The EU’s cross-border distribution of funds regulation: New AIF marketing rules provide clarity

The new rules introduced changes to the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive. The intention was to harmonise rules on the marketing of alternative investment funds (AIFs), reduce regulatory barriers, improve cost efficiencies and enhance investor protections.

Before the CBDF framework, there were no common pan-European rules for marketing funds. Generally speaking, national laws didn’t regulate pre-marketing, which meant that information and documentation requirements and processes were unclear. In order to comply with national rules, fund sponsors might have been forced to appoint various local counsels.

While the new rules should largely benefit fund managers marketing in the EU, changes to regulations always mean that current processes will need to be reviewed. Of particular importance to sponsors and their AIFMs are the newly introduced rules regarding:

• Pre-marketing
• Pre-marketing notification process with the CSSF
• Reverse solicitation
• De-notification 

This article focuses in part on funds domiciled in Luxembourg, because Luxembourg is a particularly popular domicile for marketing investment funds. That said, the factors discussed here should be considered for other jurisdictions where funds are marketed into the EU. (Luxembourg, it should be added, transposed the new rules into local law on 2 August.)

Clarification on pre-marketing

The CBDF allows AIFMs to engage in pre-marketing activities to test an investment idea or strategy with EU professional investors. This is usually done to determine if there is sufficient interest in an AIF which hasn’t yet been established. The testing can also be done for an established fund, but only if it hasn’t yet been notified for marketing in the member state where the potential investors are domiciled or have their registered office. The testing, however, must not amount to an offer or placement to the investor.

The new CBDF rules clarify that certain activities are considered marketing — not pre-marketing — and therefore require formal marketing notification. Specifically, formal notification is required if the information presented to potential 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 a draft or a final form); or
• amounts to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.

This clarification of pre-marketing rules can lead to cost savings. For example, a fund sponsor who tests interest by pre-marketing a product isn’t required to appoint a law firm to prepare a limited partnership agreement or offering documentation.

More broadly, pre-marketing registration is an easier process compared to regular marketing notifications, as no formal documents of the AIF must be filed. What’s more, the regulatory barriers and administrative burdens are less onerous, as a pre-marketing notification needs only to be filed with the local regulator and not with each member state.

Pre-marketing notification process in Luxembourg with the CSSF

Unsurprisingly, AIFMs must follow a specific process when filing pre-marketing notifications with the local supervisory authority. This has to be done within two weeks of starting pre-marketing activities.

In Luxembourg, the CSSF supervises the professionals and products of the local financial sector. It has created a standardised notification letter for the AIFM to complete. AIFMs must provide information such as the intended name of the AIF, countries in which pre-marketing is to take place, a brief description of the investment strategy, and the intended timeframe for pre-marketing activities.

Once the completed letter is sent to the dedicated CSSF email group address, the CSSF then informs the other member states where pre-marketing will take place.

The same rules apply to non-EU AIFs who have appointed an EU AIFM to distribute to European investors.

Amendments to reverse solicitation

Before the implementation of the CBDF, the AIFMD didn’t restrict professional investors who wanted to invest in AIFs on their own initiative (known as “reverse solicitation”). The investor could simply confirm that they had approached the AIFM to subscribe into the fund. The manager wasn’t required to file a marketing notification and could accept the investor without any formal proceedings with the regulator.

While the CBDF doesn’t explicitly eradicate reverse solicitation, it has effectively limited its availability. The CBDF provides that any subscriptions made within 18 months of the start of the pre-marketing activities will be considered a direct result of these and, therefore, requires the AIF to file a corresponding marketing notification.

This ensures clarity for national regulators, who will be able to establish a link between the pre-marketing activities and an investor being admitted to the fund in their jurisdiction. As above, these rules apply to non-EU AIFs who have appointed an EU AIFM to distribute to European investors.

De-notification of funds

The CBDF has harmonised the de-notification process across EU member states, where before there was a fragmented approach. If a manager has been marketing an AIF (or UCITS) in a member state and wishes to cease marketing, it can send a de-notification notice to its home regulator, under set criteria.

While a de-notification might lead to cost savings because it removes the payment of annual registration fees in some jurisdictions, AIFMs won’t be able to pre-market the de-notified AIFs for 36 months. More importantly, they can’t perform any pre-marketing for new AIFs with a similar investment idea or strategy.

As a result, changes to the de-notification process are something of a mixed bag, and it remains to be seen how this option is used. Taking into account all of the above, there are clear benefits to be had from the introduction of the new rules. That said, there are potential obstacles and pitfalls that need navigating –  as is always the case when a regulation changes. Therefore, fund sponsors and AIFMs need to ensure they are up to speed with the changes and the implications for their funds before taking any action.

For more information on marketing and setting up a fund in a new country, watch our webinar: “Cross-border funds: trends, challenges and opportunities.”