New EU Regulations to Enhance and Speed Up Cross Border Distribution
New EU regulations, which aim to make it easier, faster, and less expensive for managers to sell funds across the EU came into effect from 2 August of this year. The ESMA Guidelines on Marketing Communications also took effect from 2 August, but do not need to be implemented for 6 months from the date of their publication.
The new rules form part of a wider initiative under the Capital Market Union action plan which aims to facilitate the cross-border marketing and distribution of both UCITS and AIFs within the EU by increasing transparency and harmonisation within the process and between Member States, by reducing the remaining regulatory barriers and improving costs efficiencies.
Harmonised new definition of "pre-marketing"
Up until now, there has been a lack of clarity and a huge variance across member states in relation to what constitutes "marketing" and "pre-marketing", particularly in the context of AIFs, which is problematic for managers, especially where they want to just test investor appetite for an investment strategy. Some jurisdictions permit this and do not consider these initial activities to be "marketing" activities, whereas in other jurisdictions, marketing is deemed to occur at a much earlier stage in the process, making it nearly impossible to approach investors to assess demand. To address these issues, the new rules provide for a harmonised definition of "pre-marketing" and define the concept quite broadly.
They will permit the provision of information to, and communications with, EEA investors in relation to funds that are not yet registered in that jurisdiction and clarify that this does not amount to an offer or placement of units in that country. The new rules also prescribe who can engage in pre-marketing activities and how they should be reported to the local regulatory authority, including a 2-week notification requirement from the date the pre-marketing commenced. In order to comply with the new pre-marketing regime, AIFMs:
- must ensure that their pre-marketing communications to EEA investors meet the new marketing requirements and conditions and where applicable local requirements,
- must ensure that the entity carrying out the pre-marketing activities is either a fully authorised EU AIFM or if using a third party, that they are appropriately authorised, which will most likely mean being authorised under MiFID, as a credit institution, as a tied agent, etc. This will preclude unregulated and non-EU AIFMs from engaging in these activities.
- must have a process in place to identify when “pre-marketing” will occur and adhere to the local marketing rules.
- should note that reverse solicitation will not be permitted where investors subscribe within 18 months of pre-marketing activities and a full passporting notification will be required. So AIFMs will need to monitor investors into the fund for 18 months after the pre-marketing.
- should also note that the pre-marketing concept does not apply to non-EU AIFs that they market/manage, and they will still be subject to local discrepancies and interpretations.
Marketing Communications with investors
The new rules require all managers of both UCITS and AIFs to ensure that all marketing communications to investors are identifiable as such and describe the risks and rewards of purchasing units in an equally prominent manner and set out other requirements in respect of marketing communications.
Overall the new rules do seek to address a number of issues facing managers when looking to market their funds across the EU and are generally welcomed. However, managers need to familiarise themselves with the new requirements and exercise care to ensure that even when pre-marketing, they do not offer potential investors the opportunity to subscribe into a fund that is being pre-marketed inadvertently or otherwise.
Share Class Notifications
Perhaps one of the less favourable changes contained within the new rules is the new requirement for UCITS and AIFMs to notify to both the host and home regulators of any changes to the marketing notification letter or in the context of UCITS, a change to the share classes being registered for sale, at least one month in advance of the proposed change becoming effective. ESMA has confirmed that the launch of a new share class of a passported AIF does not require one month’s prior notice. In the context of UCITS funds, a number of local regulators have already indicated that they will waive the one month’s notice.
Changes to Regulatory Fees and Charges
Managers will already have benefitted from the new rules requiring regulatory fees or charges to be consistent with the overall costs in the performance of the functions, which are already in effect since August 2019. All regulatory authorities must publish a list of all fees and charges on their websites. ESMA maintains a centralised collection of hyperlinks to all the relevant pages, making it a lot easier and more transparent to ascertain the regulatory costs.
Pinsent Masons Global Gateway is a dedicated and specialised fund registration service within Pinsent Masons (a global law firm with 27 international offices) and provides support and assistance to asset managers in connection with the global registration, passporting, private placement and distribution of investment funds in both EEA and non-EEA countries. The Global Gateway team is comprised of a dedicated group of experienced fund registration executive staff who specialise in advising managers on the distribution of their funds globally. The Global Gateway team also has the advantage of being supported, when required, by the global network of Pinsent Masons' offices. The Global Gateway service also provides clients with access to our Global Gateway Portal and Knowledge Hub, which is an interactive portal system which allows clients to export registration matrices and to access current fund documentation and country reports.
Gayle Bowen, Asset Management and Investment Funds Partner, and Head of Dublin Office, and Helena Dalton, Head of Global Fund Registrations