As the new regime for cross-border distribution of funds beds down, Member States are adopting varying approaches to third-country fund managers
The new European Union (EU) regime on the Cross-Border Distribution of Funds (CBDF), intended to harmonise approaches to marketing alternative investment funds across the bloc, has been live since 2 August 2021.
The CBDF Directive introduced a definition of pre-marketing in law for the first time. This concept essentially captures preliminary promotional activities that fall short of "full" marketing and are carried out by or on behalf of a fund manager to gauge investor interest in a product. Prior to the CBDF regime, the scope of pre-marketing (also known as "soft" marketing) varied considerably between EU jurisdictions, requiring local law advice to navigate the complex landscape.
In November 2020, we shared our technical guide outlining the expected changes. A year on, how are the rules on pre-marketing bedding down?
Do the new rules apply to third-country fund managers?
A grey area surrounding the CBDF regime is the application of pre-marketing rules to non-EU alternative investment fund managers (AIFMs).
The CBDF Directive lays down conditions for "an authorised EU AIFM" to engage in pre-marketing. Some in the industry seem to be interpreting this to mean that non-EU AIFMs are therefore barred from pre-marketing. Yet the text of the CBDF Directive does not support this reading: it is almost entirely silent on non-EU AIFMs, making only a passing mention in the recitals. Recital 12 states that harmonised rules on pre-marketing "should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs".
In transposing the CBDF Directive into national law and issuing guidance, some EU Member States are adopting a gold-plating approach and applying the CBDF pre-marketing rules to non-EU AIFMs (whether in law or guidance). Currently, Germany, the Netherlands, and Luxembourg have gone down this route.
The Luxembourg regulator, the Commission de Surveillance du Secteur Financier (CSSF), explains on its website that this position is intended to "create a level playing field between EU AIFMs and non-EU AIFMs". The regulator has published a notification form, which must be submitted by non-EU AIFMs within two weeks of starting to pre-market in Luxembourg.
On the other hand, some EU jurisdictions may take a very restrictive approach. For example, in Denmark, where the barrier for third-country managers accessing capital is already very high given the onerous national private placement regime (NPPR), no pre-marketing at all seems to be allowed by non-EU AIFMs. Other Member States may follow suit, leading to further fragmentation across the EU.
How do placement agents and third-party AIFMs fit in?
The CSSF notification form assumes that only the AIFM will be signing and submitting to the regulator, raising the (unresolved) question of how third-country managers should proceed if they have a product in mind but haven't yet identified an AIFM.
The form for Luxembourg also asks how any third party carrying out pre-marketing on behalf of the non-EU AIFM is authorised, and the only check box options given are for EU authorised firms. This is in line with the rules for EU AIFMs. As we flagged in last year's technical guide, any third party carrying out pre-marketing on behalf of an EU AIFM must be either authorised as a Markets in Financial Instruments Directive (MiFID) II investment firm, a credit institution, a UCITS (undertakings for collective investment in transferable securities) management company or an AIFM, or acting as a MiFID tied agent.
This wrinkle – which is likely to arise in all jurisdictions that gold-plate the rules for non-EU AIFMs (pending any further clarification) – could create challenges for third-country managers seeking to use placement agents. UK placement agents, for example, don't meet these criteria in the post-Brexit world. The development could also test the third-party AIFM model, with host AIFMs in the EU charging extra fees and requiring more paperwork to carry out compliant pre-marketing on behalf of third-country managers. This model was already the subject of a review in the UK by the Financial Conduct Authority (FCA) this summer, which found weaknesses in governance structures, conflicts of interest management and operational controls.
Another question on managers' minds is whether and, if so, how non-EU staff can be involved in pre-marketing activities. Various solutions for these issues are being considered by the industry and advisers, but no easy answers are emerging.
There are differing views in the market on how the pre-marketing rules affect third-country managers who want to pre-market in jurisdictions that have not gold-plated the rules, transposed the CBDF Directive or otherwise given guidance covering this area. This may lead to diverging approaches being taken by fund managers and service providers, which could further complicate the picture.
Will AIFMD II introduce further changes?
The delayed European Commission legislative proposal for a directive to amend the Alternative Investment Fund Managers Directive (AIFMD II) has finally landed (25 November 2021).
The Commission was required to review the marketing of alternative investment funds (AIFs) in Member States by non-EU AIFMs taking place through NPPRs (Article 69(1) AIFMD). AIFMD II does not make any changes to the AIFMD pre-marketing provisions, perhaps since these have only recently been introduced by the CBDF regime.
It's worth noting a few changes relating to fund marketing via NPPRs proposed as part of AIFMD II. Currently, the AIFMD includes a requirement for non-EU AIFMs and non-EU AIFs to be set up in jurisdictions that are not Financial Action Task Force non-cooperative countries or territories. Under AIFMD II, this would be replaced with a condition that they must not be established in jurisdictions identified as high risk under the EU's anti-money laundering rules (the Fourth Money Laundering Directive) – this list includes Mauritius.
There is also a new requirement that the fund manager and the fund must not be established in countries on the EU list of non-cooperative tax jurisdictions. At the moment, the new requirements should not otherwise present too many problems for third-country managers, but this remains subject to change. For example, the Cayman Islands were listed as a non-cooperative tax jurisdiction at one point last year before being removed from the list in October 2020.
The third-country passporting provisions in AIFMD are subject to similar changes, although there is still no sign this passport is likely to come online any time soon – EU countries favour different approaches and not all are supportive of activating the passport and switching off NPPRs.
Osborne Clarke comment
While the pre-marketing rules are beginning to bed down, the overall landscape remains far from harmonised, as we are seeing jurisdictions adopt different approaches. Moreover, many Member States have yet to transpose the CBDF Directive into national law at all – per the Commission's last count, only nine had reached full transposition status – so we have a while to wait for the full picture.
Transposition delays aside, further clarification may well be forthcoming in the shape of statements from national regulators, but for the moment the need to seek local pre-marketing advice on a jurisdiction-by-jurisdiction basis remains alive and well.