EU Distribution for US Managers. The Compound Effect.
Travel bans are recently being lifted across the world. The news was welcomed by many as a clear – undeniable – sign that business is finally set to go back to the pre-pandemic ways and that includes hugs, handshakes and crowded industry events. And whilst we don’t want to spoil the euphoria of the moment, when things can go back to the old ways, we believe that many wouldn’t necessarily disagree with the fact that the digital dimension is here to stay.
A lot has been done in the course of the past year in a digital fashion. From meetings to conferences, passing by cap intro events, we all experienced our fair share of business done through a screen. Investor meetings have been held online and due diligence exercises have been conducted entirely using video calls, leaving the in-person interaction as the very final stage of the process, where possible or allowed.
And where cultural acceptance of digitalisation made European distribution for US Managers apparently easier – and more environment-friendly – the relentless regulatory output created more obstacles.
From restrictions to marketing and requirements on content sharing online, to imposing to have to take an official stance on EU ESG matters, there is so much more that should be taken into consideration in the paradigm of European distribution for US managers. To make things more complicated – and interesting – recently also premarketing rules were rolled out in Europe.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with EU distribution for US Managers.
Effect of Premarketing Rules under AIFMD
The Cross Border Distribution of Investment Funds Directive kicked in last summer and, with it, new rules on so-called premarketing came into play. Without making this another article strictly on premarketing and reverse solicitation, suffice to say that the route to European distribution for US managers is filled with a set of brand-new obstacles.
The first one on the list is that also non-EU AIFMs will be subject in principle to the new notification requirements introduced with the premarketing rules. Similar to other prior regulatory endeavours in financial services, implementation of the Cross Border Distribution of Investment Funds Directive is far from taking place in unison across Europe. US managers will have to pay particular attention to the developments of its implementation. It pays off to comply with the additional notification requirements when facing investors in EU domiciles, where the directive has already been translated in local rules. Amongst other things, the transposition of the new rules in the local law of some EU domiciles comes also with fines in case of omitted notification of premarketing activities.
The move to regulate premarketing in Europe is relevant and should not be underestimated. US managers should not only be mindful of the notification requirements introduced for premarketing, but also pay particular attention to the restrictions imposed on the type of documentation allowed to be used when approaching EU domiciled investors. New rules impose a new approach on European Distribution for US Managers.
And where the premarketing rules may have made more complicated to purport that there is a reverse solicitation at all times – via the introduction of a presumption of marketing – the official interpretation of the same rules, made by certain national competent authorities, has also reinforced the idea that there are activities not considered to be marketing nor premarketing and as such do not require any authorisation. Whilst the boundaries are blurred and far from being set in stone, it pays to put effort into thinking and acting differently.
Don’t forget about ESG – no longer simply a lawyers’ exercise
And for those US managers who reached the point of making a premarketing notification and got caught accordingly by the marketing presumption, with the 18 months prohibition to claim for a reverse solicitation, then there is a new piece in the puzzle of European Distribution for US Managers – ESG.
In July 2021 the EU Commission released its official interpretation of SFDR and clarified the scope of application to non-EU AIFMs marketing in Europe under national private placement regimes. According to the EU Commission, the whole set of disclosure requirements will apply to non-EU AIFMs marketing in Europe, including the provisions related to disclosures for financial products. In other words, sustainability disclosures, both at entity and financial product level, will have to be made both in the offering documentation of the funds as well as on the website of the managers.
Again, the importance of this additional requirement should not be underestimated for various reasons. On the one hand, Europe has been moving much faster on ESG than the US has done so far. At the same time, we cannot really speculate yet whether the two regimes will be similar in their structure and framework. The UK, for instance, whilst aligned to global standards on disclosure, is adopting a completely different approach on ESG than the rest of Europe. Chances are that the US might do the same? This additional challenge in the paradigm of European Distribution for US Managers is represented this time by having to take a formal stance on ESG through European lenses and parameters first and then have to consider it also from the US ones in the near future. A double effort and cost as well.
From a more practical perspective, European national competent authorities expect when submitting a marketing authorisation under any EU national private placement regime that applicable SFDR disclosures are already contained at least in the offering documentation of the funds concerned. Given that disclosures should not really just be drafted by a team of external lawyers, but require instead involvement of the various stakeholders within firms, that could significantly delay the time to market if the ESG angle is not tackled ahead of time.
Conclusions
As regulation increasingly captures more aspects of European distribution for US managers, one cannot forget also about the general climate of heightened alert across Europe triggered by Brexit becoming a reality. At the beginning of 2021, ESMA issued a statement that is relevant in this regard, setting the theme for more intense scrutiny on approaches made by non-European firms towards European based clients based on reverse solicitation.
Whilst the compliance burden involved with European distribution for US managers has clearly created a compound effect, timing and the right strategy remain of paramount importance when approaching Europe.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with EU Distribution for US Managers.