Harmonization of the Cross-Border Marketing of Investment Funds

Summary

On July 12, 2019, the Directive 2019/1160 regarding cross-border distribution of collective investment undertakings, amending the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers (AIFM) Directive (the CBDF Directive) and the directly binding Regulation 2019/1156 on facilitating cross-border distribution of collective investment undertakings amending the EuVECA, the EuSEF and the PRIIPs Regulations (the CBDF Regulation) were published in the Official Journal of the EU and entered into force on August 1, 2019, requiring these to be applicable from August 2, 2021. As indicated in Duff & Phelps’ Regulatory Focus published in April 2018, the new regulation, together with amendments made to the UCITS and AIFM directives, focuses on the:

1. Introduction of a strict pre-marketing definitions (aligned with proposed changes in the AIFM Directive);
2. Transparency on the marketing requirements specific to each member state;
3. Common rules for the discontinuation of marketing;
4. A time limit given to competent authorities to verify notifications submitted by alternative investment fund managers (AIFMs);
5. Transparency and proportionality of fees and charges taking account of the supervisory tasks carried out;
6. Centralized database of all AIFMs, UCITS management companies, alternative investment funds (AIFs) and UCITS.

The CBDF Directive must be transposed into national law within two years of the entry into force and a full implementation is required by August 2, 2021.

This article provides some high-level observations on the impact of the CBDF Directive and CBDF Regulation on the marketing of UCITS and/or AIFs within the European Union.

Impact on Managers and Distributors

Pre-marketing Definition

Currently, the AIFM Directive does not set out harmonized provisions for marketing and as a result each member state has its own interpretation of what marketing means. To remediate this issue, the CBDF Directive, for EU AIFs managed by EU AIFMs, introduces the concept of pre-marketing and AIFM Directive’s new Article 30a sets out these conditions. AIFMD Article 30a will permit EU AIFM’s authorized under AIFMD to engage in pre-marketing activities where the marketing material to a potential professional investor:

• Does not provide enough information to allow them to commit to invest;
• Does not include a subscription form or similar documents (both draft and final form); or
• Does not amount to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.

In addition, AIFMD Article 30a outlines that a draft prospectus/offering document may only be provided to potential professional investors if:

• The document does not contain enough information to take an investment decision;
• The document contains a disclaimer stating that it does not constitute an offer or an invitation to subscribe; and
• The document contains a disclaimer stating that the potential professional investors may not rely on the information disclosed as it is incomplete and subject to change.

Within two weeks of beginning pre-marketing activities, an EU AIFM must notify its Home Member State Competent Authority by sending a communication (likely one designated by the Member State Competent Authority) which must include the following information:

• Host member state(s) where pre-marketing activities will take or are taking place;
• The period during which the pre-marketing activities are taking or have taken place;
• The list of AIFs (and the compartments if applicable) subject to pre-marketing activities; and
• The investment strategies presented.

The pre-marketing process is similar to the marketing notification under AIFMD Article 32 in the sense that the EU AIFM is submitting a notification file to its Home Member State Competent Authority and then their Home State Competent Authority is obliged to notify all Host Member State Competent Authorities where the pre-marketing will take place.

The EU AIFM must ensure that the pre-marketing is “adequately documented.” However, further clarification is awaited on the level of information the EU AIFM must collect and there is no confirmation that each Host Member State Competent Authority would not ask for additional details, as is currently the case in Germany when an AIFMD Article 32 marketing notification is filled with them. 

Importantly, any subscription made by a professional investor consequently within 18 months of the pre-marketing activities shall be considered to have been made as a result of this pre-marketing. Therefore, the EU AIFM would need to submit a marketing notification file as per AIFMD Article 31 or 32.

The pre-marketing provisions must come into force on August 2, 2021 by way of member state domestic directive implementing measures.

