the risks linked to investment funds that are targeting long-term assets. As such, they do not regulate access to asset management activities but govern the way such activities are carried out, in order to ensure investor protection and financial stability. They underpin the correct functioning of the internal market.
In pursuit of the objective of the internal market integrity the proposed legislative measure will create a regulatory framework for ELTIFs, with a view to ensure that such funds are subject to consistent rules across the EU and that they are identifiable as such by investors throughout the EU. The target of the proposed Regulation is to create a robust, yet flexible, set of rules that specifically correspond to the long-term nature of the investments in question. The proposed rules should also ensure a level playing field between different long term investment fund managers. This legislative proposal, therefore, harmonises the operating conditions for all relevant players in the investment fund market, for the benefit of all investors and for the smooth functioning of the single market in financial services.
A Regulation is considered to be the most appropriate legal instrument to introduce uniform requirements that will deal, amongst others, with the scope of eligible assets, the portfolio composition, diversification rules, redemption policy, as well as rules regarding the authorisation of the funds intending to engage in long-term investments. The objective of these product rules is to ensure the ELTIFs work in a more efficient way. The taking up of activities as manager of an ELTIF is regulated by the AIFM Directive. The activities of the managers will continue to be subject to AIFMD, but the long-term investment products are governed by the proposed Regulation, in addition to the rules of the AIFM-D.
National regulatory approaches are inherently limited to the Member State in question. Regulating the product profile of an ELTIF only at national level entails the risk of different investment products all being sold as long-term investment funds with different characteristics. This would create investor confusion and would impede the emergence of a Union-wide level playing field for those managers who offer ELTIFs to professional and/or retail investors.
As the asset management sector is essentially cross-border in nature, the current fragmentation of the ELTIF market has led this sector to operate below the efficient level. The proposed harmonised and sustainable framework covering ELTIF will act as a source of long-term financing for the European economy. The new framework will ensure the financing of various projects and sectors and will provide stable sources of return for long-term investors. Therefore, a pan-European ELTIF market is needed and the proposed legislative measure is consistent with the subsidiarity principle set out in Article 5 TEU and the Second Protocol on the Application of the Principles of Subsidiarity and Proportionality.
As regards proportionality, set out in Article 5 TEU, the Proposal strikes the appropriate balance between the public interest at stake and the cost-efficiency of the measure. The proposed rules seek to create a common product label for which there is a strong public interest and which would lay down a foundation for a common, competitive and cost-efficient market for ELTIF across the Union. The requirements imposed on the different parties concerned have been carefully calibrated. Whenever possible, requirements have been crafted as minimum standards (e.g. issuer diversification limits,) and regulatory requirements have been tailored so as not to unnecessarily disrupt existing business models. In particular, the proposed Regulation has combined parameters suitable for long-term investments and specific investor groups, by taking into full account the safety and trust considerations relating to any ELTIFs designation. The Proposal therefore does not go beyond what is necessary to achieve a common legal framework for ELTIF, while at the same time it addresses the regulatory issues which would affect the reliability of the label.
The proposal for a Regulation on European Long-Term Investment Funds (ELTIF) is structured in seven chapters.
3.3.1. Chapter I –General provisions (Articles 1-6)
Chapter I contains general rules, such as the subject matter and scope of the proposed fund framework, definitions, the procedure for authorisation of ELTIFs (at fund level), and the interplay of the proposed Regulation with existing rules governing the authorisation of managers of alternative investment funds, as set out in Directive 2011/61/EU (AIFMD).
Article 1 specifies the subject matter and delineates the scope of the Regulation. It makes clear that the requirements contained in the Regulation are exhaustive, thus leaving no scope for gold-plating at national level. Article 2 contains essential definitions necessary for the uniform application of the proposed Regulation. Article 3 requires EU AIFs to be authorised in accordance with the proposed Regulation in order to be marketed or managed across the Union as ELTIFs. The designation European Long-term Investment Funds (ELTIFs) shall be reserved to those EU AIFs that comply with the proposed Regulation. This implies that a manager of alternative asset classes that wants to manage or market funds focused on long-term assets without using the proposed designation is not obliged to comply with the proposed Regulation.
Article 4 provides a harmonised procedure for the authorisation of ELTIFs whereas article 5 lays down the conditions for such an authorization. Article 6 describes the interaction between the existing AIFMD rules and the proposed Regulation, essentially specifying that compliance with the Regulation shall be ensured by the manager of the ELTIF.
3.3.2. Chapter II – Obligations concerning the investment policies of ELTIFs (Articles 7-15)
Chapter II contains the rules on permissible investment policies to be pursued by an ELTIF, such as rules relating to eligible investments, portfolio composition and diversification, conflict of interest, concentration and cash borrowing.
