A stronger fund market

On 16 May 2025, the Swedish government published the interim report SOU 2025:60 – En starkare fondmarknad, as part of the ongoing Swedish fund market inquiry (the "Fund Market Inquiry", Sw. Fondmarknadsutredningen). The Fund Market Inquiry aims to modernize Sweden's fund legislation, enhance competitiveness and resilience, and align national regulations with recent amendments to the EU’s AIFM and UCITS directives. Most amendments are proposed to enter into force on 16 April 2026.

Th published report covers all parts of the original mandate for the Fund Market Inquiry, except for the section on incorporated funds with variable share capital – i.e., the proposed introduction of Swedish SICAVs. This will follow in a final report, expected on 30 November 2025.

The report identifies that certain Swedish institutional investors, such as public pension funds and insurance companies, face unintended foreign tax consequences when investing through Swedish funds. This issue arises because some countries, like the United States, do not recognize Swedish funds as tax-transparent entities. As a result, Swedish institutional investors may be subject to non-recoverable withholding taxes that would not apply if the investors held the assets directly or through recognized transparent structures, such as Irish Common Contractual Funds (CCF).

To address this, the report proposes the introduction of a new Swedish fund structure that is transparent fort both legal and tax purposes, simplifying the tax assessments for eligible institutional investors.

However, the proposed structure is subject to several restrictions. It may only be used by Swedish UCITS, not AIFs, and consequently, funds using this structure are limited to liquid financial assets in accordance with the UCITS directive. UCITS are typical retail products with stringent investment restrictions, and it is questionable whether institutional investors are seeking such highly regulated products.

Also, fund units in the proposed new structure may only be offered to a limited group of institutional investors, including states, municipalities, insurance companies, occupational pension companies, and pension funds.

The rationale for these restrictions is the concern that the new structure could be used for tax avoidance. However, it is debatable whether these limitations align with UCITS directive requirements. For instance, UCITS must raise capital from “the public”, whereas the proposed investor base would generally not meet that definition.

The Fund Market Inquiry suggests that although UCITS must raise capital from the public, some UCITS are in practice marketed exclusively to professional clients. Based on this, the Fund Market Inquiry concludes that it should be possible to restrict these funds to the above-mentioned categories of investors. However, the term "professional clients" includes a much broader category of investors than the limited group suggested in the proposal. 

Given the above, we anticipate that either the scope of eligible investors will need to be expanded, or alternatively, these new fund structures will have to be AIFs rather than UCITS in the final legislative proposal. It should also be noted that Irish CCFs may be formed as both UCITS and AIFs.

The revised AIFMD (AIFMD II) introduces new rules for loan-originating funds, including credit risk assessment and risk management requirements, leverage limits and liquidity restrictions.

The Fund Market Inquiry proposes amendments to the Swedish AIFM Act to implement these changes. 

Loan-originating AIFs are defined as:

• AIFs whose primary investment strategy is to issue loans, or
   
• AIFs where issued loans constitute at least 50% of NAV.
   

Loan origination includes both loans issued directly and indirectly. Direct issuance refers to loans originated by the fund itself, while indirect issuance refers to loans originated by a company or special purpose vehicle on behalf of the fund or the AIFM.

Loan-originating AIFs will therefore primarily target corporate borrowers. It's noteworthy that the report does not address the registration requirement under the Swedish Act on Certain Financial Operations (Sw. lagen (1996:1006) om viss finansiell verksamhet), which applies to entities operating lending activities in Sweden. AIFs and AIFMs are not exempted from the Swedish Act on Certain Financial Operations, and loan-originating AIFs must therefore register and become subject to the Swedish AML/CTF regulations. This applies whether or not the fund formally qualifies as a “loan-originating” fund under AIFMD II.

One alternative would be to exempt AIFs and AIFMs from the registration requirement of the Swedish Act on Certain Financial Operations. This would, in our view, limit the administration and costs for AIFs and AIFMs that originate loans and would thus improve the competitiveness of the Swedish fund market. AIFMs are already covered by the Swedish AML/CTF regulations, and excluding them from the registration requirement would therefore make sense.

The Fund Market Inquiry also proposes the following leverage limits:

• 175% of NAV for open-ended funds
   
• 300% for closed-ended funds
   

As a general rule, loan-originating AIFs should be structured as closed-ended funds. However, open-ended structures may be permitted if the AIFM can demonstrate that the fund’s liquidity management is compatible with its investment strategy and redemption policy.

The new rules enter into force on 16 April 2026, but legacy funds established before 15 April 2024 benefit from a transitional period until 16 April 2029.

The report does not exclude consumer credits from the scope of the new rules for loan-originating funds. However, as of 1 July 2025, consumer credits – except mortgage credits – may only be issued by credit institutions or grandfathered consumer credit institutions. In practice, this means non-mortgage consumer lending by AIFs will be effectively banned.

In alignment with amendments to the AIFMD and UCITS directive, the Fund Market Inquiry proposes new liquidity management tools for UCITS and AIFs.

Additionally, the liquidity requirement for UCITS is being adjusted from daily liquidity to bi-weekly liquidity, in line with the updated UCITS directive.

Both compulsory and voluntary liquidity tools have been introduced. UCITS and AIFs must choose at least two tools to use during market stress. These tools may include suspension of subscriptions/redemptions, redemption gates, swing pricing, extended notice periods, in-kind redemptions, or side pockets (for AIFs only).

Existing funds must apply or notify the Swedish FSA to amend their fund rules or constitutional documents as soon as possible after the rules take effect – no later than 16 October 2026.

The report also includes proposals regarding ETFs, outsourcing, and the range of services fund managers and AIFMs may provide.

It is positive that initiatives to modernize the Swedish fund legislation are underway; however, it is questionable whether the proposals are indeed effective tools to strengthening the Swedish fund market. The proposals appear conservative, and it seems that a more thorough approach is needed.

We look forward to the final report on funds with variable share capital later this year. Hopefully, it will offer a more expansive and flexible approach than the current proposal for transparent funds.