On 12 March 2018, the European Commission published draft legislative proposals that are aimed at removing certain regulatory and administrative barriers to the cross-border distribution of investment funds within the EU. These legislative proposals consist of a proposed new directive (the "Amending Directive") that will amend the existing regimes relating to the cross-border marketing of AIFs and UCITS and a new regulation (the "Amending Regulation") that will seek to standardise national requirements relating to the cross-border distribution of funds within the EU.
The Amending Directive and Amending Regulation form part of the Commission's wider Capital Markets Union (CMU) policy initiative, which has the stated aim of encouraging the development of more unified, efficient capital markets within the EU.
Many of the proposed changes seek to address ambiguities identified by fund promoters in the existing fund distribution regimes in response to the Commission's 2016 consultation exercise in this regard. In particular, the proposals are clearly intended to improve the transparency of national requirements, the removal of burdensome requirements and the harmonisation of divergent national rules.
However, industry bodies such as EFAMA and ICI Global have been strongly critical of the Commission's proposed changes, arguing that the proposals fail to live up to the ambitions of the CMU project and that the reforms will do little to ease distribution, lower investor costs or increase investor fund choices. While the objectives of the proposed legislative changes are certainly laudable, the scope of the changes are relatively modest and, in some cases, may actually be counter-productive.
The Commission is inviting feedback from interested parties on its legislative proposals within an 8-week period, ending on 10 May 2018.
Summary of Key Proposals:
- Clarification that host member states can apply fees and charges in connection with marketing;
- New provisions regarding the cessation of marketing;
- New requirements for marketing communications;
- Permissible "pre-marketing" by an AIFM is defined;
- New provisions relating to marketing by an AIFM to retail investors; and
- Amendment of provisions affecting the cross-border activities of UCITS managers.
Ability of National Regulators to Apply Fees and Charges
The Amending Regulation will clarify that national competent authorities (both home and host state regulators) may levy fees or charges on AIFMs or UCITS managers for the purpose of authorisation or registration or the exercise of supervisory powers under AIFMD or the UCITS Directive, provided these are proportionate to the regulator's costs. National regulators are required to publish all applicable fees and charges on their websites and to notify ESMA of this information so that it can publish an interactive database containing this information.
The level of fees imposed by certain national regulators was previously identified by fund promoters as one barrier to cross-border distribution so these transparency and proportionality requirements, while modest, should be welcomed.
Cessation of Marketing in a Member State
Precisely when an EU AIFM or UCITS manager can be considered to have ceased marketing in a Member State, so that it can withdraw a notification about exercising the marketing passport in that jurisdiction, is an area of ambiguity in the current AIFMD and UCITS Directives.
The Amending Directive will seek to address this issue by inserting a new provision into the AIFMD, with an equivalent provision into the UCITS Directive, to the effect that the AIFM or UCITS manager may only discontinue marketing units of an EU AIF or UCITS in a jurisdiction in which it has exercised a marketing passport if the following conditions are met:
- there is a maximum of 10 investors in the relevant Member State, holding up to 1% of the AUM of the AIF or UCITS;
- the AIFM or UCITS manager has made a blanket offer to redeem, free of any charges or deductions, all units in the AIF or UCITS held by investors in the relevant Member State; and
- the AIFM or UCITS manager has published its intention to cease its marketing activities in that jurisdiction.
These requirements (and particularly the requirement to buy out remaining investors) may well cause fund promoters to think very carefully about whether they wish to exercise a marketing passport in jurisdictions where they may only attract relatively modest additional net assets.
Another area where divergent views at a national level are evident is precisely when "marketing" for the purposes of the AIFMD is deemed to have commenced. This is particularly important because the existing AIFMD passport only applies to activities that fall within the definition of "marketing" and therefore the extent of promotional activities, falling short of "marketing", that may be undertaken in different Member States may vary.
The Amending Directive seeks to address this issue by introducing a new definition of "pre-marketing" as follows:-
"… direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF that is not yet established."
Accordingly, if an activity does not fall within this narrow definition of "pre-marketing" the implication is that it should be treated by Member States as "marketing".
