The European Commission is continuing to lay foundations for the development of the Capital Markets Union ("CMU") with the publication of a number of proposals on 12 March 2018. In an investment funds context, this legislative initiative includes measures to reduce current national regulatory barriers which reduce the effectiveness of the UCITS and AIFMD marketing passports due to differing interpretation by EU Member States ("Member States") on how the marketing passports may be exercised.
Noting that the EU investment market is predominantly organised along national lines (with 70% of the total assets under management held by investment funds registered only for distribution in their domestic market and only 37% of UCITS and 3% of AIFs registered for marketing in more than three Member States), the European Commission wants to remove these inefficiencies and reduce the cost of EU cross-border fund distribution. This should enable the EU investment funds market to exploit its full potential and make EU-wide distribution simpler, quicker and cheaper.
The proposals consist of a:
- Regulation setting out a harmonised EU framework on required marketing communications; an online transparency framework for national provisions on marketing requirements; verification of compliance with national provisions; fees and charges; an ESMA central database and amendments to the European Venture Capital Funds Regulation 345/2013 and the European Social Entrepreneurship Funds Regulation 346/2013 on pre-marketing; and
- Directive on the cross-border distribution of collective investment funds which will amend the UCITS IV Directive1 on requirements on physical presence; discontinuation of marketing; and notification procedures for changes to UCITS; and AIFMD2 on pre-marketing; discontinuation of marketing and consistent treatment of retail investors.
The proposals envisage: enhanced supervisory convergence amongst national competent authorities; promote smooth operation of passports by providing for enhanced transparency; the removal of unnecessary complexity and burdensome obligations in certain Member States and set out new marketing procedures.
The key features of the proposed reforms include:
- Enhancing transparency by harmonising fund marketing requirements and regulatory fees across the EU. In order to ensure more consistency in how regulatory fees are determined, common high-level principles for the calculation of regulatory levies charged by national competent authorities will be introduced. With regard to the diverging national marketing requirements, a harmonised definition of pre-marketing is to be inserted in AIFMD to allow for certain pre-marketing activities prior to an AIF being established to allow asset managers to test the appetite of potential professional investors for new investment opportunities or strategies through pre-marketing activities.
- Removing the requirement to appoint a local agent when marketing an AIF or a UCITS in a Member State. The choice of how facilities to support local investors are provided (local presence or electronically) is to be left with the asset manager, with certain safeguards being introduced for investors in UCITS.
- Introducing conditions under which marketing of investment funds may be discontinued in a Member State.
- Establishing an enhanced notification procedure with the introduction of further harmonisation of the procedures and requirements for updating notifications and de-notification of use of the marketing passport.
The proposals will now be discussed by the European Parliament and by the Council of the EU. The European Commission has a feedback deadline of 8 May 2018 and aims for these legislative proposals to be adopted by May 2019.
The reduction of regulatory barriers for cross-border distribution is to be welcomed. If some of the matters we note below are adequately addressed in the final text, then the proposals should result in tangible benefits for both asset managers, in terms of significantly reduced compliance costs, and investors as the proposals safeguard investor protection and should ultimately increase investors' choice.
However, we believe that certain provisions of the proposals will require further review and amendment. These include the scope of the definition of AIFM and AIF, the new rules on marketing materials, the divergence in pre-marketing definitions for UCITS and AIFMD, and a prohibition on de-registering funds where they do not meet minimum numbers of investors or assets in a particular jurisdiction. We also note that a number of trade bodies and associations have queried whether a legislative proposal at this stage can act as an additional barrier rather than facilitating cross-border fund distribution. One of the arguments raised is that the proposal will add further regulatory requirements rather than consolidating and clarifying the existing rules.