Four years have passed since AIFMD was introduced, yet inconsistencies in its application still exist across EU member states. Marketing is one area where consensus has been elusive, with different regulators adopting their own separate approaches, thereby sowing confusion among fund managers.
Whereas the UK allows some ‘pre-marketing’ – including the sharing of draft fund documentation – to take place between managers and EU investors without triggering AIFMD compliance, other countries have been far less generous, insisting that the point of initial contact with prospective clients constitutes marketing, subjecting the manager to local registration, costs and occasionally reporting.
The European Commission (EC) is seeking to iron out these contradictory interpretations of marketing as part of its CMU (Capital Markets Union) initiative, the overriding purpose of which is to bring about greater harmonisation and uniformity across member states in order to facilitate easier cross-border investment.
The EC’s proposals – announced in March 2018 – aim to coherently define ‘pre-marketing’ under AIFMD as “a direct or indirect provision of information on investment strategies or investment ideas by an alternative investment fund manager (AIFM) or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an alternative investment fund (AIF) which is not yet established.”
Under the proposals, pre-marketing will be unavailable to existing AIFs, nor can firms share with investors details about their prospectuses and constitutional documents of soon-to-be-established AIFs. Some industry bodies have come out against the provisions, warning the rules introduce added complexity and restrictions for asset managers looking to sell into the EU.
The Direction of travel
At present, the pre-marketing rules – according to some legal firm commentary – appear to apply to authorised EU AIFMs only, and not to non-EU AIFMs, unless local regulators choose otherwise. It is highly probable that non-EU firms will be impacted eventually, should these proposals be implemented. While the proposals are unlikely to become legislation any time soon, they will surely affect UK firms that market in Europe, and that will become non-EU AIFMs when Brexit arrives in 2019 or 2021.
Inside the EU, many managers of non-EU AIFs utilise National Private Placement Regimes (NPPR) to distribute their products, and will have appointed depositary providers pursuant to the rules. Based on INDOS’ experience, few UK firms rely entirely on reverse solicitation, a somewhat ambiguous term interpreted differently across EU national regulators, which excuses managers from certain areas of AIFMD compliance provided they can demonstrate that an EU investor initiated first contact and not the other way around.
However, INDOS notes that reliance on reverse solicitation is more prevalent among US and other non-EU asset managers, a strategy some European lawyers believe exposes them to regulatory risk given the differences of opinion about what constitutes marketing across member states. Non-EU managers have been warned by lawyers, for example, that innocuous activities like distributing business cards to EU investors could fall foul of AIFMD’s marketing rules. While no penalties have, to our knowledge, been levied by regulators on managers to date for marketing violations, many believe it is only a matter of time. There is also the risk that investors can claim a right of rescission if a manager that had breached AIFMD’s marketing rules were to subsequently lose money.
The new prescriptive definition of pre-marketing, however, is likely to constrain non-EU managers’ from using reverse solicitation going forward. Some of the activities proscribed by the EC (i.e. sharing draft prospectuses) under its pre-marketing rules have reportedly been common practice at non-EU managers using reverse solicitation. The proposed changes may result in more managers transitioning towards NPPR registration and subjecting themselves and their funds to the relevant AIFMD rules.
The shift away from reverse solicitation would require non-EU managers to make some relatively modest changes to their operating models and procedures, including the appointment of depositaries (if marketing in certain EU countries, such as Germany and Denmark), provide additional investor disclosures, as well as file Annex IV regulatory reports in the EU jurisdictions where they are distributing products. AIFMD is bedded down, and most managers have found the costs and operational impact to be acceptable, mainly because the entire process is now tried and tested.
INDOS’ non-EU manager clients, which registered through NPPR and became subject to AIFMD, have since been rewarded with capital inflows from European allocators. With reverse solicitation likely to be trimmed, more firms targeting EU investors will transition towards AIFMD compliance, a policy which could reap benefits.