Blog: Horizon Scan For Private Investment Funds: Key Recent And … – Mondaq


Reform of UK limited partnership (UKLP) law

Draft legislative limited partnership reforms form part of the
Economic Crime and Transparency Bill (ECT Bill). If enacted, the
changes will represent a significant reform to UKLP law, in
parallel with reforms to the powers of Companies House and law
enforcement for economic crime.

See our October 2022 client alert for background.

Once the ECT Bill is enacted, we expect a short (6 month)
transitional period for existing UKLPs to comply. This will include
gathering the required information to be submitted to the registrar
for each partner (including specifics on each individual limited
partner), ensuring a UKLP has access to a Scottish or English
registered office where its principal place of business is not also
in the UK and arranging appointments of individual registered
officers of GPs.

The ECT Bill is expected to receive Royal Assent in early

We await details (including any amendments to the draft
proposals) following conclusion of the legislative process.
Implementation is likely to be Spring 2023 although secondary
legislation will need to be in place before the provisions take

A key issue that industry groups have been engaged with
Government in order to refine and resolve, is the potentially
critical impact of the registrar’s ability to
‘de-register’ UKLPs in certain circumstances, arguably
resulting in the loss of limited partners’ limited liability
post dissolution and during the UKLP’s winding up period.
Another area of concern is the introduction of potential criminal
liability for limited partners for failing to file a notice of
dissolution in certain circumstances.

The Long Term Asset Fund (LTAF) and theme of

Available since November 2021, the LTAF is a new open-ended
authorised fund structure that can invest in a full range of
illiquid asset classes.

The development of the LTAF is significant to the retailisation
agenda, as an investment platform to access retail wealth outside
the listed market.

The Productive Finance Working Group’s November 2022
publication ‘Investing in Less
Liquid Assets – Key Considerations’
includes a Legal
Guide to the LTAF. It has also published a model instrument of
for the LTAF.

A manager seeking to target the retail market would need to
accept increased compliance, detailed authorisation requirements
and regulatory risk.

To help ensure the success of the LTAF, in August 2022 the FCA consulted on its
broader retail distribution. This would potentially extend the
LTAF’s investor base to restricted retail investors (up to 10%
of their investable assets and subject to certain conditions being
met) in addition to professional investors, certified sophisticated
retail and high net worth investors, and Defined Contribution (DC)
pension schemes as either professional investors or using a
unit-linked insurance wrapper. The proposals are aligned with the
changes to the financial promotion rules for ‘high risk

On 24 November 2022 the FCA published guidance on
valuation and unit pricing for LTAFs, broadly a high-level summary
of the rules and expected policies and procedures.

The authorised fund manager (AFM) of the LTAF need not appoint
an external valuer if the depositary has determined that the AFM
has the resources and procedures for carrying out asset valuation.
Also for an LTAF that invests in other collective investment
schemes (CIS) or alternative investment funds (AIFs) subject to
external independent valuations, the AFM can rely on those.

LTAFs must publish monthly valuations, regardless of their
dealing policy.

Following its consultation, an FCA policy statement on extending
retail access is expected in early 2023. Broadening pension scheme
and retail access may help increase the appeal of the LTAF as
either an alternative to the Qualified Investor Scheme (QIS) or for
those looking to the authorised funds market for the first time.
The FCA authorisation timescale for LTAFs remains 6 months, which
compares negatively with other regulated forms (the FCA aims to
process applications to complete QIS within one month and Non-UCITS
Retail Schemes (NURS) within 2 months).

There is growing interest in the evolution of different
investment routes for retail wealth (including DC pension schemes)
in less liquid assets. Alongside closed-ended options (listed
investment companies, evergreen funds with fixed liquidity windows
to align with the investment cycle of less liquid assets and ELTIFs
in Europe – see below), and non-fund options such as bespoke
investment management arrangements, the LTAF open-ended authorised
vehicle provides an important route to consider.

The EU legislation on the ELTIF is to be repealed in the UK (as
part of the Edinburgh Reforms package of provisions to address
retained EU law), given the lack of take-up in the UK and the
recently-introduced option of the UK-specific LTAF.

UK Stewardship Code (the

The Code aims to encourage the quality of engagement between
institutional investors and companies to help improve long-term
returns to shareholders and the efficient exercise of governance

It applies to asset owners, asset managers and service
providers. Asset owners include institutional investors, pension
funds, insurance companies, local government pension pools,
sovereign wealth funds, investment trusts and other collective
investment vehicles. Reports are to be made across an
organisation’s business i.e. as a single global organisation
(if not possible it can be done as a UK entity).

As set out in the Financial Reporting Council (FRC)’s
November 2022 Review of Stewardship
, asset managers and service providers can apply to be
a signatory until 30 April 2023 (31 October 2023 for renewal
applications for existing signatories).

The FRC expect improved disclosures of how rights and
responsibilities are exercised on asset classes such as private
equity, real estate and infrastructure.

A consultation on a review of the Code (most recently revised in
2020) is expected in late 2023.

Except for certain FCA-regulated investment firms (who have to
disclose the nature of their commitment to the Code or where they
do not, their alternative investment strategy), the Code and
reporting on its application are voluntary. However, there is an
expectation that asset managers and asset owners are seen to be
taking active steps, including embracing ESG considerations, in
their stewardship role, regardless of whether or not they are a
signatory to the Code.

