On 12 March 2018, the European Commission issued a proposal for a new regulation (the Regulation) and a new directive (the Directive) concerning the cross border distribution of collective investment funds amending inter alia UCITS (the UCITS Directive), AIFMD, EuVECA and EuSEF (the Proposals). Please find below a summary of the main changes under the Proposals followed by our analysis.

What will change under the Proposals?

1. Pre-marketing:

The regime with respect to pre-marketing will be harmonized. Pre-marketing is defined as direct or indirect provision of information on investments 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 interests in an AIF which is not yet established. Under the Proposals, licensed alternative investment funds managers (AIFM), UCITS management companies (ManCos) and EuVECA and EuSEF managers are allowed to pre-market in Member States without being required to make a notification unless the pre-marketing:

  • relates to an established alternative investment fund (AIF);
  • contains reference to an established AIF;
  • enables investors to commit to acquiring units or shares of a particular AIF; or
  • amounts to a prospectus, constitution document of a non-yet established AIF, offering documents, subscription forms or similar documents whether in a draft or a final form allowing investors to take an investment decision.

Subscriptions of units or shares in an AIF established following the pre-marketing shall be considered the result of marketing. The same holds true for the subscription of units or shares in AIFs managed or marketed by the same EU AIFM that had engaged in pre-marketing of a not-yet-established AIF with the similar features. The same applies to subscriptions after the pre-marketing of EuVECA and EuSEF.

2. Requirements with respect to marketing materials:

Harmonized rules will be introduced regarding the requirements applicable to marketing materials by AIFMs and UCITS ManCos. The following requirements inter alia apply:

  • marketing communications to investors shall be identifiable as such;
  • risks and rewards of purchasing units or shares of an AIF or UCITS should be presented in an equally prominent manner;
  • all information included in marketing communications is fair, clear and not misleading;
  • marketing communication shall not contradict the information to be given in a UCITS’ prospectus and in the so-called key investor information according to Article 68 and 78 of the UCITS Directive respectively according to Article 23 AIFMD;
  • NCAs may require systematic notification of marketing communications by UCITS ManCos and AIFMs which intend to market to retail investors and which they intend to use directly or indirectly in their dealings with investors. If this is the case, then such notification shall not constitute a prior condition for the marketing of units of UCITS and retail AIFs and must be responded to by NCAs within 10 business days. Also, NCAs must publish rules and procedures in this regard on their website.

This seems to concern all AIFMs that market in EEA, including registered AIFMs and AIFMs from a third country.

3. Fees and charges by NCA’s:

New rules will be introduced with respect to fees and charges which can be imposed on AIFMs and UCITS ManCos. As a general principle, fees or charges levied by NCAs shall be proportionate to the expenditure relating to the authorisation or registration and the performance of the supervisory and investigatory powers. NCAs shall send an invoice for the given financial year to the registered office of the AIFM or UCITS ManCo. Also, NCAs and ESMA must publish and maintain on their websites central databases listing the fees or charges referred to, or, where applicable, the calculation methodologies for those fees or charges, in at least one language customary in the sphere of international finance.

4. Requirements for national competent authorities and ESMA to keep central database:

Under the Proposals:

  • Competent authorities have to publish and maintain on their websites central databases which contain all applicable national laws, regulations and administrative provisions regarding marketing requirements for AIFs and UCITS, in at least one language customary in the sphere of international finance, and notify ESMA of all such applicable laws, regulations and administrative provisions.
  • ESMA shall publish and maintain on its website a central database containing the national laws, regulations and administrative provisions concerning marketing requirements, and the summaries thereof, and the hyperlinks to the websites of competent authorities.

5. For AIFMs, the following specific changes are proposed:

(i) De-notification of marketing units in AIFs

Under the Proposals, an AIFM may discontinue its marketing activities in a particular Member State if all of the following conditions are fulfilled:

  • no investor holds units or shares of the AIF or maximum 10 investors hold units or shares of the AIF representing less than 1% of the assets under management of that AIF;
  • a blanket offer to repurchase all its AIF units or shares held by investors in that specific Member State has been made public for at least 30 working days and is addressed individually to all investors; and
  • the intention to stop the marketing activities in the specific Member State is made public by means of a publicly available medium customary for marketing AIFs and suitable for typical AIF investors.

(ii) Facilities when an AIFM markets to retail investors

Under the Proposals, Article 43a shall be inserted into AIFMD, and as a consequence, an AIFM must establish in each Member State where it intends to market AIFs to retail investors facilities to perform the following tasks:

  1. process investors’ subscription, payment, repurchase and redemption orders;
  2. provide investors with information on how these orders can be made and how the proceeds are paid;
  3. facilitate the handling of information relating to the exercise of investors’ rights;
  4. make available for inspection by investors copies of (a) the fund rules or instruments of incorporation and (b) the latest annual report; and
  5. provide investors with information relevant to the tasks the facilities preform in a durable medium.

