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Game changer or small beer for cross-border fund distribution in the EU?

Game changer or small beer for cross-border fund distribution in the EU?

  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Financial institutions


The legislative package on which political agreement was reached on 5th January 2019 was originally presented by the European Commission in March 2018 with the aim of reducing regulatory barriers to the cross-border distribution of investment funds in the EU. The COREPER has now been invited to approve the final compromise texts and Parliament is expected to consider them during the plenary session of 15th April 2019. The package includes:

• a proposed Directive on the cross-border distribution of collective investment funds, the Amending Directive to amend the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive (AIFMD)

• a proposed Regulation on facilitating cross-border distribution of collective investment funds, setting out a harmonised framework concerning certain aspects of the cross-border distribution of funds, the Amending Regulation. This is intended to amend the European Venture Capital Funds Regulation (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (EuSEF Regulation)

The main changes introduced by the new rules will:

• make it easier for EU alternative investment fund managers (AIFMs) to test the appetite of potential professional investors in new markets

• clarify customer service obligations for asset managers in their home Member State

• align procedures and conditions for fund managers to exit national markets

• improve transparency and create a single online access point for information on national rules on marketing requirements and applicable fees

A scaling back

The final compromise represents a retreat from the original proposals in two important respects:

• on pre-marketing, the original proposal would have restricted existing and legitimate market practices, by preventing firms circulating draft documents referring to existing funds. These provisions were removed after negotiation

• the requirements on fund managers who wished to withdraw from marketing in a particular Member State now has exclusions on the requirements to offer to buy back units from existing investors. This would have been unworkable for closed-end funds, such as private equity funds

Harmonised definition of pre-marketing

The compromise proposals introduce a harmonised definition of pre-marketing into the AIFMD, EuVECA and EuSEF Regulations to set out the conditions under which an EU AIFM can engage in pre-marketing activities. The proposals recognise that there are cases where an AIFM willing to test investor appetite for a particular investment idea or investment strategy is faced with a divergent treatment of pre-marketing activities in different national legal systems. In some Members States there is no concept of pre-marketing at all.

To address these divergences, the proposals take the position that permitted pre-marketing should concern an investment idea or strategy of an AIF which is not yet established, or which is established, but not yet notified for marketing in that Member State. Accordingly, during the course of pre-marketing, investors are unable to subscribe to the units or shares of an AIF, and no subscription forms or similar documents whether in draft or final form should be permitted to be distributed to potential investors during this stage.

Where a draft prospectus or offering documents are provided, such documents should not contain sufficient information allowing investors to take an investment decision and should clearly state the following:

• the document does not constitute an offer or an invitation to subscribe to units or shares of an AIF

• the information presented in those documents should not be relied upon because it is incomplete and may be subject to change

Any subscription within 18 months of pre-marketing will be considered to be marketing and will be subject to the relevant national private placement notification. Further, an AIFM will have to report to its home Member State regulator, within two weeks of it beginning pre-marketing, details of any pre-marketing activities it was engaged in, including Member State(s) in which pre-marketing took place, when pre-marketing took place and details of AIFs and compartments pre-marketed.

Further, it is worth noting that a third party will only be able to engage in pre-marketing on behalf of an EU AIFM in certain circumstances, eg where it is an authorised investment firm, credit institution, UCITS management company, AIFM or tied agent.

Reverse solicitation

The draft Directive published in March 2018 proposed to clarify the limits of reverse solicitation by stating that if following permitted pre-marketing activities an AIFM offers for subscription units or shares of an AIF with features akin to the pre-marketed investment idea, the appropriate marketing notification procedure should be observed and “the AIFM should not be able to invoke reverse solicitation”. This latter concept has been deleted from the agreed package.

AIFMs must however ensure that investors do not acquire units or shares in an AIF through pre-marketing activities and that investors contacted as part of pre-marketing may only acquire units or shares in that AIF under marketing permitted under Article 31 or 32 of the AIFMD.

It is worth mentioning that the proposed Regulation requires the Commission to publish a report on reverse solicitation and demand on the own initiative of an investor within two years.

Requirements for marketing communications

The proposed Regulation sets out the requirements for (pre) marketing communications and conforms the requirements for AIFMs, EuVECA and EuSEF managers with those for UCITS management companies under Article 77 of the UCITS Directive and portfolio managers under Article 24(3) of MiFID. The provisions echo existing requirements under the UK financial promotion regime for authorised firms.

