Central Bank of Ireland consults on new ELTIF rules

With an amended ELTIF Regulation (ELTIF 2.0) coming into effect on 10 January 2024, the Central Bank of Ireland (the Central Bank) has published consultation paper CP155 (the CP), on the introduction of a new Chapter 6 in its AIF Rulebook.

This would establish the regulatory regime for Irish-domiciled ELTIFs, a welcome addition to the range of Irish funds available.

What's the background?

Since their introduction in December 2015, not only have there been fewer ELTIFs launched than had originally been expected but these have been limited to a small number of Member States in the EU, being very largely concentrated in Luxembourg, France, Italy and Spain.

However, the amendments agreed earlier this year by the Council of the EU and the European Parliament are intended to kick start the ELTIF brand by, among other things

• broadening the range of eligible assets

• removing some of the existing restrictions and

• allowing marketing of ELTIFs to retail investors, subject to investor protection rules.

For a summary of the changes being made, see our article here.

The changes will take effect from 10 January 2024.

In preparation for that, the Central Bank is now putting forward a draft regulatory framework for an Irish ELTIF.

The CP's proposals very largely mirror the provisions in ELTIF 2.0 with only limited gold plating - most noticeably, the requirement that an ELTIF which is an investment company must have at least two Irish resident directors (a provision with which all other Irish Collective Asset-management Vehicles (ICAVs) must comply - and with no additional product-specific rules beyond those in ELTIF 2.0.

What happens next?

The consultation period for the CP, which was published on 1 November 2023, runs to 13 December 2023. The Central Bank's intention is for the new rules to apply from the same date as the amended ELTIF Regulation, i.e., 10 January 2024.

To be ready for this date, ESMA is currently finalising level 2 measures for ELTIF 2.0, following its consultation earlier this year. For a summary of the consultation proposals, see our article here.

We will be following the outcomes of both the Central Bank's and ESMA's work and are represented on the Irish Funds' response to the CP.

What does the CP contain?

The following is a high level summary only of some of the main proposals in the new Chapter 6, retaining the same order as in the CP.

Section I: ELTIF restrictions

• An Irish ELTIF would be subject to existing "investment fund legislation" - this means that a number of legal forms will be available, and an Irish ELTIF could be established as, for example

  • an ICAV

  • an Irish limited partnership (ILP)

  • an common contractual fund (CCF)

  • an unit trust (UT) or

  • an public limited company (PLC).

• The tax regime to which the ELTIF would be subject will depend on its legal structure - in other words, it will be the same as that applicable to a regulated fund which is currently established as an ICAV, an ILP, a CCF, UT or PLC (as relevant).

• An ELTIF would not be able to acquire shares with voting rights which allow significant influence over the management of an issuing body.

• Nor would it be able to raise capital through the issue of debt securities - the ELTIF would, though, be able to issue notes on a private basis to facilitate financing arrangements.

• Limits would apply on an ELTIF's ability to track or gain exposure to an index.

• An ELTIF would have to specify the maximum annual fee charged by its manager and this amount could only be increased on a majority vote at an general meeting and with a reasonable notification period

• An ELTIF's depositary could only be replaced with the Central Bank's approval.

• The ELTIF would have to specify in its constitutional documents the rules regarding the valuation of its assets.

• An ELTIF would be permitted to use side pockets, provided their parameters are prescribed in the ELTIF's constitutional documents.

• An umbrella ELTIF would need the Central Bank's prior approval for each sub-fund and its prospectus would be required to clearly state any charges applicable to the exchange of unts in one sub-fund for units in another.

• Transactions between the ELTIF and its management company, general partner, depositary or AIFM (or their delegates), would have to be conducted at arm's length and be in the best interests of the unitholders.

Section II: Supervisory requirements

• No change to an ELTIF's constitutional documents or name would be allowed without the prior approval of the Central Bank.

• An ELTIF's offer period could not commence prior to authorisation of the ELTIF and could not be for no more than six months. The initial offer period, though, could be extended to up to two years six months without the Central Bank's prior notification so long as no subscriptions have been received at the time of the proposed extension.

• Where an ELTIF is an investment company, at least of its two directors would have to be Irish resident.

• An ELTIF could only replace its AIFM with the prior approval of the Central Bank.

• An ELTIF could only acquire a real estate interest where this has been valued in advance.

• Where an ELTIF is closed-ended, it would have to have a finite closed-ended period, with the duration provided for in its prospectus.

Section III: Prospectus requirements

• The ELTIF would be required to publish a prospectus - this must be dated and its essential elements must be kept up to date.

• The ELTIF could only change its investment objectives or effect a "material" change to its investment policies, as set out in the prospectus with the prior written approval of all unitholders or with a majority of votes cast at a general meeting.

• The CP states that "material" in this context means (though not exclusively) "changes which significantly alter the asset type, credit quality, borrowing or leverage limits or risk profile of the ELTIF".

• The ELTIF would have to disclose in the prospectus

• details of service providers

• the material provisions of the contracts with the management company, general partner or investment company which may be relevant to the unitholders (other than those relating to remuneration)

• any other significant activities engaged in by its AIFM and any entity performing investment management functions on its behalf.

• The prospectus would also have to contain certain prescribed risk warnings where applicable.

Section IV: General operational requirements

• Where the ELTIF is an investment company, it would have to have sufficient financial resources to be able to conduct its business effectively.

• Where the ELTIF is an investment company which does not employ a management company or authorised AIFM, it would require a paid up share capital of EUR 125,000 within three months of authorisation.

Section V: Annual and half-yearly reports

• The ELTIF would have to publish an audited annual report for each financial year, setting out information prescribed in Chapter 6, Section V, Part B and including the information required in the Central Bank's AIFM Regulations and the ELTIF Regulations.

• The annual report would have to be submitted to the Central Bank within six months of the end of the reporting period to which it relates.

• Where the ELTIF is a UT or CCF, it would also need to publish a half-yearly report covering the first six months of the financial year, again containing the information prescribed in the CP.

• Unitholders would have to be provided with copies of the annual and /or half annual reports free of charge on request.

Section VI: Marketing of ELTIF to retail investors

• Where an ELTIF not authorised by the Central Bank is to be marketed to retail investors in Ireland, it would be obliged to include a statement prominently in its marketing materials noting that the scheme is not supervised or authorised in Ireland and explaining where it is established and by whom it is supervised

• Provided the ELTIF complies with the proposed rules applicable to retail investor ELTIFs, the Central Bank would not impose any additional requirements where an Irish-domiciled ELTIF is marketed to retail investors outside Ireland.