Cross-border distribution of UCITS and AIFs

On 22 February 2019, the Council of the EU published an "I" item note with accompanying addenda setting out the final compromise texts of the:

Proposed Directive amending the UCITS Directive and AIFMD with regard to the cross-border distribution of collective investment funds

Proposed Regulation on facilitating cross-border distribution of collective investment funds and amending the EuVECA Regulation and the EuSEF Regulation.

The Council and the Parliament reached political agreement on the proposals on 5 February 2019. The Parliament plans to consider the proposals in April 2019. The proposals (first covered in our March 2018 bulletin) aim to make cross-border distribution simpler, quicker and cheaper. The shift in decision making from national regulators to ESMA continues.

The proposed Directive contains amendments to the UCITS Directive and the AIFMD relating to, among other things, pre-marketing of AIFs and the discontinuation of marketing.

  • UCITS provisions on content requirements for UCITS marketing communications (Article 77) and the publication of national rules on marketing (Article 91(3)) are deleted from the UCITS Directive and replaced with provisions in the proposed Regulation (which will have direct effect and so will allow less scope for differences in implementation).
  • UCITS provisions on the provision of local facilities (Article 92) will be replaced so that the facilities requirements are harmonised, they may be provided on-line and Member States may not require the UCITS ManCo to provide the facilities through a physical presence. Similar provisions are introduced for AIFMs marketing AIFs to retail investors.
  • UCITS provisions requiring that document updates be furnished to host regulators are changed to require notification to the home and host regulators. The home regulator must then notify the UCITS within 15 working days that it is not to implement the change (if it believes the UCITS would no longer comply with the UCITS Directive) and in that case the home regulator must inform the host regulator. Similar changes are made to the AIFMD.
  • New UCITS procedures (Article 93(a)) are introduced where a UCITS ManCo intends to discontinue marketing in a Member State (other than the UCITS home Member State), in which event the ManCo will be obliged to:
    • make a blanket public offer to repurchase, free of charges and deductions, all shares or units held by investors in that Member State, which offer must remain open for at least 30 working days and
    • publicise its intention to stop marketing in that Member State, by a medium customary for marketing a UCITS and suitable for a typical UCITS investor
    • modify or terminate any contractual arrangements with financial intermediaries or delegates to prevent any further marketing .
    • The ManCo will notify its home regulator and, within 15 days, the home regulator will transmit the request to the host regulator and to ESMA and inform the ManCo. The UCITS may not be marketed thereafter although the obligations to provide information to investors who remain will continue.
    • Similar provisions are introduced for AIFMs, other than closed-ended AIFs and European long-term investment funds.
  • A new harmonised regime for pre-marketing of AIFs in the EU will be introduced. Currently, Member States adopt differing approaches to pre-marketing. The directive provides for an authorised EU AIFM to engage in pre-marketing in the EU. "Pre-marketing' is defined as the " provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established, or in an AIF which is established, but not yet notified for marketing in accordance with Article 31 or 32, or in compartments of such AIFs, in that Member State where the potential investors are domiciled or have their registered office, and which in each case does not amount to an offer or placement to the investor to invest in the units or shares of that AIF or compartment." The right to pre-market is not extended to non-EU AIFMs. The right falls away where the information presented to investors in the pre marketing:
    • enables investors to commit to acquiring units or shares of a particular AIF;
    • amounts to subscription forms or similar documents whether in a draft or a final form;
    • amounts to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.
  • Where a draft prospectus or offering documents are provided, such documents shall not contain sufficient information to allow investors to take an investment decision and shall clearly state that:
    • the document does not constitute an offer or an invitation to subscribe to units or shares of an AIF;
    • the information presented in those documents should not be relied upon because it is incomplete and may be subject to change.
  • AIFMs which engage in pre-marketing must fulfil notification obligations to their home regulator and document the pre-marketing.

The proposed Regulation sets out harmonised requirements for marketing materials and provides for administrative matters.

  • National regulators will be required to publish online all applicable national laws, regulations and administrative provisions concerning their marketing requirements for UCITS and AIFs and their fees and charges and must notify these to ESMA.
  • National regulators will be permitted to charge fees which must be proportionate and subject to a transparent process.
  • Where national law requires that marketing materials be submitted to the national regulator for review, the national regulator must itself comply with provisions which aim to improve transparency and equal treatment.
  • UCITS and AIFs will be required to comply with harmonised requirements for their marketing materials with ESMA required to issue guidelines on the requirements.
  • National regulators will be required to transmit notifications, notification letters, written notices and information relating to notifications to ESMA.
  • ESMA will be required to establish central databases of:
    • the national marketing requirements
    • the national fees and charges
    • a list of EU authorised AIFMs and UCITS ManCos, AIFs and UCITS which those AIFMs and UCITS ManCos manage and market and the Member States in which those AIFs and UCITS are marketed
  • The EuVECA Regulation and the EuSEF Regulation will be amended to provide for a pre-marketing regime similar to that set out for AIFMs in the draft Directive amending the UCITS Directive and AIFMD with regard to cross-border distribution of funds.
  • ESMA is to publish a myriad of templates, forms and procedures, central databases of information, regulatory technical standards, implementing technical standards, guidelines and reviews (every 2 years) after the Regulation enter into force.

