Earlier this month, the SEC published an updated version of its Marketing Compliance Frequently Asked Questions (FAQ). The FAQ clarifies the provisions of the Marketing Rule (the Rule), covering fund performance marketing requirements related to the use of subscription lines. The SEC occasionally updates this FAQ to include additional responses from the Division of Investment Management staff. However, it is important to note that the FAQs are not statements from the SEC itself.

The newly added question is:

Must gross and net performance shown in an advertisement always be calculated using the same methodology and over the same time period?

In short, yes.

This question arises in response to the Marketing Rule provision that mandates accompanying gross performance presentations with net performance. These presentations should be calculated over the same time period and using the same type of return and methodology. The Rule also requires that net performance is presented in a format designed to facilitate comparison with gross performance.

The updated FAQ focuses on how private funds may wish to present the gross internal rate of return (Gross IRR) and the net internal rate of return (Net IRR). The concern is that the Net IRR may be inflated compared to the Gross IRR due to differences in the time period and methodology used. For example, if the Gross IRR is based on a period during which the fund relies on lines of credit and does not reflect fund borrowing or subscription facilities, presenting the Net IRR including the impact of subscription facilities is inconsistent and therefore in violation of the Rule. As a result, the Net IRR can be inflated, an effect the SEC seems eager to discourage.

As provided in the FAQ, the types of fund-level subscription facilities contemplated include subscription line financing, capital call facilities, capital commitment facilities, bridge lines, or other indebtedness incurred by a private fund. The inclusion of subscription facilities in the Net IRR but not the Gross IRR could also be construed as a use of different methodology as well as different time periods.

This FAQ helps clarify this aspect of the Rule, which does not prescribe the methodology to be used when an advertisement presents net and gross performance. The FAQ advises considering disclosures that discuss the impact of subscription facilities on the Net IRR that is shown.

Based on this new addition to the FAQ, it is advisable for private funds to seriously consider the manner in which they choose to present net and gross performance. Several display methods can ensure the proper disclosures, including:

• Displaying Gross and Net IRR both commencing from a time prior to the time that capital commitments were called from investors if that is when the display of Gross IRR begins; or
• Showing four sets of data – Gross and Net IRR both with and without the impact of subscription facilities, so four sets of performance.

Understanding and working within the parameters of the Rule is essential for SEC compliance, and the published FAQ provides valuable insight into the best path forward for private funds. The industry has taken up marketing and advertising material as a concern on a global level, so understanding whether your materials comply is crucial for fund managers.

If you have questions about this newly published guidance in the FAQ, please reach out to our team! For any queries or support for your regulatory and compliance needs, get in touch with our team of specialists.

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In 2021, Congress passed the Corporate Transparency Act (CTA) which obliges reporting companies to submit a Beneficial Ownership Information Report (BOI Report) to the Financial Crimes Enforcement Network (FinCEN). The goal of the new requirement is to limit an individual’s ability to mask or benefit from their gains through shell companies or other ownership structures.  

Key Dates for BOI:

FinCEN began accepting BOI Reports on January 1, 2024, but the first deadline is not until January 1, 2025 for companies that were created or registered before January 1, 2024. For newer companies, specifically those that are created or registered after January 1, 2024, they will have 90 days after receiving notice of their creation or registration to file their reports. Companies created or registered on or after January 1, 2025 will have 30 days to report after receiving notice of their registration or creation.  

Information Included in the BOI Report:

The BOI Report includes a variety of information about company applicants and beneficial owners, including names, addresses, and contact information. While the BOI Report itself is not very onerous, determining whether your company qualifies for the reporting requirements can be a challenge, especially for companies domiciled outside the United States but authorized to conduct business in the United States. Unless an exemption applies, reporting companies include a corporation, an LLC, or a company that was otherwise created in the United States by filing a document with a secretary of state or any similar office, or a foreign company that is registered to do business in any U.S. state.  

Update Requirements:

In addition to the initial BOI Report, companies are required to update or correct their BOI Reports as necessary. The threshold for needing to update the BOI report is low- if there is any change to the required information the company must file an updated BOI Report within 30 days of the date when the change occurred. The same applies for discovering inaccuracies in the BOI  Report.  

Exemptions to Reporting Requirement:

As mentioned, there are several exemptions from the reporting requirement (23, to be exact). Three that may be pertinent are the exemptions for broker dealers, investment companies or advisers, and for pooled investment vehicles.

• To qualify for the broker dealer exemption, an entity must be a broker or dealer as defined in the Securities Exchange Act of 1934.  
• To qualify for the investment company or investment adviser exemption, the entity must be defined as an investment company or an investment adviser and must be registered with the SEC as such.
• To qualify for the pooled investment vehicle, an entity must meet two criteria:  

• Either be a registered investment company under the Investment Company Act of 1940 or be a company that would be an investment company but for qualifying for a Section 3(c)(1) or 3(c)(7) exemption from the registration requirements of the Investment Company Act of 1940; and
• Is operated or advised by another exempt entity such as a bank, credit union, Broker or Dealer in securities, investment company or investment adviser, or venture capital adviser.

Special Rule for Foreign Pooled Investment Vehicles:

Another key point to note is that there is a special rule for foreign pooled investment vehicles. An investment pool formed under the laws of another country but that would otherwise be a reporting company if not for the pooled investment vehicle exemption has limited reporting requirements. These entities need only report on one individual who exercises substantial control over the company.

CTA Compliance and Assistance:

Above all complying with CTA requirements can be intricate, especially for new entities. Our US team is here to help answer your questions, address filing concerns, and ensure a smooth compliance process. Reach out to us for expert guidance and ease your worries about reporting obligations.

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Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

Understanding the EET

The European ESG Template (“EET”) is not a compulsory reporting tool, but it plays a crucial role in the European financial industry. Developed by FinDatEx, a technical working group, the EET serves as a standardized format for sharing ESG data. While it aligns with the Sustainable Finance Disclosure Regulation (“SFDR”) and related acts, its main purpose is to facilitate the communication of ESG characteristics by funds, especially to distributors. This exchange of ESG data is helpful in assessing compliance with the SFDR and other European Financial Market Regulations, ensuring consistency in ESG data across various platforms and aiding in the sustainability assessment of funds. The EET encompasses different reporting levels based on SFDR articles (Article 6, 8, and 9).

Impact and Scope of EET

The EET particularly impacts financial market entities under Article 2 of Regulation (EU) 2019/2088. Although not a regulatory requirement, the EET is necessary for all products marketed in the European Union, aiding distributors in identifying sustainable investment options. This encompasses funds classified under Articles 6, 8, and 9 as per SFDR Level 1 and the Regulatory Technical Standards (“RTS”). It’s important to note that the EET disclosure requirements vary depending on the ESG traits of each financial product.

Who Uses the EET?

The primary users of the EET include Product Manufacturers, Fund Distributors, and Financial Advisers. These entities need the EET for SFDR reporting and to align fund selections with sustainable preferences under the Insurance Distribution Directive (“IDD”) and the Markets in Financial Instruments Directive (“MiFID”).

Recent Updates to the EET

The EET template has evolved from version 1.1.1 to 1.1.2, reflecting ongoing changes in the industry and aiming to enhance its clarity and usability. As of 20 December 2023, FinDatEx released the 1.1.2 version. This update, while not extensive, introduces key changes essential for consistency and reporting.

These include typographical corrections, a change in the Transitional Scope Fields from “Mandatory/Conditional” to “Optional,” and the introduction of new data fields like “30000_PAI_Snapshot_Frequency” and “70010_Financial_Instrument_Total_Fund_NAV_Or_Notional.”

More significant amendments have been postponed to a future date.

Implementation Timeline

The latest EET template, version 1.1.2, is available since 31 December 2023 and will be mandatory for Entity Level Reporting by March 2024.

Assistance and Contact Information

Our team is well-equipped to assist clients with the production, validation, and dissemination of the EET, offering expertise and support to navigate these reporting requirements with clarity and precision.

Reach out to us at ESGServicesDivision@zeidlerlegalservices.com for more information.

Download a copy of our EET guide here.

