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The final AIFMD cross-border fund distribution package: delivering freedom?

  • United Kingdom
  • Financial services and markets regulation
  • Financial institutions


On 24 May 2019 the European Commission published the final compromise texts, ahead of the formal signing of the amending Directive and the amending Regulation on facilitating cross-border distribution of collective investment undertakings. After the formal signing, both the Directive and Regulation will be ready to be published in the Official Journal of the EU, which is expected to be later this year.

To read the Directive, click here.

To read the Regulation, click here.

We considered the main changes introduced by the amending Directive and Regulation in some detail in our briefing of 15 March 2019, Game changer or small beer for cross-border fund distribution in the EU? (To read the briefing, click here.) In this briefing, we look at whether the final package delivers on the promise of reducing regulatory barriers to the cross-border distribution of investment funds in the EU.

Harmonised definition of pre-marketing

The final Directive recognises that there are cases where an AIFM wishing to test investor appetite for a particular investment idea or investment strategy is faced with a divergent treatment of pre-marketing activities in different national legal systems. In some Members States there is no concept of pre-marketing at all. The final text introduces a harmonised definition of pre-marketing into the AIFMD, EuVECA and EuSEF Regulations to set out the conditions under which an EU AIFM can engage in pre-marketing activities. However, it will only permit pre-marketing to potential professional investors, not retail, and it does not provide equivalent rights to non-EU AIFMs.

The finalised Directive provides that pre-marketing should concern an investment idea or strategy of an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in that Member State. Accordingly, during the course of pre-marketing, investors are unable to subscribe to the units or shares of an AIF, and no subscription forms or similar documents whether in draft or final form should be permitted to be distributed to potential investors during this stage. EU AIFMs should ensure that investors do not acquire units or shares in an AIF through pre-marketing and that investors contacted as part of pre-marketing can only acquire units or shares in that AIF through marketing permitted under the AIFMD.

Where a draft prospectus or offering documents are provided, such documents should not contain sufficient information allowing investors to take an investment decision and should clearly state the following:

• the document does not constitute an offer or an invitation to subscribe to units or shares of an AIF

• the information presented in those documents should not be relied upon because it is incomplete and may be subject to change

Any subscription by professional investors, within 18 months of an EU AIFM having begun pre-marketing, will be considered to be marketing and will be subject to the relevant national private placement notification. Further, an AIFM will have to report to its home Member State regulator, within two weeks of it beginning pre-marketing, details of any pre-marketing activities it was engaged in, including Member State(s) in which pre-marketing took place, when pre-marketing took place and details of AIFs and compartments pre-marketed.

It is worth noting that a third party will only be able to engage in pre-marketing on behalf of an EU AIFM in certain circumstances, eg where it is an authorised investment firm, credit institution, UCITS management company, AIFM or tied agent.

An EU AIFM must ensure that pre-marketing is adequately documented.

After two years, the Commission will assess whether similar pre-marketing requirements should be extended to UCITS.

Reverse solicitation

The final Directive does not clarify the limits of reverse solicitation. However, it does state that AIFMs must ensure that investors do not acquire units or shares in an AIF through pre-marketing activities and that investors contacted as part of pre-marketing may only acquire units or shares in that AIF under marketing permitted under Article 31 or 32 of the AIFMD.

It is worth mentioning that the final Regulation requires the Commission to publish a report on reverse solicitation and demand on the own initiative of an investor within two years.

Requirements for marketing communications

The final Regulation sets out the requirements for (pre-)marketing communications and conforms the requirements for AIFMs, EuVECA and EuSEF managers with those for UCITS management companies under Article 77 of the UCITS Directive and portfolio managers under Article 24(3) of MiFID. The provisions echo existing requirements under the UK financial promotion regime for authorised firms.

In order to enhance the regulatory framework applicable to investment funds and to better protect investors, the final Regulation requires marketing communications to investors to:

• be identifiable as marketing communications

• describe the risks and rewards of purchasing units or shares of AIFs and UCITS in an equally prominent manner

• contain information which is fair, clear and not misleading

• not contradict or diminish the significance of the information disclosed to investors under Article 23 of the AIFMD or contained in the prospectus or key investor information under Articles 68 and 78 of the UCITS Directive

• indicate that a prospectus exists and key investor information is available

• specify where, how and in which language investors or potential investors can obtain the prospectus and key investor information and provide electronic links to those documents

• contain clear information that the manager or management company may decide to terminate the arrangements made for the marketing of the fund

AIFMs must ensure that marketing communications meet the same standards as are required of UCITS management companies. The impact of these reforms to marketing communications is to further harmonise the regulatory treatment of UCITS and AIFs.

