Arguably, however, the final version of the new definition does not quite achieve the clear line of distinction that the Commission was originally hoping for. It is true that there is now a clearer idea as to what type of promotional activities will trigger the new obligations associated with pre-marketing (see below). It is also true that anything that amounts to an offer or placement to the investor to invest (essentially the core of the AIFMD definition of "marketing") is expressly carved out of pre-marketing, so it is clear the two concepts are intended to be mutually exclusive. It is possible, however, that by including that carve out (something which was not in the Commission's original draft), the new definition leaves open the possibility that individual Member States may still take a view as to what that phrase means and therefore what triggers the full marketing requirements.
The definition of pre-marketing is effectively glossed by a new provision which will be inserted into the AIFMD setting out the conditions for pre-marketing. Under this Member States must ensure that an authorised EU AIFM may engage in pre-marketing (as defined above) within the EU, except where the information presented to professional investors:
- is sufficient to allow investors to commit to acquiring units or shares of a particular AIF;
- amounts to subscription forms or similar documents whether in draft or final form;
- amount to constitutional documents, a prospectus or offering documents of an AIF which has not yet been established, in final form.
It is clear that the exceptions above are intended to draw the line between "pre-marketing" and "marketing".
In addition, where a draft prospectus or offering documents are provided, those documents must not contain sufficient information to allow investors to take an investment decision and must include a statement that:
- the document does not constitute an offer or an invitation to subscribe for AIF units or shares;
- the information presented in those documents should not be relied upon because it is incomplete and may be subject to change.
In practice, it is likely to be a question of degree as to whether a document contains the information necessary to permit investors to make an investment decision, but it is clear that the issue will be one of substance, not just form. Simply labelling a document as a "draft" version and stating that it does not constitute an offer or invitation does not necessarily mean that it has not crossed the line from "pre-marketing" to "marketing". Firms will additionally need to be careful not to circulate subscription forms, even if they are in draft.
The measures will mean that pre-marketing will be a recognised "phase" which itself is subject to EU regulatory requirements over and above UK domestic requirements regarding financial promotion.
They will also restrict reliance on reverse solicitation. For instance, if, within 18 months of the beginning of the pre-marketing phase there is any subscription by professional investors to units or shares of an AIF that was referred to in the pre-marketing information, that subscription will be considered to be the result of marketing and the applicable marketing notification procedures in Articles 31 (home state marketing) and 32 (marketing of EU AIFs in Member States other than the home State) will be triggered. This closes down any possibility of arguing that subsequent investments can be considered to result from reverse solicitation.
The pre-marketing letter
Furthermore, the final version of the Directive introduces a new regulatory requirement. The EU AIFM will be required to send, within two weeks of it beginning pre-marketing, an "informal letter", in paper form or by electronic means, to its home Member State regulator. This letter will be required to contain:
- references to the Member States and the periods of time in which the pre-marketing took place;
- a brief description of the pre-marketing, including information on the investment strategies; and
- where relevant, a list of the AIFs and AIF compartments that were subject to pre-marketing.
The home Member State regulator will then have to notify the regulator(s) in the "host" Member State where the EU AIFM pre-marketed. Those "host" state regulators may request further information, through the home state regulator. Since all of the pre-marketing requirements are expressed to apply only to authorised EU AIFMs, the new definition and the associated conditions do not directly affect non-EU AIFMs marketing under individual NPPRs. However, it is possible that individual Member States may seek to amend the general definition of "marketing" for these purposes and/or adapt their rules under their NPPRs to reflect these changes.
Pre-marketing by intermediaries
If the authorised EU AIFM uses a third party to carry out pre-marketing on its behalf, it will be restricted as to who it can use. The third party will have to be a MiFID investment firm (or a tied agent of one), a CRD IV credit institution, a UCITS management company or another AIFM. The third party will be subject to all of the above conditions.
Marketing to retail investors: the facilities to be made available
AIFMD currently permits authorised AIFMs to exercise a passport to market to professional investors (as defined under MiFID II), but leaves the regulation of marketing AIFs to retail investors to each individual Member State's own national rules. Similarly, non-EU AIFMs marketing under individual Member States' national private placement regimes are subject to national rules in relation to their marketing to all investors, subject only to the specific requirements imposed by the AIFMD.
