Cross border distribution of AIFs and UCITS - new rules approved by European Parliament

On 16 April 2019, the European Parliament (EP) voted in favour of a directive and a regulation which, together, bring in new rules for the cross-border distribution of AIFs and UCITS in the EU, including the ability to pre-market AIFs, new requirements around local facilities for funds sold to retail investors and a regime whereby a manager can de-notify an AIF or a UCITS which it no longer wishes to market in a given Member State.

New rules on cross border distribution of funds approved by European Parliament

What do the Directive and Regulation change?

The Directive and Regulation seek to address several barriers to the efficient cross-border marketing of investment funds across the EU which the Commission’s previous work had identified.

Among other things, they amend the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive to increase the harmonisation of cross-border marketing between both (a) the AIFMD and UCITS regimes and (b) different practices adopted by Member States.

The final texts show a number of welcome improvements on the original proposals.

However, unless individual Member States decide to make equivalent changes to their national private placement regimes (NPPRs), non-EU AIFMs can expect to see little difference when the rules eventually come into effect (likely to be in late 2021) since the large majority of the provisions apply only to EU or ‘authorised’ (i.e., for the time being at least, EU) AIFMs. A significant exception to this, though, is the new requirement to provide local facilities, which will apply to AIFMs (both EU and non-EU) which are marketing - or intending to market - to retail investors in the EU.

The Directive introduces rules regarding:

  • pre-marketing of AIFs
  • provision of local facilities for AIFs and UCITS being marketed to retail investors
  • a process to de-notify marketing of an AIF or UCITS in a host Member State
  • alignment of certain notifications in respect of marketing an EU AIF or UCITS in a host Member State.

The Regulation contains rules on:

  • requirements around marketing communications
  • verification of marketing communications
  • the creation of central databases for the publication of
    • national marketing requirements
    • fees and charges
    • a list of AIFs, UCITS and their managers.

This Note looks at each of these topics in turn below.

Background and next steps

On 12 March 2018, the European Commission adopted a proposal for a new directive and another for a new regulation, intended to better harmonise the rules on cross-border marketing of AIFs and UCITS - a summary of the proposals can be found here.

Following consideration of the proposals by the EP and the Council, an informal political agreement on the final texts was reached on 27 February 2019.

The EP has now adopted the directive and regulation and the Council will, in due course, endorse the EP’s position, before the texts are formally published in the Official Journal (OJ).

Both the proposed Regulation and Directive will ‘enter into force’ twenty days after publication in the OJ. There would then be a 24-month transposition period, so the legislation will not start to apply until sometime in Q2 or Q3 2021.

I. Provisions in the Directive

A. Pre-marketing of AIFs

Who does it apply to?

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.

What do the rules say?

The different elements of the definition of “pre-marketing” are

  • 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 EU
  • to test their interest in an AIF (or a compartment) which is:
    • not yet established, or
    • established, but not yet notified for marketing in accordance with Article 31 or 32, in the Member State where the potential investors are domiciled or have their registered office
  • 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.

The Directive requires Member States to allow authorised EU AIFMs to pre-market unless the information they present to potential investors

  • enables investors to commit to acquiring units or shares of a particular AIF
  • amounts to a subscription form or similar document (whether in draft or final form) or
  • amounts to a final form constitutional document, prospectus or offering document of a not-yet-established AIF.

A draft prospectus or offering document provided to a potential investor must avoid containing “sufficient information to allow investors to take an investment decision” and must clearly state that (a) the document does not constitute an offer or an invitation to subscribe to units or shares of an AIF and (b) the information presented in those documents should not be relied upon because it is incomplete and may be subject to change.

Investors contacted through pre-marketing can only acquire units or shares in the AIF through marketing permitted under Article 31 or Article 32 of AIFMD - these articles cover, respectively, marketing EU AIFs (a) in the AIFM’s home Member State or (b) in a Member State other than the AIFM’s home Member State.

Where a professional investor in a Member State subscribes for units or shares in a pre-marketed AIF within 18 months of the AIFM starting to pre-market that AIF (presumably, the words ‘in that Member State’ are implied, though the Directive’s text is somewhat ambiguous), this will be taken to be the result of marketing and so would be subject to the notification procedures under Article 31 or Article 32 (and cannot be treated as the result of reverse solicitation).

