Okay I went ahead and came up with some fluff for how I feel that the Aquatic Elves fit into the world of E'n as an NPC only Race. I hope this meets with approval from the judges because this is the best I think I can do here.
AQUATIC ELVES
The Aquatic Elves or Uisceach Sídhe (translated from Irish it means "Aquatic Fairy"): are similar in many regards to the Elves of the surface. Unlike their landbound cousins however, these Elves are almost completely forced to dwell under the surface of the water. They can come to the surface world for only short periods of time. Any longer and they would effectively drown in the environment that is as alien to them as the underwater world is to humans.
Like their land born cousins, the Aquatic Elves hail from the Otherworld. The vast oceans and above ground tributaries and aqueducts of the Otherworld allowed the Aquatic Elves far more freedom in where they could go than is granted them while they are on E’n. However they still manage to survive here with relative ease in a few centralized communities around the world.
The music of the Aquatic Elves is at once haunting and beautiful. They have refined art forms that utilize Coral, Aquatic Mammalian and Fish Bones, as well as Shells to create some of the most beautiful items on the face of E’n. The Laws of the Aquatic Elves are as shifting and malleable as the tides of the Ocean. Thus it is usually up to each individual Aquatic Elf to determine his own path in life and what is right or wrong for him.
Most of the population of the Aquatic Elves has opted to remain in the Otherworld. A small percentage however have come to the Border Realms and freely traverse between those realms and the mortal world. This allows for a continuous flowing of knowledge between the Aquatic Elves and the non-Fey Aquatic Races such as the Merfolk. Without such interaction the Aquatic Elves could likely be considered the most xenophobic of the Elven races, an honor that usually goes more readily to the Drow. Unlike most other types of Elf, the Aquatic Elves have not built any cities on the mortal world, as they really have no use for such cities living in the Ocean and all. They live, and seek shelter wherever they can find such accommodations in the vast oceans and rivers of the world.
The Aquatic Elf Courts, while similar to those of the Surface Elves are also structured differently in many ways. Instead of being a feudal system, the Aquatic Elves seem to be based more on a judiciary system. They have a council of 100 Magistrates who oversee any disputes between any individual Aquatic Elves. This in effect allows the various individuals in the community the most freedom of choice in their lives.
It is even rarer amongst Aquatic Elves than it is among the surface dwelling Elves for a member of the community to be exiled. This is because of the fact that it is rather difficult to exile an Elf who cannot survive on land for very long from the bodies of water that make up the homes of the Aquatic Elves. Thus Exile amongst the Aquatic Elves usually ends up being commuted to a death sentence instead and even that is rare. The most common case for an Exile/Death Sentence would be something on the scale of a violation of the laws of nature or something that endangers the balance of the waters on such a grand scale that it risks turning everything in the world on its head.
Aquatic Elves tend to be longer and lither than their land based cousins. The males rarely have hair so as to streamline themselves in the water, though the females will usually wear their hair long. What hair they do have is usually in shades of blues and greens. Additionally their skin is also a shade of yellowish-green. Their fingers and toes are webbed much like a fishes fins. And they have gills that oxygenate the water so that they can breathe. Unlike more traditional elves, their favored weapons are Nets, Tridents, and Spears. They are however also somewhat familiar with Elven Blades, though they rarely use them.
Aquatic Elves rarely if ever leave the oceans. Thus to find an Aquatic Elf as an Adventurer is exceedingly rare. Those that are found are likely to be some form of spellcaster who is able to make it so that they can breathe while on land without suffering for too long. And even then the Elf would be uncomfortable without getting soaked in a large body of water frequently