The PRIIPs KID regulation will also be amended to extend deadlines (detailed below).


​The European Supervisory Authorities (ESAs) published their final recommendations, following a consultation, on targeted amendments to the Delegated Regulation covering the rules for the Key Information Document (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs).

The recommendations include a decision not to propose amendments to the PRIIPs KID framework now and to initiate a more comprehensive revision of the PRIIPs framework, preceded by a new consultation phase. EU co-legislators have agreed to:

  • extend the deadline for the PRIIPs review, by one year to 31 December 2019
  • extend the date of the UCITS exemption to produce and provide a PRIIPs KID, by two years to 31 December 2021

The ESAs also issued a Supervisory Statement which notes that the PRIIPs KID performance scenarios risk providing retail investors with inappropriate expectations about returns.

The ESAs recommend that PRIIP manufacturers include additional warning in the performance scenarios section of the KID. The ESAs also recommend that NCAs monitor whether the steps taken by PRIIP manufacturers are in line with the recommendations. PRIIPs manufacturers are recommended to:

  • Include a (highlighted) statement in the KID warning the retail investor of the limitations of the figures shown
  • For consistency, take the following approach, or adjust the wording to reflect specific features of the PRIIP
  • Add, under the heading of “Performance scenarios” within the section “What are the risks and what could I get in return”, an additional warning that:
  • Market developments in the future cannot be accurately predicted. The scenarios shown are only an indication of some of the possible outcomes based on recent returns. Actual returns could be lower
  • The other relevant information provided to the retail investor in relation to the PRIIP at the pre-contractual or post-contractual stage could also include additional explanations or put the performance scenario figures in the KID in additional context.
  • Ensure that any steps taken are proportionate and provide information that is complementary to the existing information within the KID. Any additions to the KID should be limited to what is essential to ensure that the presentation of performance scenarios is fair, accurate, clear and not misleading. Retail investors should not be encouraged to disregard the information in the KID

The European Parliament Think Tank produced an 'at a glance' briefing on implementing measures under PRIIPs. The briefing gives some detail on the proposed amendments to the current PRIIPs framework.

Pan-European pension products.

EU ambassadors endorsed the agreement reached between the presidency and the European Parliament on 13 December on the proposed 'pan-European pension product' (PEPP).

The draft regulation (contained in the text of the political agreement) is aimed at providing greater choice for people who wish to save for their retirement, and boosting the market for personal pensions. PEPPs will have the same standard features wherever they are sold. They will be offered by a broad range of providers (principally insurance companies, banks, occupational pension funds, investment firms and asset managers). Savers will have the right to switch providers, both domestically and across borders, after a minimum of five years from the conclusion of the contract or from the most recent switch. (They could do so more frequently if the PEPP provider so allows.) The fee for switching will be capped. Moreover, savers will be able to continue contributing to their PEPP if they move to another member state. An EU 'passport' will enable providers to sell PEPPs in different member states. The text will now undergo legal and linguistic review before adoption by the EU Parliament and the Council.

ESMA's 2019 Supervisory Convergence Work Programme

ESMA's 2019 Supervisory Convergence Work Programme , sets out ESMA's 2019 work streams.

In investment management, the key objective will be to continue fostering common supervisory approaches under the UCITS and AIFMD frameworks and work may cover:

  • performance fee structures
  • closet indexing
  • funds' liquidity stress testing
  • AIFMD leverage limits (reflecting IOSCO work)
  • Brexit (the relocation of entities to EU27, identifying potential cliff edge effects, coordinating NCAs)
  • PRIIPs
  • NCA interactions on implementation challenges and specific supervisory cases
  • MMFR (such as guidelines on MMF managers' reporting obligations, MMF stress testing, central public register of EU MMFs)
  • Cross border distribution of funds
  • Environmental, Social and Governance issues

Main Investment Management Outputs

  • Performance fees (guidance: Q3/Q4 2019)
  • Guidelines on stress testing for money market funds (Q1 2019)
  • Guidelines on reporting obligations for money market funds (Q2 2019)
  • Developing/Reviewing of AIFMD and UCITS Q&As (ongoing)
  • Liquidity stress testing (CP: Q1 2019)
  • Closet indexing follow-up (ongoing)

ESMA consultation on guidelines on liquidity stress testing in UCITS and AIFs

ESMA is holding a consultation (closing on 1 April) on draft guidance for liquidity stress tests of AIFs and UCITS. One Guideline will also apply to depositaries.