How do the rules work?

Within two weeks of starting to pre-market an AIF, an AIFM would have to send its home regulator an informal letter (either hard or soft copy). This would have to inform the regulator of:

  • the Member States and periods of time in which the pre-marketing is taking, or has taken, place
  • a brief description of the pre-marketing (including the information on the investment strategies presented) and, where relevant
  • a list of the AIFs and compartments of AIFs being pre-marketed.

The home regulator would then inform the national competent authority (NCA) in each Member State in which pre-marketing is taking, or has taken, place.

Our view

For EU AIFMs, this change is, in some ways, a step in the right direction as it should help AIFMs avoid falling foul of the current diverse rules across the EU as to what does, and what does not, constitute ‘marketing’ as defined under the AIFMD.

However, the new rule is not without its difficulties.

It will, for example, no longer be sufficient for an EU AIFM which wants to avoid ‘marketing’ an AIF to rely on the fact that an enquiry came from a potential investor (“reverse solicitation”). Instead, the AIFM would need to satisfy itself that

  • the enquiry was not the result of the investor having been sent information about the AIF prior to the AIF’s establishment or its notification for marketing under Article 31 or Article 32 of AIFMD and
  • the investor is not seeking to invest in an AIF which may not, itself, have been pre-marketed but which has “similar features” to the one on which the investor has been sent information.

Although the final text clarifies some of the confusion contained in the Commission’s original proposal, it also creates a divergence as to which provisions under AIFMD apply (a) to EU vs non-EU AIFMs and also (b) to EU vs non-EU AIFs since the ability to pre-market an AIF would not be available to non-EU AIFMs unless an NCA chose to extend its NPPR to include the same concept.

B. Providing local facilities

Who does it 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 retail investors in the EU.

What do the rules say?

An AIFM which is marketing or intending to market an AIF to retail investors 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, in accordance with 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
  • act as contact point for communication with the NCAs.

In a positive move - particularly for UCITS, which have had to comply with similar rules for some time - Member States will not be able to require the AIFM or UCITS to have a physical presence in the host Member State nor to appoint a third party representative.

The facilities must be provided by the AIFM itself and/or by a third party, provided the latter is subject to regulation and supervision governing the tasks which it performs. Where a third party is used, the appointment must be evidenced by a written contract, which specifies (a) which of the tasks are not performed by the AIFM and (b) that the third party receives all the relevant information and documents from the AIFM.

Our view

Although it has long been required of UCITS to make local facilities available to investors, many have regarded this as a costly anachronism, which failed to take into account the use investors now make of digital technology for their interactions.

The new rule at least prevents Member States from requiring that local facilities be provided though a physical presence.

Nevertheless, extending the requirement to provide facilities to certain AIFs represents a new, additional and, arguably unnecessary, cost for AIFMs who market to retail investors.

C. Discontinuing marketing a UCITS or an EU AIF in a host Member State

Who does it apply to?

All UCITS and also EU AIFMs marketing EU AIFs notified under Article 32 of AIFMD.

What do the rules say?

Where a UCITS which has been marketing UCITS in a host 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 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 by means of 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.

How do the rules work?

The AIFM or UCITS must submit a notification to its home regulator, containing the information referred to in the three bullet points above and cease any new or further offering of the relevant UCITS or AIFs in the relevant Member State from the date referred to in the de-notification.

The UCITS’s or AIFM’s home regulator will then verify whether the notification is complete.

Within 15 working days of receiving a complete notification, the UCITS’s or AIFM’s home regulator must transmit this (a) to the NCA of the Member State referred to in the notification and (b) to ESMA. It must also tell the UCITS or AIFM that it has done so.

Where investors remain invested in the de-notified UCITS or EU AIF, the UCITS or AIFM must continue complying with the annual report and investor disclosure requirements under Articles 22 and 23 of AIFMD or Articles 68 to 82 and Article 94 of the UCITS Directive.

For 36 months after the date of de-notification, the UCITS or AIFM must not engage in pre-marketing of units or shares of the UCITS or EU AIF referred to in the notification, or in respect of “similar investment strategies or investment ideas” in the relevant host Member State.

