The EU’s new regulatory framework for facilitating the cross-border distribution of UCITS and alternative investment funds (AIFs) came into effect on 2 August 2021 (the Framework). The Framework comprises both an implementing Regulation (2019/1156) and Directive (2019/1160). The Framework contains several changes on pre-marketing, marketing communications, and other key new provisions including the de-notification process for UCITS and AIFs.
We have set out the relevant changes that fund managers will need to take into account when considering their existing cross-border distribution arrangements.
New Pre-Marketing Regime
The Framework aims to streamline pre-marketing requirements by EU AIFM’s across the EU and sets out the conditions for its use by an EU AIFM. The pre-marketing regime does not apply to UCITS, registered/sub-threshold AIFMs or non-EU AIFMs.
Definition of Pre-Marketing
Pre-marketing is defined in the new Article 4(1)(aea) of the AIFMD 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 with a registered office in the Union in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in accordance with Article 31 or 32, 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 potential investor to invest in the units or shares of that AIF or compartment”.
Pre-marketing will not be permitted by an EU AIFM where the information presented to investors:
-
Enables investors to commit to acquiring units or shares
-
Amounts to subscription forms or similar documents (in either draft or final form) or
-
Amounts to constitutional documents, a prospectus or offering documents of a not-yet-established AIF, in final form
Pre-marketing Notification Letter
Under the Directive, an EU AIFM must notify its home state regulator within two weeks of starting to premarket an AIF. This notification, in the form of “an informal letter, in paper form or by electronic means”, must:
-
Specify the Member States that pre-marketing is planned or has taken place;
-
Identify all the AIFs and compartments that are being pre-marketed, and
-
Include a brief description of the premarketing including details of the investment strategies being pre-marketed
The contents of this notification may vary on a Member State to Member State basis, depending on the requirements of the home state regulator.
Limits on Reverse Solicitation
Any investment in an AIF following pre-marketing (within 18 months of making pre-marketing notification), triggers a requirement to register the AIF in the relevant jurisdiction where the pre-marketing is carried out. Authorised EU AIFMs are required to comply with the AIFMD marketing rules and notification procedure as applicable under the AIFMD. The relevant procedure depends on whether the marketing is made in the Member State of the AIFM or in another Member State. Then the AIFM is permitted to accept subscriptions from professional investors to acquire units or shares in an EU AIF, in the context of pre-marketing. Pre-marketing activities that result in professional investors acquiring shares/units of the AIF requires the EU AIFM to complete AIFMD cross border marketing notification procedure. Consequently, the EU AIFM is prohibited from relying on reverse solicitation for a period of 18 months from the date that the EU AIFM first commenced pre-marketing.
Marketing Communications
The Regulation contains new requirements for the marketing communications by UCITS Management Companies and authorised EU AIFMs.
A UCITS Management Company or EU AIFM must ensure that:
-
Marketing communications addressed to investors should be identifiable as such, and should describe the risks and rewards of purchasing units or shares of an AIF or UCITS in an equally prominent manner
-
All information included in marketing communications addressed to investors should be presented in a manner that is fair, clear and not misleading, and
-
Marketing communications addressed to investors should specify where, how and in which language investors can obtain summarised information on investor rights. They should clearly state that the AIFM or the UCITS management company, has the right to terminate the arrangements made for marketing.
The Regulation provides that the European Securities and Markets Authority (ESMA) should create a central database containing summaries of national requirements for marketing communications and hyperlinks to the information published on the websites of competent authorities.
The Regulation also provides for a verification process by host Member States regulators. The regulators can now require prior notification of marketing materials in respect of AIFs which are to be marketed to retail investors and of UCITS, but only to verify compliance with the Regulation.
Under the Framework, ESMA was required to develop guidelines on the application of these requirements for marketing communications. ESMA issued its final guidelines, which includes a feedback statement from its consultation. The Guidelines will apply six months following their publication on ESMA’s website in all official EU language translations. The publication of the translations triggers a two month notification period within which national competent authorities must notify ESMA whether they will comply, or explain why they will not comply, with the Guidelines.
