This autumn, European regulators have introduced a series of tightened measures targeting key aspects of the region’s fund sector. Together, these reforms underscore the shifting regulatory priorities aimed at safeguarding investors while navigating the complex demands of cross-border fund management.
The changes span three critical areas: the revised Eltif 2.0 framework, with an emphasis on liquidity management, cost transparency, and the handling of transfer requests; heightened scrutiny over the outsourcing of portfolio management by Luxembourg-based funds; and an evolving regulatory landscape for tax transparency in the Netherlands.
On 25 October 2024, Commission Delegated Regulation (EU) 2024/2759, adding to the revised Eltif 2.0 regime (Eltif RTS), was published in the Official Journal of the EU and entered into force as of 26 October 2024.
Specific spotlight was given within these RTS (regulatory technical standards) on the requirements for an Eltif’s redemption policy and liquidity management tools, methods to determine the minimum percentage of liquid assets, certain elements of the costs disclosure requirements and the circumstances for the matching of transfer requests of units or shares of the Eltif.
The Luxembourg financial supervisory authority—CSSF—also issued a communiqué by the end of October 2024 on the publication of the Eltif RTS in the Official Journal of the EU, announcing that it has updated the Eltif application questionnaire designed to streamline the application process for Eltif’s accordingly. This updated questionnaire is now a mandatory component in all new applications submitted for Eltif’s. The CSSF underlined also the need in the Eltif prospectus to clearly outline liquidity arrangements in line with the Eltif RTS.
In essence, the new RTS represent a significant milestone in the evolution of the new Eltif regime.
CSSF on supervision of outsourcing activities
On 23 October 2024, the CSSF published a report with its observations made during one of its market reviews on the monitoring processes by investment fund managers (IFMs) who delegate the portfolio management function. Central aim of the review was to assess the compliance of Luxembourg-based IFMs with the relevant provisions of the UCITS and AIFMD framework regarding the oversight of such delegation. For this review, they selected a sample of IFMs managing regulated investment funds and investment funds that are not authorised by the CSSF.
In conclusion, the CSSF stated that IFMs were mostly adhering to the relevant legal and regulatory framework. Even given that positive general feedback, the CSSF saw the need to issue several recommendations with the goal of further strengthening compliance. The CSSF highlighted explicitly, where relevant, its recommendations should also be applied to other delegated functions.
CSSF made it specifically clear to market participants, that implementation and maintaining a delegation framework procedure in accordance with the applicable rules under Circular CSSF 18/698 on substance is essential. These requirements entail, inter alia, establishment and existence of well-documented and formalised processes for the initial and periodic due diligence, as well as the monitoring of delegates, the identification and management of potential and actual conflicts of interest arising from the delegation, the set-up of contingency plans for situations where the IFM needs to withdraw the mandate of a delegate with immediate effect, and the allocation of sufficient human resources to monitor the delegated activity.
The market was given the clear guidance from CSSF via its report, that it expects all IFMs to perform a comprehensive assessment of how they monitor the delegation of their portfolio management function and, where necessary, take corrective measures. This assessment must be performed, at the latest, by the end of Q1 2025.
So time pressure is on for the various IFMs active on the Luxembourg market to ensure compliance with these expectations and requirements. Potentially the CSSF will show little understanding with players lacking behind their expectations given the lengthy time period granted. With a busy year end in full swing, the time until March 2025 will be flying.
Dutch changes in tax transparency
In the Netherlands, investment funds often exist in the form of a fund for the joint account (fonds voor gemene rekening, FGR) and limited partnership (commanditaire vennootschap, CV). These are vehicles without legal personality. Under the current Dutch tax rules, such funds may be either tax transparent (i.e. not liable for tax on profits) or non-tax transparent (independently liable for tax on profits) such dependent on the possibility to transfer the units.
The basic rule is that if prior unanimous consent of all participants is required for transfers of units (FGR and CV) or, in case of transfers only allowed to the FGR itself or relatives in the direct line of a participant, then the relevant FGR or CV will be considered tax transparent. If the units are freely transferable, an FGR or a CV will be considered non-tax transparent. From 1 January 2025 onwards, both the FGR and the CV will by default be tax transparent.
An exception is made for an FGR that will qualify as investment funds and Ucits under the Dutch Act on the financial supervision, with units freely transferable on a regulated market or comparable trading platform (e.g. a multilateral trading facility). Such an FGR will, also after 1 January 2025, remain non-transparent for tax purposes.
Other tax regimes may be available in such a situation. The change from being non-transparent to transparent may cause tax issues since the change means a deemed transfer of all assets at fair market value. It is advisable to engage a tax advisor to be informed of the consequences.
In closing
This is our last contribution to this magazine in 2024 and we will continue in 2025. The Pinsent Masons Luxembourg and Netherlands teams wish all readers a good festive season and a happy 2025!
Jan Saalfrank is a partner in investment funds at Pinsent Masons Luxembourg. The law firm is part of the expert panel of Investment Officer.