In March 2018 the European Commission published a draft package of measures aimed at reducing barriers to the cross-border distribution of investment funds. The proposed approach involves aligning the rules between different legislative frameworks for investment funds (AIFMD, UCITS, EuVECAs and EuSEFs and money market funds). The culmination of various Europe-led consultations, surveys and other stakeholder strategies pursuant to one of the building blocks of the Capital Markets Union initiative, the proposals include a definition of “pre-marketing” for the purposes of AIFMD; a procedure to de-notify for marketing in a member state and other provisions, such as on standardisation of fees and charges, to iron out some operational inconsistencies.
This legislative package has now been finalised. It is due to be adopted by the EU Council and Parliament later this year, to come into effect in 2021.
A new concept of and provisions on ‘pre-marketing’ are helpful (and a huge improvement on the European Commission’s original proposals). Managers can have initial discussions with prospective investors in common across the EU and test the market before documents are finalised, and without needing to commit to obtaining a marketing passport or submitting Article 42 National Private Placement Regime (NPPR) notices.
EU AIFMs can carry out ‘pre-marketing’ activities in relation to AIFs pre-launch, or for established AIFs that are not yet notified for marketing in the member state where the investor is domiciled or has its registered office. To qualify, pre-marketing must not amount to an offer or placement (no subscription documents can be available, whether draft or final form) and for funds pre-launch, only draft fund and offering documents can be in circulation. In practice, this means marketing teaser documents and draft PPMs can be used at this early stage, provided it is clear that they are subject to change and do not constitute an offer or invitation to subscribe.
With this prescriptive, but welcomed, approach comes some new compliance (although this is not unduly onerous). AIFMs must ensure that their market-sounding activities are properly documented and, within 2 weeks of engaging in pre-marketing, send an informal letter or email to their home national competent authority (NCA), stating in which member state(s) they conducted pre-marketing activities; the time periods; a brief description including the investment strategies and (if relevant) the AIFs that were the subject of pre-marketing. The home member state will then inform the NCA of the member state where pre-marketing has occurred (that NCA can request further information on the pre-marketing that took place in their jurisdiction).
If a professional investor subscribes to an AIF within 18 months of pre-marketing (where such AIF was referred to or established as a result of such pre-marketing) the AIFM will be subject to the rules on notification/authorisation, on the basis that the investor’s subscription will be considered to be the result of marketing under AIFMD. In many cases, 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. However, the draft legislation is unclear as to if this restriction is investor or jurisdiction-specific – if the latter, it will rule out reverse solicitation as a marketing strategy in all but rare circumstances.
The new rules allow EU AIFMs the ability to discontinue the marketing of funds in a jurisdiction, by way of a notification process with its home state NCA. Conditions apply, including that the AIFM publically offers over a 30 day period to repurchase units or shares held by investors in the relevant jurisdiction (closed-ended AIFs and ELTIFs are excluded). The AIFM must also modify or terminate any contracts with delegates and financial intermediaries, with effect from the date of notification, in order to prevent any new or subsequent offerings or placement of the relevant fund(s).
Marketing has to cease by the time the home state NCA passes the AIFM’s de-notification form to the NCA in the relevant jurisdiction (the home state NCA has up to 15 working days to check that the information provided is complete and transmit it).
A new provision in these new rules means that AIFMs may want to be circumspect in their approach: for 3 years following de-notification, the AIFM cannot engage in pre-marketing of the EU AIF(s) referred to in the notification, or in respect of similar investment strategies or ideas. This begs the question of why an AIFM would choose to de-notify (given it’s optional) and curtail its future ability to pre-market a similar investment strategy in that jurisdiction. If an AIFM chooses not to de-notify and therefore leave the door open for follow-up marketing in that jurisdiction, the reporting and fees burdens will of course continue to apply.
The legislative package includes other provisions; we would highlight a few of interest:
- European regulators are to make fee information, national marketing rules and requirements and calculation methodologies publically available
- Specific harmonised turnaround times for NCAs (ie 15 working days to notify an AIFM that it cannot implement a planned change)
- Although there are minimum requirements for member states willing to permit marketing to retail investors, these can be provided online and a physical presence, either by the AIFM or a third party representative, is not required
- UCITS providers are not subject to the requirement to provide retail investors in the EU with a PRIIPS KID (in addition to the UCITS KID) until 31 December 2021, when the extended exemption in the PRIIPs Regulation (as provided for in the draft Regulation) will end
Impact of non‑EU AIFMs
The new provisions apply to EU AIFMs only. However, a reference to the harmonised rules not disadvantaging EU AIFMs over non-EU AIFMs may mean that NCAs apply this approach across the board.
On the UK’s withdrawal from the EU, the UK is likely to become a ‘third country’ and UK AIFMs ‘third country firms’. Pending access to the AIFMD third country passport, UK AIFMs, as non-EU AIFMs, will have to market using the NPPRs. The impact of these legislative amendments will need to be considered in this context.