De-Notification Processes for UCITS and AIFs
Where it is no longer intended to market such funds in a particular host member state, the Framework also harmonises the process for the de-registration of both UCITS and AIFs:
-
Except in the case of closed-ended AIFs and ELTIFS, a blanket offer must be made to repurchase or redeem, free of any charges or deductions, all the units or shares of the UCITS or EU AIF’s (as applicable), held by investors in that Member State, must be publicly available for at least 30 working days, and must be addressed, directly or through financial intermediaries, individually to all investors in that Member State whose identity is known
-
The intention to terminate arrangements made for marketing units or shares of some or all of its AIFs in that Member State must be made public by means of a publicly available medium, including by electronic means, which is customary for marketing AIFs and suitable for a typical AIF investor
-
Investors who remain invested in the UCITS/AIF as well as the regulators of the home member state must continue to be provided with the investor disclosures and periodic reports as required under AIFMD/UCITS Directive
-
Contractual arrangements with financial intermediaries or delegates must be modified or terminated with effect from the date of the denotification to ensure that they will not continue to offer or place those UCITS or AIF's units/shares whilst it is being de-notified, and
-
The AIFM or UCITS must submit a notification to the home state regulator, with the information above and cease any fresh or further offering of the relevant UCITS or AIFs in the relevant Member State from the date mentioned in the de-notification. Further, for 36 months after the date of de-notification, the UCITS or AIFM cannot engage in any pre-marketing of units or shares of the UCITS or EU AIF that were de-notified, or in respect to “similar investment strategies or investment ideas” in the relevant host Member State.
Cross-Border Notification Letter
The Directive modifies the notification procedures and timeframe contained in Article 93(8) of the UCITS Directive in case of changes to the information that have initially been notified by a UCITS to its home Member State regulator when such UCITS is marketing its units/shares in a host Member State under the UCITS marketing passport.
Written notice of such changes now must be given to both the home and host Member State regulators of the UCITS. This has to be done at least one month before implementing the change. In addition, both regulators must also be notified at least one month in advance of any new share classes being marketed.
Provision of Local Facilities
The new Directive prohibits host Member States (in which UCITS or AIF shares are marketed) from requiring UCITS managers and EU AIFMs (in respect of retail investor AIFs) to have a physical presence in the host Member State for the purpose of making available facilities to local investors. This is intended to reduce differing practices and requirements in EU member states in respect of facilities agents, paying agents and similar service providers.
Facilities may be provided by the UCITS management company or EU AIFM itself and/or by certain third parties that are subject to regulation in respect of the tasks which they perform. The Framework explicitly provides that the required tasks for investor servicing such as paying agency or information services can be performed electronically, rather than establishing a physical presence in the host Member State.
Central Databases
The Framework provides for the creation of central databases for the publication of:
-
National marketing requirements of the host Member States
-
Fees and charges of the host Member State, and
-
Details of all AIFs/UCITS that are marketing on a passported basis, their AIFM/UCITS management company and the member states in which they are marketed
Competent authorities will have to notify such information to ESMA, which will in turn be required to maintain a central database of summaries of and links to all national provisions by 2 February 2022.
Conclusion
The investment funds industry will broadly welcome the streamlining and transparency of the changes to the EU’s cross-border distribution regime. Fund managers will need to consider carefully the effects of the new regime to ensure they comply with the changes. They must also ensure that their distributors and financial intermediaries are fully aware of the changes brought about by the Framework.
EU AIFMs should be aware that under the Directive they are required to notify their home Member State of their pre-marketing activities. Although the Directive is yet to be implemented in Ireland, Irish AIFMs should take this opportunity to prepare for compliance with the new notification requirement concerning the pre-marketing activities for all of the AIFs under their management.
Mason Hayes & Curran LLP’s Investment Funds team can assist and advise firms when preparing pre-marketing notifications to the Central Bank of Ireland, reviewing marketing material for compliance with the Framework and all related compliance requirements under the Framework.
If you would like to discuss the above or require assistance, please contact a member of our Investment Funds team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