We expect evidence of active stewardship as part of the
sustainable growth agenda to become an area of regulatory focus.
Sector-specific guidance would be helpful so that organisations can
take steps to align expectations with their own business

Reform of UK funds regime: more to come

Other outputs are expected following HM Treasury’s January
2021 call for input on a
review of the UK funds regime, covering tax and relevant areas of

The Government is seeking a new unregulated fund structure with
relatively few constraints. The proposal under development is that
of an unregulated contractual structure available to
professional/semi-professional investors that is closed ended and
unlisted, but with tradable units.

See below (under UK Tax) for developments on the tax side, in
particular on the VAT treatment of fund management services and
further amendments to the REIT rules, which formed part of the
original UK funds review.

Recent amendments to the Financial Services and Markets Bill to
facilitate a new ‘unauthorised co-ownership’ AIF (based on
the CoACS) marks an important development to pave the way for
prospective regulations on a ‘professional investor


FCA proposals on Sustainability Disclosure Requirements
(SDR) and investment labels

The proposals set out the FCA’s October 2022 consultation CP22/20, aim to
increase transparency on the sustainability profile of products and
firms and reduce the risk of harm from greenwashing. In addition,
to protect consumers, providing better comparables among products
and ultimately increasing capital flows into sustainable
activities. As part of this package, the FCA proposes three
sustainable labels that in-scope firms can use where they meet the
relevant criteria.

Although not in scope to start, non-UK managers and overseas
funds being marketed in the UK are expected to be brought into the
new regime in due course.

See our October 2022 client alerts on SDR and on TCFD rules for background.

The consultation closes on 25 January 2023 and a policy
statement is expected by June 2023 (with a subsequent consultation
due to follow on bringing overseas funds within scope).

Apart from the ‘anti greenwashing rule’ (that will apply
to all FCA-authorised firms immediately) the rules are expected to
apply on a phased basis from June/December 2024, June 2025 and June

Various other outputs are expected in this field:

  • Development of a UK Green Taxonomy
  • The expansion of the proposed rules to overseas products,
    pensions and other investment products
  • Rules on publication of TCFD-aligned transition plans
  • An updated Green Finance Strategy (expected early 2023), with a
    focus on the regulation of green finance
  • A consultation (Q1 2023) on bringing ESG ratings providers
    within the regulatory perimeter

Firms should start thinking about the following key questions:
(i) the extent that a firm and its products are in scope; (ii) how
(and if) the labels may apply to their existing products; (iii)
whether or not a firm wants to use a label for its future products,
and if so, any changes it may have to make (for instance to
strategic, governance or resources matters) to achieve this; (iv)
information to be disclosed and what information needs to be
gathered to be able to comply, for instance to identify any
challenges with data availability and how these can be best
managed; and (v) how (and when) to have conversations with
investors on what these rules mean for investment portfolios.

Industry responses are likely to encourage the FCA to ensure
that all funds are treated the same to ensure the labels do not
inadvertently create an uneven playing field.

The Government wants to ensure that the financial system plays a
major role in the delivery of the UK’s Net Zero target, and is
acting to secure the UK as “the best place in the world for
responsible and sustainable investment”.


Sustainable Finance Disclosure Regulation

Although the principal obligations under SFDR have applied since
10 March 2021, the Level 2 RTS (SFDR Delegated Regulation) applied
from 1 January 2023 and contain supplemental details on the
disclosures, together with annexes setting out reporting

From 1 January 2023 the following is relevant:

  • Templates for the pre-contractual product disclosures will
    apply – Annex II (for Article 8) and Annex III (Article
  • Templates for the fund’s periodic reports – Annex IV
    (for Article 8) and Annex V (Article 9)

These are to be appended to the Article 23 investor disclosures
and Article 22 AIFMD annual report respectively, including an
explanatory statement, with a prominent statement in the main
document to refer to the sustainability information that is

  • Details of the ‘sustainability-related’ website
    disclosures which complement the above (and for which there is no
    mandatory template but the RTS sets out the detail of). Article 10
  • By 30 June 2023 for managers that take principal adverse
    impacts (PAI) of investment decisions on sustainability factors
    into account – a statement on their website (covering the
    period 1 Jan-31 Dec 2022 and using the RTS template in Annex I).
    Article 4 SFDR

The following updates are also anticipated:

  • RTS amendments relating to PAI indicators and product
    disclosures. The European Supervisory Authorities (ESAs) have
    delayed anticipated output from April to November 2023.
  • European Commission or ESMA guidanceon Article 8 thresholds. It
    is hoped that this will provide some much-needed clarity on which
    disclosures apply to which products.
  • SFDR RTS amendments relating to information to be provided in
    pre-contractual documents, on websites and in periodic reports
    about the exposure of financial products to investments in fossil
    gas and nuclear energy activities (with updated proposed Annexures

Further guidance in the form of Q&A continues to be
published (the most recent in an ESA November 2022

ESAs call for
on greenwashing

This paper requests views across the financial sector on how to
understand greenwashing (for sustainability-related claims relating
to all aspects of ESG) and its main drivers.

