Starting 2 August, 2021, a new EU Directive and Regulation on the cross-border distribution of collective investment funds (the CBDF Directive and CBDF Regulation) are required to be implemented in EU Member States.
Among other things, the new rules amend the existing EU Alternative Investment Fund Managers Directive (AIFMD) with the objective of harmonising the ability for EU alternative investment fund managers (AIFMs) to distribute alternative investment funds (AIFs) across the EU, including by introducing a new regime for “pre-marketing.”
Although the new rules relate to the situation where EU AIFMs of EU AIFs wish to use the AIFMD marketing passport (available only within the EU), it appears that some Member States also intend to apply certain of the rules to non-EU AIFMs (including UK and U.S. AIFMs) in relation to the process of marketing of their AIFs under the Article 42 AIFMD national private placement regimes (NPPRs).
Certain of the new rules also apply to Undertakings for the Collective Investment in Transferable Securities (UCITS) and (pre-)marketing to retail investors; however, the focus of this Update will be on the pre-marketing rules, and the resulting implications for reverse solicitation, for non-AIFMs marketing AIFs to professional investors.
Summary of the new rules
We discussed some of the new rules in our May 2019 Update EU AIFMD: New Rules on Pre-Marketing and Reverse Solicitation; in summary, the new rules contemplate the following for EU AIFMs (a discussion of how these rules might be extended to non-EU AIFMs is set out in the section that follows).
Pre-marketing – concept
The CBDF defines “pre-marketing” as:
“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, 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” (emphasis added)
However, the CBDF Directive then goes on to provide that pre-marketing must not involve the provision of, among other things, (i) draft or final for subscription documents and (ii) a final form prospectus/offering document or constitutional document of a not-yet-established AIF.
Where a draft prospectus/offering document is provided, it cannot contain sufficient information for investors to take an investment decision and must contain disclaimers that it should not be relied upon and is subject to change. This effectively excludes an EU AIFM providing a near final prospectus/offering document with a “draft” stamp and claiming that as “pre-marketing.”
An EU AIFM is required to ensure that pre-marketing is adequately documented.
The purpose of the pre-marketing rules for EU AIFMs is to introduce consistency in the EU as to what amounts to “marketing” under the AIFMD marketing passport, which can be carried out only if a passporting notification to the relevant Member State regulator is made.
Pre-marketing — notification requirement
The CBDF Directive requires that an EU AIFM send, within two weeks of having begun pre-marketing, an “informal letter” to its home Member State regulator. That letter shall specify the Member States and the periods during which the pre-marketing is taking or has taken place, a brief description of the pre-marketing including information on the investment strategies presented, and, where relevant, a list of the AIFs and compartments of AIFs that are or were the subject of pre-marketing.
That home Member State regulator is then required to inform the regulators promptly, of the Member States in which the EU AIFM is or was engaged in pre-marketing.
Pre-marketing — who can conduct
The rules will only permit the following types of authorised EU financial institutions to engage in pre-marketing activities on behalf of EU AIFMs (i.e., where the EU AIFM decides to appoint a third party to conduct the pre-marketing):
- investment firms authorised under the Markets in Financial Instruments Directive (MiFID);
- credit institutions authorised under the Capital Requirements Directive (CRD);
- UCITS management companies authorised under the UCITS Directive;
- an AIFM authorised under the AIFMD; or
- a person acting as a tied agent in accordance with MiFID.1
Implication for reverse solicitation
Under the new rules, any subscription by a professional investor in an AIF within 18 months of the commencement by an EU AIFM of pre-marketing activities relating to that AIF, will be considered the result of marketing (therefore entailing AIFMD marketing notifications).
The potential effect of the above is that pre-marketing in relation to a fund will preclude the EU AIFM being able to rely on reverse solicitation for a period of 18 months.
It should be noted, separately, that under the CBDF Regulation, the European Commission is required, by 2 August, 2021, to submit a report to the European Parliament and to the Council of the EU on reverse solicitation.
Discontinuation of marketing
The rules prescribe a procedure for de-notifying an AIF for marketing in a particular Member State. Where an EU AIFM ceases marketing and denotifies the AIF in a Member State, that EU AIFM is barred from pre-marketing that AIF or “similar investment strategies or investment ideas” in that Member State for a period of 36 months.
The CBDF Regulation sets out new rules regarding “marketing communications,” in essence requiring that such communications describe the risks and rewards of purchasing AIF shares in an equally prominent manner and are fair, clear, and not misleading.
