Summary: In March, the European Commission proposed new rules that would make marketing AIFs across the EEA easier. Although well meaning, as drafted they could have resulted in restricting, rather than enhancing pre-marketing across the EU. A revised version has now published which resolves many of the bigger concerns. This blog considers those changes.
In March 2018, the European Commission published draft legislation which sought to facilitate the cross-border marketing of funds. As we discussed in our briefing, Fund distribution across the EU – conformity and clarity or just continued confusion? there were some significant concerns with what had been proposed. On 15 June, the Council of the EU published a revised version of the legislation. These revisions are welcomed and resolve a number of the key concerns that we, and many others in the industry, had with the originally proposed legislation. In particular, the proposed “pre-marketing” definition now tracks more closely to the FCA’s pragmatic position (along with other regulators, such as Luxembourg’s CSSF) on marketing under AIFMD.
The revisions would permit AIFMs to carry out market-sounding activities with prospective professional investors before documents are finalised pre-launch - at which point AIFMs are likely to be deemed to be carrying out “marketing” activities that require authorisation or notification in the normal manner under AIFMD. The conditions to “pre-market” are that investors are not able to subscribe to an AIF (and no subscription documents are available), any constitutional and offering documents of not-yet-established AIFs are in draft form, do not constitute an offer and clearly state that they are incomplete, subject to change and cannot be relied upon. AIFMs will have to document their market-sounding activities, including details on when and where they are carried out, and be ready to share these with their regulators on request. The Commission’s original proposals on pre-marketing fell considerably short of this and would have only allowed AIFMs to present to potential investors teaser documents of not-yet-established funds. This could have resulted in AIFMs needing to apply for marketing passports or making notifications considerably earlier in the process than they do currently in the UK (and other jurisdictions taking a similar approach).
Currently, some EEA countries do not permit any pre-marketing to take place. The proposed amendments will force those more restrictive EEA countries to allow managers to have initial discussions with investors and test the market before obtaining a marketing passport or getting an Article 42 notice and fully committing to their marketing strategy.
The Council’s amendments also provide that any subscription to an AIF within 18 months after pre-marketing which either referred to the AIF or which was established as a result of pre-marketing, will be considered to be the result of marketing and subject to notification/authorisation. This is a new and prescriptive legislative approach that rules out reliance on reverse solicitation in certain circumstances. Of course, in practice, this would already have been the case where pre-marketing had been permitted in respect of those persons that were contacted or received the pre-marketing documents.
Another welcome change is in respect of new rules to allow firms to discontinue the marketing of funds in a jurisdiction. In the originally proposed Directive, firms could notify other EEA regulators where they had a marketing passport for a particular fund that they no longer wish to market. This could help to reduce reporting and fees burdens. However, the March draft only allowed this where there were fewer than 10 investors with units representing less than 1% of the AIF in that jurisdiction. AIFMs were also obliged to offer to repurchase units from those investors, even if the fund was closed-ended and so was not permitted to make redemptions. The compromise proposals have reduced the threshold to 5% (and completely removed the reference to 10 investors), and also excused closed-ended AIFs from the repurchase obligation. Again, these changes are very much welcomed.
The draft legislative package, as amended, is due to be approved by the European Parliament, on the basis of a mandate to reach agreement at first reading. We await the final version being published in the Official Journal to see whether there are further changes. In the meantime, the current rules and guidance in this area continue to apply.