Checking in with AIFMD II in Europe; Sustainable fund names in the EU: ESMA guidance; The SEC’s new Names Rule for funds; European Central Bank increases reporting on investment fund statistics

AIFMD II is in fact a set of amendments to AIFMD as well as to the UCITS Directive, and as such will impact managers covered under either framework. In its proposed RTS of July 8th, ESMA specifies the characteristics of various LMTs available to open-ended AIFs and UCITS, including redemptions, suspension of subscriptions, swing pricing, dual pricing, side pockets and more. The consultation seeks feedback on how each tool should be defined (and if that should differ for different investment strategies, or for AIFs versus UCITS).

Meanwhile in its proposed Guidelines, ESMA explains how managers should select and calibrate their LMTs, in light of fund characteristics such as investment strategy, liquidity profile and redemption policy. (This has not yet happened, as of this writing. If it happens this month, that means the Guidelines will begin to apply in November 2024. Progress on ESMA Guidelines can be tracked at the Excel file linked here).

Both the RTS and the Guidelines must be finalized by ESMA and submitted to the European Commission by 16 April 2025.

The table below shows notable dates leading up to AFIMD Il’s full implementation. (Fund managers should take particular note of the blue highlighted entries as they prepare their relevant compliance and operations adjustments).

After absorbing comments and waiting to see how AIFMD II’s passage would unfold, ESMA finalized those guidelines on 14 May 2024. Meanwhile, ESMA states that it plans to consider producing additional guidelines on fund names — unrelated to ESG or sustainability terms — “in due course”. That would presumably happen before the AIFMD II-mandated deadline of 16 April 2026.

ESMA’s guidelines on fund names with ESG or sustainability terms cover AIFs and UCITS, and will begin to apply 3 months after their publication in the official EU languages on ESMA’s website. (This has not yet happened, as of this writing. If it happens this month, that means the Guidelines will begin to apply in November 2024. Progress on ESMA Guidelines can be tracked at the Excel file linked here). Upon publication, national competent authorities will have 2 months to inform ESMA of whether they intend to follow the guidelines.

Upon application of the guidelines after the 3-month period, managers of newly created funds should comply with them immediately. Managers of existing funds should do so starting 6 months after that (i.e., 9 months after publication of the guidelines).

The guidelines specify:

ESMA also notes that a firm’s involuntary, temporary deviation from the guidelines can be treated as a “passive breach” that may be corrected. But more serious departures from the guidelines would warrant further investigation by competent authorities.

With the compliance dates approaching soon, firms are advised to make the necessary adjustments, track their portfolios accordingly and reassess their investment strategies if needed. Notably, the 80% threshold is also reflected in existing rules in the US, albeit with different standards. As explained below, that regime has been enhanced to include ESG terms and various other requirements, and may warrant global firms considering both regimes holistically from operations, data and compliance perspectives.

The compliance dates are 10 December 2025 (for funds and their affiliates with combined net assets of at least $1 billion) and 10 June 2026 (for all others).

For context, the use of deceptive names by registered investment companies and business development companies has already been prohibited by statute in the US (under the Investment Company Act, in Sections 35(d) and 59). And in 2001 the SEC further set forth how such names would be considered deceptive, with its initial Names Rule (Rule 35d-1) stating that a fund’s name suggesting a particular type of investment, industry or geographic area would trigger a requirement that the fund have a policy to invest at least 80% of the value of its assets accordingly.

Now with its amended Names Rule, the SEC additionally requires the following:

• Broader scope. The ‘80% rule’ applies more broadly to any fund names suggesting investments with “particular characteristics” (even if not connoting an investment strategy). That includes terms like “growth” or “value”, or suggesting ESG characteristics.
• Investment focus or tax-exempt distributions. Fund name terms suggesting an investment focus, or tax-exempt distributions, must be consistent with their plain English meanings.
• Quarterly review. A fund must review its portfolio every quarter, to ensure compliance with the 80% threshold (and generally must cure non-compliance within 90 days).
• Derivatives calculation. Swaps, futures, options and similar instruments (but not currency derivatives used to hedge foreign currency risk) may be included for satisfaction of the 80% test, based on their notional value. Short positions also count (based on their notional value if they are derivatives with short exposure, or on the value of the assets sold short if they are physical short positions).
• Form N-PORT reporting. On Form N-PORT, for the third month of every quarter, reporting must include the value of the fund’s 80% basket (see Item B.11.b), whether each investment is included in the 80% basket (Item C.2.e), and definitions of terms used in fund names (item B.11.a).
• Prospectus disclosure. In its prospectus a fund must define the terms used in its name, and set forth the criteria it uses to select its investments reflecting those terms.
• Change to investment policy. A fund adopting the required 80% investment policy may not change it without a shareholder vote, subject to certain exceptions.
• Recordkeeping. A fund must maintain written records documenting compliance with the Names Rule for at least 6 years, including: the investments that are included in the 80% basket, the basis therefor, the value of the 80% basket as a percentage of the value of the fund’s assets, and any departures from Names Rule compliance.

Those various requirements demand well-planned compliance and operational adjustments. In sum, a firm’s implementation of the new Names Rule must allow sufficient time for it to:

• evaluate the impact of the Rule
• determine necessary changes
• seek board and/or shareholder approval needed, for changes to fund names or investment strategies
• develop an ongoing assessment of fund portfolios, with systems and service providers as needed

With the first compliance date for larger firms 16 months away, they can be ready for it by embarking on their adjustments now. Moreover, firms that are also impacted by the European guidance on ESG-related fund names that takes effect much sooner (possibly as early as November 2024 for new funds, and May 2024 for existing funds), as explained further above, will benefit from harnessing their efforts to satisfy both regimes as soon as possible.

For more information on the SEC’s new Names Rule, see its Fact Sheet as well as the full Release.

After a consultation period, the ECB finalized that effort on June 12th, with its publication of a recast Regulation that increases reporting requirements including:

• a general monthly reporting frequency
• granular reporting of securities without publicly available identification codes
• additional asset and liability breakdowns
• information on income, fees and the classification of investment funds

Striving for a more comprehensive statistical view of the investment funds sector, the ECB and the European System of Central Banks use the reported information for monetary policy and for promoting financial stability in the euro area.

The Recast regulation is binding on all euro area countries (i.e. those whose currency is the euro), while other EU Member States may implement its provisions at their discretion.

The new reporting will apply 6 months later than originally proposed, and as such will be required starting at these times:

• for monthly reporting, for the reference period as of December 2025 (with the first reporting in February 2026)
• for annual reporting: for the reference period as of 2025 (with the first reporting in June 2026)

Some other deviations from the original proposal are listed in Table 2 of the ECB’s Feedback statement, which contains additional details on the new regime.

Confluence is a leading global technology solutions provider committed to helping the investment management industry solve complex data challenges across the front, middle, and back offices. From data-driven portfolio analytics to compliance and regulatory solutions, including investment insights and research, Confluence invests in the latest technology to meet the evolving needs of asset managers, asset owners, asset servicers, and asset allocators to provide best-of-breed solutions that deliver maximum scalability, speed, and flexibility, while reducing risk and increasing efficiency. Headquartered in Pittsburgh, PA, with ~700 employees in 15 offices across the United Kingdom, Europe, North America, South Africa, and Australia, Confluence services over 1000 clients in more than 40 countries. For more information, visit confluence.com