According to an analysis carried out by the European Commission in 2018, the EU investment fund market was still mostly a national market. 70% of assets under management held by EU investment funds were sold only in their domestic markets. Only 37% of UCITS funds and about 3% of Alternative Investment Funds (“AIFs”) were registered for distribution in more than three member states. The assessment also indicated that the regulatory barriers (namely national marketing requirements, regulatory fees, administrative requirements and notification requirements) represent a significant disincentive to cross-border distribution: the average of the regulatory costs related to cross-border distribution ranges between 1% to 4% of the overall fund expenses.
Therefore, it comes as no surprise that the Council and the European Parliament adopted a package of reforms aimed at reducing the barriers to cross-border distribution of investment funds – which arose in large part due to differing interpretations of the rules applicable to the use of marketing passports under the AIFMD and the UCITS Directives across the EEA member States.
The package of reforms, originally proposed by the EU Commission in March 2018, was published in the OJEU on 12 July 2019 and is comprised of Directive (EU) 2019/1160[1] regarding the cross-border distribution of collective investment undertakings and Regulation (EU) 2019/1156[2] on facilitating cross-border distribution of collective investment undertakings. This Directive aims to amend the existing AIFMD and UCITS legislation with the new cross-border marketing rules. The EEA member states are expected to implement the new rules by 2 August 2021.
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Defining pre-marketing under AIFMD
Under the existing EU AIFMD legislation, the definition of a ‘pre-marketing’ activity differed between the EEA member states. The new rules introduce a common definition of ‘pre-marketing activities’ which will apply in all member states.
‘Pre-marketing’ for the purpose of the new rules applying to EU AIFMs will mean:
- 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 with a registered office in the EU;
- in order to test the investors’ interest in an AIF or a compartment that is not yet established;
- or in order to test their interest in an AIF or a compartment which is established, but not yet notified for marketing, in accordance with Article 31 or 32 of AIFMD, in that member state where the potential investors are domiciled or have their registered office; and,
- which does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment.
This new definition is an important change, implying in practice that any activities going beyond the scope of “pre-marketing” will be considered as marketing activities subject to the formal marketing notification process as required by the AIFMD.
This rule will apply to authorised EU AIFMs (i.e., not including small registered AIFMs) in respect of an AIF which is either:
- not yet established; or
- established but not yet notified for marketing under Arts 31 or 32 of AIFMD (both of which concern marketing of EU AIFs only).
In addition, the rule will only permit pre-marketing to potential professional investors. The Commission will assess, after two years, whether pre-marketing requirements should be extended to UCITS funds.
Discontinuation of marketing AIFs
Where a UCITS which has been marketing a UCITS fund in a host EEA member state, or an EU AIFM which has been marketing an EU AIF in a host member state under an Article 32 AIFMD notification, wishes to cease marketing any or all of these UCITS funds or AIFs, it can send a notice of de-notification to its home regulator provided:
- it makes a blanket offer to repurchase or redeem (free of charge or deductions) all units or shares of the UCITS or AIF(s) being de-notified, which are held by investors in that Member State. The offer must be:
- – publicly available for at least 30 working days; and,
- – addressed (directly or through intermediaries) individually to all investors in the host Member State whose identity is known. (This condition does not apply in the case of closed-ended AIFs and ELTIFs.)
- it makes its intention to stop marketing in that Member State public utilizing a publicly available medium (including electronic means) which is “customary for marketing” UCITS or AIFs and suitable for a “typical” UCITS or AIF investor;
- contractual arrangements with any financial intermediaries or delegates are modified or terminated with effect from the date of de-notification to prevent units or shares in any UCITS or AIF which is being de-notified from being offered or placed.
Importantly, for 36 months following the date of a marketing de-notification, the EU AIFM may not market units in the EU AIFs that have been de-notified, nor can the EU AIFM engage in marketing similar investment strategies or ideas in the member state in which the de-notification has been made.
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Local facilities
All UCITS and also AIFMs (EU or non-EU) who are marketing or intending to market an AIF (EU or non-EU) to retail investors in the EU must make available, in each member state in which it markets, or intends to market, facilities to:
- process investors’ subscription, payment, repurchase and redemption orders relating to the units or shares of the AIF, following the conditions set out in the AIF’s documents;
- provide investors with information on how orders can be made and how re-purchase and redemption proceeds are paid;
facilitate the handling of information relating to the exercise of investors’ rights arising from their investment in the AIF in the Member State where the AIF is marketed; - make available information and documents which investors can inspect and obtain copies of, in compliance with Articles 22 (Annual report) and 23 (Disclosure to investors) of AIFMD;
- provide investors with information (in a durable medium) relevant to the tasks which the facilities perform; and
- act as a contact point for communication with the NCAs.
This does not require the investment managers to have a physical presence, nor to appoint any third-party representative in the host member state(s), since these facilities may be provided through the use of electronic or other means of distance communication which is a positive move, particularly for UCITS managers, who have had to comply with similar rules for some time.
Limitation to reverse solicitation
Relying on reverse solicitation will be limited by the new Article 30a(2) in the AIFMD. This means that any subscription by professional investors, within 18 months of the EU AIFM having started pre-marketing, to units or shares of an AIF referred to in pre-marketing, or of an AIF established as a result of the pre-marketing, will be considered to be the result of marketing. Therefore, the reserve solicitation exemption would not apply. As such the fund will be subject to the notification procedures contained in Articles 31 and 32 of the AIFMD.
It is important to note that these new rules have not been passed and implemented within UK legislation, but will apply to all UCITS and also AIFMs (EU or non-EU) who are marketing or intending to market an AIF (EU or non-EU) to investors in the EU.