Open for comment until 10 January 2023, a progress report by the
ESAs is expected by end May 2023 and a final report by end May

Tracking progress on this will provide insights in terms of
evidence on potential greenwashing practices within and outside the
scope of current EU sustainable finance legislation, and how the
European authorities intend to address this, in terms of policy and
regulatory risk and enforcement actions. Clarity and sectoral focus
in this area will no doubt help to significantly reduce the
potential harm or impact of any otherwise misleading or unsupported

ESMA consultation on guidelines on
fund names
using ESG or sustainability-related

The purpose is to tackle greenwashing risk in funds, by using
quantitative thresholds for the use of ESG and
sustainability-related terminology in fund names, to ensure that
marketing communications are fair, clear and not misleading and
that fund managers are acting honestly.

Open for comment until 20 February 2023, and expected to be
finalised by Q2 or Q3 2023.

If a fund has any ESG or impact-related words in its name, a
minimum proportion of at least 80% of its investments should be
used to meet the E or S characteristics or sustainable investment
objectives in accordance with the binding elements of the
investment strategy to be disclosed in the Article 8 and 9
pre-contractual SFDR disclosures. If a fund has the word
‘sustainable’ or any derivation of it in its name, 50%
within the 80% general threshold (as set out above) should be a
minimum proportion of sustainable investments (as defined in
Article 2(17) SFDR).

This initiative is reflective of current developments elsewhere.
For instance, in the UK, the FCA consultation CP22/20 on SDR and
product labels (set out above) proposes restrictions to ensure that
those marketing products to retail investors where those products
do not use a sustainable label cannot promote them as sustainable
through names or in marketing materials (although firms may use
such terms in their disclosures). Similar initiatives have been
proposed in France, Germany and the US.


SEC proposed ESG Disclosure Rules

On 25 May 2022, the US SEC proposed ESG disclosure rules to
address and enhance investor disclosure practices, and related
policies and procedures regarding ESG investment considerations and
objectives, as well as proposed changes to the existing “Names
Rule” applicable to registered funds. The proposed ESG
disclosure rules would require registered investment companies and
registered investment advisers that employ ESG strategies in their
investment processes to make ESG disclosures either in the fund
prospectus for a registered investment company or in the Brochure
(Form ADV Part 2A) for a registered investment adviser. Disclosure
requirements would vary based on the extent of ESG factor
integration into investment strategies, characterized as “ESG
Integration Strategies,” “ESG-Focused Strategies”,
and “Impact Strategies.”

See our June 2022 client alert for background and more

Finalization of the proposed rules and amendments is expected
sometime in 2023. The SEC, however, is already actively engaged in
enforcement activity based on inaccurate or misleading ESG-related

The proposed ESG disclosure rules would apply to investment
advisers to registered investment companies and private funds and
other clients and are intended to provide investors with clear and
comparable information about how advisers consider ESG factors.

The proposed changes to the Names Rule would, among other
things, significantly expand the scope of the terms used in the
names of registered funds that would subject the fund to the
requirements of the Names Rule, including terms indicating that the
fund’s investment decisions incorporate one or more ESG

The proposed rules, meant to address greenwashing, are the US
version of the EU’s SFDR that has applied since March 2021 and
the UK’s SDR proposals (both of which are covered above). The
focus, however, is solely on disclosures, and the SEC does not
promote the adoption of a particular ESG strategy or any ESG
strategy at all.

As proposed, the additional disclosure requirements applicable
to “ESG-Focused” funds would be very easy to trigger. For
example, the use of a single negative screen seemingly would cause
a fund to fall within this category.

The US Department of Labor (DOL) released final
amendments to its regulation on investment duties

This relates to those amendments under Section 404(a) of the
Employee Retirement Income Security Act of 1974 (ERISA) regarding
the consideration of ESG factors by retirement plan fiduciaries.
The amendments go into effect on 30 January 2023.

See our January 2023 client alert for background and more

Under President Biden, the DOL previously announced that it
would not enforce the changes made to the “investment
duties” rule under President Trump that effectively restricted
retirement plan fiduciaries’ ability to consider ESG factors.
This final rule is a codification of that reversal.

The DOL’s final amendments expressly reference ESG factors,
but take a neutral stance on whether investment fiduciaries should
consider them and, to the extent they are considered, the weight to
be afforded to them, providing investment fiduciaries leeway to
determine whether and to what extent ESG factors are relevant in
any given case.

Several US states or groups of states have engaged in
“anti-ESG” or “pro-ESG” activity

This is taking place via new legislation, investment policies,
Attorney General opinions, letters, reports, statements, and
unilateral State Treasurer action, such as South Carolina’s
divestment from BlackRock. Some states have also
“blacklisted” certain companies that they have determined
to act contrary to the principles and obligations that are the
subject of the anti-ESG action.

States that have engaged in anti-ESG activity (pending or
finalized) include Arizona, Arkansas, Florida, Idaho, Indiana,
Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri,
Nebraska, North Dakota, Ohio, Oklahoma, Pennsylvania, South
Carolina, South Dakota, Tennessee, Texas, Utah, West Virginia and
Wyoming. By contrast, Connecticut, Illinois, Maine, Maryland,
Nevada, New Hampshire, New Jersey, New York, Rhode Island, Vermont
and Virginia have recently proposed or adopted policies or
legislation to advance one or more ESG-related causes.

In response to the anti-ESG activity of certain states,
representatives from California, Colorado, Delaware, Illinois,
Maine, Massachusetts, Nevada, New Mexico, New York, Oregon, Rhode
Island, Vermont, Washington and Wisconsin released an open letter
urging support for ESG-themed investment strategies.