In order to enhance the regulatory framework applicable to investment funds and to better protect investors, the proposed Regulation requires marketing communications to investors to:

• be identifiable as marketing communications

• describe the risks and rewards of purchasing units or shares of AIFs and UCITS in an equally prominent manner

• contain information which is fair, clear and not misleading

• not contradict or diminish the significance of the information disclosed to investors under Article 23 of the AIFMD or contained in the prospectus or key investor information under Articles 68 and 78 of the UCITS Directive

• indicate that a prospectus exists and key investor information is available

• specify where, how and in which language investors or potential investors can obtain the prospectus and key investor information and provide electronic links to those documents

AIFMs must ensure that marketing communications meet the same standards as are required of UCITS management companies. The impact of these reforms to marketing communications is to further harmonise the regulatory treatment of UCITS and AIFs.

Cross-border notifications

Local facilities

Under the proposed Directive regulators can no longer require a physical local presence in the Member States where UCITS are marketed. However, facilities for processing subscriptions, repurchasing and redemption of orders, making other payments to unit-holders, handling complaints, making available information and documents about the fund and acting as contact point for communicating with the competent authority should still be made available to investors.

To ensure consistent treatment for retail investors, regardless of the type of fund in which they decide to invest, the proposed Directive introduces similar requirements to the AIFMD.

The facilities can be run by the UCITS, AIFM or by a third party.

Notification requirements

It is proposed that the UCITS Directive be aligned to the procedures set out in the AIFMD in respect of changes UCITS are planning. Particular points to note are:

• AIF and UCITS notification letters will now need to include details for the invoicing or communicating of any applicable regulatory fees or charges by the competent authorities and a description of the facilities agent

• where a change to the information provided in the AIF or UCITS notification letters means that the UCITS or the AIFM’s management of the AIF would no longer comply with the UCITS Directive or AIFMD, the home Member State regulator must notify the UCITS or AIFM within 15 working days of receiving all the information that it is not to implement that change

• where a change relates to information provided in the UCITS notification letter or share classes to be marketed, the UCITS will be required to give written notice to its home Member State at least one month before implementing that change. The home Member State regulator must notify the UCITS within 15 working days if it will not implement the change. This new requirement for one month’s prior written notice to be given seems very onerous for UCITS bearing in mind that the current requirement is that changes must simply be notified to the host Member State competent authorities in advance (rather than a mandated one month’s prior notice period).

Discontinuation of marketing

The proposed Directive introduces new Articles (93a of the UCITS Directive and 32a of the AIFMD) which will allow managers to de-notify arrangements made for marketing in a host Member State provided certain conditions are fulfilled, including:

• a blanket offer to repurchase or redeem all units or shares for at least 30 working days

• intention to terminate arrangements must be made public

• contractual arrangements with financial intermediaries need to be modified or terminated with effect from the date of de-notification

De-notification will require a notification to the home Member State regulator of the relevant AIFM or UCITS, which in turn will have to transmit this notification to the relevant host Member States within 15 working days. The AIFM or UCITS will have to cease any new offering or placement of units from the date of transmission of the notification file.

While this brings consistency across Member States, it will potentially increase the regulatory burden for managers as the new articles require that investors who remain in the fund in the Member State should continue to receive investor information.

Further, it is worth noting that AIFMs may not engage in pre-marketing activities of units or shares of EU AIFs referred to in the notification, or in respect of similar investment strategies or ideas, in the Member State where it has de-notified activities.

Verification of marketing communications

The prior notification of marketing communications to verify compliance with local marketing requirements can no longer be a prior condition for the marketing of a UCITS. Further, the competent authority must reach a decision within ten working days. This will be particularly helpful in countries such as Belgium and France where pre-approval of marketing materials is required.

In the absence of a request for amendments upon expiry of the 10 working days, the marketing communication will be deemed compliant.

Where Member States allow AIFMs to market to retail investors, the same will apply in respect of those AIFMs.

Timeline and Brexit impact

In terms of next steps, the European Parliament will consider the agreed proposals at its plenary session of 15th April 2019 with a view to the proposals being implemented by late 2020/early 2021.

The proposed legislation may therefore start to apply after the UK has left the EU. It is, however, expected that the UK government will replicate this particular EU law in UK legislation and regulation.

How Eversheds Sutherland can help

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans.

For more information contact

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