The new regulation and directive on cross-border distribution of collective investment undertakings introduce: (i) a definition of pre-marketing, (ii) uniform requirements for marketing materials, (iii) the possibility of ex-ante notification of marketing materials (when marketing to retail investors), (iv) rules for de-notification, (v) new rules aimed at transparent and proportionate fees and charges levied by competent authorities and (vi) a new central (ESMA) database on the cross-border marketing of collective investment undertakings.
The long awaited regulation ((EU) 2019/1156) and directive ((EU) 2019/1160) with respect to the cross-border distribution of collective investment undertakings were recently published in the official EU journal (the Cross-border Laws). Aim of the Cross-border Laws is to reduce (regulatory) barriers currently hindering cross border distribution of investment undertakings.
The Cross-border Laws apply to alternative investment fund (AIF) managers1, undertakings for the collective investment in transferable securities (UCITS) and their management companies2, European venture capital fund (EuVECA) managers3 and European social entrepreneurship fund (EuSEF) managers4.
In this update we take a closer look at 5 practical aspects for AIF managers under the Cross-border Laws.
'The concept of pre-marketing' is presently not harmonized in the EU. Also, in the Netherlands, there is presently no clearly defined definition of pre-marketing. The Cross-border Laws introduce a new definition of 'pre-marketing' for EU AIF managers. Pre-marketing is, in summary, defined as direct or indirect provision of information or communication on investment strategies or investment idea's by an AIF manager (or on its behalf) to potential professional investors in order to test their interest in an AIF5 which is not yet established6 and which in each case does not amount to an offer or placement to the potential investor to invest in the units of shares (together interests) of that AIF.
Pre-marketing itself is allowed, except where the information presented to potential professional investors:
(i) is sufficient to allow investors to commit to interests in the fund, i.e. to commit to acquiring interests of a particular AIF;
(ii) amounts to subscription forms or similar documents whether in a draft or a final form; or
(iii) amounts to the constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.
EU AIF managers must ensure that investors do not acquire interests in an AIF through pre-marketing.
Any draft offer documents provided should not contain information sufficient to allow investors to take an investment decision and should include a disclaimer stating (i) they do not constitute an offer or an invitation to subscribe to interests in an AIF; and (ii) the information presented therein should not be relied upon because it is incomplete and may be subject to change. The EU AIF manager is required to notify the competent authority of its home Member State within two weeks of it having begun pre-marketing by means of informal letter.
Any subscription by professional investors within 18 months of the EU AIF manager having begun pre-marketing, to interests in the AIF referred to in the information provided in the context of pre-marketing, 7 is deemed to be marketing.
Note that third parties engaging in pre-marketing on behalf of an authorised EU AIF manager are subject to the same conditions. Such a third party may only engage in pre-marketing if it is a regulated entity as specified in the Cross-border Laws.
The Cross-border Laws introduce uniform rules on marketing communications. Marketing communications addressed to investors must:
(i) be identifiable as such;
(ii) describe risks and rewards of purchasing interests in an equally prominent manner;
(iii) be fair, clear and not misleading;
(iv) not contradict regulatory transparency information (art. 23 AIFMD);
(v) specify where, how and in which language investors can obtain a summary of investor rights and shall provide a hyperlink to such summary including (as appropriate) information on access to collective redress mechanisms at EU and nation level in case of litigation; and
(vi) include clear information on possible termination of marketing.
Further ESMA guidelines on the application of the requirements for marketing communications will need to be issued prior to 2 August 2021.
Competent authorities will be required to maintain on their websites up-to-date and complete information on applicable national laws, regulations and administrative provisions governing marketing requirements for AIFs and the summaries thereof in at least one language customary in the sphere of international finance. ESMA will maintain a central database on its website containing the abovementioned summaries and the hyperlinks to the websites of the competent authorities.
Ex-ante verification marketing communications
The Cross-border Laws introduce the possibility of ex-ante verification in the case of marketing to retail investors, i.e. prior notification of marketing communications to competent authorities may be required to verify compliance. Possible amendment requests are to be communicated to the AIF manager within 10 working days.
As of 31 March 2021 competent authorities shall start reporting to ESMA on such ex-ante amendment requests and also on requests for amendments and decisions on the basis of ex-poste verifications.
New requirement is that AIF managers must, in each Member State where it intends to market interest in an AIF to retail investors, make available facilities to perform tasks. For example, including, but not limited to, processing investors' subscription, payment, repurchase and redemption orders relating to interest in the AIF and acting as a contact point for communicating with the competent authorities.
To date there were no harmonised rules with respect to de-notification of AIFs. Under the Cross-border Laws de-notification of AIFs with an EU passport is possible provided that:
(i) for open-end funds: a blanket offer is made to repurchase or redeem interests, publicly available for at least 30 working days;
(ii) a publicly available statement is made: to make public the intention to terminate arrangements made for marketing interests of AIFs in that Member State;
(iii) contractual arrangements with intermediaries or delegates are terminated or modified: to prevent any new or further offering.
Earlier legislative proposals (also) included a requirement that either (i) less than 1% assets under management (ii) no (remaining) investors would be required for de-notification. Note these requirements were not included in the final text of the Cross-border Laws.
Transparency requirements (art. 22 and 23 AIFMD) continue to apply after de-notification. Therefore the AIF manager must provide investors who remain invested in the EU AIF as well as the competent authorities (of the home Member State of the AIF manager) with the information required.
Also, after a de-notification, an EU AIFM is not allowed to market interests in AIFs with a similar investment strategy within a period of 36 months after the de-notification within the jurisdiction concerned.
Transparent and proportional fees and charges
Common principles with respect to fees and charges levied by competent authorities for carrying out their duties in relation to cross-border activities of AIF managers are introduced. Fees and charges must be proportionate, i.e. to the overall costs of the competent authorities made in carrying out their duties in relation to the cross-border activities of the AIF manager. An invoice8 must be sent including a clearly setting out means of payment and date payment is due.
The (majority of the) new provisions under the Cross-border Laws shall apply from 2 August 2021. Before this date the provisions under the directive ((EU) 2019/1160) need to be transposed by Member States into national legislation.
1 Under Directive 2011/61/EU (AIFMD)
2 Under Directive 2009/65/EC
3 Under Regulation (EU) No 345/2013
4 Under Regulation (EU) No 346/2013
5 Or a compartment of an AIF.
6 Or which is established but not yet notified for marketing in that Member State where the potential investors are domiciled or have their registered office.
7 Or of an AIF established as a result of pre-marketing.
8 This may be an individual payment statement or a payment instruction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.