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Phoenix, AZ, 16 January 2024 – Zeidler Group proudly announces the appointment of Scott G. Parkin as the Head of US, marking a significant stride in fortifying the asset management servicing firm’s presence within the United States.

Based in the firm’s Phoenix office, Mr. Parkin assumes a pivotal role in directing the regulatory and compliance landscape for Zeidler Group’s expansion strategy across North America. His responsibilities encompass steering the provision of regulatory compliance guidance for US asset management firms both domestically and internationally as well as fostering the growth of Zeidler Group’s US-specific services for the fund’s industry.

With a distinguished legal career spanning over 12 years, Mr. Parkin, a seasoned US-qualified attorney, brings a wealth of expertise gained from pivotal roles in leading US financial firms including AllianceBernstein and HSBC Global Asset Management (US).

Reporting to Serena Goldberg, Executive Vice President of Products and Services at Zeidler Group, Mr. Parkin’s appointment underscores the company’s commitment to leveraging top-tier talent to enhance its client delivery and suite of fund solutions.

Serena Goldberg, Executive Vice President of Product and Services said:

“Scott’s in-depth and nuanced understanding of investment funds law in global jurisdictions, coupled with his extensive background in navigating the intricate legal landscape, is a significant asset to our team. We anticipate his strategic insights will further bolster our provision of comprehensive fund solutions. I am delighted to welcome him to the team.”

Expressing his enthusiasm, Scott Parkin, Head of US at Zeidler Group, remarked

“Joining Zeidler Group at this exciting juncture, where the demand for specialized investment funds legal counsel is burgeoning, is an exciting prospect. I’m keen to leverage the firm’s innovative digital RegTech and compliance solutions and research-driven counsel, further solidifying and expanding Zeidler Group’s position as the asset management industry’s premier destination. Having led a large and global legal team for AllianceBernstein, I am thrilled to use my experience to show US firms how valuable and successful Zeidler Group’s services can be.

Arne Zeidler, CEO & Founder of Zeidler Group, commented on the appointment, stating:

“Scott is an esteemed investment funds lawyer with a wealth of practical wisdom gained in the US and the EU. His profound grasp of European and US investment funds law as well as Zeidler Group’s unique value proposition amplifies our capabilities, ensuring superior regulatory compliance services for our valued clients. We extend a warm welcome to him.”

About Zeidler Group

Zeidler Group is a technology-driven law firm and compliance provider revolutionizing legal, regulatory, and compliance services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships through its provision of innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry, as well as boutique operators. The law firm services more than 250 clients with aggregate assets under management above USD 1.5 trillion.

For more information, visit:  zeidler.group.

London, UK, 11 January 2024 – Zeidler Group, a pioneering force in LegalTech, RegTech, and legal services for the asset management industry, proudly announces a historic moment in its trajectory. The company heralds the elevation of two exceptional colleagues to the esteemed position of Executive Vice President, marking a monumental stride towards fostering innovation and achieving unparalleled client delivery and excellence.

"Today marks a monumental milestone for Zeidler Group," remarked Arne Zeidler, CEO & Founder of Zeidler Group. "The appointment of Serena Goldberg and Prashant Patil as Executive Vice Presidents embodies our commitment to fostering innovation and cultivating top-tier leadership within our organization. Their vision, commitment and expertise will propel us to new heights of success."

Serena Goldberg, in her newly appointed role as Executive Vice President of Products and Services, spearheads the firm’s AI integration across the group. Her primary mission is to implement a cohesive, AI-driven strategy that enhances our product and service offerings. Serena will lead in the integration of artificial intelligence into our legal, ESG, reporting, and regulatory offerings, driving the creation of innovative AI strategies that enhance our suite of products and services while meticulously aligning with client needs.

Prashant Patil steps up as Executive Vice President of Technology, bearing the critical responsibility for the successful technical implementation of Zeidler Group’s new AI and tech-infused products and services. He is tasked with ensuring the firm's technical infrastructure is reliable, safe, and effectively supports the company’s strategic vision and service delivery. His role also encompasses developing robust cybersecurity policies, overseeing IT procurement, and ensuring compliance with relevant data and tech use regulations. Prashant’s visionary approach has previously led to the successful and seamless integration of all ten fund solution modules as part of Zeidler Group’s proprietary platform, Zeidler Swift.  

Serena Goldberg, Executive Vice President of Product and Services, expressed her enthusiasm:  

"Taking on the role of Executive Vice President of Product and Services at Zeidler Group fills me with tremendous pride. Our focus on AI integration signifies a transformative shift in our suite of fund solutions, aiming not only for innovation but also for a profound enhancement of our product and service offerings. I am eager to lead our teams towards a future where AI-driven strategies redefine client excellence."

Prashant Patil, Executive Vice President of Technology, echoed this enthusiasm:  

"As the Executive Vice President of Technology, I am thrilled to spearhead the technical evolution at Zeidler Group.  Our unwavering commitment to robust infrastructure and cutting-edge digital solutions will provide greater value to our clients. The integration of AI technology into our solutions will not only support our global vision but also drive greater efficiency and security in an ever-evolving proprietary platform Zeidler Swift.”

In addition to the promotion of Serena and Prashant, Maximilian Harper now holds the dual roles of Chief Operating Officer and Chief Delivery Officer. Max's extensive experience in investment funds law and client delivery, coupled with his operational expertise, strengthens the firm’s management team.

Maximilian Harper, newly appointed Chief Operating Officer and Chief Delivery Officer stated:

"As I step into the dual roles of Chief Operating Officer and Chief Delivery Officer, my foremost goal is to amplify our client experience. By streamlining operations and enhancing delivery mechanisms, we aim to fortify our commitment to clients' needs, ensuring swift and precise support, and ultimately, elevating their journey with Zeidler Group."

Zeidler Group's strategic appointments and restructured leadership underscore its unwavering dedication to innovation, client-centric excellence, and pioneering digital advancements within the asset management servicing industry. With a focus on transformative leadership, cutting-edge AI technology, and an unyielding commitment to client satisfaction, Zeidler Group is poised to embark on a new era of unparalleled growth and client service excellence.

About Zeidler Group

Zeidler Group is a technology-driven law firm and compliance provider revolutionizing legal, regulatory, and compliance services for the asset management industry. The firm establishes collaborative, strategic, and meaningful partnerships by delivering innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group's clientele includes some of the largest and most respected names in the industry, alongside boutique operators, serving over 250 clients with aggregate assets under management exceeding USD 1.5 trillion.

For more information, visit:  Zeidler Group.

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Join Kate Horgan, Business Development Manager at Zeidler Group, as she hosts the latest episode of the Legal Zeidgeist podcast. Get ready for an insightful exploration of the intricate US regulatory landscape. Kate is accompanied by Zeidler Group colleagues, Madeline Gegg and Alex Mercer, both Associates based in Zeidler’s Phoenix office. Together, they navigate the maze of Federal, State, and Self-Regulatory Organizations.

In this podcast episode, gain clarity on the multifaceted regulatory system. Madeline and Alex simplify the complexities by discussing crucial entities such as the SEC, CFTC, state-specific variations, and key players like FINRA. Dive into invaluable insights into the intricate US regulatory framework and discover essential strategies for achieving comprehensive compliance within the financial industry.

Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

Navigate the dynamic ESG regulatory landscape, with our latest ESG whitepaper.

Our ESG experts delve into critical ESG themes that are redefining the narrative:

• Explore the importance of Principal Adverse Impacts (PAIs) and their influence on your ESG strategy.

• ESRS Demystified: Unveil the intricate connection between PAIs and the European Sustainability Reporting Standards (ESRS), unlocking their mutual influence.

• Best Practices & Real-world Insights: Immerse in practical case studies, absorb best practices, and arm yourself with actionable insights to elevate your ESG reporting.

Position yourself at the forefront of ESG excellence with our guide to mastering the nuances of ESG reporting.

Download Now

New York, 8 November 2023 – Zeidler Group, a prominent provider of cutting-edge, digitally innovative fund solutions for the asset management industry, is delighted to announce the introduction of its enhanced transaction cost calculation services. This latest offering is designed to streamline operations, enhance compliance, and improve transparency, particularly concerning costs and charges, addressing critical considerations within the asset management industry.

