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New EU laws for marketing AIFs and UCITS: One step forward, one step back?

New EU laws for marketing AIFs and UCITS: One step forward, one step back?
  • United Kingdom
  • Brexit
  • Financial services and markets regulation
  • Investment funds and asset management


On 12 March 2018, the European Commission (the “Commission”) published legislative proposals for new rules on marketing AIFs and UCITS comprising:

  • a 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 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”).

The proposals are intended to improve transparency, remove overly complex and burdensome requirements and harmonise diverging national rules. From a UK perspective, however, 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. It would also further restrict reliance on reverse solicitation.

Another effect of the proposals, which will be closely scrutinised, is the proposed transfer of further powers from National Competent Authorities to the European Securities and Markets Authority (“ESMA”). The proposed removal of the need for approval of marketing materials to be distributed by EU AIFMs are particularly significant. Removing the need for a physical presence in a Member State for the purpose of making payments, which have acted as impediments to the cross-border distribution of funds is also significant.

Key aspects of the proposal are:

  • new rules on “pre-marketing”;
  • requirements for marketing communications; and
  • cross-border notifications.

Definition of pre-marketing

The Commission proposes to introduce a harmonised definition of pre-marketing to the AIFMD, EuVECA and EuSEF Regulations to set out the conditions under which an EU AIFM can engage in pre-marketing activities. The AD recognises 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 Member States, where pre-marketing is permitted, its definition and conditions vary considerably amongst those Member States. In other Member States there is no concept of pre-marketing at all.

To address these divergences, the AD proposes a harmonised definition of pre-marketing and conditions under which an EU AIFM can engage in these activities. The AD takes the position that permitted pre-marketing should concern an investment idea or strategy without an actual AIF having already been established. Accordingly, during the course of pre-marketing, investors are unable to subscribe to the units or shares of an AIF because the fund does not exist yet.

So far, so good. However, the AD proposes, contrary to established Financial Conduct Authority Perimeter Guidance Manual in the UK, that no offering documents or limited partnership agreements, even in a draft form, should be permitted to be distributed to potential professional investors during this stage. This is a harsher position than currently exists under the Prospectus Directive, where circulation of draft prospectuses to professional investors is not prohibited. It also ignores the realities of how a wide range of funds structured as limited partnerships are negotiated with investors and that testing investor appetite for investment in a fund requires consideration not just of a particular investment idea or investment strategy but also the commercial terms on which an investment would be made.

The AD also proposes to clarify the limits of reverse solicitation by stating that where following permitted pre-marketing activities the 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”.

The AD only sets out conditions under which an EU AIFM can engage in the pre-marketing activities. This leaves it open to Member State authorities to impose additional requirements or restrictions on non-EU AIFMs. Currently there is no limitation on a Member State’s power to impose pre-marketing prohibitions on non-EU AIFMs.

Requirements for marketing communications

The AD sets out the requirements for the (pre) marketing communications and conforms the requirements for AIFMs 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 AR requires 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 all of which 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.

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.

Cross-border notifications

Local facilities

Under the AD 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 AD also introduces a new Article 43a to the AIFMD requiring Member States that 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.

Notification requirements

It is proposed that Articles 17 and 93 of the UCITS Directive be amended to align the procedures on notification to competent authorities of the changes that UCITS are planning in relation to their managed funds with the procedures set out in the AIFMD.

Discontinuation of marketing

Proposed new Articles (93a of the UCITS Directive and 43a of the AIFMD) will allow managers to de-register the marketing of their UCITS or AIFs only if a maximum of ten investors who hold up to 1% of assets under management of the UCITS or AIF have invested in the UCITS or AIF in an identified Member State.

While this brings consistency across Member States, the investor protection rationale behind this requirement, which will potentially increase the regulatory burden for managers, is not clear, as the new article sensibly requires that investors who remain in the fund in the Member State should in any case continue to receive investor information. The new article could therefore introduce the procedural consistency and certainty it provides in relation to de-registration, but allow this without the minimum investor level requirements.

Verification of marketing communications

If a competent authority requires systematic notification of marketing communications to verify the compliance of communications with relevant national provisions on marketing requirements, this can no longer be a prior condition for the marketing of a UCITS and that competent authority must reach a decision within ten working days. Where Member States allow AIFMs to market to retail investors, the same will apply in respect of those AIFMs.


The restrictions on using draft prospectuses and private placement memoranda for pre-marketing will be greeted with dismay in the fund management industry. Peter De Proft, the Director General of the European Fund and Asset Management Association (“EFAMA”), warns that these proposals can act as an additional barrier rather than facilitating cross-border fund distribution:

“The main barriers to the cross-border distribution of funds, as identified by asset managers and investors, are the lack of clarity and transparency of existing rules, along with additional layers of regulatory requirements imposed at national level. Today’s proposal unfortunately adds yet a new layer of rules. EFAMA would strongly support practical solutions at the level of ESMA. These will enhance supervisory convergence and legal certainty on the basis of a common understanding among national regulators and can be developed and implemented within a much shorter period of time than a legislative proposal.”

Further, the fact that the AD limits its recognition of pre-marketing activities to EU AIFMs raises the spectre of Member States using this as a reason to prohibit pre-marketing by requiring a non-EU AIFM to undertake any form of promotion in compliance with the rules implementing Article 42 of the AIFMD. This would be relevant to UK managers in the event of a “hard Brexit” which would result in UK managers having to fall back on the third country provisions of the AIFMD.


According to the Commission’s website the deadline for responses is 7 May 2018.

How Eversheds Sutherland can help

Our lawyers and consultants have advised countless EU and non-EU fund managers and distributors on marketing funds in the EU and beyond and through our IFN service have assisted with registrations and approvals worldwide.

We would be happy to discuss how we can help you respond to the proposed changes above in a practical manner.