The consultation sets out 14 principle based criteria for managers' to follow when executing liquidity stress tests on their funds. The draft principles require stress tests to:

  • be tailored towards the individual fund
  • reflect the most applicable risks to a fund
  • be sufficiently extreme or unfavourable (yet plausible)
  • sufficiently model how a manager is likely to act in times of stressed market conditions
  • be embedded into the fund's overall risk management framework

ESMA is seeking stakeholders' views on the Guidelines, including:

  • the design of liquidity stress testing scenarios
  • the liquidity stress test policy, including internal use of liquidity stress test results
  • considerations for the asset and liability sides of investment fund balance sheets
  • the timing and frequency for individual funds to conduct the liquidity stress tests

The ESMA Guidelines follow recommendations by the European Systemic Risk Board (ESRB) published in April 2018 on how to address liquidity and leverage risk in investment funds. The ESRB mandate asked for the principles to be based on the stress testing requirements set out in the AIFMD. ESMA expects to publish a final report by the summer of 2019.

ESA Reform

A proposed Regulation on European Supervisory Authorities in respect of powers, governance and funding has issued. It comprises a wide-ranging omnibus regulation for reforming the European System of Financial Supervision. Amendments will include: EBA, EIOPA and ESMA Regulations, MiFIR, Benchmarks Regulation, Prospectus Regulation, 4MLD, Venture Capital Funds Regulation and the European long-term investments funds Regulation. Interinstitutional negotiations are ongoing and an indicative date for consideration by the European Parliament has been set for 16 April.

ESMA speeches

Steven Maijoor, the Chair of ESMA, delivered a speech on ​Brexit - the regulatory challenges at the European Financial Forum 2019 in Dublin. Mr Maijoor gave an overview of ESMA’s preparations for the UK’s withdrawal, particularly in the areas of trading, clearing, and supervisory cooperation. He also shared some views on the EU’s capital market after Brexit and the improvements (including additional powers and tools for ESMA) needed to ensure regulation and supervision continue to be as effective as possible.

Verena Ross, Executive Director of ESMA delivered a speech considering investment funds' current issues including systemic risks (including leverage, liquidity), stress testing, costs and performance and Brexit.

ESMA's work on recognising UK CCPs and UK CSD in a no-deal Brexit

ESMA announced that it will recognise three UK Central Counterparties (CCPs) in a no-deal Brexit - LCH Limited, ICE Clear Europe Limited and LME Clear Limited to provide their services in the European Union (EU). ESMA adopted these recognition decisions in order to limit the risk of disruption in central clearing and to avoid any negative impact on the financial stability of the EU. The recognition decisions would take effect on the date following Brexit date, under a no-deal Brexit scenario.

ESMA is also to recognise the UK Central Securities Depository in the event of a no-deal Brexit.

ESMA data on AIF exposures to commercial real estate

ESMA published data on exposures of Alternative Investment Funds (AIFs) to Commercial Real Estate (CRE) markets in the EU as of 31st December 2017. At the end of 2017, 1608 AIFs were pursuing a CRE strategy of which 1244 were AIFs marketed and/or managed by authorised EU AIFMs (Net Asset Value of Eur 309.8bn). Within this sample, 1029 AIFs were pursuing primarily a CRE strategy and 215 AIFs were pursuing partially a CRE strategy.

AIFs managed by sub-threshold AIFMs registered at national level with no access to the AIFMD passport are not included.

Anti-Money Laundering/ Combating the Financing of Terror/ Corruption

5MLD third countries with weak AML/CTF regimes

The European Commission adopted a new list of third countries with weak AML/CTF regimes.

The Commission adopted the list in the form of a Delegated Regulation. It will now be submitted to the European Parliament and Council for approval within one month (with a possible one-month extension). Once approved, the Delegated Regulation will be published in the Official Journal and will enter into force 20 days after its publication. This list was drawn up using a new methodology developed by the EU Commission to identify high-risk countries, which relies on information from the Financial Action Task Force, complemented by its own expertise and other sources such as Europol. Accordingly, the decision to list any previously unlisted country reflects the current assessment of the risks in accordance with the new methodology. It does not mean the situation has deteriorated since the list was last updated. The new list will replace the list in place since July 2018. The 23 jurisdictions are:

  1. Afghanistan
  2. American Samoa
  3. The Bahamas
  4. Botswana
  5. Democratic People's Republic of Korea,
  6. Ethiopia
  7. Ghana
  8. Guam
  9. Iran
  10. Iraq
  11. Libya
  12. Nigeria
  13. Pakistan
  14. Panama,
  15. Puerto Rico
  16. Samoa
  17. Saudi Arabia
  18. Sri Lanka
  19. Syria
  20. Trinidad and Tobago
  21. Tunisia
  22. US Virgin Islands
  23. Yemen


The Financial Action Task Force (FATF) met in February 2019. The main issues dealt with were:

  • Streamlining the FATF (strengthening its governance and accountability)
  • Major Strategic Initiatives (including work on virtual assets)
  • Mutual Evaluations and Follow-Up Reviews, and Compliance (China, Finland, Italy, Norway, Brazil)
  • Identifying jurisdictions with AML/CFT deficiencies (new jurisdiction and Iran)
  • Adoption of a report to the G20 Finance Ministers and Central Bank Governors
  • Approval of three Risk-Based Approach Guidance papers for public consultation:
    • Lawyers
    • Accountants
    • Trust and Company Service Providers

For more information in relation to this topic please contact a member of the Asset Management & Investment Funds team.