Zeidler Group’s automated transaction cost calculation solution optimises transaction cost calculation processes, offering asset managers a fully managed and innovative solution that streamlines the calculation process from data ingestion to the delivery of final results. This advancement offers numerous benefits to asset managers, enhancing the efficiency of production processes and the subsequent distribution of data into the market.  

Gemma Capelo, Head of Reporting Services Division, at Zeidler Group, stated:

“Our latest enhancement presents an exciting opportunity for us to ensure our clients succeed with responsive tech-driven solutions.  With our clients’ requirements and the wider asset management industry’s key considerations in mind, we are delighted to provide a standalone, automated end-to-end, fully managed solution for calculating clients’ transaction costs in line with applicable regulatory requirements. In addition, as the need for an all-in-one fund solution service provider continues, we intentionally strive to innovate and enhance our reporting solutions with the future in mind.”

Key features of the enhanced transaction cost calculation solution include:

• Automated Calculation Engine: Our cutting-edge automated calculation engine ensures real-time validation of data inputs, error detection, and a user-friendly interface for reliable results.
• Comprehensive Compliance: Our reporting team guarantees accurate transaction cost calculations in line with PRIIPs/MiFID II ex-post and MiFID II ex-ante requirements.
• Customizable Calculation Models: Tailor your calculations with options like the “Arrival Price” Methodology (EU and UK) and the “New PRIIPs” Methodology.
• Scalability and Integration: Our solution scales to your needs, offering seamless integration with data sources for real-time calculations.
• Enhanced Automation: Customize automated processes to manage transaction results with client-specific thresholds and exception handling.
• Streamlined Data Management: Utilize Secure File Transfer Protocol (SFTP) for data delivery with no specific file format requirements, reducing operational hassles.
• Quality Assurance: Rigorous validation at all stages ensures accuracy and reliability of outputs.
• User-Friendly Interface: Our intuitive interface simplifies navigation, reducing the learning curve for implementation.
• Seamless Dissemination: Easily distribute computed results for inclusion in PRIIPs KIDs and/or MiFID II (EMT) production, enhancing efficiency.
• Transparency and Reporting: Access historical cost data for comprehensive analysis and reporting, promoting cost transparency.
• Cost Savings: Automate transaction cost calculations to reduce internal time and effort, ultimately lowering operational costs.
• Effortless Integration:  Efficiently integrates with our comprehensive suite of fund solutions, including KIDs, EMT, and EPT.

Kunal Grover, Head of Business Development at Zeidler Group, commented:

“At Zeidler Group, we are committed to empowering our clients to scale their fund operations for the future. Whether you are a small or large asset management firm, our calculations engine is scalable to meet your requirements. Our latest enhancements increase efficiency and better serve our clients.”

Arne Zeidler, CEO and Founder at Zeidler Group, added:

“Our enhanced transaction cost calculation solution is a game-changer for asset managers. The latest enhancement and automation of our transaction cost calculation services further solidifies Zeidler Group’s position as a digitally innovative and progressive fund solutions provider. This innovation is a testament to the hard work of our software engineering and of course, our Reporting Services Division.”

About Zeidler Group 

Zeidler Group is a technology-driven law firm revolutionising legal, regulatory, compliance, and reporting services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships by providing innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry and boutique operators. The firm services more than 250 clients with aggregate assets under management above USD 1.5 trillion. 

For more information, visit:  zeidler.group.

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In this episode of the Legal Zeidgeist podcast, the focus is on Swiss Representative Services for foreign collective investment schemes. Kate Horgan, Business Development Manager is joined by Josef El Semari and Michael Meier Directors at  Zeidler Group as they delve deep into the intricacies of the Swiss regulatory landscape.

Josef and Michael unveil the intricacies of Swiss Representative services, peeling back the layers to reveal how these professionals navigate the ever-evolving regulatory terrain. Sharing their expertise as they intricately map out the strategies employed by Swiss Reps, ensuring seamless compliance and fostering a conducive environment for foreign collective investment schemes.

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In this article within our DORA Series, we delve into how financial institutions should categorize ICT-related incidents and assess their impact based on the criteria outlined in the legislation. Companies will need to take into account factors such as the number of affected clients, downtime resulting from the incident, the geographical scope of the incident, data loss, the importance of the affected services, and the economic consequences of the incident. Detailed guidelines regarding these requirements can be found in the draft Regulatory Technical Standards on criteria for classifying ICT-related incidents (the “Draft RTS“), which were published as part of a broader Consultation Paper.

Understanding DORA’s ICT-related incident classification, major incident materiality thresholds, and significant cyber threats:

Are You Affected?

In accordance with the proportionality principle established by DORA, the classification criteria and materiality thresholds are designed to be proportionate to the size, overall risk profile, and the nature, scale, and complexity of services provided by all financial institutions. Consequently, these criteria and thresholds are uniform across financial entities, regardless of their size and risk profile, to ensure that smaller institutions are not burdened with excessive reporting requirements.

However, in certain instances where an incident affects a substantial number of clients and transactions without surpassing the relative thresholds, these incidents should still be reported using absolute thresholds. This approach is primarily intended for larger financial institutions.

What Are Your Responsibilities?

Financial entities must categorize ICT-related incidents and evaluate their impact based on the following criteria:

• The number and relevance of affected clients or financial counterparts, along with the number or amount of transactions influenced by the ICT-related incident.
• The extent of reputational damage caused by the ICT-related incident.
• The duration of the incident and the resulting service downtime.
• The geographic extent of the areas affected, especially if it spans more than two Member States.
• Data losses incurred, including impacts on data availability, authenticity, integrity, or confidentiality.
• The significance of the affected services, including financial entity transactions and operations.
• The economic ramifications of the ICT-related incident in both absolute and relative terms, including direct and indirect costs and losses.

Conclusion

DORA is more than a set of regulations; it stands as a cornerstone for ensuring the future resilience of the financial sector. Embracing these standards and maintaining constant vigilance is not just a means for financial institutions to shield themselves but also a way to actively participate in the collective pursuit of a secure and robust digital financial ecosystem. As DORA continues to mold the financial landscape, it is imperative to stay informed and proactive. We strongly recommend initiating internal project work without delay to ensure timely compliance and fortify the foundation of financial resilience.

How Zeidler Group can help

If you have any questions or require support, the Zeidler team is here to help.  Get in touch with our team of legal and regulatory professionals to remain up to date on the latest legal, regulatory, ESG, and compliance changes affecting the asset management industry. 

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Introduction:

One of the most exciting recent developments in technology has been the proliferation and adoption of AI technology, specifically commercially available large language models (LLMs) like ChatGPT, LLAMA 2, and Claude. These LLMs have had a massive impact across industries as wide-ranging as healthcare to fashion, disrupting existing companies and fostering widespread innovation across all levels of technical competence. While these tools have certainly proven to be impressive, they are not infallible, and using them does not come without potential risks.

The Importance of Responsible AI Use:

Having no safeguards or rules in place can mean that critical internal data could be inadvertently disclosed to a third party, or that you are at risk of erroneous output impacting a process. On the other hand, completely banning the technology can leave you at a competitive disadvantage with lower productivity due to not taking advantage of technological growth. As such, we would recommend having a responsible AI use policy to ensure proper use and maximize the total benefit your organization can receive from the technology.

What should a good policy include?

Download a checklist overview here.

Tailoring to your organization:

A good responsible use policy should first and foremost be tailored to your organization and industry. A great starting point is to look at other implemented policies, such as those regarding the use of software or third-party vendors, and consider the specific requirements that would also be applicable to LLM-based tools. Depending on the method of access, such as a website or through an API, you might have multiple existing policies that would govern the implementation of LLM-based tools. While pre-existing policies might not cover the exact use case of LLM-based tools in your organization, they can provide a great starting point for further refinement.

Understand and define the scope:

Clearly understand both the scope of who will use LLM-powered tools, as well as which specific tools they will use. Will everyone at your organization be able to use LLMs as part of their daily workload, or will it be restricted to certain teams or job functions? Who should authorize the use of specific LLM-powered tools, and will there be oversight in the process? Will you allow employees to access the tool through a web browser, or would you require access through an internal tool powered by an API? Some specialized tools, like GitHub Copilot, may be available company-wide, but the practical implementation of the tool may only be for engineering. It’s important to clearly understand the scope of the tools you would like to implement to tailor an effective policy.