The anti-ESG efforts, though widely acknowledged to promote a
“red state” political agenda, are having a practical, if
not a legal, impact. For example, a leading global investment
company recently withdrew from the Net Zero Asset Manager
initiative and was shortly thereafter excused from a hearing on ESG
investment factors convened by the Texas Senate Committee on State


Appointed Representatives regime

The changes to the FCA’s Appointed Representative (AR)
regime came into force on 8 December 2022. The
changes impose additional requirements on FCA-authorised principals
and on their ARs.

A principal is now required to provide additional and ongoing
data to the FCA about the activities of its AR. There are also new
additional obligations on a principal before taking on an AR and
during the AR’s appointment.

The FCA has indicated it will work with HM Treasury to make
further amendments to the regime.

The additional obligations are likely to result in an increase
in the fees charged by third party principals and the imposition of
further obligations on ARs to ease a principal’s oversight of
the AR. This may, in turn result in the further scrutiny by a
principal of its ARs. The FCA’s receipt of further data will
put the FCA in a position to undertake further surveillance and
exercise deeper scrutiny of the activities of ARs. The specific
impact on private fund advisers (noting that a manager cannot be an
AR) is difficult to determine because the changes were prompted by
the FCA’s concerns about financial advisers and retail
investors. If a private fund adviser finds itself with significant
additional burdens imposed by its third party principal, this may
prompt the question of whether the increased cost of compliance as
an AR justifies an application to the FCA to become authorised

The Consumer Duty

The FCA Consumer Duty is captured in a new FCA Principle for
Businesses 12 which states: “A firm must act to deliver good
outcomes for retail customers.”

Three “cross-cutting rules” underpin the duty. These
require firms to: (1) act in good faith towards retail customers;
(2) avoid causing foreseeable harm to retail customers; and (3)
enable and support retail customers to pursue their financial

The FCA also sets out four sets of “outcomes rules”,
intended to help “define what is required by Principle
12”. These relate to: (1) products and services; (2) price and
fair value; (3) consumer understanding; and (4) consumer

We addressed the likely impact of the Consumer Duty on private
fund managers in our October 2022 client alert.

The FCA rules and guidance governing the duty, which the plan
will need to address, come into force for: new and existing
investments open for sale on 31 July 2023; and
closed investments on 31 July 2024. There is also
a deadline on 30 April 2023, for manufacturers, which includes
in-scope managers, to have conducted cross-cutting rule reviews and
shared information with distributors.

In its December 2022 Quarterly
the FCA proposes making an amendment to the scope
of the rules, so that firms in a distribution chain selling
investment funds to retail customers where the minimum investment
is £50,000 are no longer excluded. This is to clarify the
policy intention that this “non-retail financial
instrument” exclusion does not cover investment funds that are
distributed to retail customers. If this change is introduced (with
a consequent widening of scope of the Consumer Duty), it will
impose further cost and disruption on affected firms, who have been
working on the basis of the rules and definitions published in the
FCA’s July 2022 policy statement (PS22/9).

The duty applies to managers who provide services for a
retail customer defined, in the context of an
alternative investment fund, as an investor in the fund or the
beneficial owner of interests in the fund, that is not a
professional client. The duty will not, therefore apply to
professional investors in respect of whom the AIFMD by default,
limits the marketing of private funds.

A point of direct contact for the managers of private managers
will be per se retail clients, who a manager cannot
“opt-up” and treat as an elective professional client.
This, in turn, highlights the role of the client categorisation
processes, noted in our previous alert, and the FCA’s existing
focus on these processes.

Likely retail client candidates include family offices, high-net
worth individuals and manager employees to whom the manager may be
offering carried interest or other employee incentives.

Financial Services and Markets Bill (the FSM

The FSM Bill is currently making its way through Parliament. The
FSM Bill is the centrepiece for delivering the UK’s future
regulatory framework (FRF).

Amongst its provisions are those which amend the Financial
Services and Markets Act 2000 and implement proposals from the FRF

The main features of the FSM Bill include:

  • Delegating more rule-making powers to the FCA and PRA and
    giving them a secondary objective for growth and international
  • Setting the process for revoking onshored EU financial services
    regulation, including a regime for designating activities as
    regulated activities
  • The tightening of the process for the approval of financial
    promotion (see below)
  • Empowering the FCA and PRA to oversee the resilience of third
    parties providing critical services to the financial sector
  • Increasing the regulation of crypto-assets

Much has been made of the secondary objective for growth and
international competitiveness, which is near-identical to what was
contained in the version of the Financial Services and Markets Act
2000 made over twenty years ago. This same provision was repealed
in the wake of the financial crisis. The full impact of the
secondary objective on the FCA and PRA rule-making and policy
making powers is uncertain but the broader policy impact can be
seen in the so-called Edinburgh Reforms (discussed below).

See our comments below on the Edinburgh Reforms and FRF.

Proposed changes to the financial promotion approval

The FCA’s CP22/27,
published in December 2022 and open for feedback until 7 February
2023, contains proposals to operationalize the proposed legislative
changes (which form part of the FSM Bill) to create a new
regulatory framework for authorised firms approving financial
promotions of unauthorised firms.

The FCA states that the changes it has set out will address gaps
in the financial promotions approvals regime and help it intervene
faster in response to harmful financial promotions communicated by
unauthorised firms in areas such as high-risk investments and
‘Buy Now Pay Later’ products.