The CBD Directive will insert new requirements into the AIFMD which will apply where any AIFM (i.e. an EU or a non-EU AIFM) is marketing units or shares in an AIF to retail investors (within the MiFID II definition). In such a case, (and without prejudice to the ELTIF Regulation which itself imposes similar requirements when marketing to retail investors) the AIFM will be required by the Directive to put in place "facilities" in the relevant Member State that must perform all of the following tasks:
- processing the investors' subscription, payment, repurchase and redemption orders in connection with units or shares of the AIF in accordance with the conditions set out in the marketing documents (i.e. essentially, fulfilling the functions of a paying agent in the jurisdiction);
- providing investors with information on how subscriptions or payments can be made and how repurchase and redemption proceeds will be paid;
- handling the information relating to the exercise of investors' rights arising from their investment in the AIF in that jurisdiction;
- making available to investors copies of the AIF's annual report and Article 23 investor disclosure information;
- providing investors with information, in a durable medium, on the tasks the facilities perform; and
- acting as a contact point for communications with the relevant competent authorities.
The Directive expressly states, however, that these facilities do not need to amount to a "physical presence" and neither do they require the appointment of a third party (although they could involve either of those things). In other words, it appears (but is not clear) that the AIFM could provide them through online means or, at a stretch, over the telephone, without needing to have an establishment or representative in the relevant jurisdiction. Since these are minimum requirements, some Member States may require more substance and/or presence or attach further conditions. The AIFM must ensure that the relevant facilities perform the above tasks in the official language(s) of the relevant Member State. In addition, the facilities must be provided either by the AIFM itself or by a third party which is appointed under a written contract and which is subject to regulation and supervision governing the tasks that are being performed (for example, a regulated paying agent).
AIFMs should note that since these requirements are triggered by marketing to MiFID retail investors, this will include investors such as high net worth individuals or local authorities who cannot be opted-up to MiFID professional status. However, many AIFMs may already be taking steps to minimise their marketing to such investors wherever possible in order to avoid becoming subject to the EU PRIIPs regime.
EU marketing passport: material changes
The CBD Directive will make some minor amendments to Article 32 AIFMD in terms of material change notifications. In the event that the AIFM would no longer be compliant with AIFMD if the change were to go ahead, the home Member State competent authority will have to tell the AIFM not to go ahead within "15 working days" of receiving all the requisite information (currently the regulator must do this "without undue delay"). The regulator must then notify the "host" Member State competent authority.
If the changes do not affect the AIFM's compliance with AIFMD, the home Member State competent authority must notify the "host" Member State competent authority of the relevant changes "within one month" of (presumably) its receipt of the requisite notification (currently the regulator must do this "without delay").
Changes relevant to both AIFMs and UCITS managers
New requirements for marketing communications
The CBD Regulation will introduce new requirements for all marketing communications made to investors by EU AIFMs, UCITS managers, EuVECA managers and EuSEF managers. These communications must:
- be identifiable as marketing communications;
- be fair, clear and not misleading; and
- present risks and rewards of purchasing units or shares of an AIF or UCITS in an equally prominent manner.
On the face of it, it is unlikely that these high level requirements will significantly increase the existing obligations of fund managers. For UCITS managers in particular, they are very similar to existing requirements under the UCITS Directive (which will be deleted by the CBD Directive when the new rules enter into effect).
UCITS managers will be under additional obligations in respect of their marketing communications. These must:
- not contain information about a UCITS that contradicts or diminishes the significance of any information contained in the prospectus or key information document required by the UCITS Directive;
- indicate that a prospectus exists and that key investor information is available and also how to get hold of such documents;
- specify where, how and in what language investors can get hold of a summary of investor rights, which summary must include a reference to available EU and national collective redress mechanisms;
- contain clear information that the UCITS manager may de-notify marketing arrangements.
AIFMs, EuVECA managers and EuSEF managers must ensure that their marketing communications which comprise an invitation to purchase units or shares of an AIF do not contain any information contradicting, or diminishing the significance of, the investor disclosures which the manager is required to make under AIFMD (or the EuVECA or EuSEF regulations). Such managers must also ensure that their marketing communications make it clear that the manager may decide to de-notify the marketing arrangements.
ESMA will also be empowered to issue guidelines to supplement these rules, including in the context of online marketing communications. These will need to be issued within 24 months of the entry into force of the CBD Regulation. The extent to which any such guidelines may have a more significant impact on current marketing documentation remains to be seen.
AIFMs may need to reflect on the meaning of equal prominence in the context of presenting risks and rewards, as well as monitoring the impact of any supplementary rules issued by ESMA.