Marketing De-notification

Regarding the cross-border marketing of EU AIFs managed by EU AIFM, the CBDF Directive sets out a new arrangement on the de-notification by introducing new AIFMD Article 32a. To de-notify the marketing of an EU AIF, the following conditions must be met:

• A blanket offer to repurchase or redeem, free of charge, shares/units held by investors must be publicly available at least 30 business days prior the effective date of the de-notification and sent directly to all investors (closed-ended AIFs and ELTIFs are excluded);
• A notice explaining the intention to stop marketing must be published on a publicly available medium; and
• All agreements with financial intermediaries must be terminated with effect from the effective date of de-notification.

The conditions set-out in Article 32a are similar to the current regulatory framework for UCITS funds. 

In the member state where the marketing of an EU AIF managed by an EU AIFM has been de-notified and for a period of 36 months starting from the effective date of the de-notification, the EU AIFM may not re-engage with any pre-marketing activities for that same AIF or any other AIFs with similar investment strategies or investment ideas.

Technically, a closed-ended EU AIF managed by the same EU AIFM will be restricted to pre-marketing of new structures, with the same strategy, only after the final closing of an existing AIF. For instance, an EU AIFM is working on the final closing of its close-ended AIF (Fund A) which will be de-notified once it is closed to further new investments and at the same time, the same EU AIFM is setting up a new structure with the same strategy (Fund B). According to AIFMD Article 32a, the EU AIFM will not be able to undertake pre-marketing of Fund B in the same member state as Fund A has been de-notified.

These de-notification provisions must also come into force by way of member state domestic directive implementing measures by August 2, 2021.

Local Representatives (Facilities Agents)

In accordance with the CBDF Directive, management companies/AIFMs must provide facilities in each member state where they intend to distribute UCITS/AIFs to retail investors (where that’s possible), which perform the following tasks:

• Process the subscription, redemption and repurchase orders and make other payments to investors;
• Provide investors with information on how orders referred above are processed;
• Facilitate the handling of information relating to investors’ right;
• Make the information and documents available to investors; and
• Act as a contact point with the competent authorities.

By providing such facilities, Member State Competent Authorities shall not require management companies/AIFMs to appoint a local presence and as a result, management companies/AIFMs will see a decrease of administrative/managing costs. For instance, before the implementation of the CBDF Directive, a management company aiming to distribute its Luxembourg UCITS fund in the EU top 4 destinations (Austria, France, Germany and United Kingdom) would need to appoint a local representative. 

Below is a pre-CBDF Directive example of the costs for the marketing in Austria, France, Germany and United Kingdom of a UCITS umbrella structure with three compartments and six share classes per compartment (18 shares classes in total):

These facilities provisions must also come into force by way of member state domestic directive implementing measures by August 2, 2021.

Supervisory Fees and Charges

The CBDF Regulation mandates a new regulation requiring the publication of supervisory fees and charges at both Member State Competent Authority and European Securities and Markets Authority (ESMA) levels. From February 2, 2020, Member State Competent Authorities must publish on their websites and keep up-to-date the list of fees and charges or, where applicable, the calculation methodologies for them. Currently, Member State Competent Authorities are already publishing the fees and charges and invoices are sent to AIFMs. However, the change occurs at ESMA level: as per article 11 of the CBDF Regulation, by February 2, 2022, the ESMA website will publish hyperlinks to the websites of competent authorities to provide access to the supervisory fees and charges they make.  

The ESMA website must have a centralized database to facilitate the gathering of all relevant information and forecast all the costs for each member state. For instance, some competent authorities are requesting the payment of an upfront fee prior to the submission of the marketing notification file.

Below are examples of the costs of competent authorities when supervising marketing UCITS umbrella structures in Austria, France, Germany and the United Kingdom with three compartments and six share classes per compartment (18 shares classes in total):

Exempted

Next Steps

The CBDF Directive and Regulations raise many questions on the application of the new requirements (pre-marketing, de-notification of marketing) but also provide solutions on the distribution and marketing activities of EU AIF (local facilities arrangements, the use of ESMA as single database). The question now is how this will be implemented into member states’ national laws and what the impact will be on the marketing and distribution strategies of AIFMs.

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