On 28 June 2013, the United Kingdom (“UK”) Financial Conduct Authority (the “FCA”) published its Policy Statement PS13/5 (the “Policy Statement”), containing the FCA’s final rules and guidelines relating to the UK’s implementation of the EU1 Alternative Investment Fund Managers Directive (“AIFMD”).2 This follows from two Consultation Papers, CP12/32 and 13/9 (the “Consultation Papers”), that the FCA published in November 2012 and March 2013, respectively.
Also, on 12 June 2013 the UK’s HM Treasury published its final text of the legislation implementing the AIFMD in the UK in the form of the Draft Alternative Investment Fund Managers Regulations 2013 (the “HMT Regulations”).3 The AIFMD will be implemented in the UK on 22 July 2013.
This Update examines some of the high level issues relating to the marketing by non-EU alternative investment fund managers (“AIFMs”) of alternative investment funds (“AIFs”) in the UK following from the Policy Statement and the HMT Regulations. Please refer to our earlier updates on the AIFMD for more information on the topic, including the disclosure and transparency requirements that may need to be complied with where active marketing is envisaged.4It is important to note that any guidance contained in the Policy Statement reflects that of the FCA only; other EU Member State regulators may have a different view, although the FCA’s approach on such matters may be persuasive.
One-year transition period The HMT Regulations confirm that there will be a one-year transition period for AIFMD implementation in the UK, not only for UK AIFMs in relation to seeking authorisation under the AIFMD, but also for non-EU AIFMs marketing AIFs (of any domicile) into the UK.
It should be noted that, in order to qualify for the UK’s one-year transition period, the non-EU AIFM must show that it is, as at 22 July 2013, managing an AIF that it has previously marketed to one or more professional investors somewhere in the European Economic Areas (EEA) (not necessarily in the UK).
Further, it is important to note that although other EU Member States such as Germany and Luxembourg appear also to be granting a one-year transition period for the marketing by non-EU AIFMs of their AIFs, the qualifying conditions and parameters of the individual Member State rules may differ from that in the UK. For example, while the UK transition appears to apply to any AIF marketed by the AIFM during the transition period and not just that marketed by the AIFM prior to 22 July 2013, another EU Member State’s transition period might apply only to the specific AIF marketed by the AIFM prior to 22 July 2013.
What is “marketing”?
The AIFMD defines “marketing” to mean:
“a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union”. (Emphasis added)
The Policy Statement makes clear that, in the FCA’s view, an “offering” or “placement” takes place when a person makes AIF units or shares “available for purchase” by a potential investor. This includes offers to invest that can be accepted by an investor and invitations to investors to subscribe for an investment.
The FCA’s approach implies that initial exploratory discussions with an investor with preliminary marketing material may not constitute “marketing”, but at the same time such initial discussions may constitute “marketing” if they include documents or statements that make clear that there are fund units or shares that the investor is invited to invest in.
This raises the question as to whether a non-EU AIFM can take an approach whereby it actively solicits a potential UK investor on the basis of having a generic discussion (i.e., not “marketing”), and then claim that any “marketing” that took place (e.g., the sending of a private placement memorandum) was at the potential investor’s request following from the generic “non-marketing” discussion (i.e., a “reverse solicitation”). AIFMs will need to assess the risks involved with such an approach (see “Passive marketing/reverse solicitation” and “Contravention of the marketing restrictions” below).
Note that it is possible that other EU Member State regulators may take a broader view of the definition of “marketing” so that sending preliminary documents (e.g., fund fact sheets) may amount to “marketing” for AIFMD purposes, even if they include “This is not an offer or solicitation...” disclaimers.
Who is the “investor”? The AIFMD restricts marketing to “investors” who are “domiciled or with a registered office in the UK”. One question that often arises is: who is the investor” for AIFMD purposes? For example, what happens when an AIFM markets to an investment manager in the UK but the investment manager is managing a managed account for an entity in France – does “marketing” take place in the UK or in France?
As a general matter, the FCA has determined that the reference to “investor” for AIFMD purposes should be regarded as a reference to the person who will make the decision to invest in the AIF.
So in the case of a discretionary investment manager who subscribes on behalf of an underlying investor without reference to the investor, it is the investment manager who is the “investor”. It is not necessary to look through to the underlying investor.
