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New laws for marketing AIFs in the EU: Who will they affect and how?

  • Europe
  • Financial services and markets regulation
  • Investment funds and asset management

02-08-2021

Background

On 2 August 2021, Directive 2019/1160 on cross-border distribution of collective investment undertakings (the “Directive”) and Regulation (EU) 2019/1156 on facilitating cross-border distribution of collective investment undertakings (the “Regulation”) will come into force in the EU.  The new rules regulate the pre-marketing of alternative investment funds (“AIFs”) including private equity, debt, infrastructure and hedge funds. While only EU alternative investment fund managers (“AIFMs”) are in scope, the new rules are likely to also have an impact on non-EU fund managers.  The rules will need to be considered before any fund launches in the EU and AIFMs who are active in the EU must familiarise themselves with the changes.

The EU Alternative Investment Fund Managers Directive (“AIFMD”) does not currently regulate pre-marketing.  An AIFM wishing to test investor appetite for a particular investment idea or investment strategy is, therefore, faced with divergent treatment of pre-marketing in different jurisdictions.

Across the EU, the position varies considerably.  Generally, there is little guidance, so a decision to pre-market is a risk-based judgment.  To address that divergence, the new rules provide a harmonised definition of pre-marketing and the conditions under which an AIFM can engage in pre-marketing.

While the proposed changes seek to clarify what pre-marketing is, as well as setting out uniform marketing requirements, it remains to be seen how this will interpreted by individual Member States. EU AIFMs may, to a certain degree, continue to face differing approaches by regulators at a local level. While harmonisation is a welcome approach, the new rules are in places quite limiting and impose an additional administrative burden on EU AIFMs. The new rules do not extend to the pre-marketing by non-EU AIFMs, however, there will still be an impact on them on the basis that Member States may not implement rules which in any way treat non-EU AIFMs more favourably than EU AIFMs. Therefore, the new rules may also apply to non-EU AIFMs, but individual Member States are left to determine their own position in that respect.

Please see our previous briefing on this topic “New EU laws for marketing AIFs and UCITS: One step forward, one step back? (March 2018)”.

New rules from 2 August 2021

Pre-marketing 

The Directive defines pre-marketing as the “provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors domiciled or with a registered office in the Union in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in accordance with Article 31 or 32 [of AIFMD] in that Member State where the potential investors are domiciled or have their registered office, and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment”.

Pre-marketing materials must not include

(a)   information which is sufficient to allow investors to take an investment decision to acquire units or shares of the AIF;

(b)   draft or final form subscription forms or similar documents; or

(c)   final form constitutional documents or offering documents of a not-yet-established AIF.

Draft offering documents must not contain sufficient information to allow investors to take an investment decision and must clearly state that they do not constitute an offer or an invitation to subscribe to units or shares of an AIF and that the information should not be relied upon because it is incomplete and may be subject to change.

An EU AIFM must ensure that investors do not acquire units or shares in an AIF through pre-marketing and that investors contacted as part of pre-marketing may only acquire units or shares in that AIF through marketing under AIFMD.

An EU AIFM must send, within two weeks of having begun pre-marketing, an informal letter to the relevant regulator, specifying in which Member States it is engaged in pre-marketing, the periods during which the pre-marketing is taking place, a brief description of the pre-marketing including information on the investment strategies presented and a list of the AIFs which are the subject of the pre-marketing.

Reverse solicitation 

The biggest impact on non-EU AIFMs is likely to be in relation to reverse solicitation, on which they have historically relied to sell their funds in the EU.  Any subscription within 18 months of the AIFM beginning pre-marketing will be considered to be the result of the marketing and will be subject to the applicable notification procedures referred to in AIFMD.  This means that in many cases reliance on reverse solicitation will no longer be possible if a fund has been pre-marketed.

Requirements for marketing communications

The Regulation requires marketing communications to investors to:

(a)    be identifiable as marketing communications;

(b)    present the risks and rewards of purchasing units or shares of AIFs and UCITS in an equally prominent manner; and

(c)    contain information all of which is fair, clear and not misleading.

By way of background, UCITS management companies must ensure that marketing communications:

(a)    do not contradict the information contained in the prospectus or key investor information;

(b)    indicate that a prospectus exists and key investor information is available; and

(c)    specify where, how and in which language investors or potential investors can obtain the prospectus and key investor information.

