ELTIF 2.0 Level 2 – why the delay? And what happens next?

The Amending Regulation which made changes to the ELTIF Regulation came into force on 10 January 2024.

It contained a number of areas where ESMA was mandated to develop draft Level 2 measures (RTS) in order to supplement the changes being introduced. ESMA delivered its Final Report, containing its draft measures, to the Commission on 19 December 2023.

However, rather than adopting these as drafted (as is usually the case), the Commission has written to ESMA requesting it to revise the draft RTS in a number of areas.

What has the Commission objected to?

In particular, the Commission's letter requires:

• the deletion of Article 4(2) of the draft RTS (which could be construed as requiring the ELTIF managers to inform the relevant NCA of material changes only after the event, thereby limiting the NCA's ability to receive updated information before the ELTIF implements changes) or its amendment to ensure that it cannot be seen to limit the competences of NCAs;

• the removal of the requirement, in Article 5(5) and (6) of the draft RTS, of a minimum 12-month notice period;

• the amendment of the liquidity related requirements (which, in Article 5(6) of the draft RTS, are linked to notice periods) so these specifically take into account the principle of proportionality, existing market practices for retail long-term funds and the individual situation of the ELTIF;

• the removal of the requirement in Article 5(7) of the draft RTS, to use at least one anti-dilution mechanism - the Commission wants this to be left to the discretion of the ELTIF Manager, with the ability to use other liquidity management tools;

• the amendment of Article 5(8) of the draft RTS to ensure that the implementation and activation of redemption gates is not limited to "certain specific circumstances" or is exclusively contingent on the notice period set out in the calibration table in the Final Report; and

• the amendment of Article 12 of the draft RTS to ensure that the provisions on cost disclosure methodology and presentation are consistent with PRIIPs, MiFID and AIFMD, and don't give rise to sector-specific requirements "unless duly justified by the characteristics of the ELTIFs".

So, what happens next?

Where the Commission intends to adopt draft RTS either (a) in part or (b) with amendments, it must send the RTS back to the ESA concerned (in this case, ESMA) explaining the reasons for its amendments - hence the Commission's letter.

The ESA then has six weeks in which to resubmit draft RTS, which take the Commission's proposed amendments into account

After six weeks, if the ESA has:

• not resubmitted new draft RTS or

• has submitted new draft RTS which are not consistent with the Commission's proposed amendments,

the Commission can adopt its own RTS with the amendments it thinks relevant or reject the RTS.

This means that ESMA now has six weeks from the date on which it received the letter of 6 March (i.e., to around 17 April 2024) in which to submit amended draft RTS.

These will then be adopted either as redrafted by ESMA or as amended by the Commission (we expect adoption to be by the end of May 2024), and then sent to the Council of the EU and the European Parliament (EP) for scrutiny.

It must now be uncertain whether the RTS will be passed before the EP breaks for the European elections in June, meaning that the revised ELTIF Regulation will continue on for some months more without all the necessary Level 2 measures in place - not unprecedented (the same happened, for example, with SFDR) but hardly ideal.

We will be monitoring the situation and will report again when there is any more clarity.