EU AIFMD - New marketing requirements for alternative investment funds
By Kam Dhillon, Gowling WLG (UK) LLP
Published: 31 January 2020
The Cross-border Distribution Directive EU/2019/1160 (CBDD) and Cross-border Distribution Regulation EU/2019/1156 (CBDR) amend the Alternative Investment Fund Managers Directive EU/2011/61 (AIFMD) and introduce new rules relating to the marketing of alternative investment funds (AIFs) in the European Union (EU).
The new rules will impact existing practices in relation to marketing activities - the key changes being the introduction of a new 'local facilities' requirement and potentially new notification and verification requirements when marketing AIFs to retail investors in the EU, as well as a new 'de-notification' procedure to follow when an EU alternative investment fund manager (AIFM) ceases marketing AIFs on a cross-border basis.
Objectives of the new rules
The new rules aim to harmonise regulatory and supervisory approaches to marketing activities for AIFs managed by EU AIFMs within the framework of AIFMD, and in particular, to reduce barriers to the cross-border distribution of funds within the EU and to ensure a more uniform, and higher, standard of protection for investors.
Which AIFMs are in scope?
These new rules apply to authorised EU AIFMs. Whilst the UK is a full member of the EU, this would capture full scope UK AIFMs and small authorised UK AIFMs.
The CBDR extends the new rules to managers of qualifying European venture capital funds (EuVECAs), European social entrepreneurship funds (EuSEFs) and European long-term investment funds (ELTIFs).
Other small registered AIFMs in the UK (such as internally managed, closed-ended investment companies and external managers of certain property funds) are not in scope of the new rules under the CBDD or the CBDR.
What about non-EU AIFMs?
Unless stated otherwise in this article, these new rules do not apply to non-EU AIFMs (such as Canadian or US fund managers) marketing their AIFs in the EU under the national private placement regime (NPPR).
It will be up to the national competent authority in each EU member state to determine whether to extend the new rules to non-EU AIFMs under the NPPR.
New requirements for marketing communications
Marketing communications must:
- be identifiable as such;
- describe the risks and rewards of purchasing an AIF in an equally 'prominent' manner;
- be fair, clear and not misleading; and
- not contain any information contradicting, or diminishing the significance of, investor disclosures which the AIFM is required to make.
In addition, where an AIF is required to publish a prospectus under the Prospectus Regulation (EU/2017/1129) or a key information document (KID) under the Packaged Retail and Insurance-based Investment Products Regulation (EU/2014/1286), marketing communications must:
- not contain information about the AIF that contradicts, or diminishes the significance of, information contained in its prospectus or KID;
- indicate that a prospectus exists and that the KID is available; and
- specify where, how and in which language investors (or potential investors) can obtain the prospectus and the KID (for example, by providing hyperlinks to websites).
ESMA will, by August 2022, issue guidelines on the application of these requirements.
These new requirements are aimed at strengthening investor protection, and apply to marketing communications issued by EU AIFMs (and managers of EuVECAs, EuSEFs or ELTIFs) when marketing to investors in the EU. In practice, these new requirements are not expected to represent a significant compliance burden for EU AIFMs.
Do the marketing requirements differ for communications to retail and professional investors?
The marketing requirements described above apply in the same way, regardless of whether the investor is retail and professional.
Facilities available to retail investors
The focus of AIFMD is regulating the marketing of AIFs to professional investors in the EU. Each member state may, at its discretion, permit marketing of AIFs to retail investors in accordance with local laws – however a harmonised cross-border approach is currently lacking.
The CBDD amends AIFMD and introduces a 'local facilities' requirement to ensure there is, at a minimum, a consistent treatment of retail investors in the EU.
Member states must ensure that EU or non-EU AIFMs make available, in each member state where they intend to market an AIF to retail investors, facilities to perform the following tasks:
- 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 repurchase 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 the latest annual report of the AIF and pre-investment disclosures under article 23 of AIFMD available to investors for the purposes of inspection and obtaining copies;
- provide investors with information relevant to the tasks that the facilities perform in a durable medium; and
- act as a contact point for communicating with relevant national competent authorities.
These facilities do not need to amount to a physical presence. An AIFM may provide these facilities electronically or by other means of distance communication, or engage the services of a third party to do so.
Where the tasks are to be performed by a third party, the third party must be subject to regulation and supervision governing the tasks to be performed. The appointment of that third party must be evidenced by a written contract.
Facilities must be provided in the official language (or one of the official languages of the member state) where the AIF is marketed, or in a language approved by the national competent authorities of that member state.
