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Marketing Private Funds in the UK and Europe: A Guide for US Managers

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

10-09-2019

Introduction

US managers wanting to market private funds in the United Kingdom and European Union will need to comply with the specific regulatory rules for “third country” managers, mainly those put in place to implement the Alternative Investment Fund Managers Directive also known as the “AIFMD”.

Where managers wish to establish offices either for marketing or for managing and marketing their funds in the UK and Europe, additional requirements under the AIFMD and under rules implementing the Markets in Financial instruments Directive also known as “MiFID 2” would also apply. This would bring an increased regulatory burdens which managers would need to weigh against the benefits of a physical presence.

Although the AIFMD establishes clear standards, each EU country has discretion as to how it implements those standards. Before you market in a particular EU country, you will need to check the specific rules in that State, especially on registration of any third country manager marketing where some EU countries have imposed their own requirements.

When the UK leaves the EU, the rules implementing the AIFMD will remain in force and the UK is likely to give effect, in the short term at least, to measures such as including Cross Border Distribution of Collective Investment Undertakings Directive, which amends the AIFMD in connection with, for example, pre-marketing.

The Conditions for marketing

Eligible investors

Generally, a private fund may only be marketed to “professional clients”, which may include high net-worth or sophisticated individuals subject to certain restrictions which should be discussed with your professional advisers, but is targeted primarily at institutional investors and family offices. The offering of funds to retail investors will usually be governed by the UCITS rules; loosely equivalent to the US mutual funds rules.

“Marketing” and “pre-marketing”

The conditions apply to “marketing”. This has a particular meaning and refers to a direct or indirect offering or placement, at the initiative of the manager or on behalf of the manager of units or shares of a fund it manages, to or with investors domiciled or with a registered office in the EEA. It does not, therefore, capture all forms of promotional promotions, such as term sheets, but only those that can give rise to binding contractual relations. These are, however, “pre-marketing” items and, as a result of a recent change to the AIFMD, distributing these item and other steps which fall short of marketing will require a notification to the FCA or authorities in the EU country where you plan to premarket. This change has yet to come into effect.

Updating marketing documents for prior disclosure of information to investors

The manager must make items of information prescribed in the rules implanting the AIFMD available to investors in the fund before they invest. These items would typically be included in the private placement memorandum and include: a description of the fund’s strategy; a description of processes for changing the fund’s strategy; the identity of the manager, the depositary, the auditor and other service providers; a description of valuation procedures; and details of any “preferential treatment”. There are other items and the document that you prepare for this information should be reviewed by a UK lawyer or lawyer in the EU country into which you are marketing the fund.

Registration of marketing with competent authority (FCA in the UK)

Before marketing the fund in the UK, the manager must notify the FCA via an online form of its intention to market. Unlike the other conditions for marketing, this is not a requirement under the AIFMD but instead is one that UK has added. EU countries have also imposed additional requirements, which in some cases go beyond mere notification and you should check the position with lawyers in each EU country that you wish to market in. As noted above, there will also be a pre-marketing notification requirement that is imposed under the AIFMD but this has yet to come into effect.

Processes for annual disclosures to investors

The manager must have a process for: (1) making an annual report available to UK and EU investors in the fund for each financial year; (2) providing the annual report to these investors on request; and (3) making the annual report available to the FCA/EU competent authorities.

Processes for making annual notifications to competent authorities

The manager must have a process for regularly reporting to the FCA/EU competent authority on behalf of the fund marketed: (1) the main instruments in which it is trading; (2) the principal markets of which it is a member or where it actively trades; and (3) the principal exposures and most important concentrations of the fund. This is also known as “Annex IV reporting” after the EU AIFM Delegated Regulation which sets out details of what has to be reported.

The options for establishing offices

A detailed discussion of the conditions for establishing an office in the UK or EU country to market funds is beyond the scope of this guide but the following options exist:

• Branch or subsidiary under the rules implementing MiFID 2

This will require: a permanent office, a minimum of two members of staff responsible for the office including a compliance officer (although functions may be delegated to the US); registration of certain individuals and a process for certifying others; corporate and other governance requirements; a minimum amount of regulatory capital to allow for an orderly wind down of the business; and compliance policies to deal with investor protection.

A MiFID 2 branch may also be able to provide portfolio management services to the manager or to a “host” established to manage the fund – a more cost effective solution if the manager wishes to manage funds from the UK or EU country as well as market.

• Branch or subsidiary under the rules implementing the AIFMD

This will require: a permanent office, a minimum of two members of staff responsible for the office including a compliance officer (although functions may be delegated to the US); registration of certain individuals and a process for certifying others; corporate and other governance requirements; a minimum amount of regulatory capital to allow for an orderly wind down of the business; and compliance policies to deal with investor protection, trading and valuation.

How Eversheds Sutherland can help

Our team has been at the forefront of regulatory interpretation and product development for the fund management industry since the 1980s. We advise on all types of fund structures and prepare all documentation necessary to achieve a successful fund launch.

For more information contact

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