The proposed new regulatory gateway will impose a universal
requirement on all authorised firms, prohibiting them from
approving financial promotions of unauthorised firms. Any
authorised firm wishing to undertake such activity will need to
apply to have the requirement cancelled or varied. A transitional
period is expected for the change to be implemented and there are
various exemptions.

The proposals currently being consulted on include provisions on
how the FCA will assess applicants, the basis on which the FCA may
grant or refuse permission, reporting (including half yearly
aggregate reporting) and notification requirements for eligible
firms. On redress, the FCA does not intend to extend the Financial
Ombudsman Service’s compulsory jurisdiction to approval of
financial promotions. Neither is the Financial Services
Compensation Scheme relevant.

These proposals do not affect the way authorised firms
communicate their own financial promotions, approve their own
promotions for communication by unauthorised persons, or approve
promotions for their Appointed Representatives or unauthorised
persons within the same corporate group. The key impact is that
authorised firms will only be able to approve financial promotions
for unauthorised persons where they have had the requirement to not
approve financial promotions varied or cancelled.

The FCA’s December 2022 Quarterly Consultation (referred to
above) also contains proposed amendments to clarify when the
Consumer Duty applies to firms approving or communicating a
financial promotion when there is no underlying regulated

Financial promotion rules for non-mainstream pooled

The changes to the FCA rules dealing with financial promotion
address investment in “high-risk” assets and are
addressed primarily at investment by retail investors.

The new rules are part of overall changes to the financial
promotion regime, including changes proposed in the FSM Bill
(covered above).

We addressed the changes to the financial promotion rules and
the likely impact of the consumer duty on private fund managers in
two recent client alerts (on new risk warnings and new financial promotion rules).

Under the new rules, there are two product categories:
Restricted Mass Market Investments (RMMI) and Non-Mass Market
Investments (NMMI). While the mass marketing of RMMI to retail
clients is prohibited, any marketing of NMMI to retail clients is
subject to further requirements. Non-mainstream pooled investments
(NMPI) are a subset of NMMI and the additional rules. The rules on
risk warnings came into force on 1 December 2022
and the remaining rules come into force on 1 February

The rules (some of which are the same as those that currently
apply) will impose requirements on FCA firms with respect to: the
preliminary assessment of suitability; pre-promotion personalised
risk warnings and “cooling off periods”; risk warnings in
the promotions, themselves; and restrictions on monetary and
non-monetary benefits.

Firms that offer NMPI to retail investors, such as family
offices, high-net-worth individuals, and employees, will need to
consider the changes to the rules. For instance, where a manager
offers carried interest or other employee incentives.

If the offers do not extend to retail investors but are limited
to professional investors, the new rules will not be relevant.

The Edinburgh Reforms and the Future Regulatory
Framework (FRF)

On 9 December 2022, the Chancellor of the Exchequer, Jeremy
Hunt, outlined a series of measures designed to drive growth and
competitiveness in the UK financial services sector, now known as
the Edinburgh Reforms.
The reforms are divided into four categories: a competitive
marketplace promoting effective use of capital; sustainable
finance; technology and innovation; and consumers and business.

On the same day, HM Treasury published a Policy Statement which
explained the Government’s approach to repealing and replacing
retained EU Law on financial services. The FCA also published the
FRF Review setting
out its approach to the FRF.

The Edinburgh Reforms and the Policy Statement, together with
the FSM Bill, are designed to give effect to the FRF.

We would highlight the below main items of interest for private
fund managers.

  • The publication of draft Statutory Instruments to demonstrate
    how Government can use the powers within the FSM Bill to reform the
    prospectus and securitisation regimes. Overhauling the prospectus
    regime to widen participation in the ownership of public companies
    and simplify the capital raising process for companies on UK
  • Plans to repeal the Regulation on European Long-Term Investment
    Funds (ELTIF) without replacement on the basis that the
    recently-established Long Term Asset Fund (LTAF) regime provides a
    fund structure better suited to the needs of the UK market (covered
    in more detail above).
  • Publishing a PRIIPs and UK Retail Disclosure consultation
    (discussed below).

As a political statement, the Edinburgh Reforms have a strong
signalling effect. The actual impact on the extent and burden of
regulation on managers in particular, is, however, difficult to

The FCA’s statement is interesting, noting its work to
encourage innovation and comments on how best to report and measure
how it can contribute to the new secondary objective for growth and
international competitiveness. It states that it will expect to
distinguish between the FCA’s inputs and outputs, and the
outcomes for the UK economy. It emphasises the importance of
focussing on drivers it can measure and those it can influence
directly and how this builds on the work it has already done on
metrics and increased accountability.

The UK PRIIPS Regulation

This legislation is to be repealed by the FSM Bill as a
“matter of priority” and replaced with an alternative
framework for retail disclosure as part of the FRF review.

A consultation (that
closes on 3 March 2023) was published as part of the Edinburgh
Reforms. The intention of this limb of the proposals is to remove
prescriptive requirements and increase flexibility, remove
PRIIPs-type comparability from the future framework, create an
FCA-led regime, and facilitate the FCA to integrate UCITS and
PRIIPs disclosure by 2026.

As part of this process the Government welcomes views on other
areas for retail disclosure to be considered for future reform.

