On 12 March 2018, the European Commission published a proposed Directive and a proposed Regulation amending the AIFMD and UCITS IV to facilitate cross-border marketing of funds.
Planned changes to the Alternative Investment Fund Managers Directive and other directives regulating funds and their marketing, which are billed as intending to make cross-border fund raising easier, are in fact likely to make it more difficult. Consultation on these proposals will close on 10 May 2018.
The proposed changes will make it clear that EU managers of EU alternative investment funds don’t have to get regulatory approval in order to have discussions with professional investors testing their appetite for planned investment strategies and ideas, but are allowed to conduct this kind of “pre-marketing”. The trouble is that:
- • Expressly permitting something immediately carries the risk that everything else – whether done by EU managers or non-EU managers – is implicitly forbidden.
- • The proposed definition of pre-marketing is very narrow. It specifically excludes any situation where the fund is already established or reference is made to an existing fund, and it won’t allow any circulation of draft documents. It therefore doesn’t permit many of the communications which currently take place prior to formal notifications and getting approval for cross border marketing.
- • If a fund is subsequently launched, any investment will automatically be treated as the result of marketing by the fund manager, not of an own initiative approach by the investor. So full-scale marketing approval is required before any investment is made. This is unsurprising and shouldn’t be a problem for EU managers of EU funds. But if, as will almost inevitably be the case, the new provisions are read across to limit the activities of those marketing non-EU funds or funds managed by non-EU managers the already highly dangerous practice of arguing that “reverse solicitation” by the investor means there has been no breach of local marketing restrictions, will become even more hazardous.
The narrow definition of “pre-marketing” is the biggest potential problem with the new proposals, but there are a number of other aspects of the proposals which could give rise to difficulties.
There will be new high-level rules, similar to those in MiFID II, governing the content and presentation of all marketing communications relating to funds and requiring equal prominence to be given to risks and rewards, with power given to ESMA to impose more detailed obligations in guidelines.
If an EU manager gives notice to market a fund into another EU country it will not be able simply to withdraw that notice if it decides to cease marketing. It will only be able to do so if it has no investors in the relevant country or has no more than 10 investors who together hold less than 1 per cent of the fund and it makes a blanket offer both publicly and to the individual investors to repurchase free of any charges or deductions all interests held by investors in that country and it publicises its intention to stop marketing in the country and it continues to provide investors in that country with investor reports under the AIFMD.
While no one can reasonably object to continuing investor reporting, the obligation to comply with all the other conditions seems to create pointless and potentially damaging, obligations to publicise the cessation of marketing which was never conducted publicly in the first place and to make public repurchase offers even when there are no investors in the jurisdiction.
Moreover, many closed-ended alternative investment funds and those investing in illiquid assets will have neither the legal power nor the practical ability to repurchase interests.
Individual jurisdictions will be allowed to charge fees to those marketing cross-border into their territory under an AIFMD passport (though only at a level which reflects the supervisory work involved).
A number of states have been charging these fees, but it was previously hotly contested whether they had any right to impose extra charges on the exercise of passporting rights.
To confirm this power seems a poor way to encourage cross-border fund raising.
A proposed new interactive tool to help firms identify and calculate these costs before incurring them should be helpful, but not nearly as helpful to fund managers as a ban on additional charges would have been.
An opportunity has also been missed to extend the AIFMD marketing passport to cover marketing to certain types of high net worth individuals or other sophisticated investors who do not qualify as “professional clients” under the tests in MiFID II. It continues to be left to individual EU Member States to decide how far, if at all, marketing to even the highest end of the “retail” market is permitted.
Instead, new minimum (not maximum) obligations will apply to both EU and non-EU managers whenever they are allowed to do any retail marketing in an EU Member State.
Whenever a fund manager plans to market outside the purely professional client market, it will need to have facilities (run by the manager or another regulated entity it employs for the purpose) in the relevant country to process investors’ subscription, payment and redemption orders, provide information on how orders can be given and proceeds will be paid, handle information on the exercise of investor rights, make fund documentation and annual reports available and provide relevant information in a durable medium regarding all these tasks.
The positive side of this change is that the investor servicing facilities will not need to be physically located in each relevant Member State.
The negative side is that all these tasks must, for each country, be performed in “the official language or languages of the Member State where the AIF is marketed”.
If these provisions survive consultation it will not be possible for fund managers to engage in even the most limited and tightly targeted marketing to selected retail investors in any Member State unless they are ready to provide fully translated documents and a functioning website or other facility operating in all the official languages of that country.
To be determined.