On 27 May, 2021, the European Securities and Markets Authority (ESMA) published its final report on its Guidelines under the Regulation on cross-border distribution of funds (the Guidelines). The Guidelines make clear that the term “marketing communications” is extremely broad in scope and would include “marketing material addressed individually to investors or potential investors” as well as any form of advertising, press releases, interviews, etc. but not a contractually binding document.
The Guidelines also go into some detail on specific requirements for marketing communications, including specific disclaimers that must be used, consistency with other documents of the fund, and rules regarding the presentation of information on costs, information on past performance and expected future performance, and information on sustainability-related aspects.
These new rules will clearly require some changes to be made to EU AIFMs’ pitch books and other marketing materials.
Application of the new rules to non-EU Managers
As the UK has exited the EU, it will not be implementing the CBDF Directive and CBDF Regulation. UK AIFMs would thus be treated as non-EU AIFMs in the same manner as U.S. and other non-EU AIFMs.
Non-EU managers using third-party/host EU AIFMs
Non-EU managers that have established funds managed by third-party/host EU AIFMs (i.e., where the non-EU manager is a delegated sub-manager of the EU AIFM) will be affected in the sense that the host EU AIFM will need to comply with the CBDF Directive and CBDF Regulation.
In particular, the non-EU sub manager will not be able to engage in any pre-marketing activities on behalf of the EU AIFM, given the requirement that pre-marketing by third-party distributors can be carried out only by EU financial institutions (see Pre-marketing — who can conduct above).
That said, it has always been the case that non-EU managers did not have the right to carry out any significant marketing activities in the EU generally, as such activities may be considered in many Member States to amount to regulated activities (e.g., the MiFID activity of “reception and transmission of orders” under local law). Brexit has highlighted that point further, with UK managers having to consider how to market and provide investment products and services to EU investors generally.
Non-EU AIFMs (pre-)marketing funds in the EU under the NPPRs
As explained above, the CBDF Directive and CBDF Regulation are specified to apply to EU AIFMs. On that basis, they are not intended to apply to non-EU AIFMs such as U.S. and UK AIFMs that (pre-)market their funds into Member States using the NPPRs.
However, Recital (12) of the CBDF Directive states:
National laws, regulations and administrative provisions necessary to comply with [the AIFMD] and, in particular, with harmonised rules on pre-marketing, should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs. This concerns both the current situation in which non-EU AIFMs do not have passporting rights, and a situation in which the provisions on such passporting in [the AIFMD] become applicable.
With the CBDF Directive having to be transposed into each Member State’s local law, it will be left to each Member State to determine how its local implementation will not “in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs.”
At the time of writing, Member States have made varied progress in implementing the CBDF Directive. For example, Germany has passed its implementing bill into law and will apply the CBDF Directive to non-EU AIFMs in a similar way as it applies to EU AIFMs. However, many other Member States have yet to publish their final or, in some cases, even draft implementing legislation. As such, it is not yet possible to determine a consensus among Member States in regard to the application of the CBDF Directive to non-EU AIFMs.
Pre-marketing rules vs. marketing communications requirements
The pre-marketing rules discussed in the context of the above Member States’ local implementation are contained in the CBDF Directive, which, as an EU “directive,” is required to be transposed into local law (with possible local variations). In contrast, the rules for “marketing communications” are set out in the CBDF Regulation, which, as an EU “regulation,” is directly applicable in each Member State, with no local transposition or variation.
That being the case, it would appear that the rules on marketing communications should apply to EU AIFMs only, unless each Member State drafts new rules on marketing communications specifically for application to non-EU AIFMs.
Finally, note that ESMA’s Guidelines on marketing communications will become applicable six months after their publication in all EU languages; this means that the Guidelines will become applicable after 2 August, 2021.
As a result of the likely inconsistent implementation of the CBDF Directive and CBDF Regulation into the national law of each Member State, non-EU AIFMs will need to check whether any particular restrictions or notification/denotification requirements will apply in each Member State into which they market their AIFs, from 2 August, 2021. Your Sidley contacts can assist you in that exercise.
1 A tied agent is defined in MiFID as, in brief, a person who is able, under the full and unconditional responsibility of a regulated MiFID investment firm, to promote investment services, engage in reception and transmission of orders, and give investment advice to third parties.
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