ESMA report on the Eligible Assets Directive | Article

ESMA report on the EligibleAs- sets Directive – Impact on the acquisition of closed-ended fund units by UCITS and open- ended special AIFs

Authors: Dr. Jens Steinmüller, Tarek Mardini , Dr. André Blischke, Dr. Marco Bertl, David Ben Kaiser, Dr. Enzo Biagi

On June 26, 2025, the European Securities and MarketsAuthority (ESMA) submitted its long-awaited final report on the revision of Directive 2007/16/EC (Eligible Assets Di- rective,"EAR") to the European Commission (ESMA34-2087785638-1548). ESMA had already been taskedby the European Com- mission in June 2023 with reviewing the EAR and proposing potential adjustments.

The EAR specifies which assets may be ac- quired by undertakings for collective invest- ment in transferable securities (UCITS). An important component of the EAR is the definition of the term transferable securities, which is also relevant for the concept of securities under German investment law.

In addition to their impacton UCITS, the pro- posed amendments by ESMA also affect certainspecial AIFs that are used as own accounts by institutional investors to invest in closed-ended funds.The background to this is that some of these special AIFs are subject to product requirements that do not re- sult directly from the implementation of the

EAR but refer – for certain purposes - to the definition of securities in the UCITS Directive.

An implementation of ESMA's current proposals would make it significantly more difficult to classify investments in closed-ended alternative investment funds (“AIF”) as transferable securities within the meaningof the UCITS Directive and the EAR. It also seems highly doubtful to what extent invest- ments in closed-ended funds in the areas of private equity, private debt, infrastructure, and, in particular, fund of funds could still qualify as transferable securities in this case.

Below, we summarize the main contentand implications of the ESMA report for special AIFs of institutional investors in relation to investments in AIF. At the same time, we provide an update on the status of the process and an outlook on the next steps and possible prospects for the affected structures.

EXECUTIVE SUMMARY

1 . Once implemented, ESMA's proposals would significantly restrictthe definition of securities under the EAR, meaning that shares in closed-ended target funds would generally no longer be eligible for acquisition as securities.

2 . Despite the amendment to the EAR, shares in closed-ended target funds should remain eligible for most of the special AIFs.

3 . For special investment funds within the meaning of Chapter 3 of the InvStG, shares in closed-ended funds would no longer be eligible as securities.However, the legislator may remedy this by expanding the catalog of eligible assets for investment tax purposes.

4 . Closed-ended funds whose investment policy is focused on investments in infrastructure projects and corporate financing instruments should continue to be eligible for ac- quisition by open-ended specialAIFs within the meaning of Section 2 (1) No. 16 AnlV.

A . Initial situation and proposed changes

Under current law, the eligibility of invest- ments in closed-ended funds for open- ended special AIFs (in particular those that are so-called semi-transparent special in- vestment funds for tax purposes) dependsin certain cases on whether the investments qualify as securities. If investments in closed-ended funds meet the criteria under the EAR, this facilitates their eligibility. Such a classification has generally been possible for interests in closed-ended funds if the free transferability of the interest can be agreed upon and subject to certain additional condi- tions.

ESMA is now proposing to significantly tighten the requirements for the qualification as securities, which in particular also affect the eligibility of interests in closed-ended funds:

Look-through approach: In the future, holdingsin a closed-ended fund will only qualify as securities if the closed-ended fund is permitted to invest exclusively in assets that are directly available for acquisition by UCITS. Unlike for holdings in open- ended funds, thereare apparently no plans to introduce a "dirt quota" rule for holdings in closed-ended funds. For the qualification of investments in closed-ended private equity, private debt, infrastructure, and real estate funds,such a look-through approach would mean that these would no longer qualify as securities, as com- pany investments, loan receivables, real estate, and comparable illiquid assets may not be acquired directly by UCITS.
Full authorisation requirement: In-vestments in closed-ended funds should only qualify as securities if the closed-ended fund is registered or authorised and subject to supervi-sion comparable to that under law of the European Union. In the case of EU AIFs, such comparability of su-pervision should only be assumed if these funds are managed by an EU management company with full authorisation.
Cascade prohibition: The ESMA proposals also stipulate that closed- ended funds should only be eligible for acquisition as securities for a UCITS if it invests a maximum of 10% of its assets in participations in other investment funds (i.e., other AIFs or UCITS). Investments in closed-ended funds of funds would therefore be prohibited, as would in- vestments in feederfunds, for exam- ple. This proposal also represents a tightening of the current law, which did not provide for any such restriction.

B . Impact on special AIF structures

The impact of any implementation of the ESMA proposals on a special AIF structure depends on the regulatory and tax charac- teristics of the special AIF and the regulatory background of the investors in the respective special AIF.