A new provision will be inserted into AIFMD that would require Member States to ensure that an authorised EU AIFM may engage in pre-marketing within the EU without having to make passporting notifications for individual Member States, provided the information given to professional investors does not:
- relate to, or contain any reference to, an established AIF;
- enable investors to commit to acquiring units or shares of a particular AIF; or
- amount to a prospectus, constitutional document of an AIF which has not yet been established, offering document, subscription form or similar document, which is in draft or final form, which would allow an investor to make an investment decision.
These new requirements will mean that circulating draft offering documents or constitutional documents will constitute AIFMD marketing. This will represent a significant change from the current approach in certain EU jurisdictions (most notably, the UK) where the circulation of draft, "path finder" documentation, which does not involve an offer to an investor to enter into a binding agreement, is not generally considered AIFMD marketing.
New Requirements for Marketing Communications
The Amending Regulation will introduce new requirements for all marketing communications made to investors by an AIFM or UCITS manager. These communications must:
- be identifiable as marketing communications;
- be fair, clear and not misleading; and
- present risks and rewards of purchasing units or shares of a fund in an equally prominent manner.
AIFMs and UCITS managers must also ensure that any marketing communications do not contain statements that contradict or diminish the significance of any information disclosed in a prospectus, key information document or required disclosure document for the relevant fund.
The Amending Regulation will empower national regulators to require notification of marketing communications which UCITS managers intend to use directly or indirectly in their dealing with investors and which AIFMs intend to use directly or indirectly in their dealings with retail investors.
Under the proposed legislation, national regulators will not be permitted to make any such notification a pre-condition of marketing. However, national regulators will have up to 10 working days following receipt of a notification to inform the relevant manager of any request to amend a marketing communication.
Marketing to Retail Investors
AIFMD currently permits authorised AIFMs to exercise a passport to market to professional investors but leaves the regulation of marketing AIFs to individual Member States.
The Amending Directive will introduce requirements into AIFMD that will apply where any AIFM is marketing units in an AIF to retail investors. In such circumstances, an AIFM is required to put facilities in place in the relevant Member State to perform the following tasks:
- processing investors' subscription, payment, repurchase and redemption orders in connection with units in the relevant AIF;
- providing investors with information on how subscriptions can be made and how redemption proceeds will be paid;
- handling information relating to the exercise of investors' rights arising from their investment in the AIF in that jurisdiction;
- making available to investors copies of the AIF's rules or instruments of incorporation and its latest annual report; and
- providing investors with information, in a durable medium, relevant to the above tasks being performed by the facilities put in place.
Importantly, the proposed Amending Directive expressly provides that the facilities do not need to amount to a physical presence in the relevant Member State (i.e. the AIFM could provide the facilities through online means or over the telephone). However, the AIFM must ensure that the facilities perform the tasks in the official language(s) of the relevant Member State. In addition, the facilities must be provided either by the AIFM itself or by a third party that is subject to regulation governing the tasks to be performed and is appointed by way of written contract.
Proposed Changes to the UCITS Regime
Currently the UCITS Directive provides that a UCITS manager is required to maintain facilities in any Member State in which a UCITS is marketed for making payments to unitholders, redeeming units and making available any required investor information. The Amending Directive will delete these provisions and substitute requirements for UCITS managers to maintain facilities that essentially mirror those described above that will apply to AIFMs that are marketing to retail investors.
Currently a UCITS manager is required to give prior notice when it is making changes to its marketing arrangements as set out in a marketing passport notification. The Amending Directive will amend this requirement to clarify that this written notification must be given at least one month prior to implementing the proposed change or immediately after implementing an unplanned change.
The precise timeline for the entry into force of these proposals remains unclear. The consultation period runs to 10 May 2018 and it could be reasonably expected to take some time to finalise drafts as between the EU Commission, EU Parliament and Council of Ministers. Thereafter, there will be a two-year period from the date of publication for implementing the Amending Directive at a national level and the Amending Regulation also provides for a two-year period before certain provisions come into effect (notably those relating to Member States' obligations to publish their marketing rules and certain of the rules on marketing communications).