Cross-border notifications

Local facilities

The final Directive recognises that the requirement to maintain facilities to investors have proven to be burdensome and facilities are rarely used as intended under the UCITS Directive and AIFMD. Under the final Directive regulators can no longer require a physical local presence in the Member States where UCITS are marketed. However, facilities for processing subscriptions, repurchasing and redemption of orders, making other payments to unit-holders, handling complaints, making available information and documents about the fund and acting as contact point for communicating with the competent authority should still be made available to investors.

To ensure consistent treatment for retail investors, regardless of the type of fund in which they decide to invest, the Directive introduces similar requirements to the AIFMD. The facilities can be run by the UCITS, AIFM or by a third party. If a third party is appointed to act as facilities agent, an appropriate agreement must be put in place.

Notification requirements

The final text aligns the UCITS Directive to the procedures set out in the AIFMD in respect of changes UCITS are planning. Particular points to note are:

• AIF and UCITS notification letters will now need to include details for the invoicing or communicating of any applicable regulatory fees or charges by the competent authorities and a description of the facilities agent

• where a planned change means that the UCITS or the AIFM’s management of the AIF would no longer comply with the UCITS Directive or AIFMD, the home Member State regulator must notify the UCITS or AIFM within 15 working days of receiving all the information that it is not to implement that change. The home Member State regulator will in turn inform the relevant competent host Member States regulators

• where a change relates to information provided in the UCITS notification letter or share classes to be marketed, the UCITS will be required to give written notice to its home Member State at least one month before implementing that change. The home Member State regulator must notify the UCITS within 15 working days if it will not implement the change. This new requirement for one month’s prior written notice to be given seems very onerous for UCITS bearing in mind that the current requirement is that changes must simply be notified to the host Member State competent authorities in advance (rather than a mandated one month’s prior notice period)

Discontinuation of marketing of shares of a UCITS or AIF

The final Directive introduces new Articles (93a of the UCITS Directive and 32a of the AIFMD) which will allow managers to de-notify arrangements made for marketing in a host Member State provided certain conditions are fulfilled, including:

• except in the case of closed-ended AIFs and European long-term investment funds (ELTIFs), a blanket offer to repurchase or redeem, free of any charges or deductions, all units or shares for at least 30 working days

• intention to terminate arrangements must be made public

• contractual arrangements with financial intermediaries or delegates need to be modified or terminated with effect from the date of de-notification

De-notification will require a notification to the home Member State regulator of the relevant AIFM

or UCITS, which in turn will have to transmit this notification to the relevant host Member States within 15 working days. The AIFM or UCITS will have to cease any new offering or placement of units from the date of transmission of the notification file.

While this brings consistency across Member States, it will potentially increase the regulatory burden for managers as the new articles require that investors who remain in the fund in the Member State should continue to receive investor information.

Further, it is worth noting that for a period of 36 months from the date of the de-notification, an AIFM may not engage in pre-marketing activities of units or shares of EU AIFs referred to in the notification, or in respect of similar investment strategies or ideas, in the Member State where it has de-notified activities.

Verification of marketing communications

The final Directive confirms that the prior notification of marketing communications to verify compliance with local marketing requirements can no longer be a prior condition for the marketing of a UCITS – and cannot be part of the passport notification process. Further, the competent authority must reach a decision within 10 working days. This will be particularly helpful in countries such as Belgium and France where pre-approval of marketing materials is required.

In the absence of a request for amendments upon expiry of the 10 working days, the marketing communication will be deemed compliant.

Competent authorities that require prior notification of marketing communications will be required to publish details about the process for such prior notification on their websites. Where Member States allow AIFMs to market to retail investors, the same will apply in respect of those AIFMs.

Assessment of the passport regime

The final Directive requires the European Commission to submit a report as well as a legislative proposal, where appropriate, to the European Parliament and Council on the results of the assessment of the passporting regime under the AIFMD, including the possible extension of the passport to non-EU AIFMs. Unless 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 come into effect since most of the provisions apply to EU AIMFs – with the exception of the requirement to provide facilities as mentioned above.

Timeline and Brexit impact

In terms of next steps, after the formal signing, both the amending Directive and Regulation will be ready to be published in the Official Journal of the EU, which is expected to be later this year. Member States will then have 2 years within which to incorporate the new provisions into national laws.

The new provisions will therefore most likely come into force after the UK has left the EU. It is, however, expected that the UK government will replicate this particular EU law in UK legislation and regulation.

How Eversheds Sutherland can help

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans.

For more information contact

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