1 . Open-ended special AIFs under the KAGB

For special AIFs that fall under the investment law product regulation for general open-ended special AIFs (Section 282 KAGB) or open-ended domestic special AIFs with fixed investment conditions (Section 284 KAGB), implementation of the ESMA proposals would have no impact on the general eligibility of participations in closed-ended funds, providedthat no further (tax or regulatory) product requirements are additionally required. For special AIFs that are designed for tax purposesas non-trans- parent investment funds under Chapter 2 of the Investment Tax Act ("Chapter 2 invest- ment funds"), where, in particular, there are no insurance supervisory reasons requiring closed-ended target fund investments to be classified as securities, nothing would change: the target fund investments would, in principle, continueto be eligible for acqui- sition. Under the investment product rules for the widely used open-ended domestic special AIFs with fixed investment condi- tions (Section 284 KAGB), acquisition as a "corporate participation” would be possible in most cases (subjectto certain concentra- tion limits).

2 . Special investment funds within the meaning of Section 26 InvStG

For special investment funds within the meaning of Section 26 InvStG ("Chapter 3 investment funds"), however, investments in closed-ended funds would no longer be available for acquisition after implementa- tion of the ESMA proposals on the basis of the applicable investment tax law and the current administrative practice of the tax au- thorities, because in many cases qualifica- tion as securities is the only option. This is because, unlike in the context of investment product regulation for special AIFs under Section 284 of the German Investment Code (KAGB), "corporate participation" is not available as a permissible asset category typically suitable for investments in closed- ended funds in the case of Chapter3 invest- ment funds.Closed-ended funds in the legal form of a partnership are therefore generally not available for acquisition if they cannotbe classified as securities. However, invest- ments in closed-ended funds in the legal form of corporations, whose fair market value can be determined, would still be pos- sible, although these would have to remain below 10%.

If the ESMA proposals were implemented within the framework of UCITS regulation, various measures couldbe envisaged under national (tax) product regulation for Chapter 3 investmentfunds that could remedy the sit- uation. Under the previous government, the government draft of a secondlaw on financ- ing future-proof investments ("Second Fu- ture Financing Act") already provided for a change to the productrules for Chapter3 in- vestment funds, according to which these would have been allowed to invest without restriction in closed-ended or open-ended domestic and foreign investment funds pur- suant to Section 1 (1) of the German Invest- ment Code (KAGB). According to this, the acquisition of participations in a closed-ended fund wouldno longer depend on whether they qualify as securities or as cor- porate participations. However, due to the collapse of the former government and the new elections to the GermanBundestag, the legislative processwas not completed. It re- mains to be seen whether and in what form corresponding amendments will be reintro- duced into the legislative process or to what extent investments by special investment fundsin closed-ended fundswill continue to be permitted by corresponding statutorypro- visions or an adjustment of the practice of the tax authorities.

3 . Master funds within the meaning of section 2 (1) no. 16 AnlV

In certain circumstances, implementation of the ESMA proposals could also affect the el- igibility of investments in closed-ended funds by master funds whose shares are held by regulated investors subject to the In- vestment Regulation (Anlageverordnung) (e.g., pension funds or pension schemes).

The BaFin Capital Investment Circular (BaFin Circular 11/2017 [VA] of December 12, 2017) expressly permits open-ended special AIFs within the meaningof Section 2 (1) No. 16 AnlV to invest in closed-ended funds whose investment policyis focused on investments in infrastructure projects and corporate finance instruments (Section 2 (1) No. 13 letter b Investment Regulation). For certain other types of closed-ended funds, however, the eligibility may also depend on whether securities exist within the meaning of investment law. According to reports from the BaFin, an update of the Capital Invest- ment Circular is currently beingplanned, in- dependently of the proposals for the EAR. It remains to be seen whetherthis will also result in changes with regard to the possibili- ties for master fundsto invest in closed-ended funds.

C . Outlook

The ESMA report contains recommendations to the European Commission, which may implement them in the form of a proposal for a directive that would then have to be dealt with by the Council of the EU and the European Parliament as part of an EU legislative procedure. Amendments to such a proposal, including those influenced by public consultations with experts, are possi- ble. Following publication of an amending directive in the Official Journal, transposition into national law would still be required before the new rules could enter into force with immediate effect for the industry.

In its proposal, ESMA advocates appropriately long transition periods after the revised EAR comes into force, without specifying a specific timeframe, due to the potential im- pact on the existing portfolios of UCITS. This is intended to allow existing portfolios to be adapted to the new requirements. However, ESMA currently rejects a general grandfathering clause for UCITS authorized before the application of the revised EAR. ESMA wants to avoid a division of the UCITS market into "liberal" old UCITS and new UCITS subject to the amendedregime (harmonization principle).

The implementation of an amended EAR into German law would entailan adjustment of the acquisition criteria for UCITS in the KAGB from an investment law perspective. It remains to be seen whether and to what extent the changes wouldalso affect the ac- quisition of interests in closed-ended funds by AIFs (in particular master funds structured as open-ended special AIFs).

We will monitor further developments, participate in association hearings, and keep you informed. If you have any questions, please do not hesitate to contact one of the people listedbelow or your contact at POELLATH.