There is no automatic application of these provisions to marketing communications that a non-EU AIFM may make under Article 42 AIFMD marketing, although individual Member States may revise their expectations as to what a marketing communication under their NPPR should contain in line with what will apply to authorised EU AIFMs
Prior notification of marketing and communications
Under the CBD Regulation, where a fund manager proposes to market into a particular EU Member State, the relevant national regulator may require prior notification of marketing communications which:
- UCITS managers intend to use directly or indirectly in their dealings with investors; and
- AIFMs, EuVECA managers or EuSEF managers intend to use directly or indirectly in their dealings withretail investors (within the MiFID II definition).
It should be noted that there is no "passport" for this notification: it will have to be made in every EU Member State in which the firm intends to market where the national regulator so requires.
The relevant national regulator has up to 10 working days following receipt of a notification to inform the relevant manager of any request to amend a marketing communication.
If the national regulator chooses to require such prior notification, it must publish on its website the relevant rules and procedures for such notifications, which must ensure transparent and non-discriminatory treatment of all UCITS and AIFs regardless of the Member State in which they are authorised.
Two years after the CBD Regulation enters into force, the national regulator will also have to start making biennial reports to ESMA on the number of requests it makes requiring amendments to marketing communications. The reports will be required to indicate the most frequent breaches of the marketing requirements giving rise to such requests, including breaches of the mandatory requirements for marketing communications (see above). This is presumably so that ESMA can audit how managers are complying with marketing requirements across the EU but also so that it can assess whether the actions of individual regulators may be having a detrimental effect on marketing in their jurisdictions.
"De-notification" of marketing in a Member State
The current AIFMD and UCITS Directive rules are unclear on when an EU AIFM or UCITS manager can be considered to have ceased marketing in a Member State (for example, so that it can withdraw a notification about exercising the marketing passport into that jurisdiction).
The CBD Directive will insert a new provision into the AIFMD and an equivalent provision in the UCITS Directive which states that an EU AIFM or UCITS manager may only discontinue the marketing of units or shares of an EU AIF or UCITS in a jurisdiction in which it has exercised the marketing passport if the following conditions are me:
- Except in the case of closed-ended AIFs and European Long-term Investment Funds (ELTIFs), the EU AIFM or UCITS manager has made a blanket offer to repurchase, free of any charges or deductions, all units or shares held in the EU AIF or UCITS by investors in the relevant Member State. This offer must be publicly available for 30 working days and must also be addressed, directly or through financial intermediaries, individually to all investors in that jurisdiction whose identity is known to the EU AIFM or UCITS manager;
- the EU AIFM or UCITS manager has publicised its intention to cease its marketing activities in respect of some or all of its funds in that jurisdiction through a "publicly available medium, including by electronic means, which is customary for marketing" AIFs or UCITS (as the case may be) and suitable for a typical AIF or UCITS investor; and
- any contracts the EU AIFM or UCITS manager has with financial intermediaries or delegates are modified or terminated with effect from the date of de-notification.
For 36 months after such de-notification, the EU AIFM or UCITS manager will not be able to engage in any further pre-marketing of the relevant units or shares (which is unlikely to be a problem in practice) or any premarketing of "similar investment strategies or investment ideas" in the relevant Member State. The interpretation of the latter phrase could cause problems for any manager which is only seeking to de-notify in respect of a particular issue of units or shares and which is not intending to cease its marketing activities in that jurisdiction altogether.
In addition, where the EU AIFM or UCITS manager has de-notified, it must still provide investor transparency information (e.g. periodic reports) on an ongoing basis to those investors who choose to remain invested in the relevant fund.
In practice, these conditions may make it quite unattractive for firms to de-notify their marketing passports, particularly the requirement to make a public offer to buy-out existing investors in the jurisdiction. However, that particular condition does not apply in respect of closed-ended AIFs or ELTIFs – this carve-out will be particularly welcome for some industry sectors.
These changes do not apply to non-EU AIFMs marketing under Member States' individual national private placement regimes (NPPRs), or to EU AIFMs marketing non-EU AIFs under the NPPRs. However, Member States may choose to exercise national discretions to impose equivalent or analogous requirements under their NPPRs for such managers.
EU AIFMs and UCITS managers may need to re-calibrate their marketing strategies. For instance, they may want to consider whether it is worth exercising the marketing passport at all in jurisdictions where they may only attract a relatively small number of investors who may not contribute significant funds. Or, where they have exercised the passport, whether it is worth making a de-notification, given its attendant 36-month ban on any further pre-marketing of the same or similar funds and its ongoing investor disclosure obligations.