Additional requirements when marketing to retail investors
National competent authorities may, but are not obliged to, require prior notification of marketing communications which EU AIFMs (or managers of EuVECAs, EuSEFs or ELTIFs) intend to use directly or indirectly in their dealings with retail investors.
This notification, however, must not constitute a pre-condition for marketing.
National competent authorities that choose to verify marketing communications must do so for the sole purpose of ensuring compliance by fund managers with applicable marketing requirements. Any procedures that competent authorities establish for this purpose must be published on their website and must ensure transparent and non-discriminatory treatment of all AIFs, regardless of the EU member state in which they are authorised. If a national competent authority requires a manager to amend a marketing communication, it must notify the manager within 10 working days of receipt of the notification.
As there is no passport for this notification, it will need to be made in each EU member state in which the AIFM (or EuVECA, EuSEF or ELTIF manager) intends to market where the national competent authorities requires it.
De-notification of marketing in a member state
Under the current rules in AIFMD, it is not clear when an EU AIFM is considered to have ceased 'marketing' an AIF in a host member state and this therefore means it is not clear when the EU AIFM can withdraw its notification of marketing under its passport.
The CBDD aims to address this and introduces a new procedure to follow for de-notifications of EU AIFs.
An EU AIFM may de-notify arrangements made for marketing some or all of its EU AIFs in a host member state, provided all of the following conditions are satisfied:
- the EU AIFM makes a blanket offer to repurchase or redeem (free of any charges or deductions) all units or shares in the EU AIF held by investors in the relevant host member state. The offer must be publicly available for at least 30 working days and must be addressed (directly or through financial intermediaries) individually to all investors whose identity is known to the AIFM in that member state. This requirement to make a blanket offer does not apply to closed-ended AIFs and ELTIFs;
- the intention to cease marketing some or all of its EU AIFs in that member state is made public (including electronically) in a form that is customary for marketing AIFs and suitable for a typical investor in that AIF;
- the public notification and blanket offer clearly describes the consequences for investors if they do not accept the offer to redeem or repurchase their units or shares in the AIF;
- the EU AIFM modifies or terminates any contractual arrangements with financial intermediaries or delegates with effect from the date of de-notification. This is to prevent any new or further marketing of the relevant AIF;
- the EU AIFM notifies the national competent authorities of its home member state of its intention to cease marketing. The national competent authorities must transmit that notification to the national competent authorities of the member state identified in the notification within 15 working days of receipt; and
- for a period of 36 months from the date of de-notification, the EU AIFM must not engage in any pre-marketing of the units or shares of the AIFs identified in the notification – nor of AIFs with similar 'investment strategies' or 'investment ideas', in the member state where marketing has previously been discontinued.
The 36 month blackout period will be problematic for EU AIFMs that wish to cease marketing activities in relation to a particular issue of units or shares, rather than entirely cease marketing activities in an EU member state.
EU AIFMs will need to carefully consider whether it is worthwhile to make a de-notification, particularly as they will be prohibited from marketing another AIF with a similar investment strategy or idea in that jurisdiction, yet will still need to provide investor transparency information on an on-going basis to investors who choose to remain invested in the relevant AIF.
These new de-notification rules do not apply to the cessation of marketing by:
- a non-EU AIFM of an EU or non-EU AIF under NPPR; or
- an EU AIFM of a non-EU AIF under NPPR.
However individual member states may, at their discretion, choose to impose equivalent requirements under NPPR.
When do the new rules apply?
The new rules are expected to apply from 2 August 2021.
The European Parliament adopted the CBDD and CBDR on 16 April 2019, and the European Council followed shortly after in June 2019. The CBDD and CBDR was published in the Official Journal of the EU on 12 July 2019 and (subject to limited exceptions) entered into force on 1 August 2019. Member states must transpose these new rules into national law from 2 August 2021.
Following the 2019 general election, it is not yet clear whether the UK is likely to adopt the CBDD and the CBDR into UK financial services laws. The Financial Services (Implementation of Legislation) Bill 2017-2019 does provide a mechanism for HM Treasury to implement EU financial services legislation that is currently in the pipeline for a period of two years after the UK leaves the EU, and this includes the CBDD and the CBDR.
However in the event of a 'no-deal' Brexit, the UK would be classified as a non-EU country. This means UK AIFMs and UK AIFs would, respectively, be classified as non-EU AIFMs and non-EU AIFs, and the majority of the new rules described in this article would become irrelevant in relation to the UK (unless the Financial Conduct Authority decided to extend the new rules to non-EU AIFMs under the NPPR).
Notwithstanding the uncertainty surrounding Brexit, AIFMs looking to raise capital from professional or retail investors in the EU from summer 2021 onwards should be aware of these new requirements and their potential impact on marketing activities.