On 12 March 2018, the European Commission (the “Commission”) published draft proposals aimed at removing certain regulatory and administrative barriers to the cross-border distribution of alternative investment funds (“AIFs”) and undertakings for collective investment in transferable securities (“UCITS”). The changes are an attempt to remove overly complex and burdensome requirements, improve transparency and harmonise divergent national rules, comprising:
- a new directive on the cross-border distribution of collective investment funds (COM(2018) 92), the Amending Directive (“AD”) to amend the UCITS Directive and the Alternative Investment Fund Managers Directive (“AIFMD”); and
- a new regulation on facilitating cross-border distribution of collective investment funds (COM(2018) 110), setting out a harmonised framework concerning certain aspects of the cross-border distribution of funds, the Amending Regulation (“AR”). This is intended to amend the European Venture Capital Funds Regulation (Regulation 345/2013) (“EuVECA Regulation”) and the European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (“EuSEF Regulation”).
Changes include the proposed transfer of further powers from National Competent Authorities (“NCAs”) to the European Securities and Markets Authority (“ESMA”), demonstrating the increasing role of ESMA in policing the regulatory behaviour of not just asset managers but also national authorities themselves. Some of the most notable proposals are: the removal of the requirement for pre-approval of marketing materials being distributed by EU AIFMs; and the removal of the need for a physical presence in a Member State for the purpose of making payments, which has been considered an impediment to the cross-border distribution of funds.
Furthermore, the AD and AR form part of the Commission’s wider Capital Markets Union (“CMU”) policy initiative, which aims to encourage the development of more unified and efficient capital markets within the EU.
However, responses have been mixed, with industry bodies such as the European Fund and Asset Management Association and ICI Global criticising the changes, arguing that they do not meet the aims of the CMU policy initiative, commenting that the reforms will not make much of a difference in aiding distribution, lowering investor costs or increasing investor fund choices. From a UK perspective, it seems that the proposed AD would make the pre-marketing of AIFs to professional investors more difficult by:
- banning the circulation of draft private placement memoranda and draft limited partnership agreements; and
- restricting reliance on reverse solicitation.
The key aspects of the proposal include the following:
- new rules on “pre-marketing”;
- requirements for marketing communications;
- cross-border notifications; and
- clarification on regulatory fees.
New rules on pre-marketing
The Commission proposes to introduce a harmonised definition of pre-marketing to the AIFMD, EuVECA and EuSEF Regulations and to set out the conditions under which an EU AIFM may engage in pre-marketing activities, clarifying the definition of ‘pre-marketing’ compared to ‘marketing’. The AD restricts pre-marketing activities to EU AIFMS only.
The new definition of ‘pre-marketing’ excludes information that does not:
- relate to, or contain any reference to, an established AIF;
- enable investors to commit to acquiring units or shares of a particular AIF; or
- amount to a prospectus, constitutional document of an AIF which has not yet been established, offering document, subscription form or similar document, which is in draft or final form, which would allow an investor to make an investment decision.
The AD allows EU Alternative Investment Fund Managers (“AIFMs”) to test investor appetite for an investment idea or investment strategy before launching a notification process for the fund with the relevant NCA, without being considered as circumventing the marketing rules. The AIFM is only allowed to test an investment idea or an investment strategy if it has not already established the AIF. Therefore, investors are unable to subscribe to the units or shares of an AIF as the fund would not yet be in existence. If, however, a professional investor later subscribes to the AIF when established (or an AIF managed by the AIFM with “similar features”), this would be considered to have been the result of marketing.
However, the new requirements propose that circulating draft offering documents or constitutional documents will constitute AIFMD pre-marketing. This is contradictory to the FCA’s Perimeter Guidance Manual, where circulation of draft, ‘path finder’ documentation, which does not involve an offer to the investor to enter into a binding agreement, is not usually considered marketing. This is accordingly a harsher position for UK AIFMs and does not consider the practical issues of how a wide range of funds are structured such as limited partnerships, where negotiating the commercial terms of the agreement would technically be ‘marketing’ to investors.
The AD also proposes to clarify the limits of reverse solicitation, stating that where following permitted pre-marketing activities the AIFM offers for subscription units or shares of an AIF with features similar to the pre-marketed investment idea, the appropriate marketing notification procedure should be observed and the AIFM will not be allowed to use reverse solicitation.
It is also important to note what impact the proposed definition of “pre-marketing” might have on the interpretation of the definition in AIFMD of “marketing” in EU Member States which currently do not consider the sending of draft documentation to potential investors to fall within the latter definition.
Requirements for marketing communications
The proposals reflect the existing requirements under the UK financial promotion regime for authorised firms in the UK.
To enhance the regulatory framework and better protect investors, the AR requires all marketing communications to investors to:
- be identifiable as marketing communications;
- present the risks and rewards of purchasing units or shares of AIFs and UCITS in an equally prominent manner; and
- contain information that is fair, clear and not misleading.
UCITS management companies must ensure that marketing communications:
- do not contradict the information contained in the prospectus or key investor information;
- indicate that a prospectus exists and key investor information is available; and
- specify where, how and in which language investors or potential investors can obtain the prospectus and key investor information.
AIFMs and UCITS management companies must also ensure that no marketing communications compromising an invitation to purchase units or shares of an AIF contain statements that contradict or diminish the significance of any information disclosed in a prospectus, key information document or required disclosure document for the relevant fund.
The proposed regulation allows NCAs to require notification of marketing communications with UCITS managers and AIFMs targeting retail investors to notify them of all marketing communications which they intend to use directly or indirectly in their relations with investors. This notification would not be a pre-condition of marketing. NCAs will have up to 10 working days following receipt of notification to inform the relevant manager of any request to amend a marketing communication.
Cross border notifications
Under the proposed AD, Member States cannot force UCITS to have a physical presence in the countries where they market their funds to process investors’ orders, make payments and provide the fund information and documentation. But they must have facilities in place to perform these tasks in each country in which they market their funds. To ensure consistent treatment for retail investors, the same requirements apply to AIFMs marketing their AIFs to retail investors (this is reflected in a new Article 43a to the AIFMD).
Articles 17 and 93 of the UCITS Directive are to be amended to reflect the procedures on notification to NCAs of the changes for UCITS in relation to their managed funds with the procedures set out in AIFMD.
Discontinuation of marketing
New Articles 93a of the UCITS Directive and 43a of the AIFMD allows managers to de-register the marketing of their UCITS or AIFs in a Member State other than its home Member State if there are less than ten investors, holding less than 1% of assets under management of the UCITS or AIF.
This may increase the regulatory burden for managers which arguably is not necessarily needed.
Clarity on regulatory fees
The proposals call for more transparency of regulatory fees at national and EU level and consequently require NCAs to apply only fees and charges that are proportionate to the expenditure to the activity that they perform and send yearly detailed invoices to the registered office of the supervised AIFMs or UCITS management companies.
Although these rule changes will not be in force by the time the UK is expected to leave the EU (potentially only being applicable in the final few months before the end of any transitional period), the provisions the Commission proposes to introduce should be watched carefully and the impact of the new definition of pre-marketing for UK managers in the event of a hard Brexit.
For more information on cross-border marketing of AIFs and UCITS, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.