Data protection:

You’ll also want to make sure that there are limits around what information can be provided to the tools. You likely do not want employees to provide either sensitive personal information or critical business knowledge into a tool that will then use that information for training purposes. Depending on the tool you are using, there can be options that keep your data private and separate from a training set, such as using an enterprise edition or direct API access. Depending on the vendor, data privacy and control can vary greatly, so reviewing the individual vendor’s policy and any potential contracts is critical. Remember, if you are not paying for a product, your data is the product.

Output controls:

You’ll also want to consider what controls will be in place surrounding the use of the outputs from the LLM-based tools. In some cases, establishing a human-in-the-loop policy can be incredibly beneficial. This means that before the output from an LLM-based tool is allowed to be integrated into information provided to external or internal stakeholders, an individual reviews the output for accuracy and applicability with the asked question. In other cases, clear disclaimer language might be added to the output, so the end user knows the results were provided by the tool. It is also likely that depending on the specific implementation of LLM-based tools in your organization, multiple output controls will be used. As a rule of thumb, the more critical a process is, the more important controls around integrating the use of LLM tools become.

Ongoing reviews:

Finally, be sure to revisit the policy as time and technology progress. We’ve seen an impressive growth in the LLM field, with multiple competitors and products offering services for varying purposes and niches. Every day there are new developments that both provide increasing opportunities, as well as increasing potential exposure to new issues. While it is important to set reasonable standards around use, treating the policy as a living document will allow you to maximize opportunities and reduce risk from emerging LLM tools.

Conclusion and Next Steps:

The use of LLM tools doesn’t come without its complexities. There can be many factors to consider in implementing an effective policy that enables the safe use of these emerging technologies. It is important to tailor an effective policy that considers your organization’s specific situation and usage of the tools. With the right approach and proper guardrails put in place, LLM tools can serve as a substantial value-add to your organization.

Implementing effective AI technology policies is crucial in harnessing the full potential of these emerging technologies while managing associated risks. Craft a tailored policy that aligns with your organization's unique needs and technology usage. With the right strategy and safeguards in place, AI tools can significantly benefit your organization. Reach out to Zeidler Group today for expert guidance in drafting a custom policy that suits your requirements.

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Zeidler Group is delighted to announce the outstanding achievement of our US associate Madeline Gegg in passing the Arizona Bar Exam.We wish the warmest congratulations to Madeline on this remarkable milestone in her career.

The DORA Information Register

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The financial sector’s rapid digitalization requires strong regulatory measures to safeguard against cybersecurity threats and potential technological disruptions. Part of this effort is the Digital Operational Resilience Act (DORA) which among others addresses the financial sector’s growing reliance on information and communication technology (“ICT”) third-party providers.

The information register forms part of the ICT third-party risk management framework and shall allow the financial entities to identify and assess the risks in respect to contractual arrangements on the use of ICT services.

Separately, by the new reporting obligation of financial entities to the national competent authorities, effective supervision and a broader understanding of the ICT dependencies of financial entities shall be ensured.

Understanding DORA’s Information Register Requirements

Within the ICT risk management framework, financial entities are obliged to maintain a comprehensive register that captures all contractual arrangements with third-party ICT service providers and on the use of ICT services. The financial entities must distinguish between ICT services that support critical/important functions.

Firms shall report to the national competent authority on the number of new arrangements on the use of ICT services, the categories of ICT service providers, the type of contractual arrangements and the ICT services and functions which are being provided at least on a yearly basis and are obliged to provide the entire register upon request.

This high-level requirement is specified by the Consultation Paper On Draft Implementing Technical Standards (“ITS Draft”) that has been published by the European Supervisory Authorities (“ESAs”). This ITS Draft present the templates composing the information register in relation to all contractual arrangements on the use of ICT services provided by ICT third-party service providers. The ESAs expect to submit these draft technical standards to the European Commission by 17 January 2024.

Financial entities are expected to use these standardized templates and to fill in the information as laid out in the Draft ITS as part of the ICT risk framework. 

Are you in scope?

The requirement targets a broad range of financial entities, among others investment firms, managers of alternative investment funds, management companies credit institutions, and payment institutions.

Please note that in the case of groups, all financial entities that are part of the group shall maintain and update, in addition to their register at the entity level, the information register at the sub-consolidated and consolidated level.

Also, group-internal service providers are in scope and the data about this intra-group ICT arrangement must be included in the information register.

With regard to the application outside of the European Union, DORA has an extraterritoriality effect for non-EU companies that provide ICT services in the supply chain. This might become relevant, for example, if ICT services are performed by an intra-group entity, which is based outside of the EU, but provides the service to an EU-based financial entity.

Besides, it is expected that a clarification will be provided if non-EU AIFMs that manage EU AIFs or market AIFs in the EU will fall under the scope of DORA.

What are your obligations?

You will be required to fill out the templates with data using the formats set out in Annex I of the ITS Draft for the information at the entity level, and Annex II of the ITS Draft for  information at the sub-consolidated and consolidated level. 

The register of information at the entity level is composed of 10 templates. The ESAs visualized the templates by the following illustration in the ITS Draft:

The ITS Draft provides additional and extensive details about the information and granular instructions on how to fill out the templates.

Some of the templates are linked to each other by using four relational keys, namely: 

• The contract reference number; 
• The ICT third-party service provider identifier; 
• The function identifier;
• The ICT service identifier.

They are symbolized by the colored dots in the illustration above.

If you are part of a group, you must fill out all of the following templates:

In summary, you are obliged to include information about your own financial entity, the contractual arrangements with an ICT third-party service provider, and in principle also about the entities in the supply chain, identify the functions and ICT services, the assessment of the ICT services and a set of internal definitions. On a group level, you must fill out additional templates, include information about group-internal or -external relations, specify which group entity signs the contractual arrangement, and include clarification on the entities that are covered by the (sub-)consolidation.

Furthermore, you are obliged to report to the competent authority on the number of new arrangements on the use of ICT services, the categories of ICT third-party service providers, the type of contractual arrangements, and the ICT services and functions that are being provided at least on a yearly basis. Upon request, you must make available the entire information register to the regulator.

What should you do now?

We recommend that you read through the detailed instructions of the ITS Draft in order to familiarise yourself with the new regulatory requirements.

Most important will be the review exercise of the existent database and the identification of missing but required data under DORA. The accurate and consistent data is the basis for a compliant information register and any reporting obligation.

Your data management capabilities, operational processes regarding the data collection from various parties, and technical setup of the information register including the reporting functionality to the national competent authorities are crucial to meet the new regulatory requirements.

In addition, you must ensure that all the data is properly stored and archived for 5 years after the contract termination with the ICT service provider.

Furthermore, you should ensure that the information register has an audit trail functionality that allows to retrieve changes that significantly affects the information contained in the register of information for at least the previous 5 years.

Conclusion

The DORA requirement for an information register shall strengthen the digital resilience of the financial sector. For the implementation of the new measures, enormous efforts are expected to be undertaken by the financial entities. Despite the draft character of the ITS and the ongoing consultation, significant and materially new requirements are likely to arise.

Given the complexity, the amount of data, and the impact on the operational processes, we recommend starting with the internal project work as soon as possible.

How Zeidler Group can help

If you have any questions or require support, the Zeidler team is here to help.  Get in touch with our team of legal and regulatory professionals to remain up to date on the latest legal, regulatory, ESG, and compliance changes affecting the asset management industry. 

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Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

This past spring, we discussed the SEC’s proposed rules regarding ESG-Related Regulations, including amendments to the SEC’s Fund Name Rule. To recap, the proposal broadened the applicability of the 80% investment policy mandate. This mandate stipulates that a fund must invest a minimum of 80% of its assets in accordance with terms mentioned in the fund's name. The proposal extends this requirement to include any terms in a fund's name that pertain to ESG (Environmental, Social, and Governance) factors.

