_The European Commission continues to review the rules around management and distribution of AIFs within the EU. The latest round of changes aims to improve the landscape for fund distribution, so let’s take a look with Partner Mark Shaw, at the changes introduced by the Cross-border Distribution Directive, which will be coming into force from the 2nd of August.
Video transcription below.
> 2 August 2021 Onwards – The Cross-border Distribution Directive (and Regulation)
While you will hear references to the “Cross Border Distribution Directive”, it is actually a package of changes contained in both a Directive and a Regulation (the Regulation being required to amend existing Regulations). The main regulatory changes are to AIFMD and the UCITS Directive.
Key changes are as follows:
In order to simplify the AIF launch process, a streamlined “pre-marketing” process is being introduced.
In short, where a firm is considering launching an AIF and wishes to sound-out prospective investors, this activity will constitute “pre-marketing” that will have to be notified to the AIFM’s home state regulator within two weeks of the pre-marketing having commenced.
The notification must specify where and for what period the pre-marketing is taking place, with a brief description of the pre-marketing and investment strategy of the proposed AIF.
Once AIF promoters comply with the notification requirement, they receive the benefit of regulatory coverage for up to 18 months to speak to prospects in the EU. However, they will have to select and appoint an EU AIFM in order to make the notification for the proposed AIF.
Reverse solicitation has been in the EU’s regulatory crosshairs for some time. It should never form the basis for a distribution strategy, but has nonetheless been a useful tool for accessing investors in certain jurisdictions.
Now, any subscription made within 18 months of a pre-marketing notification will be considered the result of such pre-marketing, which essentially means it could not be classified as reverse solicitation during that time and would therefore require a formal passporting in the event that the EU AIF is indeed established and a subscription is made from that member state.
The European Commission is currently considering whether the national private placement regime (NPPR) creates an unlevel playing field in some member states by favouring less regulated non-EU fund managers the same level of market access as their EU (AIFM) counterparts.
While there are no specific provisions on private placement, the Cross Border Distribution Directive includes a recital that states that national rules implementing its measures “in particular, harmonised rules on pre-marketing, should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs”. What this means in practice is that non-EU AIFMs will not be able to take advantage of any pre-marketing regulatory coverage. Private placement rules vary from member state to member state, but fund promoters should be aware of the possibility of rules changing as a consequence of a member state’s implementation of the Cross Border Distribution Directive.
UCITS (and Retail AIFs)
The position for UCITS is slightly different, as the concept of pre-marketing does not apply to them yet.
Since the regulation of UCITS attaches to the vehicle itself, whereas for AIFs it attaches to the AIFM, it is conceptually more challenging. Added to which, anything other than execution-only distribution of UCITS is technically a MiFID activity, despite the provisions relating to the passport being dealt with in the UCITS Directive.
The key rule change for UCITS, which also applies to AIFs that are available to retail investors is a relaxation of the rules applying to local facilities agents. These facilities agents perform tasks such as processing subscription, repurchase and redemption orders and making other payments to unit-holders. Under the new rules, while these will be required for all retail offerings, they do not need to be physically located in each member state of distribution, so a fund can simply appoint a single provider to host the services online, such as the fund’s existing registrar and transfer agent.
De-notification of Marketing of an AIF or UCITS in Member State
Where a UCITS or open-ended EU AIF has been marketed in a member state and the promoter wishes to cease marketing the UCITS or AIF, it must send a notice of de-notification to its home regulator relating to the activities in the member state in question. The new requirements go further and it must also make a blanket offer to investors in that member state to repurchase or redeem (free of charge or deductions) all units or shares of the UCITS or AIF being de-notified.
This offer must publicly available for at least 30 working days and addressed individually to all investors in the member state in question.
A UCITS or an EU AIFM will have to ensure that all marketing communications to investors are identifiable as such, describe the risks and rewards of purchasing units or shares of a UCITS or an AIF in an equally prominent manner, and -crucially- all information included in marketing communications must be fair, clear and not misleading. This is a standard that already applied to retail communications in the EU, but has been extended to all EU AIFM communications.
The changes introduced under the Cross Border Distribution Directive are a step towards a more homogenous fund distribution environment. But the EU still has a very complex legal framework, As hinted earlier, there are aspects of fund marketing that cross into the different system of rules under MiFID, and we now have a new level of uncertainty of the treatment of non-EU AIFs.