Asset Management and Investment Funds Legal and Regulatory Update January 2021
Welcome to the latest edition of our Asset Management and Investment Funds Legal and Regulatory Update.
In this issue we consider some SFDR updates including, the Central Bank’s fast-track filing process and the European Supervisory Authorities’ request for clarifications from the European Commission on the application of certain SFDR provisions. Ahead of the commencement of the ILP (Amendment) Act 2020 on 1 February we take a look at the Irish Investment Limited Partnership structure. We also consider ESMA’s announcement of its CSA on costs and fees in UCITS and its recent statement regarding reverse solicitation rules.
If you would like to discuss any of the topics covered, please feel free to contact a member of our team.
SFDR: Central Bank Confirms Fast-track Filing Process
On 17 December 2020, the Central Bank issued a communication setting out further details of its fast-track filing process for prospectus updates on foot of the Sustainable Finance Disclosures Regulation (“SFDR”).
In its communication the Central Bank noted the following:
Fast-track Filing Process
The fast-track facility relates only to the self-certification of compliance with the SFDR Level 1 disclosure requirements. Any other changes will not be accommodated through the fast-track facility so where other changes are being made concurrently with SFDR compliance, the normal post authorisation review and timelines will apply. Where filings are made for new funds or for post authorisation changes, then any disclosures made in relation to SFDR may be reviewed by the Central Bank as part of the review process. The Central Bank has indicated that it expects the quality of disclosures in relation to SFDR compliance to be of the same standard as if they were subject to review.
The Central Bank will require the completion of a self-certification of compliance with the disclosure requirements of SFDR Level 1. This certification is to be submitted by the Responsible Person. The “Responsible Person” is the UCITS management company or UCITS SMIC, the AIFM or AIF SMIC, as relevant and in the case of an AIF with a non-EU AIFM, the fund itself should be considered the Responsible Person. The Central Bank will not provide a form for the self-certification, which is to be determined by each Responsible Person. Irish Funds, however has prepared a common form of self-certification that has been circulated to industry.
Filing of Submissions
The Central Bank has established a dedicated email address for the receipt of submissions of revised documents and self-certifications. The email address is [email protected] and filings under the fast-track process may be made by funds from 11 January 2021. The Central Bank will issue an acknowledgement of filings made to that address.
Where a prospectus review has been noted before 11 January 2021 and the document includes SFDR updates, no further action is required and no submission to the SFDR inbox is required or should be made.
SFDR requirements for new funds will be reviewed and cleared as part of the new fund authorisation process and therefore a submission to the SFDR inbox will not be required.
Where both SFDR and non-SFDR changes are being made prior to 10 March 2021 but it is likely that the non-SFDR elements will not be clear of comment on or before the 10 March deadline, it will be necessary for the fund to separate the SFDR and non-SFDR revisions. In such instances, the self-certification fast-track filing process may need to be applied, however, the applicant should discuss this with the relevant Central Bank reviewer in order to agree an appropriate approach.
The Central Bank is encouraging firms to make submissions ahead of the 10 March 2021 deadline in order to avoid a bottleneck and has asked that applicants not wait until the last week, as the mailbox being full will not be accepted as an excuse for late submissions.
The Central Bank has also issued a Q&A highlighting these requirements.
ESAs Seek Clarifications on SFDR Application
The European Supervisory Authorities (the EBA, ESMA and EIOPA) (“ESAs”) have written to the European Commission seeking clarifications on the application of some requirements under the Sustainable Finance Disclosures Regulation (“SFDR”). The ESAs believe that clarifications on the following matters would be helpful to ensure an orderly application of SFDR from 10 March 2021:
- the application of SFDR to non-EU AIFMs and registered AIFMs;
- the application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group;
- the meaning of “promotion” in the context of products promoting environmental or social characteristics;
- the application of Article 9 of SFDR; and
- the application of SFDR product rules to MiFID portfolios and other tailored products.