Our view

Although the intention behind it seems uncontroversial, the new rule introduces an additional element of bureaucracy (and, so, cost) where it is difficult to see the need for one.

On the positive side, an AIFM will have certainty in knowing it is no longer notified to market an EU AIF in a given Member State.

However, an AIFM or UCITS making use of the new provision will need to consider carefully the logistical complexity (and prospect of breach of the AIFMD or UCITS Directive) in ensuring both that (i) a new offer is not inadvertently made to investors in the relevant Member State in respect of an AIF or UCITS which has been de-notified, and (ii) an AIF or UCITS with ‘similar investment strategies or investment ideas’ is not subsequently pre-marketed in that Member State.

Equally, should any investors decide to remain invested in the de-notified AIF or UCITS, the AIFM or UCITS must continue to comply with its obligations under Article 22 and 23 of AIFMD or Articles 68 to 82 and Article 94 of the UCITS Directive (as applicable) in respect of those investors.

On balance, the change is well-intentioned but it is unclear to what extent AIFMs or UCITS will wish to make use of it.

D. Alignment of notification rules

Who does it apply to?

To UCITS and to authorised EU AIFMs managing or marketing EU AIFs in a host Member State.

What do the rules say?

When an EU AIFM wants to market an EU AIF in a host Member State, it must first notify its home regulator of its intention to do so and provide specified information.

If there is subsequently a material change to any of these particulars, the AIFM must notify its regulator of this at least one month before implementing a planned change (or immediately after an unplanned change has occurred).

The regulator must then determine whether the change would mean the AIFM would no longer be in compliance with AIFMD

  • if it would, the regulator must inform the AIFM “without undue delay” not to implement the change or
  • if not, the regulator must inform the NCA of the host Member State of the change “without delay”.

The new provisions change these deadlines, so the home regulator will be required to inform

  • the AIFM not to implement the change within 15 working days of receiving notification of the change (In this case, the regulator must also notify the NCA of the host Member State accordingly) or
  • the host NCA within one month if the change does not affect compliance with AIFMD.

These provisions also apply mutatis mutandis to UCITS.

Our view

The new provisions seem uncontroversial and at least provide AIFMs and UCITS with greater certainty as to when they can expect to know whether or not the material changes they have notified are acceptable.

II. Provisions in the Regulation

Note that, where the provisions of the Regulation apply to AIFMs, their application is restricted to AIFMs authorised under Article 6 of AIFMD. Since only EU AIFMs may currently be authorised under the AIFMD, non-EU AIFMs are not within scope of the Regulation.

A. Marketing communication requirements

Who does it apply to?

UCITS and authorised (ie only EU) AIFMs.

The requirements will apply 24 months after the Regulation formally ‘enters into force’ (which will be on the twentieth day after its publication in the OJ).

What do the rules say?

A UCITS or an EU AIFM will have to ensure that

  • all marketing communications to investors
    • are identifiable as such and
    • describe the risks and rewards of purchasing units or shares of a UCITS or an AIF in an equally prominent manner and
  • all information included in marketing communications is fair, clear and not misleading.

Marketing communications which contain specific information about an AIF must not contradict, or “diminish the significance of”, information disclosed to investors under Article 23 of AIFMD.

Similarly, if an AIF publishes a prospectus under the Prospectus Regulation, its marketing communications must not contradict or diminish the significance of the information contained in the prospectus but must indicate that a prospectus exists and provide hyperlinks to, or a web address for it.

Our view

AIFMs should note that the new provisions are not limited to communications to retail investors - an AIFM marketing an AIF to professional investors will also need to make sure its communications comply with the new requirements.

B. Verification of marketing communications

Who does it apply to?

UCITS and authorised (ie only EU) AIFMs.

What do the rules say?

An NCA will, as now, be able to require prior notification of marketing materials in respect of AIFs which are to be marketed to retail investors and of UCITS but will be able to do so only to verify compliance with the Regulation.

Where an NCA does require prior notification, it must inform the AIFM or UCITS within ten working days of receipt of the marketing communication if it requests the AIFM or UCITS to amend the communication.