Article 7 provides that, where applicable, each investment compartment of an ELTIF shall be regarded as a separate ELTIF for the purposes of Chapter II.
Article 8 describes two categories of financial assets that an ELTIF can invest in: long-term assets and assets listed in Article 50 of Directive 2009/65/EC (UCITS Directive). However, an ELTIF shall not engage in short selling of assets, gain exposure to commodities, enter into securities lending or securities borrowing agreements, enter into repurchase agreements or use financial derivative instruments unless these instruments are used for hedging purposes.
Article 9 elaborates on the eligibility conditions for long-term assets, such as the different categories of instruments used to gain access to qualified portfolio undertakings, the investment in units or shares of other ELTIFs and participations in real assets, such as real estate, ships or aircrafts. Article 10 sets out the conditions for an undertaking to become a qualified portfolio undertaking. The qualified portfolio undertaking should be unlisted, domiciled in the EU and have the purpose of financing infrastructure projects, companies or real estate, ships and aircrafts. It should not take the form of a collective investment undertaking,
Article 11 contains a general rule on the treatment of conflicts of interest by the ELTIF manager. The manager may not have any personal interest in a long-term asset in which the ELTIF is invested.
Article 12 provides detailed rules on the portfolio composition characterising an ELTIF. It also covers the diversification rules that each ELTIF has to respect in the context of eligible investment assets, such as rules on the maximum risk exposure that an ELTIF can have vis-à-vis a single counterparty. Article 13 stipulates the maximum limits that an ELTIF can hold in a single issuer (concentration limits). Article 14 provides for the conditions under which the ELTIF may borrow cash. Article 15 contains provisions on the application of the portfolio composition and the diversification rules, taking into account the different stages in the ELTIF fund life.
3.3.3. Chapter III – Redemption, trading and issue of ELTIF shares or units and distribution of income (Articles 16-20)
Chapter III deals with the redemption policy of ELTIFs, the possibility of trading units or shares of ELTIF on a secondary market, the issuance of new shares or units, the disposal of ELTIF assets and the distribution of income to the investors of an ELTIF.
Article 16 precludes an ELTIF from offering a redemption right to its investors before the end of the life-cycle of the ELTIF. The life-cycle is defined in the ELTIF rules and corresponds to the life-cycle of the individual assets of the ELTIF and its long-term investment objectives.
Article 17 provides for the trading of units or shares of an ELTIF on regulated markets, as well as the free transfer of units or shares of an ELTIF to third parties. Article 18 contains the conditions for the issuance of new shares or units by the ELTIF, such as the prior offering to existing investors when the issuance price is below the NAV of the ELTIF. Article 19 deals with the procedure that each ELTIF shall adopt for the disposal of its assets. Article 20 lays down the applicable rules for the distribution of the income generated by the assets of the ELTIF and requires an ELTIF to set out its distribution policy in its fund rules.
3.3.4. Chapter IV – Transparency requirements (Articles 21-22)
Chapter IV contains transparency rules where ELTIFs are being advertised to investors.
Article 21 requires the prior publication of a key information document and a prospectus before the ELTIF is marketed to retail investors. The prospectus and any other marketing document shall inform the investors about the special nature of the long-term investment into an ELTIF. Article 22 requires the ELTIF manager to disclose in a detailed way to the investors all costs attached to the fund.
3.3.5. Chapter V – Marketing (Articles 23-25)
Chapter V contains the rules applicable to an EU AIFM for marketing units or shares of an ELTIF to professional and retail investors.
Article 23 requires managers of ELTIFs to have facilities in place in each Member State where they intend to market their ELTIFs. Article 24 provides the additional requirements that managers have to comply with in order to market to retail investors. Article 25 builds on the notification procedures contained in the AIFM Directive for authorising the managers of ELTIFs to market the units or shares of their ELTIFs to investors both in their home and in potential host Member States.
3.3.6. Chapter VI – Supervision (Articles 26-29)
Chapter VI sets out the applicable rules on supervision of ELTIFs.
Article 26 clarifies the respective roles of the competent authorities of the ELTIF and of the manager of the ELTIF. Article 27 states that the powers of the competent authorities under UCITS and AIFM Directives should be exercised also with respect to the proposed Regulation. Article 28 refers to the power of ESMA, whereas Article 29 provides for the cooperation between supervisory authorities.
3.3.7. Chapter VII – Final Provisions (Articles 30-31)
Chapter VII contains rules on a review of the functioning of the envisaged rules to be prepared by the Commission as well as provisions on the entry into force of the proposed Regulation.
The budgetary impact of the ELTIF regulation is as indicated in the Legislative Financial Statement attached to the proposal.