This note examines the (limited) impact that the new EU rules on cross border marketing of alternative investment funds (AIFs) will have for non-EU alternative investment fund managers (AIFMs).
I’m a non-EU AIFM marketing non-EU AIFs into the EU - what’s changed?
New rules which change how AIFs can be marketed cross-border within the European Union (EU) have been passed by the European Parliament (EP).
The rules are in the form of a new Directive and a new Regulation. They are likely to apply sometime in Q2 or Q3 2021.
Will I be affected?
The majority of rules in the Directive will only apply to EU AIFMs, while the Regulation is limited in its scope to “authorised” AIFMs. Until the European Commission extends the marketing passport under AIFMD to non-EU AIFMs - and there seems to be no appetite to do so in the foreseeable future - only EU AIFMs can be “authorised’. For more information, see the section “What rules may apply to me in the future?” below.
So, unless individual Member States decide to make equivalent changes to their national private placement regimes (NPPRs), non-EU AIFMs can, actually, expect to see little difference when the rules eventually come into effect.
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.
AIFMs wishing to market an AIF to retail investors in an EU Member State should note that they will only be able to do so to the extent that the Member State in question has implemented Article 43 of AIFMD into its NPPR - not all Member States have done so - and that the AIFM complies with any applicable limitations.
Providing local facilities - what do I need to know?
Who do the rules apply to?
All AIFMs (EU or non-EU) who are marketing or intending to market an AIF (EU or non-EU) to retail investors in the EU.
Note that, under the AIFMD, a retail investor is one who is neither a per se professional investor (as defined in MiFID) nor one who has opted up to professional investor level - accordingly, the class of “retail investor” may include for example, high net worth individuals, family and friends etc.
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 (among other things).
- 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
- 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
- act as contact point for communication with the National Competent Authorities (NCAs).
In a positive move, Member States will not be able to require the AIFM 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.
Where a third party is used, (a) that party must be subject to regulation and supervision governing the tasks which it performs and (b) 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.
What is Simmons & Simmons’ view?
Although UCITS have long been required to make local facilities available to investors, many in the industry 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.
What rules may apply to me in the future?
As mentioned above, a number of other provisions in the Regulation will apply to non-EU AIFMs but only if the AIFMD marketing passport is extended at some stage in the future (and the AIFM decides to opt in to the AIFMD regime to take advantage of the passport).
These include rules regarding:
- marketing communication requirements - all marketing communications to investors (professional as well as retail) will have to be identifiable as such and describe with equal prominence the risks and rewards of purchasing units or shares of an AIF
- verification of marketing communications by NCAs - although, as now, an NCA will be able to require prior notification of marketing materials in respect of AIFs which are to be marketed to retail investors, the Regulation will limit the NCA to doing so only in order to verify that the materials comply with the Regulation.
For more detailed information on these provisions, please see our summary here.
What else should I be aware of?
In addition, the Regulation requires NCAs and the European Securities and Markets Authority (ESMA) to maintain a number of databases, which will contain information likely to be of interest to non-EU AIFMs.
These will set out:
- the national marketing requirements in each Member State
- fees and charges which the NCA in each Member State can levy
- a list of all AIFs marketed by authorised AIFMs in a Member State other than the AIFM’s home Member State, together with the name of their AIFM and the Member States in which they are marketed.
In respect of the third bullet point, the database will not include AIFs marketed in the EU by a non-EU AIFM under a given Member State’s NPPR.
When do the changes come in?
Now that the EP has adopted the new rules, they will be endorsed by the Council of the EU and subsequently published in the Official Journal (OJ) of the EU.
The Directive and the Regulation will “enter into force” on the twentieth day following publication in the OJ (this is merely a procedural step) and their provisions will apply two years after entry into force - ie most likely sometime in Q2 or Q3 2021.
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.