The ELTIF marketing rules represent, in a very eloquent manner, one example of the hybrid nature of the recently introduced long-term European investment funds regulation. In fact, ELTIF are AIFs themselves managed by authorised EU AIFMs. The AIFM directive already recognises that it is permissible to market certain types of AIFs vis-a-vis retail investors. However, such permissibility and its assessment has been entrusted by the AIFM directive respectively to the rules and authorities of each individual member state, with imposition of stricter national requirements and more cumbersome processes for the marketing passport of AIFs towards retail investors where this was made available. ELTIF marketing rules, especially in relation to the retail investor marketing passport, are different from the general AIFM directive marketing rules.
Cutting across both the AIFM and UCITS directive, the ELTIF rules create more homogeneity in Europe for the offer of long-term investments opportunities to both institutional and retail investors and introduce a more streamlined concept of marketing passport for offer towards retail investors within the AIFMD framework.
Body of an AIF
The need to regulate at European level the long-term type of investment stems, of course, from the ensuing upsides that homogenisation of rules in Europe can generate at all levels. In fact, piecemeal regulatory approach at local level bears an inherent risk of divergent requirements in the various European domiciles on portfolio composition, diversification and eligible assets. Lack of homogenisation could hinder the marketing cross-border in Europe of long-term investment opportunities. It is also of paramount importance that investors feel comfortable in comparing various investment propositions and homogenisation has also the ultimate effect to determine more consistent investor protection across Europe. If nothing else, in terms of comparability, ELTIFs marketed to retail investors will be considered as a packaged investment and, accordingly, will have to produce a PRIIPs KID.
The main framework for marketability across Europe of authorised ELTIFs is lent by the AIFM directive. The ELTIF regulation introduces additional specific ELTIF marketing rules to supplement the existing framework and cater for ELTIFs marketing in Europe, towards both institutional and retail investors more specifically.
The AIFM directive contains rules for the marketing passport to be extended also to non-EU AIFMs, even though the conditions to implement such extension are yet to materialise and possibly never will. The AIFM directive, most importantly, codified some of the principles in terms of marketing under private placement. The recitals of ELTIF regulation clarify that, even though the external regulatory framework is the one of the AIFM directive, the scope of the ELTIF marketing rules is not as wide as to encompass also non-EU AIFM and AIFs, nor to provide for any mechanism to include these under either national private placement regime or extension of passport to non-EU AIFMs and AIFs. The long-term investment funds regulation and ELTIF marketing rules are strictly and exclusively Europe-centric and so is the eligibility under the relevant rules, restricted to EU AIFs insofar as these are managed by EU AIFMs.
The dynamic of the passport towards retail – the Soul of a UCITS
Since implementation of AIFM directive, certain European domiciles have allowed for the marketing of selected types of AIFs to retail investors on the basis of the AIFM directive allowing them to do so on a general basis. In all of those instances, the passport for retail investors has been a more complicated and less homogeneous process. In fact, for the EU domiciles where a marketing passport towards retail investors was possible, most typically a two-step or layered process was required, which involved obtaining first a passport for marketing towards professional investors and, on the back of that, a second passport for retail investors through a procedure carried out directly with the local regulatory authority of the target host state.
The ELTIF regulation is an exception with the introduction of powers for the authorities of the home member states of the ELTIF to deal with the passport process for retail investors in their entirety, with no need to carry out a second step process directly with the national competent authorities of the target home state. Of course, this is a consequence of the introduction of European homogeneous rules on the long-term investment funds and the permissibility of the marketing passport towards retail investors across the board in Europe.
Article 26 of ELTIF regulation and the Omnibus directive
Amongst the novelties of the ELTIF regime is the fact that retail investors can access long-term investments opportunities and, subject to being properly advised, amongst other things on the limited redemption abilities offered by these funds, gain access and exposure to investment opportunities that were limited to professional investors in the recent past. Of course, the intents underpinning ELTIFs go hand-in-hand with the ones of the Capital Markets Union especially insofar as new opportunities of investment need to be created for retail investors and conversely new avenues and markets for issuers to raise capital.
In line with the tradition created with UCITS directive, the ELTIF regulation imposes that local facilities will have to be put in place in each of the European domiciles where the ELTIFs purports to offer its units or shares to retail investors. The duties and tasks entrusted to these local facilities are by and large the ones already provided for by article 92 of UCITS directive. The ones that have also been recently object of the proposal of the European Commission (Omnibus Directive) to reduce barriers to cross-border fund distribution in Europe.
The second level ELTIF regulation implemented with the Regulatory Technical Standards (RTS) provides specification on the duties and requirements of the facilities to be made available to retail investors. The RTS specify that those facilities perform their task a) in person; b) by telephone; c) electronically and, most importantly that the tasks are performed in the local language of the market where the ELTIFs are offered to retail investors. When the tasks of the local facilities agent are outsourced to an entity outside of the group of the ELTIF, the appointment will have to be evidenced in writing.
Of course, whilst the Omnibus directive has proposed to make clear that, at least in the UCITS world the appointment of local facilities is no longer a requirement, we see a clear reference to local language skills, both in the ELTIF RTS and in the proposal of Omnibus directive, which makes us think that discharging these obligations will require, also going forward, a local presence, be it only electronic.
ELTIFs are an interesting proposition, which has received a lot of interest recently especially in Southern Europe. Still early in the process though to ascertain whether the upside in terms of investor confidence, represented by the European regulation on long-term investments will win the reduced appeal and attractiveness of these funds, especially for retail investors, due to the limited redemption capabilities of the ELTIFs.