This is welcome news – the PRIIPs KID has been widely
criticised as “not fit for purpose”, requiring misleading
information to be provided to retail investors and placing an
unnecessary burden on firms. The UK regulation also diverges from
that of the EU. This is therefore a welcome opportunity to create a
new retail disclosure regime that is proportionate and aligns with
FCA’s high level requirements – being clear, fair and not
misleading and in a client’s best interests.

Overseas persons

At the end of 2020, the Government called for evidence on the
overseas regulatory framework, including the overseas persons
exemption (OPE), and published its response in July
2021. The OPE, addressed in parts of the Regulated Activities
Order, allows UK fund managers and certain types of investors to
receive services from advisers and managers based outside the UK
without those non-UK advisers or managers having to be

The FCA had concerns that the OPE was not being used correctly
and was working with HM Treasury to clarify the extent of the OPE
and also to address the “characteristic performance” test
(CPT). This holds, in essence, that where an activity, such as
investment management, is performed outside the UK on behalf of or
for the benefit of a UK client, that activity will not be deemed to
occur in the UK and, therefore, not be a regulated activity.

Further action is awaited.

The OPE and CPT are vital pillars in the current cross-border
regime and ensure that non-UK businesses, such as US investment
advisers, can provide services to UK managers. If the OPE and CPT
were to be restricted, this would likely increase the burden on
non-UK businesses and potentially restrict investor choice. In
light of the growth and international competitiveness objective set
for the FCA under the FSM Bill (see above), it is difficult to see
how a restriction could be justified.


AIFMD marketing / pre-marketing

In December 2022 ESMA published its final report on implementing technical
standards and regulatory technical standards to specify the
information to be provided and the content and format of
notification letters to be submitted by AIFMs (and UCITS ManCos) to
national competent authorities (NCAs) to undertake cross-border
marketing or cross-border management activities in host member
states. These complement the EU legislative package on cross-border
distribution of funds (that has applied since August 2021).

This ESMA work aims to foster convergence and standardization of
information and templates for cross-border management and marketing
activities, so that NCAs can gather meaningful data that serves a
supervisory purpose. ESMA has confirmed that the standards do not
apply retrospectively. However, the new templates will result in
increased costs (filing fees along with IT development and
associated compliance burden), even though ESMA states this has
been taken on board in developing the final report.

The European Commission has 3 months (extendable to 4) to adopt
these standards.

The cross-border legislation includes provisions on
pre-marketing, reverse solicitation, ceasing marketing and minimum
requirements for retail investors. In addition, new rules on
marketing communications, that are supplemented (since February
2022) by ESMA’s final guidelines.

There remain various grey areas in the practical application and
interpretation of some of these rules, for instance: questions on
the definition of ‘marketing communications’; the 36 month
blackout period following a marketing de-notification; that any
subscription within 18 months of the start of pre-marketing is
considered to be marketing under AIFMD and how the rules impact
non-EU AIFMs/AIFs marketing under the national private placement
regime (NPPR). The publication of these standards do not shed any
light on these areas of uncertainty.

Review of AIFMD

Since the European Commission’s October 2020 consultation on a proposed Amending Directive,
the Council of the EU and the European Parliament have been
proposing further amendments. Once finalized, the Amending
Directive will enter into force 20 days following its publication
in the Official Journal of the EU; EU member states will then have
24 months to implement. The passage of a Directive through the
legislative process is typically 18 months (this would mean
implementation in 2025) but it can be quicker.

See our December 2021 client alert for background on the original
AIFMD II proposals.

The key areas of review relate to: loan-originating AIFs, third
party delegation, minimum stable substance within the AIFM,
cross-border access to depositary services and the use of liquidity
management tools. In addition, new transparency requirements on
providing information on AIF loan portfolios are to be fed into
investor disclosures and reporting to NCAs.

The final shape of these rules is yet to be determined, pending
the outcome of the trialogue negotiations. Further output is
expected imminently.

UK AIFMs will not be directly impacted by the proposed
amendments, unless the UK applies equivalent changes through the
FCA Handbook and UK AIFM Regulations.

Loan-originating/private debt funds are an important and growing
source of financing; also expected to help facilitate the
transition to investing in a sustainable green economy.

Even if the UK does not take an aligned approach, the changes
could still be relevant – for example, when marketing
cross-border using the NPPRs, or acting as a delegate of an EU27
AIFM (or, if a UK AIFM chooses to voluntarily comply, on a grouped
basis or in response to investor demand).

Review of ELTIF Regulation

Available since December 2015, a European Long-Term Investment
Fund (ELTIF) is a collective investment framework for both
professional and retail investors looking to invest in long-term
assets. A review of the ELTIF Regulation was finalised in October
2022 and the amending regulation will come into force 20 days
following its publication in the Official Journal of the EU –
and apply 9 months later.

Further output is expected in early February 2023 following the
European Parliament’s consideration.

See above in respect of the UK’s expected repeal of the
ELTIF Regulation.

