New rules on national and cross-border fund distribution
The regulatory landscape for marketing funds in Europe is complex due to the divergent approaches taken by the various member states in implementing fund distribution and marketing rules. New rules on national and cross-border fund distribution are now on their way. FCG’s experts share with you what you need to know to stay ahead!
Introduction
This article explains some core areas you need to be aware of related to the new marketing and distribution legislation. The complete final legislation has not been presented yet but here’s what we can assume so far. (Make sure not to miss the timeline at the end of this article.)
Background
The primary goal with the legislation is to harmonize for UCITS management companies and alternative investment fund managers (including managers of European venture capital funds) across Europe and create a level playing field for these fund managers. The purpose is also to enhance investor protection by adding certain information requirements.
Stricter requirements on pre-marketing of alternative investment funds
There are cases where an alternative investment fund manager wishing to test investor appetite for a particular investment idea or investment strategy is faced with diverging treatment of pre-marketing in different national legal systems.
The definition of pre-marketing and the conditions under which it is permitted vary considerably between those member states in which it is permitted, whereas in other member states there is no concept of pre-marketing at all. To address those divergences, a harmonized definition of pre-marketing is introduced and the conditions under which an EU alternative investment fund manager can engage in pre-marketing is established.
Pre-marketing means provision of information or communication, on investment strategies or investment ideas to potential professional investors in the EU in order to test their interest in a fund which is not yet established, or which is established, but not yet notified for marketing in that member state, and which in each case does not amount to an offer or placement to the potential investor to invest in the units of that fund.
For pre-marketing to be recognized as such, it should be addressed to potential professional investors and concern an investment idea or investment strategy in order to test their interest in a fund which is not yet established, or which is established, but not yet notified for marketing in accordance with the legislation. Accordingly, during the course of pre-marketing, it should not be possible for investors to subscribe or commit to subscribe to the units or shares of an alternative investment fund. The distribution of subscription forms or similar documents to potential professional investors, whether in draft or final form, should not be permitted either.
Where a draft prospectus or offering documents are provided these shall not contain information sufficient to allow investors to take an investment decision and must include explicit disclaimers. There are also several additional requirements on any documentation provided.
EU alternative investment fund managers should ensure that investors do not acquire units or shares in an alternative investment fund through pre-marketing and that investors contacted as part of pre-marketing can only acquire units or shares in that fund through marketing permitted under the alternative fund managers legislation.
A requirement is also introduced that the manger must, within two weeks of having initiated pre-marketing, send an informal letter regarding the pre-marketing to the FSA of its home member state.
Placement agents and distributors carrying out pre-marketing must be EU regulated firms or tied agents, and will be directly subject to the new AIFMD rules on pre-marketing.
FCG’s key takeaway: Alternative investment fund managers who today pre-market alternative investment funds before initial closing without notification to the Swedish financial supervisory authority, will have to implement new guidelines and procedures to make sure to stay compliant in the future. Draft prospectuses and other offering documents will have to be carefully designed and include explicit disclaimers. Alternative investment fund managers must also review placement and distribution agreements to make sure only regulated firms or tied agents place or distribute its products.
No longer possible for FSAs to require a fund manager to have a physical presence in another member state
UCITS fund managers and alternative investment fund managers are in some member states, where fund units are marketed to investors, required to take the necessary measures on-site to enable payments to unit holders, handle repurchases and redemptions and provide information.
The directive (refer to the timeline below) changes this so that it is clear that fund managers who market fund units in a member state other than their home member state will not have to provide such facilities. The proposal is prompted by the fact that payments, repurchases and redemptions as well as the provision of information to fund unit holders must be able to be provided electronically or in another way remotely, e.g. via the Internet. This clarifies that the fund manager cannot be required to have a physical presence on site in the member state where the cross-border activity is taking place.
FCG’s key takeaway: UCITS fund managers and alternative investment fund managers who today are required to have physical presence in other member states will be relieved of this obligation. The new legislation entails hence a possibility to cut costs for several fund managers.
Harmonized rules on de-notification of cross border marketing
In order to harmonize the rules on requirements for notification of changes in operations and on de-notification in the case of cross-border distribution of UCITS funds and alternative investment funds, new rules on this are proposed.
FCG’s key takeaway: The new rules bring about clarifications and are not deemed to be burdensome for Swedish UCITS management companies and alternative fund managers.
New ESMA Guidelines
Sweden has a history of self-regulation in the fund marketing area. As members of the Swedish Investment Fund Association (Sw. Fondbolagens förening) many Swedish fund managers are recommended to comply with the Guidelines for marketing and information by fund management companies. These guidelines are based on an agreement between the Swedish Investment Fund Association and the Swedish Consumer Agency (Sw. Konsumentverket).
In order to promote good practices of investor protection which are enshrined in the national requirements for fair and clear marketing communications, including on-line aspects of such marketing communications, ESMA has now been appointed to issue guidelines on the application of those requirements for marketing communications. The Swedish self-regulation will hence be accompanied by guidelines from ESMA.
It should be noted that also national marketing is targeted in the ESMA guidelines and there are several new requirements that are yet to be finally determined. ESMA’s guidelines have quite a few similarities with Swedish self-regulation and the two guidelines will most likely work in parallel in Sweden for many fund managers.
Hot topics in Sweden related to the draft ESMA guidelines are investor protection requirements related to online marketing, such as disclaimers or warning texts, the responsibility of fund managers in cases where funds are sold by distributors and how ESMA’s guidelines will interrelate with the already established Guidelines for marketing and information by fund management companies issued by the Swedish Investment Fund Association. Another question that is discussed is to what extent the ESMA guidelines shall apply to marketing communications relating to funds that are open to professional investors only.
FCG’s key takeaway: FCG believes that some marketing documentation has to be changed due to the new ESMA guidelines. Also, depending on the outcome as regards on-line marketing and if requirements on online marketing are deemed too burdensome, the marketing models may have to change.
ESMA’s new guidelines will be imposed on UCITS fund managers and alternative fund managers who haven’t complied with the Swedish Investment Fund Association’s Guidelines up until now.
Timeline:
1 August 2019: The regulation (EU) 2019/1156 on facilitating cross-border distribution of funds was published in the Official Journal on 12 July 2019 and most of its provisions entered into force.
Q1, 2021: The Swedish Government is estimated to issue a memorandum on the Swedish legislation, that will implement the directive, to enter into force 2 August 2021.
May 2021: The Swedish Government is estimated to issue a proposition related to the Swedish legislation, that will implement the directive, to enter into force 2 August 2021.
Q2, 2021: The Swedish Investment Fund Association is expected to announce if and how the Guidelines for marketing and information by fund management companies will be affected by ESMA’s new guidelines.
2 August 2021:
The law implementing the directive (EU) 2019/1160 on cross-border distribution of funds to enter into force in Sweden.
ESMA’s final Guidelines on marketing communications under the Regulation on cross-border distribution of funds enter into force.
The directive (EU) 2019/1160 on cross-border distribution of funds
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019L1160&from=EN
The regulation (EU) 2019/1156 on facilitating cross-border distribution of funds
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R1156&from=SV
ESMAs Guidelines on marketing communications under the regulation on
cross-border distribution of funds