The establishment of these facilities can be done electronically or by other means of distance communications.

6. For UCITS ManCo’s, changes are proposed in the following areas:

(i) Facilities in the member states where units of a UCITS are marketed

UCITS must establish facilities to perform the following tasks:

  1. process investors’ subscription, payment, repurchase and redemption orders;
  2. provide investors with information on how these orders can be made and how the proceeds are paid;
  3. facilitate the handling of information relating to the exercise of investors’ rights;
  4. make available for inspection by investors copies of (a) the fund rules or instruments of incorporation and (b) the latest annual report; and
  5. provide investors with information relevant to the tasks the facilities preform in a durable medium.

The establishment of these facilities can be done electronically or by other means of distance communications. The UCITS can no longer be required to have a physical presence for fulfilling these tasks. (ii) De-notification of marketing units in UCITS

Pursuant to the Proposals, UCITS may discontinue its marketing activities in a particular Member State if all of the following conditions are fulfilled:

  • no investor holds units or shares of the UCITS or maximum 10 investors hold units or shares of the UCITS representing less than 1% of the assets under management of that UCITS;
  • a blanket offer to repurchase all its UCITS units or shares held by investors in that specific Member State has been made public for at least 30 working days and is addressed individually to all investors; and
  • the intention to stop the marketing activities in the specific Member State is made public by means of a publicly available medium customary for marketing UCITS and suitable for typical UCITS investor.

(iii) Information to host country regulators after notification

The Directive proposes to change Article 93 paragraph 8 of the UCITS Directive to achieve that changes in the arrangements made for marketing units of the UCITS in the host Member State and changes regarding share classes to be marketed shall be communicated to the competent authority of the UCITS home Member State who then informs the host country regulator. As Article 93 paragraph 7 remains unchanged, UCITS (respectively their management company) will continue to provide certain updates directly to the relevant host country regulator(s).

Impact analysis

The concept of pre-marketing

Pre-marketing is already acknowledged in some Member States (e.g. Germany, UK and Luxembourg). For these markets the suggested approach is nothing new and it would, rather, limit the possibility to pre-market. Moreover, the pre-marketing concept as proposed by the Directive seems inconsistent - on the one hand it foresees that pre-marketing is not subject to a marketing notification, but on the other hand subscriptions to an AIF that was pre-marketed are considered the result of marketing. It would have appeared more appropriate that such subscriptions (following pre-marketing) are not considered to be the result of marketing. Besides, it is not immediately clear why these rules should not apply to ELTIFs.

Requirements with respect to marketing materials

The provisions on marketing materials are undifferentiated and seem not sufficiently clear. Given the existing provisions on key investor information and key information documents for so-called PRIIPs, it appears unnecessary to regulate marketing materials as foreseen in the Proposals - both from the point of view of investors and from the point of view of AIF/UCITS.

The Proposals do not differentiate between UCITS and AIF on the one hand and between professional investors and retail investors on the other hand. Professional investors will not require that the risks and rewards are presented in a particularly prominent manner in marketing material; they can consider the relevant prospectus or placement memorandum, as acknowledged by the PRIIPs Regulation. Non-professional investors need to be given a pre-contractual document with risk warnings (the key investor information document respectively the so-called PRIIPs KID) in good time before they make an decision to invest.

Conversely, in order to avoid liability issues, the relevant AIF/UCITS respectively the AIFM/ManCo have an interest to present risks in a prominent manner in the prospectus or placement memorandum and to make sure that possible returns are not presented to appear too high and too likely. Often the risk warning sections are even more detailed than the sections dealing with the rewards. Requiring additional information on risks in marketing materials is therefore unlikely to improve investor protection.

Furthermore, it is not clear what “equally prominent” means – the same amount of information or merely same appearance (in terms of font size, bold/non-bold print etc.)?

De-notification of marketing units in AIFs and UCITS

AIFMD and UCITS Directive are so far silent about de-notification. The question if and how a fund can be de-registered is relevant though if marketing is or becomes unsuccessful.

