On June 26, 2025, the European Securities and Markets Authority (ESMA) submitted its long-awaited final report on the revision of Directive 2007/16/EC (Eligible Assets Directive, “EAR”) to the European Commission (ESMA34-2087785638-1548). ESMA had already been tasked by the European Commission in June 2023 with reviewing the EAR and proposing potential adjustments.
The EAR specifies which assets may be acquired by undertakings for collective investment 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 impact on UCITS, the proposed amendments by ESMA also affect certain special 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 result 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 meaning of the UCITS Directive and the EAR. It also seems highly doubtful to what extent investments 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 content and 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.
Key Facts
- Once implemented, ESMA’s proposals would significantly restrict the definition of securities under the EAR, meaning that shares in closed-ended target funds would generally no longer be eligible for acquisition as securities.
- Despite the amendment to the EAR, shares in closed-ended target funds should remain eligible for most of the special AIFs.
- 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.
- Closed-ended funds whose investment policy is focused on investments in infrastructure projects and corporate financing instruments should continue to be eligible for acquisition by open-ended special AIFs within the meaning of Section 2 (1) No. 16 AnlV.
Initial Situation and proposed changes
Under current law, the eligibility of investments in closed-ended funds for open-ended special AIFs (in particular those that are so-called semi-transparent special investment funds for tax purposes) depends in 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 conditions.
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, holdings in 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, there are 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 company investments, loan receivables, real estate, and comparable illiquid assets may not be acquired directly by UCITS.
- Full authorisation requirement: Investments in closed-ended funds should only qualify as securities if the closed-ended fund is registered or authorised and subject to supervision comparable to that under law of the European Union. In the case of EU AIFs, such comparability of supervision 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 investments in feeder funds, for example. This proposal also represents a tightening of the current law, which did not provide for any such restriction.
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 characteristics of the special AIF and the regulatory background of the investors in the respective special AIF.
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, provided that no further (tax or regulatory) product requirements are additionally required. For special AIFs that are designed for tax purposes as non-transparent investment funds under Chapter 2 of the Investment Tax Act (“Chapter 2 investment 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, continue to be eligible for acquisition. Under the investment product rules for the widely used open-ended domestic special AIFs with fixed investment conditions (Section 284 KAGB), acquisition as a “corporate participation” would be possible in most cases (subject to certain concentration limits).
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 implementation of the ESMA proposals on the basis of the applicable investment tax law and the current administrative practice of the tax authorities, because in many cases qualification 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 Chapter 3 investment funds. Closed-ended funds in the legal form of a partnership are therefore generally not available for acquisition if they cannot be classified as securities. However, investments in closed-ended funds in the legal form of corporations, whose fair market value can be determined, would still be possible, although these would have to remain below 10%.
If the ESMA proposals were implemented within the framework of UCITS regulation, various measures could be envisaged under national (tax) product regulation for Chapter 3 investment funds that could remedy the situation. Under the previous government, the government draft of a second law on financing future-proof investments (“Second Future Financing Act”) already provided for a change to the product rules for Chapter 3 investment funds, according to which these would have been allowed to invest without restriction in closed-ended or open-ended domestic and foreign investment funds pursuant to Section 1 (1) of the German Investment Code (KAGB). According to this, the acquisition of participations in a closed-ended fund would no longer depend on whether they qualify as securities or as corporate participations. However, due to the collapse of the former government and the new elections to the German Bundestag, the legislative process was not completed. It remains to be seen whether and in what form corresponding amendments will be reintroduced into the legislative process or to what extent investments by special investment funds in closed-ended funds will continue to be permitted by corresponding statutory provisions or an adjustment of the practice of the tax authorities.
Master funds within the meaning of section 2 (1) no. 16 AnlV
In certain circumstances, implementation of the ESMA proposals could also affect the eligibility of investments in closed-ended funds by master funds whose shares are held by regulated investors subject to the Investment 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 meaning of Section 2 (1) No. 16 AnlV to invest in closed-ended funds whose investment policy is 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 Investment Circular is currently being planned, independently of the proposals for the EAR. It remains to be seen whether this will also result in changes with regard to the possibilities for master funds to invest in closed-ended funds.
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 possible. 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 impact 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 amended regime (harmonization principle).
The implementation of an amended EAR into German law would entail an 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 would also affect the acquisition of interests in closed-ended funds by AIFs (in particular master funds structured as open-ended special AIFs).