An NCA which requires prior notification of marketing communications must publish its procedures for doing so on its website. 

Our view

On the plus side, the provision helpfully makes clear that Member States cannot require prior verification of marketing materials as a pre-condition of marketing (as some have been doing in the case of UCITS).

The rule, though, does not seek to stop Member States from requiring the verification of marketing communications but, instead, tries to harmonise the process and introduce some transparency into it.

C. Creating a central database for

i. the publication of national marketing requirements

Who does it apply to?

The rule applies to NCAs and will apply 24 months after the Regulation formally ‘enters into force’ (which will be on the twentieth day after its publication in the OJ).

What do the rules say?

NCAs must

  • publish up-to-date and complete information on their websites regarding applicable national laws, regulations and administrative provisions governing marketing requirements for AIFs and UCITS, together with summaries of these, in at least a language “customary in the sphere of international finance”
  • notify ESMA of hyperlinks to these sites, and
  • notify ESMA of any changes made.

Within 30 months of the Regulation’s entry into force, ESMA must publish and maintain a central database containing the hyperlinks and summaries provided to it by the NCAs.

By 31 March 2021, and then every second year thereafter, NCAs must report to ESMA:

  • how many requests for amendments of marketing communications the NCA made on the basis of ex-ante verification
  • how many requests for amendments and decisions the NCA made following ex-post checks, clearly distinguishing the most frequent breaches, with a description and nature of those breaches
  • a description of the most frequent “breaches” of the national requirements for marketing communications.

By 30 June 2021, and then every second year thereafter, ESMA is required to submit a report presenting an overview of Member State marketing requirements and an analysis of the effects of national laws, regulations and administrative provisions governing marketing communications.

Our view

The database is likely to be a helpful source of reference for AIFMs and UCITS.

ii. the publication of fees and charges

Who does it apply to?

The rule applies to NCAs.

What do the rules say?

Fees or charges which an NCA can levy in carrying out its duties in relation to the cross-border activity of UCITS and AIFMs must be consistent with the overall cost of the NCA performing its functions.

Within six months of the Regulation’s entry into force, NCAs must publish information on their websites regarding their fees and charges, including (where applicable) the calculation methodologies and must provide ESMA with hyperlinks to the relevant webpages.

In turn, ESMA, within 30 months of the Regulation’s entry into force, must publish these hyperlinks on its own website, along with an interactive and publicly available tool for calculating the NCA’s fees and charges.

Our view

Again, this change is uncontroversial and is a positive development, especially if it indirectly leads to greater harmonisation of fees across Member States. 

iii. the publication of a list of managers, AIFs and UCITS.

Who does it apply to?

This rule applies to ESMA.

What do the rules say?

Within 30 months of the Regulation’s entry into force, ESMA must publish a publicly accessible central database, which lists:

  • all AIFs that are marketed in a Member State other than the home Member State of the AIFM
    • their AIFM and
    • a list of the Member States in which they are marketed.
  • all UCITS that are marketed in a Member State other than their home Member State
    • their UCITS ManCo and
    • a list of the Member States in which they are marketed.

NCAs must provide the necessary data to ESMA on a quarterly basis.

Our view

The final text is a marked improvement over the Commission’s original proposals, under which it appeared ESMA would be required to include details of all AIFMs - non-EU as well as EU and below threshold as well as above - and all AIFs (in practice, an impossible task for ESMA to comply with).

The purpose of the database is to help ESMA “monitor and assess market developments in the area of its competence” although how far the database will help achieve this remains to be seen.

Some AIFMs expressed concern, when the Commission’s original proposal was published, at the idea of making public information regarding the AIFs which they market. However, the final text of the Regulation would seem to require only the name of each relevant AIF to be listed. It should also be noted that similar - albeit more limited - online databases are already available, such as the FCA Register, which lists all FCA authorised AIFMs and UCITS ManCos, as well as all authorised and passported funds in the UK.

Since ESMA’s database will be restricted to AIFs managed by EU AIFMs, it will not include AIFs marketed in the EU by non-EU AIFMs under a given Member State’s NPPR pursuant to Article 42 of AIFMD.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.