The amendments include:

  • Broadening eligible assets, including a revised definition of
    ‘real assets’ meaning ‘any assets that have intrinsic
    value due to their substance and properties’, lowering the
    investment threshold from €10m to €1m minimum investment
    value and reducing the threshold for eligible investment assets
    from 70% to 60%
  • Permitting ELTIFs to utilise master-feeder structures by
    investing in master ELTIFs (provided sufficient investor protection
    is ensured)
  • Reducing barriers for retail investors (i.e. removing the
    €10,000 initial investment requirement and 10% exposure
    threshold for retail investors with portfolios below €500,000)
    and aligning the suitability test with that of MiFID
  • More favourable rules on conflicts of interest to allow

The aim of the amendments is to make ELTIFs more appealing to
investors, in particular retail investors; minimise the
restrictions and reduce the barriers; provide more flexibility and
accessibility to the regime and more favourable redemption options.
The review was in response to findings that, as at October 2021,
only 57 ELTIFs had been authorised since 2015 with a relatively
small amount of AuM (estimated at €2.4bn) and domiciled in
only 4 member states (Luxembourg, France, Italy and Spain).

Although AIF structures are likely to continue to dominate the
institutional end of the non-listed fund market, the ELTIF may be
an appealing alternative for those managers targeting retail
investors as well as professional investors. The benefit of an EU
wide marketing passport may also appeal to sub-threshold managers
who do not have AIFMD passport rights.

An ability to opt in to the revised rules, once finalised, would
assist those keen to take advantage of the amended regime before
the 9 month legislative lead-in period has passed.


UK-Luxembourg double tax treaty (DTT)

The changes in the DTT are now expected to be effective in

While it was expected that changes in the DTT would take effect
in 2023, the changes are now not expected to be effective until
2024 at the earliest.

Under the revised DTT, the changes agreed in July 2022 between
the UK and Luxembourg will take effect (in respect of UK income
tax, capital gains and corporation tax) in April of the calendar
year following the year in which the DTT enters into force.

Although the UK ratified the Treaty in October 2022, Luxembourg
did not ratify the changes before 31 December 2022, and so
(provided Luxembourg ratify during the course of 2023), the
earliest date on which the changes relating to capital gains are
expected to take effect is April 2024.

The revised DTT will allow the UK to tax Luxembourg investors on
any capital gain made on the disposal of a UK real estate-rich
entity (including gains accrued prior to the amendments taking
effect). Affected investors will welcome a further year of being
able to rely on the existing exemption from UK tax.

However, certain helpful changes to the DTT will also be
postponed. For instance, the revised DTT provides most UK parent
company recipients with an exemption from withholding tax on
dividends paid by Luxembourg holding companies (whereas the
existing DTT only reduces the withholding tax rate), in
circumstances where Brexit had meant that UK dividend recipients
were not, under Luxembourg law, automatically benefitting from a
full exemption available to EU recipients. Investors will now also
have a longer wait for the anticipated DTT changes extending the
treaty’s benefits to certain Luxembourg corporate collective
investment vehicles (CIVs), where the relevant qualifying
conditions are met.

Qualifying Asset Holding Companies (QAHCs)

Market uptake of the UK’s new QAHC regime, which took effect
in April 2022, has steadily increased.

The UK QAHC regime was implemented to provide for a
tax-efficient UK-resident corporate holding vehicle which enables
qualifying investors (including funds) to invest using a UK asset
holding structure, with minimal additional UK tax leakage.

The Government has made a number of targeted changes to the
initial rules since implementation to deal with points that were
raising practical issues, and is continuing to discuss further
helpful changes with the industry.

Through our participation in industry working groups, we are
closely involved in working with HMRC to continue to refine and
improve the operation of this regime. Please contact us if you
would like to receive a more in-depth summary of the QAHC regime,
including the potential advantages, conditions of eligibility and
practical points to note.

Expected relaxation to the UK’s REIT

The Government announced a relaxation of the UK REIT rules on
9 December 2022, to take effect from April 2023, with the aim of
increasing the attractiveness of the regime.

The proposed amendments include:

  • Removing the requirement for a REIT to own at least three
    properties, where it holds a single commercial property worth at
    least £20 million
  • Amending a rule that subjects gains on properties disposed of
    within three years of development by the REIT where the cost of
    development exceeded 30% of the fair value of the property when
    acquired or on entry into the REIT regime (the “development

The Government has not specified how the development rule will
be amended, although responses to its recent call for input include
providing exceptions, recognising inflation in property values and
excluding disposals required to meet statutory requirements.

These amendments will be welcomed amid the growing trend for
large and mid-size pan-European real estate funds to structure UK
investments using a REIT rather than (for example) a master holding
company taking the form of a Luxembourg S.à r.l (see also
the comments above on the changes to the UK-Luxembourg double tax

The REIT regime and its exemption from UK corporation tax on
qualifying income and gains from the REIT’s UK property rental
business (which, in practice, make up the majority of the income
and gains from the UK REIT’s investments) is proving to be a
popular alternative structuring option. In addition, the impact of
“rebasing” for assets held within “PropCos”
that are bought and sold by REITS has become increasingly important
in the pricing of UK deals.

VAT treatment of fund management services

The Government published its consultation on the VAT
treatment of fund management services
on 9 December 2022. The
consultation is due to close on 2 February 2023.

The Government proposes codifying the UK’s existing policy
(based on UK law, retained EU law, general principles, case law and
guidance) to provide certainty on the VAT treatment of fund
management. VAT is chargeable on supplies of fund management
services to most private funds in the UK (e.g. AIFs), other than
certain, limited exempt supplies (including supplies to special
investment funds (SIFs)). It is not proposed that this VAT
treatment will significantly change following the review.

