ELTIF RTS: what changes could we expect?

Changes proposed by the Commission

(1) Prior notification regarding material changes to the redemption policy

The draft RTS requires ELTIF managers to inform the national competent authority (NCA) of the ELTIF of material changes to the redemption policy, as soon as possible and not later than within three business days from the date that the material change became known or should have become known.

The Commission is of the view that material changes should be notified to the NCAs before they occur, unless such material changes are beyond the control of the ELTIF manager. This amendment aims to avoid the misinterpretation that ELTIF managers are required to inform the NCAs only on an ex-post basis and preventing NCAs from receiving the updated information before the ELTIF implements changes, including significant ones. 

(2) No 12-month minimum notice period for redemptions

The draft RTS introduces requirements on notice periods for redemption, stipulating that redemptions should only be possible after a notice period of at least 12 months. An ELTIF, however, may allow investors to redeem their shares/units with a notice period of less than 12 months. In such cases, the notice period must be calibrated based on the minimum liquid assets and the maximum percentage. 

The Commission considers that linking the length of the notice periods with fixed percentages of minimum liquid assets and maximum percentages does not sufficiently take into account the specificities of the different ELTIFs.¹ In addition, when this requirement is read together with the determination of the minimum holding period, it could lead to a misleading interpretation that a minimum holding period is mandatory and that its duration may correlate with, or be contingent on, the notice period. This would hinder the flexibility brought about by ELTIF 2. 

The Commission is, therefore, of the view that the draft RTS should be amended to remove the requirement of a minimum 12-month notice period.

(3) Liquidity requirements considering the specificities of each ELTIF

The draft RTS sets out that the notice period must be calibrated based on minimum liquid assets and taking into account the maximum percentage of redeemable assets. In its communication, the Commission highlights some possible issues that may occur due to this requirement: 

• The simultaneous application of these requirements may fail to sufficiently take into account the individual situation of each ELTIF and may lead to ill-fit² ELTIFs pursuing well-established and legitimate investment strategies
• Such high liquidity requirements would create an inevitable cash drag on ELTIFs caused by excessive liquidity in its portfolio and would put the attractiveness of the ELTIFs and the capacity of ELTIFs to finance long-term projects under question
• Setting out such standardized requirements, which may not be suited to certain ELTIFs, could disincentivize the use of ELTIFs

The Commission argues that the liquidity related requirements linked to notice periods should be amended and should take into account the principle of proportionality, the existing market practices for retail long-term funds and the specific characteristics of each ELTIF. According to the Commission, this could be achieved through targeted amendments which determine the liquidity profile of the ELTIF through the proportionate and carefully calibrated application of:

(i) The maximum percentage, the redemption frequency and the notice period of the ELTIF, or 

(ii) The redemption frequency, the minimum percentage of liquid assets and the maximum percentage 

(4) Aligning liquidity management tools requirements with other sector legislations

The draft RTS provides that ELTIF managers must select and implement at least one anti-dilution liquidity management tool (LMT), among anti-dilution levies, swing pricing and redemption fees. In addition to that/those anti-dilution tool(s), the ELTIF manager may also select and implement other LMTs in specific circumstances. 

The Commission is of the view that the draft RTS should not introduce new ELTIF-specific requirements with respect to LMTs (beyond those set out in the ELTIF Regulation). In addition, the Commission highlights that it is not clear why ELTIFs would be treated differently from other AIFs,³  including national long-term funds marketed to retail investors, which are not subject to the same requirements imposed upon ELTIFs. 

(5) Redemption gates no longer restrict to specific circumstances

The draft RTS requires ELTIF managers to implement redemption gates in certain specific circumstances (e.g., where gates are needed to mitigate potential risk to financial stability; in stressed market conditions). The Commission considers that this may seem to conflict with the right for redemptions during the life of the ELTIF and suggests that the draft RTS should be amended in order to ensure that the implementation and activation of redemption gates is not limited to certain specific circumstances or exclusively contingent on the notice period set out in the draft RTS.

(6) Aligning the ELTIF cost disclosure with PRIIP Regulation

ELTIF 2 aligns the cost disclosure with the PRIIPs framework, where all costs must be presented as a reduction in yield figure. The draft RTS, however, requires costs to be presented as a percentage of the capital of the ELTIF. In addition, the draft RTS does not seem to take into consideration that there are several layers of cost disclosures.⁴ This may cause regulatory uncertainty and additional operational burdens. 

The Commission is, therefore, of the view that cost disclosures (both the methodology and the presentation) under ELTIF 2 should not give rise to sector-specific requirements unless duly justified by the characteristics of the ELTIFs. For this reason, the Commission suggests that the draft RTS should be amended in a manner that it ensures a better alignment of the ELTIF Regulation with PRIIPs Regulation, MiFID and the AIFMD.

How EY can help

EY Luxembourg Consulting Services

Product design

EY can assist you during the product design and operational fund structuring phase, which will encompass a review of the key features of the ELTIFs with regard to their operational feasibility and compliance key requirements of the ELTIF regulation and AIFMD.

Definition of your ELTIF Target Operating Model

EY can assist you in defining the Target Operating Model for your ELTIFs, including selection of 

suitable external service providers or software for administrating semi-liquid retail AIFs. 

Competitor analysis and benchmarking

In accordance with ESMA’s requirements for costs and charges applicable to retails AIFs, EY can assist you with performing an analysis and benchmarking related to costs and charges for your ELTIF, in order to establish the appropriateness of the fees charged to the fund. 

EY Luxembourg Tax services

EY can assist you with assessing all Luxembourg direct and indirect tax considerations including the four phases of the investment structure.