Fees and charges of competent authorities in supervising cross-border activities
In a provision which will be effective twenty days after the CBD Regulation enters into force, any fees or charges which competent authorities (including home and host State regulators) levy in carrying out their duties in relation to the cross-border activity of AIFMs, UCITS management companies, EuVECA managers and EuSEF managers must be consistent with the overall cost to the competent authority of carrying out their functions. This requirement for the host State regulator to exercise proportionality in terms of fees it charges
for cross-border activity does not seem to extend to the fees it may charge to non-EU AIFMs seeking to market under Article 42 AIFMD.
Regulators will be required to provide invoices to the relevant manager, indicating how payment should be made and the date upon which it is due.
In addition, national regulators will be required to publish and maintain on their websites a central database of applicable fees and charges, or relevant calculation methodologies for them, in at least "a language customary in the sphere of international finance". They must also notify ESMA of this information so that it can publish an interactive database containing the relevant information.
ESMA is required to develop draft implementing technical standards setting out the standard forms, templates and procedures regarding fees and charges and must submit these to the Commission within 18 months following the date on which the CBD Regulation enters into force.
Changes to specific UCITS managers
The CBD Directive makes a number of amendments to the existing UCITS Directive, which will affect the crossborder activities of UCITS managers.
Required facilities where marketing in an EU Member State
Existing rules under the UCITS Directive require UCITS managers to maintain facilities in any EU Member State in which the UCITS is marketed for making payments to unit holders, repurchasing and redeeming units and making available any required investor information.
The CBD Directive will delete those provisions and substitute requirements for the UCITS manager to maintain facilities that are essentially the same as those required for AIFMs that are marketing to retail investors (see above).
Notification procedure: changes in marketing arrangements
Currently, a UCITS manager is required to give prior written notice to the competent authorities of the host Member State when it is making changes to its marketing arrangements set out in its notification of the marketing passport. The CBD Directive will amend that requirement to clarify that this written notice must be given to the competent authorities of both the home Member State and the host Member State at least one month before implementing any planned change (thereby aligning it with equivalent requirements under the AIFMD passporting regime).
The home State regulator then has 15 working days to inform the UCITS manager if the proposed change would not comply with the requirements under the UCITS Directive. If the change is still made, or if an unplanned change has occurred which has resulted in the UCITS manager ceasing to comply with the UCITS Directive, the national regulator may take enforcement action, including by expressly prohibiting the marketing of the UCITS in its jurisdiction. Again, this is an alignment with the AIFMD regime.
Changes in branch arrangements
Currently, where a UCITS manager has exercised the passport to establish a branch in another EU Member State, and it subsequently makes changes to those branch arrangements, it must notify both the home State and host State regulators at least one month before implementing the change. The CBD Directive will retain this requirement, but introduce new rules under which the home State regulator must inform the UCITS manager within 15 working days that it is not to implement the change and notifying the host State regulator accordingly. Where, despite this objection, the change is implemented and the UCITS manager ceases to comply with the UCITS Directive, the home State regulator may take enforcement action, notifying the host State regulator "without undue delay".
Extension of the PRIIPs exemption
The CBD Regulation effects an amendment to Article 32(1) of Regulation (EU) No 1286/2014 (the PRIIPs Regulation). This Article currently provides an exemption from the PRIIPs Regulation for UCITS managers until 31 December 2019. The amendment extends this exemption to 31 December 2021.
Changes to EuSEF Regulation and EuVECA Regulation
The CBD Regulation will introduce changes to the existing European Social Entrepreneurship Fund (EuSEF) and European Venture Capital Fund (EuVECA) Regulations in connection with pre-marketing. These new provisions will essentially extend the new definition of "pre-marketing" being introduced for AIFMs (see above) to the EuSEF and EuVECA regimes, along with the same conditions for engaging in pre-marketing. As with AIFMs, this may lead to significant changes to the ways in which the marketing rules are currently interpreted
in Member States (including the UK), meaning that marketing notifications may be required at a much earlier stage in the marketing process.
Commission evaluation: reverse solution
The Commission will be required to undertake various reviews and evaluations in relation to the CBD measures. One of these relates to reverse solicitation. On the basis of a consultation by competent authorities, ESMA and other relevant stakeholders, the Commission will be required to submit a report to the European Parliament and Council on reverse solicitation. This report will address the extent to which investors subscribe in funds as a result of reverse solicitation, the geographical distribution of such activity, including in third countries, and the impact of reverse solicitation on the passporting regime.
The Commission will be required to deliver its report at the same time as the CBD measures become effective for firms (i.e. mid-2021). On that timeline, a consultation on reverse solicitation from ESMA can be expected in the not-too-distant future. ESMA has already raised concerns about reverse solicitation in the context of MiFID II.