On 20 September 2023, the SEC announced in a Press Release that they have adopted the amendments to the Fund Name Rule (section 35d-1 of the Investment Company Act of 1940). The existing Fund Name Rule aims to prevent fund names from misleading investors about the fund’s investment policies and any potential risks the policies may expose investors to. If a fund name suggests a focus in a particular type of investment, it is required to adopt a policy aligning at least 80% of the fund’s assets in those investments. The final rule release reveals that the SEC contemplated a disclosure-based framework instead of the 80% investment policy, however, ultimately concluded that the 80% investment policy method was best for addressing concerns of misleading investors. The SEC attributes this decision, in part, to the fact that a fund’s name is the first information investors receive regarding the fund and has been found to have an impact on investors’ decisions to invest in a fund.

How to comply?

The amendments do not state exactly which additional wording or phrases will bring a fund’s name under the scope of the amendments, however, the primary types of names that the amendment is anticipated to cover, include fund names such as “growth” or “value” or terms that have a thematic or ESG focus according to the SEC factsheet released with the final rule. Terms in fund names will need to be defined in fund prospectuses along with an explanation of criteria used for selecting investments associated with those terms. Terms in fund names must also be consistent with plain English meanings.

The amendments require that funds follow the 80% investment policy during normal circumstances. Where a fund identifies that their portfolio is inconsistent with the 80% investment policy, the fund is obligated to return to compliance as soon as is reasonably practicable, which shall be no later than 90 days after identifying that the portfolio is not in compliance. Funds will be required to assess their portfolio assets’ inclusion in the fund’s 80% basket at least quarterly.

The amendments also include new recordkeeping requirements. Funds that are newly required to adopt an 80% investment policy will need to maintain a written record documenting its compliance with the rule, including the fund’s record of which assets are invested in the fund’s 80% basket. This recordkeeping requirement will be filed on the fund’s Form N-PORT filing. According to the final rule, a fund will also be required to keep records of any notice the fund sends to its shareholders pursuant to the rule. Funds that are not required to adopt an 80% investment policy do not have any obligations under these additional recordkeeping requirements.

Next steps

Certain funds, such as closed-end funds and business development companies (BDCs), will potentially need shareholder approval before changing their 80% investment policy pursuant to the rule amendments.

The Fund Name Rule amendments will become effective sixty (60) days after publication in the US Federal Register.

Funds will have 24 or 30 months to comply with the amendment from its effective date, depending on the size of the fund:

• Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments;
• Fund groups with net assets of less than $1 billion will have 30 months to comply.

Please note that one point remains open for discussion in relation to the ESG “integration funds” as the SEC is not adopting the proposed approach to integration fund names. In this regard, the SEC stated that it is still reviewing public comments and that it remains under consideration.

If you have any questions or require support, reach out to our global team and stay up to date on the latest regulatory compliance changes affecting the asset management industry.

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Overview of the SEC’s Regulatory Changes for Private Fund Advisers

In order to improve oversight for the Private Fund market in the US, the SEC has recently adopted new rules aimed to enhance the regulation of Private Fund Advisers.

The SEC purports that the enhanced rules will help promote greater competition and thereby efficiency in the private fund market. Unless specified otherwise, the rules discussed in this post apply to Registered Private Fund Advisers in the US. Since the enactment of the Dodd-Frank Act in 2010, the SEC’s oversight in the private fund industry has steadily increased. The new rules demonstrate the SEC’s continuing intention to increase oversight and disclosure across the financial services industry.

Key Components of the SEC’s New Rules

The SEC’s new rules for Private Fund Advisers can be summarized into six distinct parts:  

• Quarterly Statement Rule
• Private Fund Audit Rule
• Adviser-Led Secondaries Rule
• Restricted Activities Rule
• Preferential Treatment Rule
• Compliance Rule Amendments  

Quarterly Statement Rule: Transparency in Fund Reporting

The Quarterly Statement Rule will require private fund advisers to provide quarterly disclosure statements to investors including key information regarding fund fees, expenses, and performance.

Private Fund Audit Rule: Annual Financial Audits for Transparency

The Private Fund Audit Rule will also require private fund advisers that are registered with the SEC to provide investors with annual financial statement audits of each private fund that the adviser advises.

Adviser-Led Secondaries Rule: Ensuring Fairness and Disclosure

The Adviser-Led Secondaries Rule requires that all registered private fund advisers to obtain a fairness opinion or a valuation opinion from an independent third party when offering existing investors the option between selling their interests or converting their current interests into shares of another investment vehicle that is managed by the private fund adviser. Additionally, this rule requires the private fund adviser to disclose any relationship the adviser has had, if any, within the last two years with the independent third party.

To reiterate, the theme of the new rules is disclosure, disclosure, disclosure.  

Restricted Activities Rule: Prohibiting Certain Practices

The Restricted Activities Rule provides that certain activities will be prohibited unless the private fund adviser discloses the activities to their current investors. These activities include charging certain fees or expenses of the adviser to the investors, reducing the amount of adviser claw back, charging or allocating fees or expenses related to an investment on a non-pro rata basis, or borrowing or receiving an extension of credit from a private fund client. The conflict of interest that may interfere with investors’ interests is a key concern for private funds the SEC aims to address.

Preferential Treatment Rule: Addressing Investor Fairness

Another key component of the new rules is a prohibition against private fund advisers providing certain types of preferential treatment that have a material negative impact on other investors, as well as prohibiting any preferential treatments without disclosing the treatment to other current and prospective investors. In part, the Preferential Treatment Rule requires certain preferential information about portfolio holdings or exposures to be offered to all investors, otherwise it is prohibited.

Compliance Rule Amendments: Strengthening Compliance Policies

In addition, there are Compliance Rule Amendments being implemented across all registered advisers under the Advisers Act. The reforms require all registered advisers to document in writing the required annual review of their compliance policies and procedures. This is intended to help the SEC with reviewing compliance with SEC rules and identify potential industry weaknesses.

Enforcement Timeline: Implementation of New Rules

As planned, compliance with most of the new rules will be enforced on a rolling basis, depending on the type and size of the fund, from 23 August 2023, when the finalized rule was published on the federal registrar. The Compliance Rule Amendments takes effect in 60 days after the publication on the federal registrar.

What’s Next: Anticipated Litigation and Impact on Compliance

In short, likely a lot of litigation. Multiple private fund industry associations collectively filed suit against the SEC on 01 September 2023 in the Fifth Circuit on behalf of the interests of private fund advisers and associated parties. The complaint alleges that the new rules “exceed the Commission’s statutory authority,” and are arbitrary, capricious, an abuse of discretion, and contrary to law. Furthermore, the complaint alleges that compliance with the rules would interfere with existing contractual terms between investors and their private fund advisers.

While not the first of its kind, the lawsuit comes within the first few weeks after the SEC published its new rules to the federal registrar. As far as moving forward with the new rules in mind, their applicability and compliance requirements may be delayed while the matter is litigated, though, at such early stages of the process, it may be too soon to tell. The enforcement of the new private fund adviser rules will certainly be a space to watch moving forward.

Stay Informed: Future Developments in Private Fund Adviser Regulations

If you have any questions or require support, reach out to our global team and stay up to date on the latest regulatory compliance changes affecting the asset management industry.

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Winterthur, 10 August 2023- Zeidler Group, the technology-driven law firm, and regulatory compliance provider revolutionizing the legal and compliance services for the asset management industry, today unveiled its latest fund solution, Swiss Representative Service.

As a FINMA-licensed and regulated Swiss Representative, Zeidler Group is now authorized to represent foreign funds for offering to qualified and non-qualified investors in Switzerland.  

Zeidler Group is renowned for its use of tech-driven automated workflows and commitment to efficiency and scalability. The law firm’s new Swiss Representative service is resolute in delivering unmatched value and expert legal delivery to ensure robust compliance and ongoing fund governance with Swiss laws and regulations as well as EU, UK and 70+ jurisdictions for global coverage.

Josef El Semari, Director, at Zeidler Group said:

“As the demand for our services grows, we are thrilled to expand our regulatory division offerings with our newest service.  Asset managers seek streamlined processes, and we empower our clients by offering a full suite of fund services.  Obtaining the FINMA license enables us to provide our clients and the wider asset management more flexibility to consolidate all their Swiss requirements under Zeidler Group to achieve great efficiencies.”

