On the 3rd January 2022, the European Securities and Markets Authority (ESMA) published a letter (ESMA Letter) dated 17 December, 2021 to the European Commission (Commission) setting out the results of its survey of national competent authorities (NCAs) in connection with the Commission's forthcoming report on the use of reverse solicitation by asset managers and the impact on passporting activities (Report).
The use of reverse solicitation has been subject to increased regulatory scrutiny and commentary by ESMA, the Commission and NCAs over recent years and its use has been further restricted by the introduction of the Cross-Border Distribution framework last year (see our previous publication for further information).
Article 18 of the Regulation on the cross-border distribution of collective investment undertakings ((EU) 2019/1156) (Regulation) requires the Commission to prepare and submit, following a consultation with NCAs, ESMA and other relevant stakeholders, the Report to the European Parliament and to the European Council on reverse solicitation and demand on the own initiative of an investor, specifying the extent of that form of subscription to funds, its geographical distribution, including in third countries, and its impact on the passporting regime.
To the purpose of preparing the Report, in September 2021, the Commission requested ESMA to assist in gathering information from NCAs on the use of reverse solicitation by asset managers and the impact on passporting activities.
Following the request for support, ESMA conducted a survey of NCAs and issued the ESMA Letter.
Survey Results and Proposals
In the ESMA Letter, ESMA sets out the results of the completed survey:
- Identified that under European Union (EU) law asset managers are not subject to any obligation to report to their NCAs any information on subscriptions stemming from reverse solicitation, although some EU jurisdictions may impose local reporting requirements. For this reason, ESMA noted that the vast majority of NCAs had no readily available information to provide on the use of reverse solicitation either via asset managers or investor associations as compared to marketing.
- For those EU jurisdictions (namely, Italy and Cyprus) which did provide statistical information to ESMA, it was clear that the use of reverse solicitation was significant in size. The Italian Supervisory Authority, Consob, reported that, in 2020, 25% of the total subscriptions in funds gathered by Italian asset managers (excluding the amount distributed through third-party distributors) were made on the basis of reverse solicitation. It was noted that in 99% of the cases, subscriptions were for the account of professional investors and frequently related to the establishment of tailor made alternative investment funds. Furthermore, the Cypriot regulator, CySEC, reported that 30% of UCITS management companies and 50% of AIFMs established in Cyprus use reverse solicitation.
- Reported that a number of NCAs believe that “reverse solicitation is used in practice to circumvent the rules of the third-country and EU passport regimes, which raises some concerns in terms of investor protection but may also create an unlevel playing field between EU asset managers and non-EU asset managers operating in the Union via reverse solicitation.”
Furthermore, ESMA identified the following steps that could be taken by the Commission to source and collate additional information on the use of reverse solicitation:
- To engage directly with market participants such as asset managers, depositories or account holders, possibly via national and European trade associations.
- To consider the introduction of new reporting requirements to permit the collection of information on the use of reverse solicitation across EU member states.
DLA Piper regularly advises fund promoters, asset managers and distributors on their marketing activities in EU and non-EU jurisdictions. Should you wish to discuss the above update, or to discuss marketing activities and regulatory requirements, please get in touch with the authors or your regular DLA Piper contact.