Similar provisions require AIFMs to ensure that no marketing communication comprising an invitation to purchase units or shares of an AIF contradicts information that needs to be disclosed to investors in accordance with the AIFMD, or diminishes its significance.  AIFMs must ensure that marketing communications meet the same standards as are required of UCITS management companies as set out above.

The impact of these reforms to marketing communications is to further harmonise the regulatory treatment of UCITS and AIFs and is another step towards a single regulatory approach for all collective investments.

Local facilities

Under the Directive, regulators cannot require a physical local presence in the Member States where UCITS are marketed, but facilities for processing subscriptions, payment, repurchase and redemption of orders, handling complaints and making available information about the fund must be made available.  To ensure consistent treatment for retail investors, regardless of the type of fund in which they decide to invest, the Directive also introduces a new Article 43a to the AIFMD requiring Member States which allow AIFMs to market units or shares of AIFs to retail investors, to make similar facilities available to retail investors and these also do not have to have a physical local presence.

De-notification of marketing

The Directive introduces the following new rules for de-notification of marketing:

(a)   except in the case of closed-ended AIFs and European Long-Term Investment Funds, a blanket offer must be made to repurchase all AIF units held by investors in the relevant Member State, which must be publicly available for at least 30 working days and addressed to all investors in that Member State whose identity is known;

(b)   the intention to terminate marketing of units in the relevant Member State must be publicised in a publicly available medium customary for marketing AIFs and suitable for a typical AIF investor; and

(c)   contractual arrangements with financial intermediaries or delegates must be modified or terminated from the date of de-notification to prevent new or further offering or placement of units.

The AIFM must cease any offering or placement of units of the AIF in the Member State from the date of de-notification, and must not engage in pre-marketing of units in the AIF (or of similar investment strategies or investment ideas) in the Member State for a period of 36 months from such date.

AIFMs will need to carefully assess the opportunity cost of de-notification against the administrative burden and cost of continued registration.  Depending on the interpretation of ‘similar investment strategies or investment ideas’, if the AIFM intends to launch successor funds or funds with a similar investment strategy during the three year period after final close, de-notification may not be practical.

Application to non-EU AIFMs

As mentioned above, while the new rules are expressed to apply only to EU AIFMs, importantly, they provide that Member States may not implement rules which in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs.  Non-EU AIFMs are likely to find the new rules extremely limiting, given that there is a risk that the rules applying to them in local markets could be even more restrictive.

Luxembourg implementation

The Luxembourg Law implementing the Directive was published on 26 July 2021 and will enter into force on 2 August 2021. Additionally, on 28 July 2021, the Luxembourg Financial Supervisory Authority (“CSSF”) published Circular 21/778 laying down technical rules for marketing notifications in accordance with the requirements of the Directive. Provisions of the circular are applicable to UCITS only.  For AIFs, on 30 July 2021, the CSSF made available a dedicated web page for the pre-marketing notifications of AIFMs.  It describes pre-marketing procedures applicable to Luxembourg, EU, and non-EU AIFMs targeting potential professional investors. 

As an EU regulation, the Regulation is directly applicable in Luxembourg and does not require transposition into national law.  Although the majority of its provisions became applicable on 1 August 2019, entry into force of certain requirements related to marketing notifications, their publication by Member States as well as amendments to Regulations (EU) No 345/2013 (EuVECA) and (EU) No 346/2013 (EuSEF) were deferred until 2 August 2021. The CSSF addressed the requirements of the Regulation in its frequently asked questions (“FAQs”) published on 30 July 2021. FAQs provide further guidance on different procedures applicable to marketing notifications of both UCITS and AIFs and technical requirements for their filing with the CSSF.

UK implementation

While the Directive was in force on 31 December 2020 when the UK left the EU, the requirement to transpose the pre-marketing rules does not fall due until 2 August 2021 and the UK government and the FCA are under no obligation to transpose the Directive.  Unless they choose to do so, and they have announced no plans that they will, the Directive will have no effect in the UK.

There are certain provisions in the Regulation which came into force and were applicable on 1 August 2019 and which, therefore, form part of UK law as directly effective EU law onshored into UK law by the EU (Withdrawal) Act 2018.  However, the provisions in the Regulation which deal with pre-marketing are not applicable until 2 August 2021 and will, therefore, not come into force in the UK unless equivalent rules are adopted by the UK government or the FCA.  Neither the UK government nor the FCA have announced any plans to do so.

For further information on how the Directive and Regulation impact on your business, please get in touch