Zeidler Group’s Swiss Representative Service stands out in a saturated market of service providers due to its dynamic suite of fund services. The firm facilitates seamless entry into the Swiss market, connecting foreign funds, Swiss investors, and the Swiss financial regulator FINMA.

Based in Winterthur, the highly specialized Swiss Representative team not only ensures legal compliance and administrative tasks but also meticulous fund registration and fund setup in line with the Swiss Collective Investment Schemes Act (CISA), positioning funds for success in Switzerland and beyond.

Arne Zeidler, CEO and Founder of Zeidler Group, emphasized the company’s strategic expansion:

“Embracing our proven reputation as a trusted EU Facilities Agent Provider and UK facilities provider, we are proud to introduce this latest addition to our arsenal of fund services. This strategic move not only meets but surpasses our clients’ long-standing demands, bridging a crucial gap in our offerings. With our latest service expansion, we are thrilled to cover the entire European continent, solidifying our position as a dynamic and forward-thinking industry leader.”  

Jasminka Makovec, Head of Regulatory Services Division of Zeidler Group highlighted the firm’s client-centric approach, stating:

“We are unwavering when it comes to delivering a truly end-to-end service that empowers our clients to meet their  regulatory and compliance requirements worldwide. Zeidler Group is achieving economies of scale that are appreciated by our clients by offering solutions for cross-border distribution in-house. We believe this approach is beneficial not only for our clients but also for the end investors.”  

To learn more about the Swiss Representative Service, please contact SwissRep@Zeidlerlegalservices.com

About Zeidler Group  

Zeidler Group is a technology-driven law firm and compliance provider revolutionizing legal, regulatory, and compliance services for the asset management industry.  Through innovative digital solutions and research-based legal advice, Zeidler Group establishes collaborative partnerships and serves a diverse range of asset management clients, including industry leaders and boutique operators. The firm’s services extend to over 200 clients with aggregate assets under management exceeding USD 1 trillion.

For more information, please visit zeidler.group.

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*Zeidler Group US does not offer legal advice.‍

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Introduction

In recent years, Environmental, Social, and Governance (“ESG”) factors have become a focus point for investors and advisers alike when considering investment strategies. In addition to the standards adopted by the EU, such as the ‘Sustainable Finance Disclosure Regulation’ (“SFDR”), the US Securities and Exchange Commission (“SEC”) has proposed rules addressing ESG approaches to prevent greenwashing and requiring transparency for US actors as well.

Whilst SFDR requires different levels of disclosure depending on the ESG integration adopted, one of the rules proposed by the SEC actually differentiates between three types of funds, thereby formally introducing a “labelling regime”.  

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Proposed Rules

The SEC has published three proposals: the first is a proposal for climate-related disclosure rules for Public Companies; the second is a proposal for ESG disclosure rules for Investment Companies and Advisers; the third is an amendment to the existing Name Rule to address misleading investment company names.

The Proposal for Climate-Related Disclosure Rules for Public Companies (the “Climate Risk Disclosure Proposal”)

The first set of rules requires public companies registered with the SEC to disclose “information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition,”. The rules within this Climate Risk Disclosure Proposal would require disclosures to be made in periodic SEC reports and registration statements. The Climate Risk Disclosure Proposal requires qualitative – description of risks, impacts and opportunities – and quantitative climate-related disclosures.  The quantitative metrics must be provided in accordance with XBRL and will need to be in part attested by an independent attestation service provider. These disclosures will need to be included in the publicly traded companies annual reports and, if applicable, reports throughout the year.

These rules are based on recommendations from the Task Force on Climate-Related Financial Disclosures (“TCFD”) as well as the Greenhouse Gas Protocol and are in the final state before enforcement, coming into force under a phased-in approach at the earliest by 2024.

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The Proposed ESG Categorizations

The SEC is proposing three categories of funds to reflect differences of sustainability related objectives. Funds will only fall into the different categories if they consider any ESG factors at all.

i. Integrated Funds

Integrated funds are funds which integrate both ESG and non-ESG factors in investment decisions. The disclosure requirement for Integrated Funds is to explain to investors how ESG factors are included in their strategy in the prospectus. The proposed rules include amendments to the registration and periodic reporting forms themselves, as such the required disclosures must be included in the relevant forms. For example, integrated funds would need to include disclosures on the funds’ annual and periodic reports.

ii. ESG-Focused Funds

ESG-focused funds are funds which use ESG factors “as a significant or main consideration” in investment selection or engagement. These disclosures require information about the fund’s strategy, including:

• a table demonstrating ESG-related investment strategy;

• the procedure for proxy voting or engagement with issuers as part of ESG strategy;

• the portfolio’s carbon footprint;

• the fund’s use of exclusionary screening methods if applicable; and

• how the fund considers GHG emissions.

This type of funds also includes those whose name indicates the incorporation of ESG factors in the investment decision making.

iii. Impact Funds

Impact funds are a subset of ESG-focused funds mentioned above. The disclosure requirements for Impact funds are the same as those for ESG-focused funds with the addition of qualitative and quantitative measures assessing the progress made in achieving the specific ESG impact.

These rules also affect advisers who will be required to provide specific disclosures in relation to their approach to ESG investing in the Adviser Brochures.

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The Proposed Amendments to the Fund Name Rule  

These proposed rules seek to amend the Name Rule, which regulates the labelling of investment products under the Investment Company Act of 1940 to prevent misleading investors. The proposal would require funds to disclose additional information about their ESG investments and strategies, which includes information on the criteria used to select ESG investments, the extent to which the investments align with their ESG goals, and the methods used to evaluate the ESG performance of the investments. The proposed rules amend the scope of the 80% investment policy requirement, by extending this to funds whose names indicate particular characteristics being considered in the investment decision. These funds will be required to invest at least 80% of their assets (incl. derivatives calculated by using the notional amount rather than market value) in alignment with the ESG objective, whilst allowing potential drifts to be rectified withing 30 days. This includes references to “ESG”. In addition, affected funds will be required to disclose in the prospectus how they define the terms used in the name as well as the criteria described by the name that are used to select investments.

These rules also mean that ESG-related terms cannot be used in the name of funds which consider ESG factors along with, but not more significantly than, other factors (e.g. integration funds).

Other procedural amendments are also included in the proposed rules.

The proposed amendments are expected to be finalized by October 2023.

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*This is an article from Zeidler Group's International site. Zeidler Group US does not offer legal advice.

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Introduction

The European Long-Term Investment Fund (“ELTIF”) has been around since 2015 and was created to provide investors with an opportunity to invest in long-term projects that support economic growth and job creation. However, despite its potential benefits, the uptake of ELTIF has been slow due to several regulatory and operational challenges.  

On 20 March 2023, the European Long-Term Investment Funds Regulation (EU) 2023/606 (“ELTIF 2.0”), amending Regulation (EU) 2015/760 (the “ELTIF Regulation”), was published in the Official Journal of the European Union. ELTIF 2.0 aims to be a new and improved version of this fund type that aims to address these issues and unlock the full potential of long-term investments.  

ELTIF 2.0 was entered into force on April 9th, 2023, and the amendments to the ELTIF Regulation will apply from January 10th, 2024.

ELTIF 2.0 addresses several supply and demand constraints and clarifies the scope of eligible assets and investments, portfolio composition and diversification requirements, cash borrowing and lending conditions and other fund rules, including sustainability considerations. The changes create improvements aimed at increasing investor protection and facilitating the creation of a more diversified and transparent market. The main aim of ELTIF 2.0 is to increase participation by retail investors, for example through private equity, which is traditionally the sphere of wealthy investors and institutions.

Background

The ELTIF Regulation was first introduced in April 2015. The focus of the ELTIF Regulation was to facilitate to raise European long-term investments for certain types of assets together with the framework of a passporting regime, similar to the AIFMD and UCITS passporting regime.  