Harmonizing de-notification criteria by a set of pragmatic rules would indeed be helpful for AIFM or UCITS who market in several Member States. Unfortunately, the de-notification rules suggested are too restrictive and they could rather deter from cross-border distribution:

The Directive defines certain factual criteria as requirements for de-notification. However, the AIFM/UCITS (ManCo) cannot influence those. It could thus easily occur that an AIFM/UCITS (ManCo) would want to de-register from a Member State, but is prevented from doing so because the relevant criteria are not met, e.g. if there are 14 investors in a Member State or less than 10 investors whose aggregate holding exceed 1% of the assets under management of the AIF or UCITS in question.

The blanket offer to repurchase is highly questionable – as it is most uncertain why the de-notification would have a negative impact for the relevant investors which continue to enjoy all their investor rights? If there is no negative impact, it appears discriminative vis-à-vis investors in other Member States not to make them a blanket offer to repurchase at the same time. In closed-ended funds it may not even be possible to generate the liquidity required to honour repurchase offers.

Furthermore, the Directive imposes additional language requirements for the mandatory documentation of UCITS if not all investors in the host Member State accept the blanket offer to repurchase. In that case, the mandatory documentation is to be made “available for investors in the official languages of the Member State where the investor is located.” At present, the UCITS Directive requires a translation of the KIID in the official language or one of the languages of the host Member State. The other usual documents may be provided in English instead.

Besides, it is inconsistent that a de-notification is to be made public and fund documents are private in an AIFMD context.

Facilities when an AIFM markets to retail investors

Article 43a of the AIFMD seems intended as an alignment between the UCITS Directive (as proposed to be modified by the Directive) and the AIFMD for the marketing to retail investors. An alignment with the UCITS rules would only be appropriate if AIF could be sold via a passport to retail investors, which is not the case.

Moreover, AIFMD already contains a provision for the marketing to retail investors, notably Article 43 AIFMD, which shall remain unchanged. Article 43 AIFMD leaves it to Member States to define in a non-discriminative manner requirements for the marketing of foreign AIF (managed by authorized AIFM) to retail investors. Some countries have thus permitted marketing to qualified investors (semi-professional investors in Germany, a similar concept exists in Austria) that would qualify as retail investors under AIFMD, subject to relatively flexible rules. Article 43a AIFMD would de facto impose dedicated local service providers for marketing to this type of investors.

Information to host country regulators after UCITS notification

Under the current UCITS Directive, marketing notifications are filed with the home country regulator who transmits them to the relevant host country regulator. Updates have to be sent by the UCITS to the relevant host country regulator. It would indeed be an improvement of the cross-border marketing of UCITS if all relevant information for the marketing in other Member States could be made through the home regulator. Yet the approach taken in the Proposal is not as efficient as it could be, because it seems not envisaged to amend Article 93 paragraph 7 of the UCITS Directive. As a result UCITS/UCITS ManCos would still need to provide certain information directly to the competent authorities in the host Member State whereas other information would be given to the competent authority in the home Member State who would have to share it with the competent authorities of the host Member State(s).

There is no practical need for this difference - the information referred to in Article 93 paragraph 7 of the UCITS Directive (by cross-reference to Article 93 paragraph 2 of the UCITS Directive) must be made available to the competent authority in the UCITS home Member State in any case (see Articles 5, 74 and 82 of the UCITS Directive) and Article 93 paragraph 7 first sentence of the UCITS Directive already provides that the UCITS home Member State “shall ensure that the competent authorities of the UCITS host Member State have access, by electronic means, to the documents referred to in paragraph 2 and, if applicable, to any translations thereof.” As a consequence, the competent authority in the UCITS home Member State not only transmits the relevant information in the context of a marketing notification, but also transmits all updates to the regulator(s) in the host Member State(s). If deemed necessary or appropriate, the competent authority in the UCITS home Member State may request compared versions (mark-ups) of the relevant documents from the UCITS or its ManCo.

Furthermore, the proposed wording of Article 93 paragraph 8 of the UCITS Directive introduces a 1 month waiting period before changes regarding share classes to be marketed and/or changes on information contained in the notification letter submitted in accordance with Article 93 paragraph 1 UCITS Directive may be implemented. The Directive foresees that the competent authority in the UCITS home Member State should review if any such change leads to a breach of the Directive. This seems inappropriate: the competent authority in the UCITS home Member State is not well placed to review marketing arrangements relating to marketing in host Member States. In addition, it is not obvious how a change in a marketing arrangement (or a change relating to the share classes marketed) would make a UCITS fail to comply with the UCITS Directive.

Finally, there seems to be no reason to impose a waiting period before a new share class may be marketed.

General conclusion is that the European Commission had good intentions in tabling the Proposals. However, as currently drafted, the likely outcome will be reduced legal certainty for fund managers. Also the Proposals establish additional requirements to cross-border marketing, some of which would lead to higher costs or a longer time to market.