The Government proposes establishing criteria to identify SIFs
as follows:

  • The fund must be a collective investment operating on the
    principle of risk-spreading
  • The investment return must depend on the performance of the
    investments with holders bearing the risk connected with the
  • The fund must be subject to the same conditions of competition,
    and appeal to the same investors, as a UCITS (retail

However, a fund will not need to be subject to ‘State
Supervision’ to qualify as a SIF. A definition of
“Collective Investment”, broadly mirroring that in FSMA
2000, will also be introduced.

Views on the proposals are being sought, as well as whether any
further VAT related modifications would improve the fund management
regime for taxpayers.

Greater certainty over whether a fund is a SIF is welcome and
may improve the UK’s attractiveness to funds. However, ruling
zero-rating for fund management services out of the
consultation’s scope (as announced in the Government’s
response to its call for input on the review of the UK funds
regime) will disappoint some, as this would have addressed
irrecoverable VAT for UK private fund managers.

Domestic implementation of the OECD Pillar 2

The UK continues to set the pace on this, following the
publication of the first draft of the UK legislation in July

As expected, the UK draft legislation closely follows the
OECD’s Model GloBE Rules published in December 2021, and
contains similar exceptions and carve-outs in relation to

The legislation confirms that the provisions relating to the
Pillar 2 income inclusion rule (IIR) will apply to accounting
periods beginning on or after 31 December 2023, having originally
been intended to take effect from 1 April 2023, with the Government
acknowledging concerns (expressed in response to its 2022
consultation paper) that the UK’s position at the front of the
pack could place it at a competitive disadvantage when compared
with countries that are slower in uptake.

While, on paper, the draft legislation will principally impact
the UK tax system, it is expected to be of wider significance for
the global Pillar 2 project given the consultative role undertaken
by the Government at OECD level. For instance, in its Summary of
Responses (20 July 2022), the Government has reiterated its
intention to work with international partners to resolve various
outstanding technical issues including, for example, the consistent
implementation of the €750m consolidated revenue threshold and
Effective Tax Rate (ETR) calculation.


Proposed ATAD 3 Directive

The European
Parliament’s Committee on Economic and Monetary Affairs (ECON)
published its report on the proposed ATAD 3 Directive
the use of “shell companies”) on 9 December 2022,
including recommended amendments to the draft legislation.

The ECON report includes several notable amendments, and in
particular a softening of the minimum substance indicators required
to be reported by in-scope undertakings under Article 7(1) of the
draft Directive:

  • The “premises” indicator can now be satisfied if
    reporting entities share premises with entities of the same group
    in the relevant Member State (rather than having to have their own
    premises or premises for their own exclusive use)
  • The requirement that directors must be “qualified” to
    take income-generating decisions (in addition to being
    “authorised” to do so) has been removed from the relevant
  • The requirements that directors actively and independently use
    such authorisation, and are not employed by an associated
    enterprise (and do not perform directorial functions of other
    enterprises) have also been removed

The report also recommends an amendment to the effect that the
European Commission must prepare a report regarding the
Directive’s operation and implementation, five years from the
date of transposition. The report would, amongst other things,
assess whether it is appropriate to extend the Article 7(1)
obligation to “regulated financial undertakings”, and if
necessary, review the exemption that such undertakings would (on
current drafting) benefit from under Article 6(2b).

The original European Commission proposal had included an
exemption for “regulated financial undertakings”
(broadly, vehicles established as an AIF managed by an AIFM), and
during committee debates there had been some support for a proposal
to remove this exemption.

The retention of the exemption in the latest report will be
welcomed, although some will be disappointed that it has not been
extended (as had been proposed) to cover entities owned by such
funds. There will also certainly be interest in any potential
requirement to report on this exemption’s continued operation
or existence in future.

The proposed amendments to the minimum substance indicators will
also be welcomed, as they move closer to aligning the requirements
set out in the rules with the way in which many large groups
operate in practice.


SEC Marketing Rule

The Marketing Rule came into effect on 4 November 2022.

The new Marketing Rule overhauls the regulatory requirements for
SEC-registered investment advisers (RIAs) with respect to placement
agents for their private funds. It captures a wide range of
communications by placements agents as “advertisements”
of the RIA and imposes oversight requirements on the RIA with
respect to placement agents.

For non-US fund managers, the Marketing Rule will not apply to
“exempt reporting advisers” (ERAs), nor will it apply to
non-US RIAs in relation to non-US funds (even if US investors
commit to these non-US funds). If a non-US RIA is marketing a fund
based in the US, then the Marketing Rule will apply.

Non-US RIAs marketing non-US funds should take care to minimise
references in marketing documents to the fact that the manager is
SEC registered, and include appropriate disclaimers/qualifications
where they do make such references.

SEC Proposed Rules

On 9 February 2022, the SEC proposed a package of new rules
which, if adopted, will have a significant impact on fund

Following the publication of the proposed rules, there was a
period of consultation with the funds industry during 2022. The SEC
have yet to issue amended proposals following the consultation but
that is expected as some point in the next few months.

The proposed rules include (among other issues):

  • A prohibition of certain activities such as charging investors
    accelerated monitoring fees or regulatory expenses for SEC
    examinations etc
  • Clawback of carried interest would need to be gross of any tax
  • A prohibition on preferential treatment
  • Mandatory quarterly statements to investors on fund
    performance, fees and expenses

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