ELTIFs invest on a long-term basis in infrastructure projects, real estate and SMEs, among others. The aim of the ELTIF Regulation was to support the development of ELTIFs as an alternative long-term investment vehicle for institutional and retail investors and to encourage long-term investments towards European long-term investments in the EU’s ‘real economy’.1. Despite the aims to promote European long-term investments, since the introduction of the ELTIF Regulation in 2015, only a relatively small number of ELTIFs have been authorised.2 The aggregate size of net assets of those funds was estimated at only approximately EUR 2.4 billion in 2021 compared to the total net assets of European investment funds (UCITS and AIFs) of EUR 19.6 trillion.3

Key changes

1. Increased Investor Protection

In order to enhance the level of trust especially for retail investors, ELTIF 2.0 places a greater emphasis on investor protection by introducing more stringent due diligence requirements and a requirement for greater transparency in the investment process. This will help reducing the risk of investors being exposed to unsuitable or fraudulent investments.

2. Simplification of the Suitability Test

To simplify the administration for ELTIF managers, the ELTIF specific suitability test requirement was deleted. It is now required to carry out an assessment of suitability and provide potential retail investors with such in accordance with Article 25(2) and (6) of Directive 2014/65/EU (“MiFID II”).

3. Ease of Requirements for Marketing to Retail Investors  

ELTIF 2.0 introduces a harmonised distribution regime for retail investors by way of removing the EUR 10,000 initial minimum investment requirement and the 10 % limit on aggregate investment cap on financial instrument portfolios not exceeding EUR 500,000 for retail investors.  

In addition, the requirement of the local facilities was removed alongside other complementary amendments.4 This complements the efficient and effective use of the passport for the retail-distribution passport.

4. Encouraging Long-term Investments

ELTIF 2.0 aims to encourage long-term investments by increasing the maximum investment period from ten to fifteen years. This will provide more time for investments to mature and generate returns, thereby making the ELTIF more attractive to institutional and retail investors.

5. ELTIF Manager Authorisation

ELTIF 2.0 does no longer require that the ELTIF Manager to have an additional ELTIF management authorisation. ELTIF 2.0 amends Article 5 of the ELTIF Regulation to provide that only the ELTIF itself is subject to regulatory authorisation.  

6. Enhanced Market Liquidity and Redemption Rights

ELTIF 2.0 aims to increase the liquidity of the long-term investment market by allowing ELTIF managers to invest in listed securities and facilitating the trading of ELTIF units on the secondary market. This will make it easier for investors to buy and sell their units and increase the attractiveness of the ELTIF as an investment vehicle.

While the ELTIF remains a closed-ended product by nature, ELTIF 2.0 introduces redemption rights during the lifetime of the fund under certain specific circumstances, including where appropriate redemption policies and liquidity management tools are compatible with the relevant ELTIF’s long-term investment strategy.5

7. Amendments to Eligible Assets and Portfolio Diversification

ELTIF 2.0 allows for a broader range of assets to be included in the ELTIF portfolio, including renewable energy, infrastructure, and real estate. It also removes the minimum threshold for individual value of real estate assets. This will provide investors with a wider range of investment opportunities, thereby increasing the diversification of the market.  

The amended thresholds in portfolio composition and diversification include the reduction of the diversification requirements by way of lowering the minimum investment in eligible investment assets from 70% to 55%.  

ELTIF 2.0 permits fund of fund strategies and removes the 20% investment limit. It also expands the scope of eligible collective investment undertakings to include ELTIFs, EuVECAs and EuSEFs and UCITS and EU AIFs managed by EU AIFMs (with setting a concentration of limits of no more than 30% of the units or shares of a single ELTIF, EuVECA, EuSEF, UCITS or EU AIF) as eligible investments.  

The investment rules are further amended with regard to master-feeder ELTIFs structures by permitting that one ELTIF may invests at least 85% of its assets into another ELTIF.   

ELTIF 2.0 distinguishes between ELTIFs marketing to professional investors and ELTIFs marketing to retail investors. It is noteworthy that ELTIFs marketing solely to professional investors will be able to take advantage of the revised leverage limit, increased from 30% to 100% of such ELTIF’s net asset value.  

In addition, ELTIF 2.0 increases borrowing limits (exceeding short-term borrowing) from 30% to 50% of the net asset value of the ELTIF, when marketing to retail investors, and 100% of the net asset value of the ELTIF, if marketing only to professional investors.

Impact for existing ELTIFs

Existing ELTIFs or those established between 9 April 2023 and 10 January 2024 can choose to opt-in to ELTIF 2.0, subject to notification of the competent authority of the ELTIF, such as the CSSF in Luxembourg or the CBI in Ireland. This creates an opportunity for structures that do not yet exist or are not yet authorized as ELTIFs prior to 10 January 2024 to take advantage of the ELTIF 2.0 regime from their establishment/authorization date, subject to the non-objection of the relevant regulatory authority.

ELTIFs authorized under the original regulation before 10 January 2024 are deemed to comply with ELTIF 2.0 until 11 January 2029. After this date, they will need to comply with ELTIF 2.0. However, if such ELTIFs do not raise additional capital on or after 10 January 2024, they will be deemed to comply with ELTIF 2.0 even after 11 January 2029.

Conclusion

ELTIF 2.0 represents a significant step forward in the development of a robust and efficient long-term investment market in the European Union. By introducing greater investor protection, a more diversified investment market, enhanced market liquidity, and longer investment periods, ELTIF 2.0 aims to unlock the potential of long-term investments and support economic growth. Investors and fund managers should note these developments and consider the opportunities presented by the new ELTIF framework.

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The objective of the Cross-Border Distribution Directive and Regulation, effective from 2 August 2021, is to improve and simplify the cross-border distribution of investment funds within the EU. The directive and regulation apply to both UCITS and AIFs.

Zeidler’s legal and regulatory experts have summarised the implementation progress of the new CBDF-Directive in the relevant EU / EEA member states to ensure firms are aware of potential operational blind spots to maintain ongoing fund governance best practices.

Get clarity on each Member States’ implementation progress with Zeidler’s legal and regulatory expertise.

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Access the whitepaper here

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Please note this document will be updated periodically to reflect the implementation progress in each EU / EEA member state.

The document was last updated on Friday, 3 June 2022.

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London, 12 July 2022- Zeidler Group, the technology-driven law firm and compliance provider revolutionising the legal and compliance services for the asset management industry, today announced its inclusion in the AIFintech100.

The prestigious ranking highlights the world’s most innovative solution providers developing artificial intelligence (AI) and machine learning technologies to solve challenges or improve efficiency in financial services. The firms chosen were selected by a panel of industry experts and analysts based on research produced by FinTech Global on over 2,000 FinTech companies.

“Now, more than ever, established financial institutions need to be aware of the latest AI and data analytics technology in the market to deliver competitive financial products and reach new customers. The AIFinTech100 list helps senior decision-makers in the industry filter through all the vendors in the market by identifying the market-leading AI innovators which will have a lasting impact on the industry.”

“We are delighted to be recognised and included among the world’s most innovative companies. Using digital innovation to create efficiencies and added value for our clients is a cornerstone value of our firm. The recognition demonstrates the hard work and tenacity of our software engineering division as well as the collaboration we have we our clients.”

“The recognition is a testament to our service divisions and their commitment to client delivery. As a tech-driven law firm and compliance provider, we continuously look to innovate and explore new ways to deliver streamlined and futureproofed solutions for our clients and wider community. We are delighted to be ranked again this year”.

Zeidler Group is a technology-driven law firm and compliance provider revolutionising legal, regulatory and compliance services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships through its provision of innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry, as well as boutique operators. The law firm services more than 200 clients with aggregate assets under management above USD 1 trillion.

The Zeidler Group today announced that industry leader Rüstem Dagtekin has joined as Director – Product Owner, in the Reporting Services Division, based in Luxembourg. Mr. Dagtekin brings deep experience managing fund data and regulatory reporting solutions, including UCITS and PRIIPs production, costs, and risks calculations.

Most recently, Mr. Dagtekin served as the PRIIPs and MIFID cost and charges calculations subject matter expert at KNEIP- Deutsche Borse Group, where he was a pioneer in developing automated solutions to efficiently report and disclose MIFID and PRIIPs cost and charges figures. He has successfully developed and marketed his products throughout his career and has built an extensive client base.

“I am thrilled to join such an innovative firm as Zeidler where I can continue to transform manual workstreams into technology-driven, automated solutions that bolster efficiency and add value to clients,” said Mr. Dagtekin.

