Key takeaways
- While ELTIF II eliminated many of the perceived bottlenecks and legacy requirements from its previous iteration, confusion persisted regarding the requirement of appointing a facilities agent for ELTIF.
- Many stakeholders, including law firms, have assumed in bona fide that the repeal of Article 26 on the local facilities in the second iteration of the regulation equated to a complete removal of any requirement to appoint a Facilities Agent for ELTIF.
- Regardless of legal sophisms, market practice has been the ultimate test of the requirement for a facilities agent for ELTIF. Particularly in continental Europe, where most ELTIF have been either launched or predominantly offered from inception of the regulation, the appointment of a facilities agent for ELTIF remains a market expectation.
Why You Won’t Believe That You Need a Facilities Agent for ELTIF
The spirit of the ELTIF II Regulation, applicable in Europe since January 2024 was to make the launch and cross-border distribution of ELTIF as seamless as possible.
Complex and esoteric investment structures have been accessible to retail investors across Europe without many formalities. From minimum investment thresholds and dual suitability assessments to the appointment of a Facilities Agent for ELTIF, European policy makers saw in all these unnecessary entanglements and formalities part of the reason of the failed first European attempts at a long-term investment fund regime. While ELTIF II eliminated many of the perceived bottlenecks and legacy requirements from its previous iteration, confusion persisted regarding the requirement of appointing a facilities agent for ELTIF.
Many stakeholders, including law firms, have assumed in bona fide that the repeal of Article 26 on the local facilities in the second iteration of the regulation equated to a complete removal of any requirement to appoint a Facilities Agent for ELTIF. This assumption as we will see, is somewhat misleading in practice.
ELTIF II and the Illusion of Simplification
Recital 38 of the ELTIF II Regulation directly references the Cross-Border Distribution Directive when stating the removal of the local facilities requirement as prescribed under its previous iteration. The elimination of the requirement was made to align with the Cross-Border Distribution Directive. At a glance, this appears to be a definitive move away from the need to appoint a Facilities Agent for ELTIF. One box less to tick – and cost alike – for AIFMs willing to launch an ELTIF, as it was intended in the spirit of the reform of the long-term investment funds European regulation.
This perception has proven to be misleading and a misinterpretation of the corresponding legal framework governing retail distribution of AIFs, under which ELTIF are still classified.
The Regulatory Trap. Article 43a AIFMD
Let’s look at the legal classifications here. ELTIF, by nature, are AIFs offered to retail investors. ELTIF is lex specialis vis-a-vis AIFMD, which is lex generalis. The relation between lex specialis and generalis is that in case of conflicting provisions, the rules of the lex specialis prevail over the ones of the lex generalis. The Cross-Border Distribution Directive amended the AIFMD to include Article 43a, which requires that facilities are made available in each Member State where an AIF is marketed and offered to retail investors. The way article 43a was drafted respected the prevalence of the corresponding rules of lex specialis under article 26 ELTIF, at that time still in force.
However, with the elimination of the provision of lex specialis under ELTIF, effective in the second iteration of the regulation, the provisions of lex generalis contained under article 43a AIFMD remained the only ones applicable to AIFs offered to retail investors. ELTIF included.
This is where most were caught off-guard when assisting their ELTIF clients so far. A genuine misunderstanding given that the very spirit of ELTIF II regulation was indeed to simplify the regime with the elimination tout court of the requirement for a facilities agent for ELTIF.
Market Practice Speaks Louder Than Legal Theory
Regardless of legal sophisms, market practice has been the ultimate test of the requirement for a facilities agent for ELTIF. Particularly in continental Europe, where most ELTIF have been either launched or predominantly offered from inception of the regulation, the appointment of a facilities agent for ELTIF remains a market expectation.
This is especially the case in certain jurisdiction of continental Europe, like Italy and France, where a combination of tax regimes and local distribution practices require local agents or intermediaries to be deeply involved in local distribution of retail funds.
Often, in these jurisdictions multiple actors work together in making available facilities to local investors, with ELTIF issuers involved as well depending on their local capabilities. Similar to what was formerly required under ELTIF I, facilities for retail AIFs under the Cross-border distribution directive can be offered also by the AIFM managing the ELTIF, also n combination with other agents.
Don’t Sweat the Small Stuff
The fact that state of the art facilities for ELTIF and retail AIFs can be offered digitally and online nowadays is one of the reasons why AIFMs planning to launch and distribute ELTIF in Europe should not waste any time in legal debates.
Having a facilities agent for ELTIF already lined up and readily available at the time when applying for marketing authorisations or when dealing with local clients for distribution in any of the European jurisdiction of distribution will help with shortening the time to market of these funds.
About Veneziano and Partners
Veneziano and Partners is an international consulting boutique specialised in the European regulation of cross-border fund distribution. In catering to a selected group of investment managers, hedge fund managers and financial institution worldwide, the firm offers a custom-made service that is unique and allows its clients to gain competitive advantage in an ever increasingly regulated environment for global registration of UCITS and AIFMD funds.