However, where a nominee company subscribes as bare trustee for an underlying beneficiary, or where a custodian subscribes on behalf of an underlying investor, it will be necessary to look through to the underlying beneficiary/investor. This would be because it is the underlying beneficiary/investor who makes the investment decision and not the nominee or custodian bank.
While the FCA’s approach is helpful in seeking to provide some clarity on this issue, it is nonetheless problematic if another EU Member State regulator takes a different view. For example, if an AIFM is marketing to a UK discretionary investment manager with an underlying French beneficiary, that AIFM would be entitled to assume it is marketing to a UK “investor” since no look-through is required. However, it is possible that under French law the AIFM is required to look through to the underlying beneficiary, in which case the AIFM would be considered to be marketing both in the UK and in France.
Passive marketing/reverse solicitation
The HMT Regulations provide that the AIFMD marketing restrictions do not apply to an offering or placement of units or shares of an AIF to an investor made “at the initiative of that investor.” This is referred to as “passive marketing” in the Policy Statement and is otherwise commonly referred to as “reverse solicitation” by the funds industry.
The difficulty arises in trying to evidence such passive marketing/reverse solicitation. In this regard the FCA determines that:
“[a] confirmation from the investor that the offering or placement of units of shares of the AIF was made at its initiative, should normally be sufficient to demonstrate that this is the case, provided this is obtained before the offer or placement takes place.” (Emphasis added)
The FCA notes, however, that AIFMs should not be able to rely on such confirmations if they have been obtained to circumvent the requirements of the AIFMD.
This approach is helpful in that it provides AIFMs with a starting point from which they may be able to demonstrate reverse solicitation. This is a change in approach from the FCA’s proposal in Consultation Paper CP13/9, where the FCA had given an example of reverse solicitation as follows: “communications in response to an approach from a potential investor with prior knowledge of the AIF and no previous involvement with the AIFM could be at the initiative of the investor.” In contrast, the FCA says in the Policy Statement that it has decided not to give such examples, but simply give guidance in the manner above.
The issue of secondary offerings (i.e., where an AIF’s units are sold by one investor to another) is also addressed in the Policy Statement.
The FCA’s view is that an “offering” or “placement” for the purposes of the “marketing” definition does not include secondary trading in the units or shares of an AIF, because this does not relate to the capital raising in that AIF. However, if the AIF’s units have been temporarily purchased by a person for onward-sale to investors (e.g., an underwriter-type of arrangement), then that kind of activity would be considered to be indirect offering or placing (and thus indirect marketing subject to the marketing restrictions).
Contravention of the marketing restrictions The HMT Regulations provide for certain sanctions where an unauthorised person (which would generally include a non-EU AIFM) acts in contravention of the AIFMD marketing restrictions as implemented in the UK. As applied to a non-EU AIFM marketing a typical hedge or private equity fund:
that non-EU AIFM would be committing a criminal offence (with possible fines and imprisonment); and
the agreement (e.g., the subscription agreement) entered into with the investor resulting from the unlawful marketing becomes unenforceable against the investor, and the investor is entitled to recover any money invested as well as seek compensation for any loss sustained by the investor as a result of the investment.
In this context it is important to note that the AIFMD cooperation arrangements to be signed between the FCA with non-EU regulators (including the United States Securities and Exchange Commission (SEC)) will include the ability for the FCA to conduct onsite visits at non-EU AIFMs.
The publication of the HMT Regulations and the Policy Statement means that the UK’s preparations for implementing the AIFMD are now mostly complete. Although the FCA will be consulting further on some remaining issues, such as proportionality under the AIFMD remuneration principles, non-EU AIFMs marketing their AIFs now have final guidance on the UK’s approach to the AIFMD marketing issues. As noted above, however, the UK’s approach may differ from that of other EU Member State regulators and it will always be important to seek local law advice as to the approach taken in those Member States.
For further information regarding this Update please contact:
Leonard Ng, Partner
+44 (0)20 7360 3667
Barry Breen, Counsel+44 (0)20 7360 3637
1 References to “EU” in this Update should be taken generally to include not only the 28 EU Member States (Croatia having joined on 1 July 2013) but also Norway, Iceland and Liechtenstein (as European Economic Area Member States). 2http://www.fca.org.uk/your-fca/documents/policy-statements/ps13-05. 3http://www.legislation.gov.uk/ukdsi/2013/9780111540206/pdfs/ukdsi_9780111540206_en.pdf. 4 See: http://www.sidley.com/AIFM-Directive-Updates/.
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