Zeidler’s Reporting Services Division simplifies regulatory reporting requirements with an end-to-end intuitive dashboard built to eliminate human error and manual processes, enabling asset managers to fulfil their regulatory reporting requirements digitally.

“We are pleased to welcome a talented professional like Rüstem to our global team,” said Zeidler CEO Arne Zeidler. “With his deep expertise in providing transaction costs and ongoing charges calculations and our transformational technology platforms, we are redefining legal value by building robust, automated solutions for our asset management clients.”

Mr. Dagtekin earned his M.S. in Banking and Finance from the Luxembourg School of Finance, an Executive M.S. in Corporate Finance from NYU Stern, a double M.S. in International Finance and industrial economics from the CEFI – University of the Mediterranean, Aix-Marseille II, and a B.S. in economics and corporate management from Nancy II University. He speaks and writes on topics related to quantitative analyses, model validation, risk management and is fluent in English, and French, Kurdish, and Turkish.

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Zeidler Group's Head of ESG Services Division, Elisa Forletta-Fehrenberg and Senior Associate, Sarah Noville have analysed and summarised the following ESG regulatory updates:

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• European Commission's Response to ESAs Q&As,
• ESA's clarification on RTS - May 2022
• ESMA Supervisory statement

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Ensure you are aware fo the practical implications and key items to consider.

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Download the guide here.

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This impact assessment is dated 17 June 2021. Given the dynamic nature of regulatory changes in this space, please note that the assessment results may be subject to change.

On 17 November 2022 the Luxembourg regulatory authority (Commission de Surveillance du Secteur Financier- "CSSF") published a new Standardised Model Prospectus (the "SMP") in English for undertakings of collective investment in transferable securities ("UCITS") accompanied by a general User Guide and a Sub-Fund Specific Guidance for the set-up of sub-fundsusing the SMP.

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The SMP should serve as a guidance for the set-up of UCITS and good practice to shorten the authorisation process by the CSSF. It composes and reflects the current and up-to-date practice and allows users to insert compulsory information of the UCITS in a template.
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Background
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An investment fund set up as a UCITS must be previously authorised by the CSSF in order to carry out any activities in Luxembourg. Before the creation or registration of a UCITS in Luxembourg, an application letter must be filed with the CSSF for entry on the official list. The official list is a register of all the investment funds authorised in Luxembourg and which are subject to the supervision of the CSSF. The entry on the official list is tantamount to authorisation and the CSSF will notify the entry to the investment fund concerned.

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The application letter must be accompanied by several documents including the prospectus of the UCITS. A UCITS will only be authorised if the CSSF has approved the respective management regulations (i.e., prospectus, Articles of Association/Fund Rules) and the choice of the depositary. Upon receipt of the prospectus and all compulsory documents, the CSSF will examine and if satisfactory, processes the registration of the UCITS on the official list.

1. Scope

• a UCITS to be set up as a common fund or with multiple sub-funds of low to average complexity domiciled in Luxembourg;
• a UCITS to be set up in the form of an investment company with variable capital ("SICAV") domiciled in Luxembourg; and
• a UCITS to be managed by a Luxembourg-domiciled Management Company ("ManCo") or by a Management Company domiciled in another EU Member state in accordance with the freedom to provide services on a cross-border basis.

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1. Practical implementations of using the SMP
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The SMP shall effectively be used for the establishment of new UCITS and does not have an impact on already authorised UCITS. The CSSF clarifies that the SMP shall not be considered as a regulatory requirement or as a guarantee for the approval and does not limit the right of the CSSF to request additional information as it deems necessary in the context of the authorisation process. The creation of a uniform structure shall solely simplify the review of the content and be understood as a guide as to what and where rather than the extent and content of the information to be provided. A review of whether the information given meets the regulatory requirements remains
mandatory.
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In practice, the authorisation process of UCITS remains unchanged and the processing times from submission of the application to approval will depend on the content, completeness, accuracy, complexity of the investment strategies and the speed of response either by the Mano or the CSSF.

III. How can Zeidler Group assist?

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We support you with the set-up of UCITS in Luxembourg including the drafting of your fund's constitutional and offering documents for filing, ensuring that the documents meet the relevant regulatory requirements and liaise with the CSSF to obtain fund approval.

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For additional queries in respect of the above, please do not hesitate to reach out and contact a member of our Legal Services Division or Regulatory Services Division.

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Introduction

On 21 April 2021 the European Commission adopted:

• a new Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU (the “UCITS Delegated Directive”), as regards sustainability risks and sustainability factors for undertakings for collective investment in transferable securities (“UCITS”); and
• a new Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) No 231/2013 (the “AIFMR”), as regards sustainability risks and sustainability factors to be taken into account by alternative investment fund managers (“AIFMs”).

Specifically, it impacts management companies and AIFMs and how they integrate sustainability risks in their management process.

For a definition of “sustainability risks” and other ESG-related industry terms, please refer to our ESG Glossary.

Background: what was required so far?

Under Article 3 of the Regulation (EU) 2019/2088 on sustainability-related disclosures (“SFDR”), financial market participants – in our case, management companies and AIFMs – must publish on their website “information about their policies on the integration of sustainability risks in their investment decision‐making process”. In some cases, management companies and AIFMs opted for simply disclosing that they would not integrate sustainability risks in their investment decision-making process.

What are the new requirements?

The UCITS Delegated Directive and the AIFMR go one step further as management companies and AIFMs are now required – in accordance with the proportionality principle – to take into account sustainability risks when establishing, implementing and maintaining their internal procedures and organisation. This is regardless of whether these are offering sustainable funds or not. With this in mind, there is also an obligation for management companies and AIFM to ensure sufficient resources and expertise for effectively integrating sustainability risks in their processes.

The responsibility for integrating sustainability risks in the firm’s activities will lay with senior management. This means ensuring that sustainability risks are integrated when:

• implementing the investment policy for each managed fund and overseeing the approval of such investment strategies;
• ensuring that it has a permanent and effective compliance function;
• reviewing periodically that the general investment policy, the investment strategies and the risk limits of each managed fund are properly and effectively implemented and complied with;
• approving and reviewing periodically the adequacy of the internal procedures for undertaking investment decisions for each managed fund;
• approving and reviewing periodically the risk management policy and arrangements, processes and techniques for implementing that policy; and
• for AIFM, ensuring that valuation procedures are well designed and implemented.

Sustainability risks should also be considered when identifying potential conflicts of interest or when performing due diligence on investments or implementing the risk management policy as regards the portfolio composition of a specific fund.

Sustainability risks must now be considered alongside the traditional market, liquidity, and counterparty risks.

What does it mean in practice?

When implementing the new requirements under the UCITS Delegated Directive and/or the AIFMR, you should pay particular attention to the following:

• the website disclosures under Article 3 SFDR;
• the product pre-contractual disclosures under Article 6 SFDR; and
• all relevant policies and procedures relating to:
• investment due diligence;
• risk management;
• remuneration;
• recruitments and human resources (including a sufficient panel of expertise and regular trainings on sustainability-related matters);
• organisational structure and decision-making;
• internal reporting and recording keeping; conflict of interest;
• delegation monitoring; accounting and valuation;
• costs and fees;
• reporting; and internal control functions and regular controls by senior management.

Entry into force

For management companies, the deadline for transposition by Member States is 31 July 2022, for the measures to apply from 1 August 2022. You can follow transposition in each Member State here.

For AIFMs, the measures will apply directly from 1 August 2022.

In conclusion

Sustainability risks have the potential to really impact funds, and as such should be taken into account by management companies and AIFMs at several levels, regardless of whether these are offering sustainable funds or not.

With the deadline for implementation upon us, management companies and AIFMs should review their internal procedures and processes as well as their risk management policies, whilst at the same time ensuring that they have sufficient capabilities and expertise to perform this review and continuous monitoring effectively.

Finally, they should ensure that disclosures previously made under Article 3 and/or Article 6 SFDR are still accurate after having reviewed those procedures and processes to integrate sustainability risks as well as a review of the delegation arrangements.

If you have any further specific questions or queries in this regard or require support in implementing the above, do not hesitate to reach out to our team.