With regard to the application of Article 9, the ESAs have asked:
- must a product to which Article 9(1), (2) or (3) of SFDR applies only invest in sustainable investments as defined in Article 2(17) SFDR? If not, is a minimum share of sustainable investments required (or would there be a maximum limit to the share of “other” investments)?
- where an EU Climate Transition Benchmark (“EU CTB”) or EU Paris-aligned Benchmark (“EU PAB”) exists, is it necessary for a product to track an EU PAB or an EU CTB on a passive basis for Article 9(3) SFDR to apply to it?
- if the questions above are answered in the affirmative and if the minimum standards of an EU PAB or an EU CTB do not require the index components to be sustainable investments, can the product fall within the scope of Article 9(3) SFDR?
ESMA Announces Common Supervisory Action on Costs and Fees in UCITS
On 4 June 2020, ESMA published a supervisory briefing to support national regulators in their assessments of “undue costs” and their supervision of the obligation to prevent such undue costs being charged to investors in AIFs and UCITS. ESMA had also advised last year that as part of its Work Programme for 2021 that a Common Supervisory Action (“CSA”) would be launched in respect of this matter for 2021.
On 6 January 2021, ESMA announced that it was launching a CSA with national regulators on the supervision of costs and fees of UCITS across the EU. The CSA will be conducted during 2021.
The CSA aims to assess the compliance by supervised entities with the relevant cost-related provisions in the UCITS framework, and the obligation of not charging investors with undue costs. For this purpose, national regulators will take into account ESMA’s supervisory briefing on the supervision of costs. (Please see our article here for more information on ESMA’s supervisory briefing).
The CSA will also cover entities employing efficient portfolio management (EPM) techniques to assess whether they adhere to the requirements set out in the UCITS framework and the ESMA Guidelines on ETFs and other UCITS issues.
The work will be done on the basis of a common methodology developed by ESMA.
UCITS management companies and UCITS self-managed investment funds should expect to receive a communication from the Central Bank of Ireland in relation to the CSA in due course.
Investment Limited Partnerships in Ireland
The recently enacted Investment Limited Partnerships (Amendment) Act 2020 (“Act”) has modernised the Irish Investment Limited Partnership structure, bringing it in line with comparable partnership vehicles in other leading jurisdictions and offering a structuring solution for private equity, private credit, real asset and other private fund strategies. In addition, the Central Bank has proposed related guidance concerning share-class features for closed-ended AIFs which extends to all closed-ended fund structures, not just Investment Limited Partnerships (“ILP”). For more information on these developments and the ILP structure, please see our more detailed briefing here.
The majority of the provisions of the Act will take effect from 1 February 2021 with the provisions relating to beneficial ownership requirements for ILPs taking effect from 1 March 2021. ILPs in existence as at 1 March 2021 will have six months within which to file their beneficial ownership information with the Central Bank for inclusion on the Central Bank’s central register of beneficial ownership. ILPs established post 1 March 2021 must file this information within six months of establishment.
ESMA Reminds Firms of MiFID Rules on ‘Reverse Solicitation’
On 13 January 2021, ESMA issued a public statement to remind firms of the MiFID II requirements on the provision of investments services to retail or professional clients by firms not established or situated in the EU. In its press release, ESMA noted that following the end of the Brexit transition period on 31 December 2020, some questionable practices by firms around reverse solicitation, where the product or service is marketed at the client´s own exclusive initiative, have emerged. ESMA cites as an example that some firms seem to be trying to circumvent the MiFID II requirements by including general clauses in their Terms of Business or through the use of online pop-up “I agree” boxes whereby clients state that any transaction is executed on the exclusive initiative of the client.
ESMA is reminding firms that: “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client”. This is true “regardless of any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client”.
ESMA has also highlighted that:
- the provision of investment services in the EU without proper authorisation in accordance with the EU and the national law applicable in Member States exposes service providers to the risk of administrative or criminal proceedings, for the application of relevant sanctions; and
- when using the services of investment service providers which are not properly authorised in accordance with EU and Member States’ law, investors may lose protections granted to them under EU relevant rules.